Source: http://techlawjournal.com/home/newsbriefs/2002/06f.asp
Timestamp: 2019-04-22 08:50:18+00:00

Document:
TLJ News: June 26-30, 2002.
6/29. President Bush also addressed financial reporting in his weekly radio address on Saturday, June 29. He stated that "Despite recent abuses of the public's trust, our economy remains fundamentally sound and strong, and the vast majority of businesspeople are living by the rules. Yet, confidence is the cornerstone of our economic system, so a few bad actors can tarnish our entire free enterprise system. We must have rules and laws that restore faith in the integrity of American business. The government will fully investigate reports of corporate fraud, and hold the guilty parties accountable for misleading shareholders and employees. Executives who commit fraud will face financial penalties, and, when they are guilty of criminal wrongdoing, they will face jail time."
Bush also said that "the SEC ordered the CEOs and CFOs of the 1,000 largest public companies to certify that the financial information they submitted in the last year was fair and accurate."
6/28. The National Institute of Standards and Technology (NIST) released a report [309 pages in PDF] titled "The Economic Impacts of Inadequate Infrastructure for Software Testing". See also, NIST release.
The report states that "The objective of this study is to investigate the economic impact of an inadequate infrastructure for software testing in the U.S." It concludes that "Based on the software developer and user surveys, the national annual costs of an inadequate infrastructure for software testing is estimated to range from $22.2 to $59.5 billion. Over half of these costs are borne by software users in the form of error avoidance and mitigation activities."
The report also concludes that $22.2 Billion of these costs could be eliminated by an improved testing infrastructure that enables earlier and more effective identification and removal of software defects.
6/28. The U.S. Court of Appeals (9thCir) issued its opinion [PDF] in In Re Broderbund / Learning Company Securities Litigation, a class action securities case involving the issue of damages. The District Court concluded that plaintiff suffered no damages, and dismissed. The Appeals Court affirmed.
Background. Plaintiff was a shareholder of Broderbund Software. Broderbund was acquired by The Learning Company (TLC) in 1998. He acquired stock in TLC at $17.6875 per share. TLC filed registration statements with the SEC that plaintiff alleges contained misstatements. TLC was acquired by Mattel in 1999. Plaintiff received $33.45 worth of Mattel stock for each share of TLC stock. Mattel stock subsequently fell to under $14 per share.
District Court. Plaintiff filed a complaint in U.S. District Court (CDCal) against TLC and Mattel alleging violation of federal securities laws in connection with alleged misstatements by TLC. The District Court dismissed on the grounds that plaintiff had not suffered damages within the meaning of §§ 11 and 12 of the Securities Act of 1933, 15 U.S.C. §§ 77k and 77l. Plaintiff appealed.
Appeals Court. The Appeals Court affirmed. It reasoned that he acquired TLC stock at $17.69 per share, and disposed of his TLC stock in a merger at $33.45 per share. The Court concluded that the plaintiff "sues Mattel and TLC's officers and directors because of alleged improprieties at and before the date of his acquisition of the TLC stock. By use of rather vermiculate logic, he now attempts to change his $15.7625 per share gain into a loss. The perspicacious district judge was not persuaded that gain is loss. Nor are we."
6/28. The U.S. District Court (SDNY) entered an order in SEC v. WorldCom ordering WorldCom to preserve records relating to its financial reporting obligations, prohibiting WorldCom from making any extraordinary payments to any present or former director, officer, or financial reporting personnel, and providing for the appointment by the Court of a monitor. See, SEC release. The Securities and Exchange Commission (SEC) filed its original complaint on June 26.
6/28. President Bush gave a speech at a campaign event for Rep. Connie Morella (R-MD) in Washington DC at which he also addressed corporate governance and financial reporting. He stated that "We can have all kinds of rules, and we will. I laid out some initiatives in March of this year that will hold people accountable. And our Justice Department will hold people accountable. But corporate America has got to understand there's a higher calling than trying to fudge the numbers, trying to slip a billion here or a billion there and may hope nobody notices -- that you have a responsibility in this country to always be aboveboard."
6/28. The Securities and Exchange Commission (SEC) published a list of 945 companies whose chief executive and chief financial officers are now required to personally certify -- in writing, under oath, and for publication -- that their most recent reports filed with SEC are complete and accurate. See, SEC release.
The list of technology related companies on the list includes 3Com, Adobe, AMD, Agilent, AllTel, Amazon, AOL, AT&T, Atmel, BellSouth, Cadence Design Systems, CDW Computer Centers, CenturyTel, Charles Schwab, Charter Communications, Ciena, Circuit City, Cisco, Comcast, Comdisco, Computer Associates International, Computer Sciences Corp., Compuware, Comverse Technology, Corning, Convergys, Cox Communications, Dell, DST Systems, E*Trade, Earthlink, Eastman Kodak, Echostar, EDS, Electronic Arts, First Data, Gemstar-TV Guide International, Gateway, General Cable, Ingram Micro, Intel, Integrated Electrical Services, IBM, Intuit, JDS Uniphase, L-3 Communications, Level 3 Communications, Lockheed Martin, LSI Logic, Lucent, MasTec, Maxim Integrated Products, Micron, Microsoft, Motorola, National Rural Utilities Cooperative Finance Corporation, National Semiconductor, NCR, Nextel, Northrop Grumman, Novellus, Nvidia, Office Depot, OfficeMax, On Semiconductor, Oracle, PeopleSoft, PEPCO, Perot Systems, Qualcomm, Quantum, Qwest, Radio Shack, Raytheon, Sabre Holdings, SBC, Siebel Systems, Silicon Graphics, Sprint, Staples, Storage Technology, Sun Microsystems, SunGard Data Systems, Tech Data Corporation, Tektronix, Telephone & Data Systems, Tellabs, Texas Instruments, TRW, Unisys, Veritas Software, Verizon, Viacom, Viasystems Group, Vishay Intertechnology, Visteon, Volt Information Sciences, Wallace Computer Services, Walt Disney, Western Digital, WorldCom, Xerox, Xilinx, and XO Communications.
6/28. Xerox stated that "it expects to file today the company's 2001 10-K, which includes a restatement for the years 1997 through 2000 as well as adjustments to previously announced 2001 results." It further stated that "Approximately $1.9 billion of revenue that was recognized over past years has been reversed". See, Xerox release.
6/28. Rep. Bill Thomas (R-CA), the Chairman of the House Ways and Means Committee, released a summary of the American Competitiveness Act of 2002, a bill to be introduced after the July 4 recess. It would address the foreign sales corporation, and successor, tax regime, which the World Trade Organization (WTO) has ruled to constitute an illegal trade subsidy.
Rep. Thomas issued a release which states that the "current Extraterritorial Income (ETI) regime was designed to level the playing field between U.S. companies and their foreign competitors. Both ETI and its predecessor, the Foreign Sales Corporation (FSC), have been repeatedly ruled to be ``export subsidies´´ that violate our treaty obligations."
The release continues that "If we repeal ETI, U.S. businesses will be placed at an even greater competitive disadvantage relative to their foreign competitors. If we don't repeal ETI, U.S. companies may be hit with billions of dollars of retaliatory trade sanctions. An arbitration panel will set the level of authorized trade sanctions in July."
EU representatives have stated that retaliatory sanctions would target U.S. technology exports.
Rep. Thomas' release states that the American Competitiveness Act would amend the Internal Revenue Code by "Simplifying the complex foreign tax credit rules designed to prevent double taxation, Increasing expensing for small businesses, Reforming complex interest allocation rules, and Removing punitive rules which reduce companies ability to defer taxes on active income earned abroad."
The bill would also seek to limit corporate inversions, the relocation of companies' nation of incorporation from the U.S. to countries with more favorable tax laws.
6/28. EU Commissioner for Trade Pascal Lamy held an online chat regarding trade issues. See, rough transcript [41 pages in PDF].
He was asked "Is the Doha Round dead, after the EU-US steel conflict, the New Farm Bill and the TPA with poison pill?" Lamy stated that "steel, the farm bill are clearly irritants, but they will not in themselves prevent the round to go ahead; TPA is a bigger problem, but we are confident that the TPA will in the end come out without poison pills".
He also stated that "The new American administration under G. W. Bush has advertised a 'more active' trade policy for the US both in multilateral arenas and in bilateral negociations (FTAA or other free trade agreement). Fine with that. But, at this stage, we have seen more protection than openess. Optimists here say that this is the price to pay for the administration to get negociating authority from the Congress."
He was also asked "What steps is the EU taking to secure a liberalisation of trade in legal services"? He responded that "the EU will participate actively in the on-going services negotiations in the WTO with a view to secure inter alia improved market access for lawyers in foreign markets, provided they have proper qualifications."
He was asked again, "How can the EU expect other countries to liberalise their trade restrictions when its own Member States won't even comply with Community Directives aimed at achieving the same purpose (e.g. Lawyers' Establishment Directive)?" To this, he responded, "as far as far Community internal measures are concerned, the Commission has the power to pursue Member States to the Cour of Justice and does so when necessary. We do not hesitate to remind Member States of their duties and we have no difficulties in asking third countries to take commitments in areas covered by an EC directive, if we deem it in the EU interest."
He was also asked if he meets with the U.S. Congress. He stated that "Each time I am in Washington (approx. 4 times a year) I spend half of my time on the hill and the other half with the administration, various constituencies and communication. I have regular contacts down there or on the phone with a number of trade stars: chairman of ways and means in the house, of finance in the Senate. Our delegation in Washington and our people here interact permanently with staffers."
6/28. The General Accounting Office (GAO) released a report [101 pages in PDF] titled "Information Technology: DOD Needs to Improve Process for Ensuring Interoperability of Telecommunications Switches".
The report concluded that the Department of Defense (DOD) "does not have a well defined process, including clear requirements, for certifying and authorizing telecommunications (telecom) switches. DOD's process is not fully documented, current, or complete. Additionally, the process lacks an effective enforcement mechanism. As a result, DOD is increasing the risk that its certification and authorization process will be applied inconsistently and that the department's telecommunications will experience future interoperability problems. DOD attributed these weaknesses to the fact that the process is relatively new and still evolving."
6/28. The Federal Trade Commission (FTC) released another followup report [62 pages in PDF] to its September 2000 report titled "Marketing Violent Entertainment to Children: A Review of Self-Regulation and Industry Practices in the Motion Picture, Music Recording and Electronic Game Industries". See also, FTC release.
With respect to electronic games, this latest report finds "widespread compliance with industry standards limiting ads for M-rated games where children under 17 constitute a certain percentage of the audience -- 35 percent for television and 45 percent for print. At the same time, the Commission found several examples of advertisements on popular teen television programs, and continued placement of advertising in youth-oriented game enthusiast magazines. As the Commission noted in its December 2001 Report, the industry’s anti-targeting standards diminish -- but do not eliminate -- placements in media with large teen audiences."
The report continues that "The electronic game industry continues to provide rating information prominently in most forms of advertising, which likely reflects its enforcement program. Although some areas still could be improved (e.g., including content descriptors in television advertising), there is much in the game industry’s rating disclosure requirements that merits duplication by others."
FTC Commissioner Orson Swindle issued a concurring statement. He wrote that "the First Amendment appropriately limits what the government can do. Despite our scrutiny, the music industry continues to target young people explicitly in its advertising and, for the most part, refuses to provide content-based information that could help consumers. The motion picture and electronic game industries have acted far more responsibly in improving their self-regulatory programs, yet continue to allow advertising of R-rated movies and M-rated games in venues that attract large numbers of teens."
Rep. Billy Tauzin (R-LA) stated in a release that "The movie and video game industries should be commended for their continued commitment to responsible marketing of violent material. Since the inception of the FTC's reports, these industries have made vast improvements to their marketing practices. However, I continue to be deeply disappointed by the recording industry's lack of response to the shortcomings noted in these FTC reports." Rep. Tauzin is Chairman of the House Commerce Committee, which oversees the FTC.
6/28. The Supreme Court completed the work of its current term with the release of opinions and its order list on Friday, June 28. It will be in recess until Monday, October 7, 2002.
6/28. The White House press office announced the list of appointments for White House Fellows for 2002-03. The list includes Cesar Conde, of Coral Gables, Florida. The White House release states that he "Led the strategic development of the first full service Internet portal geared exclusively towards the U.S. Hispanic market."
6/28. Kevin English, Ch/CEO/P of Covisint announced his resignation. Harold Kutner will replace him as Ch/CEO. Bruce Swift will become P/COO. Covisint is an automotive industry B2B. See, Covisint release.
6/28. Brad Sonnenberg was named SVP and General Counsel of Covad. He had been Deputy General Counsel. He replaces Dhruv Khanna. See, Covad release.
6/28. The Federal Communications Commission (FCC) announced that it signed an Interim Arrangement with Industry Canada pertaining to spectrum sharing for the development of Multipoint Distribution Systems near the U.S. Canada border. The arrangement covers operations in the 2150-2162 MHz and 2500-2690 MHz bands. See, FCC release [PDF].
6/28. The Department of Justice's (DOJ) Antitrust Division filed its appeal brief with the U.S. Court of Appeals (2ndCir) in USA v. Visa, an antitrust case involving the governance practices of Visa and MasterCard.
6/28. Tren Griffin, Pierre De Vries, and Marc Berejka of Microsoft, along with Microsoft attorney Scott Harris, met with Federal Communications Commission (FCC) Commissioner Michael Copps, Paul Margie (Legal Advisor to Copps), and Matt Brill (Legal Advisor to Commissioner Kathleen Abernathy) regarding the future of broadband wireless technology and networking. Microsoft noted in a disclosure letter [PDF] that Microsoft suggested the "the growth of the Internet has been characterized by the ability of consumers to reach an unprecedented array of content, services, and applications through an ever increasing diversity of consumer owned devices. Microsoft suggested that the Commission should remain mindful of the importance of assuring that consumers continue to enjoy that ability in the broadband future."
6/28. The Supreme Court issued an order in the NextWave case. It states that "The motion of the Acting Solicitor General for divided argument is granted. The motion of Creditors of NextWave Personal Communications, Inc., for leave to participate in oral argument as amici curiae and for divided argument is granted." See, Order List [PDF] at page 4.
6/28. The U.S. Court of Appeals (DCCir) issued its opinion in Costa de Oro Television v. FCC, a petition for review of two Federal Communications Commission (FCC) orders pertaining to local television market designations pursuant to the cable television mandatory carriage rules. The Appeals Court denied the petition.
6/27. The Senate passed S 803, the E-Government Act of 2002, sponsored by Sen. Joe Lieberman (D-CT). The bill seeks to promote electronic Government services and processes. It would establish an Office of Electronic Government within the Office of Management and Budget. This version of the bill does not include earlier language creating the position of Chief Information Officer.
6/27. House Financial Services Committee Chairman Michael Oxley (R-OH) stated in a release that "Problems with accounting in telecommunications are, unfortunately, damaging a key growth sector of the economy that is already facing other, steep challenges." Rep. Oxley scheduled a hearing before his Committee for Monday, July 8. He also issued subpoenas [PDF] to John Sidgmore, Scott Sullivan, Bernard Ebbers, and Jack Grubman. See, HFSC release.
Rep. Billy Tauzin (R-LA), the Chairman of the House Commerce Committee, wrote a letter to John Sidgmore, CEO of WorldCom, stating that his Committee "has undertaken a comprehensive review of allegations of accounting improprieties within certain telecommunication companies." He requested that WorldCom provide his Committee certain enumerated records by July 11.
His letter includes requests for the recent internal audit the precipitated WorldCom's June 25 disclosure, records relating to communications with the SEC, minutes of the meeting of the Audit Committee and Board of Directors, and records pertaining to accounting policies for treatment of operating costs / expenses and capital investment / expenses.
The letter is also signed by Rep. James Greenwood (R-PA), Chairman Subcommittee on Oversight and Investigations.
6/27. Microsoft announced that it signed a Memorandum of Understanding (MOU) with the State Development & Planning Commission (SDPC) of the People's Republic of China. Microsoft stated in a vaguely worded release that the MOU pertains to "software industry cooperation".
Microsoft stated that it "will invest RMB 6.2 billion (USD 750 million) in China in the next three years in the areas of education and training, academic and research cooperation, hardware manufacturing outsourcing, continued support in software outsourcing and strategic investments and cooperative developments in local software companies."
Microsoft also said that the "SDPC will recommend the companies Microsoft shall work with. In addition to that, SDPC will also select entity to cooperate with MS on key national informatization projects."
6/27. Sen. Russ Feingold (D-WI) introduced the Competition in Radio and Concert Industries Act [22 pages in PDF]. See also, Feingold's summary of the bill.
The bill is a response to the phasing out of the Federal Communications Commission's (FCC) ownership rules affecting the broadcast radio industry. The bill states in its findings that "This deregulation of ownership rules has materially altered the radio broadcast industry and resulted in a concentration of ownership of radio stations and a corresponding reduction in localism."
The also recites that "Segments of the radio, concert, and concert promotion industries have also become vertically integrated. In some cases, radio station owners, and concert promoters have common ownership, as well as exclusive agreements to manage concert venues. As a result, these radio station owners have the incentive and ability to favor the musical artists and groups they promote."
The bill would amend 47 U.S.C. § 312(a), which currently lists seven reasons that FCC may revoke a broadcaster's radio license. The bill would add an eighth basis: "for willful and repeated engagement in unfair methods of competition, unfair or deceptive acts or practices, or tying the use of entities owned by the licensee or permittee for the purpose of hindering significantly, or preventing, the broadcast of programming or content, including any sound recording by a musical artist, if such programming or content is produced or promoted by a person independent of the licensee or permittee or the creator thereof is independent of the licensee or permittee".
The bill would also add a ninth basis: "for conviction or final adjudication under an antitrust law or unfair trade practice law of a violation of such law regarding concert venues or concert promotion". Moreover, "unfair trade practice law" is defined to include, not only the FTC Act, but also any similar state law.
The bill would also require the FCC to promulgate new regulations to implement these provisions the bill.
The bill would also require the FCC to conduct proceedings scrutinizing any license transaction that would result in further consolidation. Moreover, the bill would require the FCC to promulgate rules "to prohibit the transfer or assignment to operate, or the use of, a local marketing agreement with respect to a commercial radio station if the transfer or assignment, or such agreement, will permit the applicant, or the brokers of such agreement, to own, operate, or have an attributable interest in commercial radio stations that have in aggregate ... (1) more than 35 percent of the audience share of the local market of such radio stations; or (2) more than 35 percent of the radio advertising revenue in the local market of such radio stations."
The NAB opposes with bill, while the RIAA supports it. National Association of Broadcasters (NAB) CEO Edward Fritts stated in a release that "The 1996 Telecommunications Act has strengthened the ability of radio to better serve listeners, and we strongly dispute claims that radio has grown more homogenous in recent years. Separate studies show that radio format diversity is far greater now than six years ago, and Spanish stations in the U.S. now number more than 600, up from fewer than 400 in 1996. Moreover, through the collective efforts of stations from Boston to Boise, local radio stations generated $7 billion in public service last year. That alone should be reason enough for Congress to let flourish a communications medium that is free, local and reliable."
In contrast, Hillary Rosen, Ch/CEO of the Recording Industry Association of America (RIAA), stated in a release that "We applaud Senator Feingold for introducing this important legislation. It takes the necessary first step toward ensuring diversity of programming on radio stations by preventing abuse of independent promotion through unprecedented increased radio ownership consolidation. This radio promotion system needs reforming and this bill provides the road map to getting there."
6/27. Rep. Billy Tauzin (R-LA) wrote a letter to Federal Communications Commission (FCC) Chairman Michael Powell in connection with the FCC's rulemaking proceeding regarding on the newspaper broadcast cross ownership rules.
He wrote that the "explosion of media sources since 1975, when the rule was first implemented, should eliminate lingering concerns regarding a lack of diversity of views in the marketplace and the need for greater media competition -- the principal justifications for the newspaper/ broadcast cross ownership rule in the first place. Indeed, the vast majority of commenters in this proceeding advocate repeal of this antiquated and unnecessary rule, noting in large part the dramatic changes in the media marketplace."
Rep. Tauzin continued that "I am disappointed with the Commission's decision to defer what should be an immediate repeal of this outdated rule. However, I am heartened that final resolution of all of the outstanding broadcast ownership issues -- in the form of an ``omnibus´´ proceeding -- is on the horizon."
6/27. Numerous House and Senate Committees held hearings this week on the President's proposal to create a new Department of Homeland Security (DHS). House Majority Leader Richard Armey (R-TX) introduced legislation in the House that contains the President's proposal. See, HR 5005, the Homeland Security Act of 2002. See also, White House section by section analysis of the bill, and Bush's message to Congress.
One provision that has not received much scrutiny at these public hearings is Section 204. It creates a Freedom of Information Act (FOIA) exemption for cyber security information provided to the federal government. It provides that "Information provided voluntarily by non-Federal entities or individuals that relates to infrastructure vulnerabilities or other vulnerabilities to terrorism and is or has been in the possession of the Department shall not be subject to section 552 of title 5, United States Code."
Sen. Patrick Leahy (D-VT) raised the matter at a Senate Judiciary Committee hearing on Wednesday morning, June 26. In his opening statement he objected to "creating an ill considered and overly broad new exemption to the Freedom of Information Act. Encouraging government complicity with private firms to indefinitely keep secrets about information on critical infrastructure vulnerabilities may reduce the incentive to find solutions and fix the problems. In the end, more secrecy may undermine rather than foster security."
Rep. Bobby Scott (D-VA) asked Tom Ridge, Director of the Office of Homeland Security, about this exemption at a House Judiciary Committee hearing on Wednesday afternoon. However, he merely asked Ridge to provide a written response to a number of questions, including one regarding this exemption.
The ACLU circulated a statement opposing the exemption. The ACLU requests, in the alternative, that the exemption be narrowed in several respects. For example, the ACLU argues that it should be limited in time to only "months". The ACLU also argues that parties submitting documents to the federal government should be required to elect only one FOIA exemption to apply to that document, even though several might apply.
There are also several other pending bills that would provide a cyber security FOIA exemption. For example, Sen. Robert Bennett (R-UT) is the sponsor of S 1456, the Critical Infrastructure Information Security Act of 2001. It would provide a FOIA exemption for certain cyber security information provided to certain federal agencies, including the NIPC, FCC, Justice Department, Defense Department, and Commerce Department. The bill would also provide an antitrust exemption for certain collaboration on cyber security issues.
6/27. A collection of groups wrote a letter to Rep. Don Young (R-AK) and Rep. James Oberstar (D-MN), the Chairman and ranking Democrat on the House Transportation Committee, opposing HR 4633, the Driver's License Modernization Act of 2002. The letter states that the bill "establishes a nationwide identification system (national ID) through the bureaucratic back door of state drivers' licenses."
The bill would require all states within five years to have a drivers license system that includes computer chips embedded in licenses. The bill would require these chips to store "all text data written on the license" and "biometric data matching the holder of the license".
The bill would also require the following: "A State shall participate in a program to link State motor vehicle databases in order to provide electronic access by a State to information contained in the motor vehicle databases of all other States." The bill would also require that these databases include all of the "data fields printed on drivers' licenses and identification cards issued by the State" and driving records.
The bill would also make the following acts a federal crime, punishable by up to 20 years in prison: "falsely makes, forges, counterfeits, mutilates, or alters any driver's license ...", "tampers with, alters, or destroys a computer chip embedded in a driver's license or identification card or data contained on the computer chip", and "except by lawful authority, accesses data contained on a computer chip embedded in a driver's license or identification card".
The letter opposing the bill further states that "An identity card is only as good as the information that establishes identity in the first place. Terrorists and criminals will continue to be able to obtain -- by legal and illegal means -- the documents needed to get a government ID, such as birth certificates and social security numbers. H.R. 4633 builds a hi-tech card system on a faulty foundation of potentially false ``breeder´´ documents."
6/27. The Senate Judiciary Committee approved the nomination of Lavenski Smith to be a Judge on the U.S. Court of Appeals (8thCir).
6/27. Retired General Wayne Downing resigned his position as Deputy Assistant to the President, National Director and Deputy National Security Advisor for Combating Terrorism. He had held the position since October of 2001. President Bush replaced him with retired General John Gordon. Gordon is currently Under Secretary for Nuclear Security and Administrator of the National Nuclear Security Administration (NNSA). He was previously Deputy Director of Central Intelligence at the Central Intelligence Agency (CIA). Before that, he was Associate Director of Central Intelligence for Military Support at the CIA. Before that, he worked on the National Security Council. See White House release.
6/27. Albert Yu, Intel SVP and Strategic Programs Director, retired. See, release.
6/27. Marilyn Nelson resigned as a director of Qwest Communications. See, release.
6/27. The Office of the U.S. Trade Representative (USTR) announced a reorganization. See, USTR release.
6/27. The House Judiciary Committee postponed its hearing titled "Revisions to the Attorney General's Investigative Guidelines". Attorney General John Ashcroft had been scheduled to testify.
6/26. The Securities and Exchange Commission (SEC) filed a civil complaint in U.S. District Court (SDNY) against WorldCom late on Wednesday, June 26.
The SEC also released the following statement earlier on June 26: "The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets. The public can be assured that we are actively investigating these and other events relating to the veracity of WorldCom's financial statements and disclosures. As part of that investigation, we are ordering the company to file, under oath, a detailed report of the circumstances and specifics of these matters. These events further demonstrate the need for comprehensive market regulatory reforms that the administration, the Congress, and the SEC have been advocating and implementing."
President Bush stated that "I am deeply concerned about some of the accounting practices that take place in America. Today the revelations that Worldcom has misaccounted $3.4 billion is outrageous. We will fully investigate and hold people accountable for misleading not only shareholders, but employees, as well. There is a need for a renewed corporate responsibility in America. Those entrusted with shareholders' money must -- must -- strive for the highest of high standards. The good news is most corporate leaders in America are good, honest, open people who care deeply about shareholders and employees. And our economy is strong. When we find egregious practices, such as the one revealed today, we'll go after them. And need to." See, transcript.
Federal Communications Commission (FCC) Chairman Michael Powell stated in a release that "I am deeply concerned by the WorldCom developments, and the impact it could have on consumers and other providers in the industry. We are closely monitoring the situation and are doing everything possible to ensure and protect both the stability of the telecommunications network and the quality of service to consumers."
Powell continued: "To better assess the continuing troubles in the telecommunications industry, I will travel to New York on Friday to meet with a variety of telephone industry officials, analysts and debt rating agencies to gain a first-hand understanding of the recent developments that continue to challenge the telecom industry. Through this exchange, I hope to assure the financial markets that the FCC is committed to doing whatever it can to assist in the recovery of the sector and strengthen the public trust in this vital segment of our economy." See, release [Word].
House Commerce Committee Chairman Billy Tauzin (R-LA) stated in a release that "Following the latest scandal to rock Wall Street, I have ordered the investigative staff of the House Energy and Commerce Committee to immediately begin reviewing all of the facts surrounding WorldCom Inc.'s massive $3.8 billion restatement of earnings and losses. In many respects, this case appears to be eerily similar to the accounting hocus pocus that occurred at Enron."
"Once again, it seems as if accounting rules were manipulated to hide debt and inflate income, violating all accepted accounting standards and, perhaps, violating federal law as well. This was not a simple bookkeeping mistake. Clearly, it was an orchestrated effort to mislead investors and regulators, and I am determined to get to the bottom of it."
"This latest accounting scandal only highlights the importance of Congress working together to pass tough, new laws, which will prevent future abuses and restore investor confidence in the stock markets and corporate America," said Tauzin.
Sen. Paul Sarbanes (D-MD), Chairman of the Senate Banking Committee, stated in a release that "The startling revelations about WorldCom underscore the necessity to restore trust and confidence in our markets, where over 60% of the American public now invests. It is imperative we move forward with strong accounting reform and investor protection legislation. I am pleased that Senate Majority Leader Daschle has said he plans to move the bi-partisan Banking Committee bill immediately when we return from our July 4 recess."
6/26. The California Court of Appeal (4/1) issued its opinion [PDF] in Gentry v. eBay, affirming the trial court's dismissal of various state law claims against Internet auction site eBay. Auction purchasers alleged that eBay was liable for misrepresentations and other actions of auction sellers. The Appeals Court held that eBay has interactive computer service immunity under Section 230 of the Telecom Act of 1996.
Background. eBay operates an auction web site. Lars Gentry and other individuals purchased through eBay auctions sports memorabilia with phony autographs that the sellers had represented to be real. The sellers also provided Gentry and other purchasers with false certificates of authenticity for the items.
Trial Court. Lars Gentry and others filed a complaint in California Superior Court in San Diego against the individual sellers. They also named eBay as a defendant, alleging violation of California's Autographed Sports Memorabilia statute, Civ. Code, § 1739.7, by failing to furnish a certificate of authenticity to persons who purchased autographed sports related collectibles, and violation of the Unfair Competition Law, Bus. and Prof. Code, § 17200 et seq., by failing to supply certificates, and for the acts of others in distributing false certificates and making false representations in the eBay web site.
The District Court dismissed the complaint. It ruled that eBay is not a dealer within the meaning of Section 1739, and that it has immunity under Section 230 of the Telecom Act of 1996, 47 U.S.C. § 230, for statements made by third parties in its web site.
Statutes. § 1739.7(b) provides that "Whenever a dealer, in selling or offering to sell to a consumer a collectible in or from this state, provides a description of that collectible as being autographed, the dealer shall furnish a certificate of authenticity to the consumer at the time of sale. The certificate of authenticity shall be in writing, shall be signed by the dealer or his or her authorized agent, and shall specify the date of sale."
§ 1739.7(a)(4) provides that " 'Dealer' means a person who is in the business of selling or offering for sale collectibles in or from this state, exclusively or nonexclusively, or a person who by his or her occupation holds himself or herself out as having knowledge or skill peculiar to collectibles, or to whom that knowledge or skill may be attributed by his or her employment of an agent or other intermediary that by his or her occupation holds himself or herself out as having that knowledge or skill. 'Dealer' includes an auctioneer who sells collectibles at a public auction, and also includes persons who are consignors or representatives or agents of auctioneers. 'Dealer' includes a person engaged in a mail order, telephone order, or cable television business for the sale of collectibles."
§ 230(c)(1) provides that "No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider." § 230(d)(3) provides that "Nothing in this section shall be construed to prevent any State from enforcing any State law that is consistent with this section. No cause of action may be brought and no liability may be imposed under any State or local law that is inconsistent with this section."
Court of Appeal. The Court of Appeal affirmed. First, the Court held that eBay is not a dealer of the sports memorabilia within the meaning of the California Autographed Sports Memorabilia statute. It is not "in the business of selling or offering for sale collectibles" as required by the statute.
The Court further held the Section 230 provides eBay with immunity from suit. The Court wrote that "Subsection (c)(1) of section 230 thus immunizes providers of interactive computer services (service providers) and their users from causes of action asserted by persons alleging harm caused by content provided by a third party. This form of immunity requires (1) the defendant be a provider or user of an interactive computer service; (2) the cause of action treat the defendant as a publisher or speaker of information; and (3) the information at issue be provided by another information content provider."
6/26. The U.S. Court of Appeals (9thCir) issued three opinions in the last two days that are noteworthy. None are technology related. However, they could have an impact on the fight over confirmation of many Appeals Court judges. Confirmation of President Bush's picks would, in turn, impact a wide range of legal issues.
In Newdow v. U.S. Congress, the Court issued an opinion [PDF] holding that it is unconstitutional for school children to recite the Pledge of Allegiance. In Suzuki v. Consumers Union the Court issued an opinion [PDF] reversing a District Court dismissal of suit alleging product disparagement by Consumer Reports; the District Court had dismissed the case pursuant to New York Times v. Sullivan. In Hasson v. Medical Board of California the Court issued an order [PDF] denying an en banc rehearing in an ADA case; what is notable is that the 9th Circuit arguably ignored a controlling Supreme Court decision.
In Newdow, the Court issued a ruling that, regardless of the merits of its legal analysis, runs counter to the strongly held beliefs of most voters. In Suzuki the Court disregarded a case held sacred by the news media. And, in Hasson, the Court arguably violated two fundamental tenets of the American judicial system -- that the Supreme Court is the highest court, and that precedents must be followed.
These cases, but especially the Newdow case, may have political significance because President Bush is in a long running battle with Senate Democrats over appointments to the Appeals Courts, including the Ninth Circuit. The President nominates, and the Senate confirms. However, as a practical matter, the Senate Judiciary Committee plays a gate keeping function. And, its Chairman, Sen. Pat Leahy (D-VT), has been delaying consideration of many of the President's nominees. The Democrats hold majorities in the Senate, and on the Committee, by a one vote margin.
Sen. Leahy is not up for re-election this November, but one third of the Senate is. If there were a net swing of one seat in the Senate, control of the Senate, including committee chairmanships would change. The chairmanship of the Judiciary Committee would return to Sen. Orrin Hatch (R-UT), who would not hold up Bush's Appeals Court nominees.
President Bush has given some political speeches in which he has mentioned the battle over Appeals Court appointments. However, to date, Bush has lacked a concrete issue that resonates with a large segment of voters that he can use to generate voter interest in judicial selection.
Now he has one. And, his allies have already raised it. Sen. Trent Lott (R-MS), the Senate Minority Leader, stated that "This absurd ruling highlights the urgency for the Senate to act on President Bush's nominees for current judicial vacancies. I urge Senate Democrats to stop stalling and let us vote on the men and women who will restore common sense to the federal judiciary." See, release.
Sen. Hatch stated that "this court's outrageous decision demonstrates the importance of nominating and confirming qualified and learned judges who understand the role of the law and will not legislate from the bench. President Bush has done his job and has nominated fine judges. I once again, call upon the Senate to expedite the confirmation process, which has been stalled by the Democrat Majority. For instance, the Democrat controlled Senate has confirmed only 9 of 31 Circuit Court judges nominated by President Bush. This deliberate slowdown has caused 31 vacancies on the Circuit Courts, of which the Administrative Office of the U.S. Courts has declared 17 judicial emergencies. Furthermore, many fine nominees have been waiting for many months for even a hearing, let alone a vote for final confirmation." See, release.
Hence, Bush, and Senate Republican candidates can campaign on a new issue. In a stump speech, it might sound something like this: "restore a Republican majority in the Senate, so that Bush's common sense judges can get confirmed, so that there won't be any more San Francisco anti Pledge of Allegiance decisions."
The issue could be useful in Senate campaigns. However, it could also put pressure on Democrats to stop blocking Bush's judicial nominees. Some Democrats might want to deprive Bush and the Republicans of this campaign issue. Merely having the issue now puts pressure on Democrats to capitulate on Appeals Court nominees.
Bush's Press Secretary, Ari Fleischer, spoke on the subject at the economic summit in Canada. He stated that "The President was informed at the G-8 Summit about the San Francisco court decision pertaining to the flag. The President's reaction was that this ruling is ridiculous. The Supreme Court, itself, begins each of its sessions with the phrase, ``God save the United States and this honorable court.´´ The Declaration of Independence refers to God or to the Creator four different times. Congress begins each session of the Congress each day with a prayer. And of course, our currency says, ``In God We Trust.´´ ... this decision will not sit well with the American people. Certainly, it does not sit well with the President of the United States." See, transcript.
Sen. Leahy, like many Democrats, did promptly state that "I disagree with the decision". However, his solution is not new judges, but better decisions from the current judges. He continued that "It seems likely that this split decision by a three judge panel will be reconsidered by the full 9th Circuit, and I hope it will be." Of course, any decision en banc would most likely be issued after the November elections, which would be of little assistance to Sen. Leahy or others seeking to block Bush's nominees.
Perhaps, the Ninth Circuit disregarded Alexander Bickel's admonition regarding judicial review. He wrote that judicial review is legitimate if it "can be so exercised as to be acceptable in a society that generally shares Judge Hand's satisfaction ``in a sense of common venture´´; ... and whose discharge by the courts will not lower the quality of the other departments' performance by denuding them of the dignity and burden of their own responsibility." The Least Dangerous Branch, at 24.
6/26. Microsoft SVP and Chief Technology Officer Craig Mundie, and others, met with Federal Communications Commission (FCC) Commissioners Kathleen Abernathy and Kevin Martin, and key staff, to discuss the FCC's proceeding regarding the classification of cable modem service as an information service. Microsoft's attorney stated in a disclosure letter [PDF] that Microsoft argued that the FCC "should not require cable operators to offer access to multiple ISPs but should remain mindful of the importance of assuring consumers continue to enjoy that ability in the broadband future."
6/26. The Securities and Exchange Commission (SEC) filed a civil complaint in U.S. District Court (SDNY) against WorldCom alleging violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder, in connection with WorldCom's disclosure that it engaged in improper accounting practices.
The complaint states that WorldCom "disguised its true operating performance by using undisclosed and improper accounting that materially overstated its income before income taxes and minority interests by approximately $3.055 billion in 2001 and $797 million during the first quarter of 2002."
The complaint explains WorldCom's actions. "Starting at least in 2001, WorldCom engaged in an improper accounting scheme intended to manipulate its earnings to keep them in line with Wall Street's expectations, and to support WorldCom's stock price. One of WorldCom's major operating expenses was its so-called ``line costs.´´ In general, ``line costs´´ represent fees WorldCom paid to third party telecommunication network providers for the right to access the third parties' networks. Under GAAP, these fees must be expensed and may not be capitalized. Nevertheless, beginning at least as early as the first quarter of 2001, WorldCom's senior management improperly directed the transfer of line costs to WorldCom's capital accounts in amounts sufficient to keep WorldCom's earnings in line with the analysts' consensus on WorldCom's earnings. Thus, in this manner, WorldCom materially understated its expenses, and materially overstated its earnings, thereby defrauding investors."
The SEC seeks civil penalties, an injunction against further violations of federal securities law, an order prohibiting WorldCom from destroying records, appointment of a corporate monitor, and an order prohibiting WorldCom from making severance payments, bonus payments, or indemnification payments.
6/26. Securities and Exchange Commission (SEC) Chairman Harvey Pitt gave a speech in New York City in which he addressed the WorldCom lawsuit.
He stated that "WorldCom's announced $4 billion restatement puts a sharper point on all the concerns we have been expressing -- that our system has had serious dysfunctional aspects for quite some time. It leads me to offer you a simple message this evening, from the movie ``Network,´´ a message in which I encourage you all to join: ``I'm mad as hell, and I'm not going to take it any more.´´ What happened at WorldCom -- and we do not yet know all that happened at WorldCom -- is an outrage. What we also know we're looking at isn't a mistake, it's a fraud."
He also stated that the SEC plans to "require our 1000 largest companies to file a formal certification with us on the accuracy and completeness of their last annual reports" by August 15.
6/26. The House passed HRes 450 by a vote of 216-215. See, Roll Call No. 264. Trade promotion authority, which is also known as "TPA" and "fast track", would permit the President to negotiate trade agreements that the Congress could accept or reject, but not amend. TPA would strengthen the bargaining position of the President, and the U.S. Trade Representative (USTR), in trade negotiations with other nations. This resolution sets the structure and mandate for the House's negotiating team as the TPA bill goes to conference.
The House passed its version of the bill, HR 3005, the Bipartisan Trade Promotion Authority Act of 2001, on December 6, by a vote of 215-214. The Senate passed its version last month. For a bill to be signed by the President, the House and Senate must be reconcile their differences in a conference committee.
6/26. The House passed HR 4598, the Homeland Security Information Sharing Act, by a vote of 422-2. See, Roll Call No. 258. The bill provides for the sharing of homeland security information by federal intelligence and law enforcement agencies with state and local entities. Rep. Bill Delahunt (D-MA) and Rep. Dennis Kucinich (D-OH) voted no.
6/26. Federal Trade Commission (FTC) issued a short document [PDF] titled "Online Gambling and Kids: A Bad Bet". It states that "The most common types of gambling for kids are reported to be card games and sports betting. But increasingly, parents of teens are concerned that their kids may be gambling on the Internet, where many game operators are operating from servers outside the U.S. -- beyond the jurisdiction of state or federal regulations about the hours of operation, the age of the participants, or the type of game offered."
The FTC continues that "it's easy for kids to access online gambling sites, especially if they have access to credit or debit cards. Indeed, some of the most popular nongambling websites carry ads for gambling sites, and many online gameplaying sites link to gambling sites."
Rep. Bob Goodlatte (R-VA) praised the FTC. He stated that "The spread of gambling brings with it the onslaught of a host of social ills including bankruptcy, addiction, family break down and even suicide. Web users including children, who make up the largest percentage of Internet users, are constantly confronted with unsolicited banner ads, linking to Internet gambling sites. These sites operate without all of the necessary safeguards that are in place for the legalized gaming industry, which ensure that children are protected from gambling."
Rep. Goodlatte is the sponsor of HR 3215, the Combating Illegal Gambling Reform and Modernization Act, a bill directed towards shutting down illegal off shore gambling web sites. The bill passed the House Judiciary Committee on June 18.
6/26. Legislators and technology industry representatives criticized various cyber security related provisions of the President's proposal to create a new Department of Homeland Security (DHS). Rep. Sherwood Boehlert (R-NY) stated that it does not give research and development a high enough profile. Industry representatives opposed plans to move the NIST's Computer Security Division to the DHS.
House Majority Leader Richard Armey (R-TX) introduced HR 5005, the Homeland Security Act of 2002, on Monday, June 24. It contains the President's proposal. See also, White House section by section analysis, and Bush's message to Congress.
The House Science Committee held a hearing on Thursday, June 27 on the research and development aspects of the President's proposed bill. Committee Chairman Boehlert said in his opening statement that "The need for such a Department is as plain as the front page of today's Washington Post, with its talk of an Al Qaeda plot against our nation's computer systems. And the need for that Department to have a strong research and development (R&D) component is equally plain."
However, Rep. Boehlert said that "the nation lacks the tools it needs to foil a cyberattack". Moreover, "the bill the Administration has sent us simply does not give R&D a high enough profile to enable the Department of Homeland Security to accomplish its goals. The bill does not even explicitly mention R&D in some critical areas, such as cybersecurity".
See also, prepared statements of John Tritak, Director of the Critical Infrastructure Assurance Office, and John Marburger, Science Advisor to the President, and Director of the White House Office of Science and Technology Policy.
The President's proposal has also come under criticism for its planned relocation of the National Institute of Standards and Technology's (NIST) Computer Security Division to the new DHS.
The Computer & Communications Industry Association (CCIA) held a two day conference this week that addressed a wide range of technology related issues. On June 15, Benjamin Wu spoke. He is Deputy Under Secretary of Commerce for Technology at the Commerce Department (which includes the NIST).
CCIA members used this occasion to express opposition to moving the NIST's Computer Security Division. One participant said that "the concern being raised is ... the possibility exists that if it moves over to Homeland Security that it would be more subjected to a law enforcement agency mentality. And with the history that some of our folks have gone through of Clipper Chip, or that DES, there is a certain suspicion."
Benjamin Wu offered some slight support for the President's plan to move the Computer Security Division. He stated that "the President has proposed that a number of functions around the federal government be unified into the Department of Homeland Security. The primary mission of those functions is to protect our homeland security. A proposal that clearly we need to do". He added that "At the last minute, the NIST Computer Security Division was tossed into the mix. And, because it is in the President's proposal, we support the President's proposal."
However, he continued: "Now, having said that, clearly, also -- give you a readout on the situation as I understood it, because there has been, as you mentioned, a longstanding tension between the computer, or the IT industry, in relation to the -- really, two entities that perform computer security work ... the NSA and NIST. And there has always been a healthy, I think it would be fair to say, healthy disregard for NSA, even though they are technically capable. NSA always tilts towards their mission of national security."
He also stated that "the work that industry has done with NIST has been very productive -- has developed, as you say, the AES standard, and moved away from the Clipper Chip, and has been one that is well honed, and one that has proven to be effective in championing some of the industry's concerns. And the proposal that would move that Computer Security Division to the Department of Homeland Security, in our preliminary discussions with Congress, because, what the President proposed was a proposed piece of legislation, that has to work it way through the legislative process. So, both the House and the Senate, and then eventually conference, will need to come to agree to all of the final points of the legislation."
"What the Congress has indicated in preliminary discussions is some concern they felt of some feedback from industry that the Computer Security Division, if it is placed into the Department of Homeland Security, its functions, and its personnel, would then tilt towards homeland security, in much the same way that industry has concerns with NSA. And as a result, there won't be any real champion for the IT industry. And that sentiment is out there within Congress."
"And, if you truly believe that, then it would be incumbent upon you to contact your Members of Congress as this bill goes through the legislative process. So, I understand those concerns. And, I think that Congress will probably be -- want to reach out to the industry. And if you have to share those concerns, I am sure they would be interested in hearing them. But, now also, I could say that that is a very small function of the entire DHS proposal," said Wu.
The President's proposal would also transfer several other existing cyber security related units to the DHS. These would include all operations of the Federal Bureau of Investigation's (FBI) National Infrastructure Protection Center (NIPC), except for NIPC's Computer Investigations and Operations Section, the Department of Defense's (DOD) National Communications System, the Department of Commerce's (DOC) Critical Infrastructure Assurance Office, the Department of Energy's (DOE) National Infrastructure Simulation and Analysis Center, and the General Service Administration's (GSA) Federal Computer Incident Response Center (CIRC).
6/26. Representatives of the National Venture Capital Association (NVCA) spoke at a luncheon on Capitol Hill regarding the venture capital industry and public policy. NVCA members argued to an audience that included Congressional staff that the venture capital industry promotes innovation, creates jobs, and increases per capita income.
Bob Grady, of Carlyle Venture Partners, stated that the NVCA has four broad policy objectives: education reform, more research and development spending by government, promotion of free trade, and incentive based competition.
He also opposed the proposals that "say that we should expense stock options". He elaborated that stock options are shares, not costs, that they are hard to value, and that they are volatile. He also said that treating stock options as costs would make financial statements less reliable. Finally, he argued that treating stock options as costs would punish the best performing companies most, and hurt "job creators".
6/26. Rep. Anna Eshoo (D-CA) spoke at a National Venture Capital Association (NVCA) luncheon on Capitol Hill. She praised the venture capital industry, and argued that the Congress, in its efforts cure corporate corruption, should not require that stock options be expensed.
She stated that "venture capital ... today is one of the most important ingredients in our national economy, and our national successes". However, she continued that "Today, American businesses ... are under siege. I was at a hearing this morning on FASB. Everyone is looking to pick the magic piece of fruit off the tree that will be the golden apple, so to speak, that will somehow cure the excesses in our system".
She also spoke about stock options. She said that "In the rush, and in the heat of the debate about Enron, and now subsequent corporations, today, we see WorldCom on the headlines of all of our nation's newspapers. This issue today is in great jeopardy. I spoke up this morning in the FASB hearing and said, as much as we need to reform, we cannot throw the baby out with the bath water. There is a direct nexus between venture capitalists, venture capital, and stock options."
"The issue of stock options is now being thrown into, and being used as one of the toxic substances that poisoned the corporate well, and therefor, we need to throw this out," said Eshoo.
She added that "I think that the most important part of this story is that it is the average person that is being rewarded. It is the American way ... to take a risk, and be rewarded for taking that risk. We cannot allow this issue to be lost." However, she cautioned that "We are losing so far."
See, for example, S 1940 and HR 4075, the "Ending the Double Standard for Stock Options Act", which would require companies to treat stock options for employees as an expense on financial statements if they take a tax deduction for stock option compensation.
6/26. The House Commerce Committee's Subcommittee on Commerce, Trade, and Consumer Protection held a hearing on draft legislation titled the Financial Accounting Standards Board Act. Edmund Jenkins, Chairman of the Financial Accounting Standards Board (FASB) argued for FASB independence.
Jenkins said in his prepared statement that "Members of Congress, however, must avoid the urge to legislate technical accounting standards and must reject the facile arguments and emotional appeals sometimes made by constituents claiming that FASB proposals will destroy Western civilization." See also, FASB release.
Bala Dharan of Rice University said in his prepared testimony that "the SEC and Congress have demonstrated, albeit only rarely, their willingness to pressure the FASB to reconsider its decisions for what might well be political reasons rather than conceptual reasons. The most glaring example of such an intervention was with respect to FASB's project on stock options accounting, when the US Senate passed a non-binding resolution in opposition to the FASB's position that the cost of stock options should be shown by corporations as an expense".
See also, opening statement of Rep. John Dingell (D-MI), and prepared statements of John Coffee (Columbia University Law School) and Baruch Lev (NYU).
6/26. President Bush announced the following judicial nominations: Richard Griffin (to be a Judge of the U.S. Court of Appeals for the Sixth Circuit), Daniel Hovland (U.S. District Court, North Dakota), Thomas Phillips (U.S. District Court, Eastern District of Tennessee), and Linda Reade (U.S. District Court, Northern District of Iowa). See, White House release.
6/26. The American Electronic Association (AeA) announced that it is selling a report titled "Cyberstates 2002: A State by State Overview of the High Technology Industry". See, AeA release.
6/26. The Senate passed S 1754, the Patent and Trademark Office Authorization Act of 2002, and HR 2047, the Patent and Trademark Office Authorization Act of 2002.
Go to News from June 21-25, 2002.

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