On Tuesday of this week the U.S. Supreme Court ruled 5 to 3 against plaintiffs who had sued a couple of cable television equipment companies who had assisted Charter Communications to inflate its earnings and conceal from investors how the company had failed to reach its financial goals.
In a follow-up article on Wednesday Linda Greenhouse reported in the New York Times:
“The decision in the case, Stoneridge Investment Partners v. Scientific-Atlanta Inc., was a major and ardently sought victory for investment banks, accountants and vendors — the deep pockets that have become nearly automatic targets of class-action lawsuits that accuse them of having engaged in a fraudulent scheme with the company that actually issued the stock.”
And:
“The notion of “scheme liability,” as the theory behind such lawsuits is known, now appears to be dead.”
The core of the fraud is summed up here best:
“The case, which was dismissed before trial in the lower courts, involved an accusation of a deceptive arrangement between a cable television company and two suppliers that gave the company’s books the illusion of an additional $17 million in revenue.”
The USSC simply side-stepped the whole issue of aiding and abetting by mumbling about there being no clear laws compelling second-parties communicating to the “markets” that they are well aware of a company deceiving investors (especially it seems if they themselves are helping in this deception).
So, apparently, once again, the USSC decides that there are two separate law books in this country: one for the average citizen and one for Corporate America.
Let me pose this scenario: you are hauled into court and put on the stand. There you are being grilled by the district attorney. “Did you know that this crime had been committed Mr. X?”
“Yes.”
“And you did not report it?”
“No, I did not.”
I don't know about anyone else but in my law books that's defined as an accessory “after the fact.” You can BET your ass is in serious trouble...
These two cable equipment companies ABETTED Charter Communications by inflating the cost of their equipment TO Charter, then used that extra money to purchase more ADVERTISING on Charter's cable stations. So Charter gets to use this advert purchasing as current revenue and penciling out the “extra” money spent on the equipment as “capital expense”.
In my law books this is called “accessory before the fact”. Now your ass is not simply leaning in the direction of that abyss, it is HANGING out over it...
But apparently, in America, there are two sets of rules...
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Article comments
— go to most recent comments1 - Pablo
Another excellent article in my opinion by Marlowe.
I would like to add on the subject of lying, that it is in the USA illegal to lie to a federal law enforcement officer, this is obviously an affront to the first amendment to the Constitution. I believe we would live in a much freer country if it was illegal for government officials from the highest to the lowest to lie to us. We have also seen more and more of the government in this country becoming secretive, and demanding more and more openess (divulging our privacy in almost every area) instead of the other way around.
Again thanks for the great article Marlowe.
2 - Dave Nalle
Marlowe, I'm not sure you're explaining (or understanding) this case entirely clearly.
The basis for the ruling is that while the colluding businesses (Motorola and Scientific Atlanta) did special favors for Charter which made them look more profitable than they really were, that action did not directly harm or deceive the stockholders because the ultimate responsibility for any deception lay with Charter, which should have disclosed the nature and effects of those special relationships.
The court did not rule that stockholders had no recourse for their losses, but that their claims should be directed at Charter rather than going after secondary parties just because they have more money. Charter committed the only actual fraud here and had a responsibility to report their deals with the two other companies to their auditors who should have then informed stockholders.
What they did here is rule against vampiric lawyers who sue everybody and anybody they can go after no matter how much of a long shot it is, so that they can pocket millions of dollars and pass on pennies to the actual injured parties.
If the court had ruled the other way it would have opened the gates to even more spurious and speculative suits from these leeches which do a hell of a lot more harm to stockholders than anything Scientific Atlanta or Motorola did here.
You can read the actual opinion in this PDF.
Dave
3 - troll
...do you really think that Congress meant to leave this gaping hole (undermining basic concepts on which the rule of law is based) when it passed the underlying legislation - ?
Stevens' short dissent calls 'bullshit'
4 - P.Marlowe
Dave... Thanks for the points. And I didn't realize lawyers had evolved TO the level of vampires - certainly a Day to hail for the species. There's a chance for them yet!
I guess we can cut to the chase on what this means... Enron. I'm sure the accounting firms are all screaming this week - wondering if this ruling can't be retroactive.
We have another case warming up in the bull pin that is a much larger example of this - General Re (the reinsurer which is a part of Berkshire Hathaway). This stems from the 2000/01 intent to inflate the LOSS RESERVES of AIG which I think everyone knows....
And any moment now we're going to hear how some company X knew very well that the practices Countrywide was using were certianly unethical and perhaps illegal.
NOW, with this ruling - certainly the way I read it and various analysts read it (and by the way Dave I do have the actual text - thanks for the offer - appreciate it) NO ONE can go after the DEN of thieves just the one - WHO, in the cases such as Enron are nothing more (by that time) but a hollow shell...
Lying is lying... Why on earth should we give separate rules for business? Would this ever stand in criminal court?
"Mr. Accessory since you didn't ACTUALLY hold the knife to this lady's throat and rob her but only assisted in it... And despite the fact that subsequently the assailant spent all the stolen money and has no more assets you, yourself have nothing to worry about... Since all you did was ASSIST in the commission of the crime you can't be held libel."
And you see NO problems with this ruling? You don't see the Pandora's box being opened up here?
P.Marlowe
5 - Maurice
I am weary of this hatred of Corporations.
Here is the Income Statement for Motorola. You will notice they pay 1 to 2 billion in taxes per year. They have 66 thousand employees. If Motorola did not exist those employees would have to pay 15 to 30 thousand dollars a year to make up the difference in tax loss.
Does that have meaning for anyone?
6 - Dave Nalle
Lying is lying, but the two companies being sued in this case didn't lie to anyone. They never communicated with or had an obligation to communicate with anyone but the company they were dealing with. Their actions weren't even illegal. They can sell stuff to Charter on any twisted terms they like as long as both parties agree to it.
I think the implications of this ruling are much more limited than you realize. If the secondary companies had actually been parties to the fraud the situation would have been very different, but the ruling clearly says that they were not approached with this arrangement by someone saying 'we need your help to defraud our investors' so they can plead ignorance of Charter's criminal intent. It's still the US. there's still a presumption of innocence even for corporations.
And frankly, as someone who owns stock in Motorola I don't much like the idea of them being screwed for something someone else did. Motorola supplies components to EVERYONE under all sorts of strange arrangements especially because they deal with the cell phone industry. As a stockholder I don't want them dragged through the courts as part of ever class action suit over undisclosed rates and by people who don't read their service agreements just because they're in partnership as a supplier to these somewhat sleazy companies.
Your accessory example from criminal law does not work here, because it's not clear that the companies knew that their assistance to Charter would be used to commit fraud. As far as they knew Charter was going to disclose their actions to the auditor. A better analogy would be suing the gun store for selling the gun that's used in a crime. Yes, they knew that it's possible to use a gun in a crime, but they had no knowledge of the intent of the purchaser to do so.
And yes, lawyers were recently upgraded from leeches to vampires. Did you not see it on the news?
Dave
7 - Maurice
followup to #5
the disparity would actually be 30~60 thousand dollars per employee since only about half MOT employees are in the US.
Vampires are now offended.
8 - Clavos
"I am weary of this hatred of Corporations."
Maurice,
It's becoming very clear to me that the hatred of corporations is yet another front in the class war being fomented by the far left in this country.
Having failed miserably to bring socialism to the USA during the Cold War years, the socialists sat back and studied where they went wrong.
What they realized was that socialism has hitherto failed here because, for the most part, there has been very little dissatisfaction on the part of the workers here. For socialism to take root anywhere, the workers have to be unhappy; they have to feel they are being exploited.
American workers for decades were among the best paid, best housed, best fed and clothed in the world during those years. They actually still are, but what has changed is there is a concerted propaganda effort on the part of left wing extremists to make them think they're not full participants in the economy.
Hence the hatred of corporations, the growing envy of the wealthy, and the constant drumming in the press and on the internet that American workers are exploited, the system has failed them, the rich are evil, CEOs are overpaid, etc.
You tell a lie long enough, and it becomes the truth.
The stakes are huge; and unfortunately, it appears that most supporters of capitalism are unaware there even is a battle, let alone that they're losing it.
9 - P.Marlowe
Maurice...
First, I don't remember stating that I 'hated' corporations.
Second, which is it with Motorola (who used to be a large customer of mine) 1 billion or 2 billion?
Third, educate yourself on the corporate "tax" system in this country. Read PERFECTLY LEGAL by the Pulitzer Prize winning David Cay Johnston... Or his latest FREE LUNCH.
Forth, pay a bit more attention to the business sections of the New York Times, The Washington Post and the WSJ...
Fifth, read up on IBM's latest $1.6 billion dollar TAX DODGE that was finally caught by the IRS
And SIXTH... Realize that in 1957 corporations paid 50% of the taxes collected in this country... in 2005 it was LESS than 7%.
GUESS who picks up the difference... YOU DO.
Marlowe
10 - P.Marlowe
Dave... The example of the criminal is perfectly accurate here. I won't be surprised if we see some mention of the USSC case re: General Re and AIG in the coming weeks. The whole Enron case is likely to be tossed out now (since it's been languishing on the dockets for who knows how long).
The ENTIRE IMPORT of this case is that the two cable equipment suppliers DID know what Charter Communications was doing! But that since they were metaphorically standing BEHIND Charter (who was committing the crime) they themselves can't be touched.
This has been evolving or rather devolving for years. As pointed out in the NYT article (01/15/08) the USSC case back in '94 (Central Bank of Denver v. First Interstate Bank)came down on the STINKING side of this pig pen - insisting that somehow, "aiding and abetting" doesn't mean anything legally in the realm of securities!
I hope you're just as blase some day when a huge chunk of your investments is wiped out in one of these deals... While the CEO skips off to his new island in the Caribbean and you're left wondering how the hell you're going to handle retirment or your kid's college costs and the court's are saying, "Sorry Dave, but why should the banks, brokerage houses, insurance companies that "aided and abetted" in this fraud that's now destroyed your retirement plans be held liable? Just because they knew you were going to be wrecked by these actions doesn't mean they had an obligation to inform you."
You REALLY want to live in this world?
Marlowe
11 - P.Marlowe
Speaking of the IMMEDIATE fall out from the USSC case.
12 - Maurice
Second, which is it with Motorola (who used to be a large customer of mine) 1 billion or 2 billion?
If you had clicked my link you would know what I meant by that comment. They pay taxes base on how much money they make. The range is for the last 3 years.
Please click the link.
13 - Clavos
"GUESS who picks up the difference... YOU DO."
Marlowe,
Guess who picks up the taxes when corporations pay them...YOU DO.
Corporations act only as tax collectors; what taxes they pay are passed on to the end users of their product or service in the prices charged.
14 - Maurice
And SIXTH... Realize that in 1957 corporations paid 50% of the taxes collected in this country... in 2005 it was LESS than 7%.
We have been very successful in taxing our Corporations to point they must leave our shores.
Clavos - great post. Marlowes comment about the CEO supports your points for you.
15 - P.Marlowe
Maurice... First off, I hope that your point that Motorola paying some tax (and I assume you're smart enough to know you can't trust the annual statements) isn't supposed to be definitive PROOF that there's has been and isn't any corruption, tax dodging, no rigging of the tax structure in the past 30 years in US business history to grossly favor the richest 1% of this country, to hide a whole CONTINENT worth of unethical and immoral business dealings you've got a long LONG way to go... You certainly aren't expecting us to swallow that are you??
My beef here isn't with Motorola per se. They're playing on the field they, along with thousands of others helped to create. I'm saying the FIELD is putrid...
And simply saying "Well, Motorola paid tax" as some kind of argument to DISMISS other abhorrent behavior is the same as saying, "Well, Osama once left me a nice tip and paid his check so he must be OK..."
Wake up. Your naivete is giving me a headache...
Marlowe
16 - P.Marlowe
Clav... Do us all a favor and actually do some research before posting next alright? Seriously... This argument is so threadbare it's embarrassing that you've used it.
American corporations don't "leave" the US. They shift their HQs simply to avoid as many laws as they possibly can.
If you love the present structure of corporations so much I'm sure you'll have no problem volunteering to strip your WAGES back to pre-minimum wage times, in order to convince these behemoths to stay here in the US.
God forbid you should make a livable wage while the CEO is earning over 1700% more than you (at your CURRENT wage).
For God sake Clav, turn off Rush and READ a few books and newspapers.
Marlowe
17 - Maurice
Marlowe,
thanks for your kind words about my intelligence. Your comments give me the impression you might not make as much money as I do. I am a wage earner that pays 6 figures in taxes. If you were to look over my tax return you would be shocked at the exemptions I don't quality for. As you go up the scale you lose deductions most people take for granted (mortgage, dependants).
You would be amazed at the amount of property taxes Motorola pays.
18 - Clavos
Great reply, Marlowe! Unfortunately, you didn't address a single point I made:
I said nothing about corporations moving offshore; it was Maurice who made that very cogent point.
"Threadbare" means well worn, not wrong. Show me how corporations actually DO pay (without passing through) taxes.
The rest of your "response" to me was cutely flippant but totally devoid of any meaning or substance.
I guess that's one way of obviating any need to actually think when responding...
19 - P.Marlowe
Maurice... I didn't insult your INTELLIGENCE fella. Your lack of education on this matter is another point entirely...
You think because you're making/paying in the six figures you're NOT being screwed?
I'm begging you. READ "PERFECTLY LEGAL" by David Cay Johnston.
Everyone making between $24K and $250,000 per year are the ones suffering because of the tax shift...
One of the things you will learn is that the TAX a corporation waves about in front of everyone, yelling "look what we have to pay!" is in many respects a smoke screen.
Just go read the book...
As we so often do in this country we personalize things... We assume because we're making a great income AND getting drilled by taxes that this must be happening to everyone else up the line...
If you've been in business as long as you suggest M then you have to know that things stink mightily
up the hill from where you are....
Gotta run
Marlowe
20 - P.Marlowe
Clav... "Cutely flippant" - thanks.
Sorry if I misquoted you...
No doubt you're absolutely right. Corporations are ALL model citizens. Despite all the government tax data to the contrary they shoulder a terrible burden (tax-wise)...
One point though Mr. C... If you detest "socialism" you no doubt don't avail yourself of ROADS, SCHOOLS, LIBRARIES, THE FIRE DEPARTMENT, THE POLICE DEPARTMENT, THE SEWER SYSTEM, THE WATER SYSTEM, ANY PUBLIC UTILITY, etc, etc, etc. Because of course, by your definition THIS TOO is socialism - since all our taxes go to paying for them...
Gotta go boys! Been fun!
Marlowe
21 - Clavos
"Corporations are ALL model citizens."
Again, a deliberate misinterpretation of my comments.
I have not portrayed corporations as "model citizens:" merely pointed out that taxing the hell out of them does NOT shift the tax burden from the end user or consumer, because in the final analysis, the ONLY REAL PAYERS OF TAXES in our system are those who earn income (regardless of source, unless said source is legally not taxable), and the consumers. NO ONE ELSE.
As Maurice has pointed out, with the growth of global business, American corporations now face the problem of competing against foreign companies which pay lower, or even no, taxes in their respective countries.
These two points, taken together, militate for a reduction (or even elimination), not an increase, in the taxation of businesses.
Once again, your condescension and flippancy fail to respond adequately to my points.
My remarks address the economic system of this country, not the political structure. The fact that the various governments, federal and state, are responsible for elements of the infrastructure such as roads, and obvious responsibilities of the state, such as policing, has nothing whatever to do with maintaining an economic system based on capitalism, as you well know.
To bring them up in response to my comments is a non sequitur.
22 - Maurice
Maurice... First off, I hope that your point that Motorola paying some tax (and I assume you're smart enough to know you can't trust the annual statements...
Maurice... I didn't insult your INTELLIGENCE fella
I do trust the Income statement so I must not be as smart as you had hoped. When a corporation announces profits(loss) they are making an official declaration.
Are you saying you don't believe Motorola paid the 1~2 billion in taxes these past 3 years?
Did you click my link to their Income Statement?
23 - P.Marlowe
Clav & Maurice:
By the IRS's own accounting records (as reported in PERFECTLY LEGAL for example) and as I've already stated, in the 50's US corporations paid nearly 50% of all COLLECTED taxes in this country. As of 2005 it is roughly 7%...
At the same time the number of reported corporate tax avoidance schemes has skyrocketed. Corporate inversions along with other off-shore transfers, etc., etc, etc., funnel hundred of BILLIONS off the books every year.
Now THIS BEHAVIOR doesn't account for that 7% above. No, that 7% is what the ACTUAL TAX LAWS REQUIRE - currently - of corporations.
Do yourselves a favor. Read the business sections - specifically the TAX SUB-SECTIONS of the New York Times, the Washington Post and the Wall Street Journal (and occasionally the LA Times does a good job reporting).
In the Washington Post - read the (free to everyone) THINK TANK section. There are reports in there EVEN FROM THE CONSERVATIVE think tanks that lament some of these same conditions.
It is simply not true that US corporations are scrambling to leave the US because their being taxed too much. The tax laws have been so stunningly rewritten for the corporations as well the super-rich has wrecked our economy...
It began in the early 60's when the ultra-conservatives began a real effort to take over the Republican party. They needed charismatic leaders - so the shopped around and their first acquisition was Ronald Reagan - a died-in-the-wool DEMOCRAT prior to this...
It is true that back in the times of FDR those with the most paid some serious tax... So did corporations... It was the price of living in society.
As a matter of fact most workers were not taxed at all. It was considered savage to tax a man who sweats to make a dollar... Those who could AFFORD to pay taxes - paid them...
But by the late 70's Republicans and Business did everything they could to make TAX a four letter word. They pounded away at this, making the common man and woman believe that THEY were being ripped off and that the system must be changed...
It was changing alright... The program to re-write the tax code to favor the rich and corporate America had begun...
Marlowe...
24 - Dave Nalle
The whole Enron case is likely to be tossed out now (since it's been languishing on the dockets for who knows how long).
The Enron case bears very little relationship to this case since both of the major parties were directly involved in the fraud and there's not even a possibility of presumption of innocence.
The ENTIRE IMPORT of this case is that the two cable equipment suppliers DID know what Charter Communications was doing! But that since they were metaphorically standing BEHIND Charter (who was committing the crime) they themselves can't be touched.
I hate to be tedious and introduce facts here, but here is a key quote from the actual ruling. On page 10 it says:
That's pretty unambiguous. Elsewhere in the ruling it also makes the point that there is no law criminalizing or applying liability to 'aiding and abetting' a corporate misrepresentation like this at all, and that previously Congress was requested to draft one and never bothered to do so. But the main point is that you can't just sue everyone just because you didn't get enough money from the actual defrauder.
This has been evolving or rather devolving for years. As pointed out in the NYT article (01/15/08) the USSC case back in '94 (Central Bank of Denver v. First Interstate Bank)came down on the STINKING side of this pig pen - insisting that somehow, "aiding and abetting" doesn't mean anything legally in the realm of securities!
All Central said was that there was no statute covering the application of penalties or determination of responsibility for secondary parties, and it asked for a new law. That was 13 years ago, so you might want to be asking why the hell the Congress hasn't done anything in all that time.
I hope you're just as blase some day when a huge chunk of your investments is wiped out in one of these deals...
Look up Global Crossing sometime, Marlowe. $20,000 of my kids college fund was in it. We're now party to a huge, pointless class action suit from which I expect to see some pocket change.
While the CEO skips off to his new island in the Caribbean and you're left wondering how the hell you're going to handle retirment or your kid's college costs and the court's are saying, "Sorry Dave, but why should the banks, brokerage houses, insurance companies that "aided and abetted" in this fraud that's now destroyed your retirement plans be held liable? Just because they knew you were going to be wrecked by these actions doesn't mean they had an obligation to inform you."
You just presume that these various parties know that the company they help out is going to go under. More likely they think that their efforts will help protect investors by preventing a shaky company from going under.
And ultimately, Marlowe, we're talking investments here. They involve risk. If you don't like risk don't invest in a cable company (trans-pacific or TV).
Dave
25 - P.Marlowe
Dave... let's start with you last statement first...
>And ultimately, Marlowe, we're talking investments here.<
Yes. And were a hurricane to have blown your investment away or a petite asteroid hit it, well, C'est la vie...
What you suffered was NOT an Act of God. It was an Act of Greed. Were you to be held at gunpoint at a 7-11, shot, wounded and robbed would you tell the judge:
"Well judge, I took a risk stepping out of my house... I should have known better than hanker for a mega-slurpy!"
As to the case... I know what Kennedy said. I know his wording. "Wording" doesn't make it right. "Wording" didn't make the Taney Court right in Dred Scott. "Wording" didn't make Lockner right...
It is simply another brick pulled from the wall...
And the plaintives in the Enron case have already pleaded with the USSC. See the WASHINGTON POST today - ENRON INVESTORS PETITION JUSTICES...
Corporations should NEVER have been given the legal status of personal entity - but if we must continue to accept them as such then they DAMN WELL better abide by the same ethical and legal code I have to...
P. Marlowe