False Corporate Accounting

“High Court limits investors suits against 3rd parties,” Chicago Tribune, Jan. 16. Scientific-Atlanta and Motorola were vendors for cable company, Charter Communications. Charter misrepresented its revenue to pump up its stock prices. When the accounting errors were revealed, their stock price plummeted. Investors sued
S-A and Motorola arguing that they were part of the scheme. The Supreme Court in a 5-3 decision limited the liability of third parties to the company committing the fraud. The Court’s revolutionaries Kennedy, Scalia, Thomas, Alito and Roberts argued (imagined) that a contrary decision would result in an explosion of securities litigation. Well, if there is a ton of wrong-doing, that is exactly what should happen. The same argument was used by the administration in opposing holding CEO’s liable for fraud, ignoring the advise of then Secretary of the Treasury O’Neil and Alan Greenspan chair of the Council of economic advisors.
The progressives Stevens, Souter and Ginsberg argued that Charter could not have committed the fraud without the vendor’s help. Motorola supplied cable boxes at inflated prices to Charter and used the windfall to buy advertising on the cable. The higher prices were booked as a capital expense while the advertising purchases were noted as revenue. The decision is expected to have a major impact on class-action lawsuits arising from the implosions of Enron and HealthSouth. (It did.) The administration ignored the advice of the Securities and Exchange Commission that pleaded to be allowed to file a brief in the case, and instead followed the advice of the Justice Department. The SEC clearly has the authority to bring such suits on its own behalf, instead of being brought by private investors in class action suits. Obviously, if they can’t file a brief, they are not going to bring their own suit. The decision was applauded by the U.S Chamber of Commerce and the National Association of Manufacturers. This is the payoff to generous campaign contributions from big business.
This is a clear example of how the average guy gets screwed. But, how can the average citizen understand what is going on? I had to read the story in the NYT to get the whole picture. The Tribune just said two vendors were involved, but did not explain the fraudulent accounting that obviously could not have happened without Motorola’s knowledgeable participation. Maybe they did not directly tell the public how wonderful investment in Charter would be, but they clearly understood how their cooperation would be used. But what the hell, they owe it to their own stockholders to make as much profit as possible and sell as many boxes as possible and get free advertising. Greed is good, or so we are told! John Edwards is running for President as the champion of the little guy. His examples are not as complicated as the above. He paints a picture of big, bad health insurance companies not paying the claims of those unfortunately suffering from unusual diseases. That is easy to understand, but nevertheless Edwards is not getting much support from voters.