May 22, 2006

SEC: No Sarbanes Oxley Exceptions

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 3:45 pm

The SEC announcement (HT Sox First) says this:

….. ultimately all public companies will be required to comply with the internal control reporting requirements of Section 404.

There’s lots of window-dressing and promises of improved assistance and guidance, but the bottom line is that the Commission is in essence forcing costly big-company control systems and practices onto small public companies.

Many small companies will conclude that it’s not worth being public any more, and many other companies considering going public will say “never mind.” This is not progress, and is not good for the economy.

Angela Merkel Channels Bush 41, to the Country’s Detriment

Filed under: Economy,Soc. Sec. & Retirement,Taxes & Government — Tom @ 1:30 pm

It’s the German equivalent of Bush 41′s broken “read my lips” pledge:

German parliament to pass biggest post-war tax hike
19 May 2006

BERLIN – Germany’s parliament was poised Friday to approve the biggest tax hike in the post-war era despite fears it could harm the country’s modest economic upswing.

Chancellor Angela Merkel’s grand coalition plans to raise value-added-tax to 19 per cent from the current 16 per cent as of January 1, 2007.

This and other measures are expected to yield the government a whopping 19.4 billion euros (24.8 billion dollars) in extra revenue next year.

Funds will be used to plug holes in the country’s gaping budget deficits which have overshot the eurozone limit for the past years.

But given that the move is expected to boost the average annual tax bill of a married couple by 560 euros, experts warn it could further dampen the already weak domestic demand in Europe’s biggest economy.

Analysts fear that economic growth, which is slowly picking up after five years of stagnation, could go back into a tailspin.

Eckart Tuchtfeld, a senior economist with Commerzbank in Frankfurt, said following expected GDP growth of 1.5 per cent this year, Germany’s economy would likely post only a sickly 1 per cent growth in 2007.

“Consumer prices will go up … and there will be zero growth in domestic demand next year compared with 2006,” he warned in comments to Deutsche Press-Agentur dpa.

Even Chancellor Merkel insisted during her election campaign last summer that “tax increases … would damage the economy. We will never do it.”

But she swiftly changed her tune after being narrowly elected in September.

There remains considerable public opposition to the tax hike.

No kidding?

And Ms. Merkel, if economic growth will contract with the tax increases, doesn’t that mean that economic growth would increase if taxes went down?

Unfortunately, maybe not in Germany. As discussed last September, the country has dug itself such a deep hole with its “untouchable” social-welfare commitments, combined with low birth rates, that it has little room to maneuver. Meaningful tax cuts that actually change behavior would have to drop the highest rates down in the mid-30s, and it appears Ms. Merkel’s coalition doesn’t have the stomach for that (it may also be that the hidebound EU wouldn’t permit it anyway).

As also stated last September, what is happening in Germany now is the future the US faces if it doesn’t reform its current 70 year-old Social Security and 40 year-old Medicare models.

Kudlow on the Cruelest Tax of All, and a Solution

Filed under: Economy,Taxes & Government — Tom @ 11:40 am

Quick: You bought 500 shares of stock in Company A ten years ago at $20 a share, investing $10,000. Monday, before the market dipped, you sold it for $60, pocketing $30,000 (assuming no transaction costs, which would be minimal in any case).

Your profit was $20,000, right?

Wrong, says Larry Kudlow, who of course is correct (HT Club for Growth):

Since the capital gains tax remains unindexed for inflation, the effective tax rate on real stock market profits has been gradually rising from 22.5 percent to 28.6 percent, over the past two years, as the chained CPI has increased to 3.2 percent from 1.7 percent.

This means that investors keep $71.40 cents of every hundred-dollar capital gain today, but they kept $77.50 cents two years ago. That comes to an 8 percent disincentive, or drag, on stock market wealth.

All the more reason for the Fed to strengthen the dollar by withdrawing greenbacks from the financial system. Otherwise, the cruel inflation tax will continue to exact a stock market toll.

Making it tangible, let’s assume in the original example that inflation was consistently 3% during the 10-year period involved. The purchasing-power adjusted (i.e., “real”) gain would not be $20,000, it would be $16,600, or $30,000 minus $13,400, which is the amount of the original investment adjusted for 10 years of inflation. Running the numbers with consistent 4% inflation would reduce the real gain to about $15,200.

The reduced capital-gains tax rates put into place in 2003 compensate to an extent for this situation, but not wholly, or even fairly, by any stretch of the imagination.

Imagine an investor in a fast-food franchise who plunks down $500 grand for a couple of locations. He runs the franchise for 20 years, and sells out for $995,000. Under current law, he owes capital gains tax on the $495,000 “gain.” But if inflation has been 3-1/2% during those 20 years, he should owe ….. nothing, as the franchise’s purchasing power value has not increased at all.

What’s the answer? Index capital gains (AND losses, though there would be problems in allowing excessive losses) to inflation. I would even support making capital gains tax rates the same as those for ordinary income, IF true indexation were put into place.

The reporting would not be as difficult as you might think, as the Turbotaxes of the world would simply build the inflation tables into their cap-gains reporting modules. More importantly, investors would finally pay taxes based on real instead of mythical gains.

Milberg Weiss: A Quick Overview, and the Fallout Begins

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 9:52 am

A Wall Street Journal subscription-only editorial has a useful overview of what shareholder “strike” suits are about, what the two indicted partners at Milberg Weiss allegedly did, and how they did it:

The 102-page indictment out of the Los Angeles U.S. Attorney’s office is a remarkable account of mass-tort corruption that has long been suspected by anyone paying attention. It accuses Milberg Weiss, as well as partners David Bershad and Steven Schulman, of paying off their class-action plaintiffs. The accused say they’ll fight the charges. But this exercise has already done a public service by turning over a rock to expose the dirty world of securities “strike” suits that Milberg Weiss helped pioneer.

At best these are acts of legal extortion, with law firms jumping on a company with a falling share price to allege fraud on behalf of shareholders — whether or not there has been any bad behavior. The law firms claim to represent so many investors that most companies settle rather than keep paying legal fees to fight in court. Shareholders typically receive only token payments, while the likes of Bill Lerach and Melvyn Weiss have become rich as Croesus. Even Congress has recognized this as a racket, passing a 1995 reform over Bill Clinton’s veto that has moderated some abuses but failed to stop the shakedowns.

This indictment breaks new ground, however, in alleging that many of these suits aren’t just unethical but have been illegally manufactured. In order to file a securities suit, tort firms require a “lead plaintiff” who was actually harmed and seeks to represent thousands of other unnamed shareholders. According to prosecutors, Milberg Weiss was paying millions of dollars in kickbacks to its lead plaintiffs.

For some of these “investors,” filing lawsuits seemed to be a full-time job. Howard Vogel, a New Jersey businessman who turned state’s evidence in April, served, or had his relatives serve, in 40 suits. Retired Palm Springs lawyer Seymour Lazar is accused of taking part, or having his family take part, in 70 suits. All told, the indictment claims Milberg Weiss raked in some $216.1 million from lawsuits in which they kicked back cash to plaintiffs.

The indictment also asserts that the accused didn’t just happen to be invested in these stocks. Rather, “the Paid Plaintiffs purchased the securities at issue anticipating that the securities would decline in value, in order to position themselves to be named plaintiffs in securities fraud actions and to obtain kickback payments. . . .”

The Journal is worried about the unfairness of indicting the firm: “The threat of a corporate death sentence is an abuse of prosecutorial discretion against any but the most corrupt criminal enterprises — namely, the mob.” I believe that if the firm has done what is alleged, it has essentially been operating a mob-like protection racket under the false pretense of protecting shareholders. The only thing missing is “contracts” on those who resist.

Meanwhile, the fallout from the indictment of the leading firm in shareholder class-action “strike suits” and two of its partner has been widespread, and there is surely more to come:

  • According to the New York Sun, current New York Attorney General and gubernatorial candidate Elliot Spitzer is returning “tens of thousands of dollars” in campaign contributions from the firm and its partners.
  • Ohio Attorney General Jim Petro has removed Milberg Weiss as his “special counsel,” and as lead counsel in its suit against Putnam Funds and that firm’s alleged mismanagement of Ohio Tuition Trust Authority funds.
  • Milberg Weiss partner David Bershad is taking a leave of absence.
  • So is partner Steven Schulman.
  • For our ongoing entertainment, the firm has set up a self-defense web site.

Finally, the New York Sun has lots of uncomfortable information on Milberg Weiss’s relationship with Spitzer and other New York lawmakers in a Friday editorial:

If this indictment makes an eloquent case for tort reform, other related circumstances, especially right here in New York, highlight how difficult that reform can be to achieve. Consider all the New York politicians who have taken contributions just from the members of the plaintiff’s bar implicated in this particular case. The state’s comptroller, Alan Hevesi accepted $100,000 from the firm for his 2002 campaign, as well as $13,500 each from senior partners Melvyn Weiss and William Lerach. Mr. Lerach later left the firm, but was still a partner during part of the time covered by the indictment. He was certainly at the firm when he donated $12,000 to the Friends of Pataki committee in 2001 and 2002.

The gubernatorial campaign of the attorney general, Eliot Spitzer, accepted $35,000 from the firm, of which $20,000 came in during the past year as the legal cloud darkened, and another $35,000 from Mr. Weiss. Mr. Schulman donated $9,000 to Mr. Spitzer’s 2002 attorney-general and 2006 gubernatorial campaigns. Mr. Bershad gave Mr. Spitzer $13,000 in 2002 and $10,000 for 2006.

It’s worth asking whether that money might have played some role in one interesting little trill in the indictment: The federal indictment notes that some of the behavior it alleges also violates New York law. Yet Mr. Spitzer, who normally interprets New York law to expand his jurisdiction, doesn’t seem to have taken much interest in pursuing Milberg Weiss before or during the federal investigation. Likewise, after winning re-election in 2002 in part with a cash infusion from Milberg Weiss, Mr. Hevesi just happened to hire the firm to represent the state’s public-employee pension fund in – you guessed it – a shareholder suit against Bayer AG.

….. We’re all for campaign contributions as a form of free speech, but trial lawyers’ exercise of their First Amendment rights doesn’t absolve politicians of their responsibility to put an end to abusive litigation like that alleged in this indictment. No matter how much money these New York politicians, or other beneficiaries of trial lawyer largesse, return, the fundamental problem of the abuse of civil litigation will remain. This indictment shows just how big that problem may turn out to be.


UPDATE: How sleazy is this? — “Prosecutors asserted in court filings that Mr. Bershad used cash from a safe in a credenza in his office to pay kickbacks to plaintiffs. Access to the safe ‘was strictly limited,’ according to the indictment.”

Previous Posts:

  • May 19 — Milberg Weiss: At Long Last, Two Partners, and the Firm Itself, Are Indicted
  • April 30 — Is the Jig Finally Up on Milberg Weiss?
  • Dec. 14, 2005 — Quebec’s Lawyers Are Mimicking Milberg Weiss’s US Class-Action Tactics
  • Nov. 18 — Update: Investigation into Illegal Payments to Shareholder-Suit Plaintiffs
  • Aug. 19 — Update: The Multi-Billion Dollar Shareholder-Suit Payoffs Investigation Is Gaining Steam; Only the WSJ Cares
  • June 27 — Payoffs to Shareholder Suit Plaintiffs Alleged

Amnesties Gone Wild

Filed under: Economy,Taxes & Government — Tom @ 9:07 am

From the Washington Times’ again-eponymous Charles Hurt, in yet another article that should carry a “you will scream before you’re done reading it” warning (HT Michelle Malkin):

Among those who will be cleared of past crimes under the Senate’s proposed immigration-reform bill would be the businesses that have employed the estimated 10 million illegal aliens eligible for citizenship and that provided the very “magnet” that drew them here in the first place.

….. Lawyers for the Senate Judiciary Committee have scoured the bill and come up with a list of 31 crimes relating to illegal immigration that would be wiped clean.

That is, “Lawyers for the Senate Judiciary Committee, of which Ohio Senator Mike DeWine is a member …..”


Another Reason I Detest Tax Abatements and Incentives

Companies often can’t, won’t, or don’t stick to the terms of the deal.

Then the state or other government entity doesn’t try to get its money (i.e., our money) back.

That appears to be the case here with a multibillion-dollar household-name company.

(Why does the company even need to be asked to fork over the value of the breaks it didn’t earn?)


Bizzy’s AM Coffee Biz-Econ-Life Links (052206)

Free Links:

  • Let a million foreclosures bloom? Moderate Mainstream has caught what has to be seen as an ugly, and predicted, downside of the “Bankruptcy Reform” law BizzyBlog opposed last year — foreclosures are skyrocketing. Update: In a related item also caught by Moderate Mainstream, Meredith Whitney, a CIBC World Markets official speaking at a Federal Deposit Insurance Corporation conference, stated her belief that 10% of the economy will experience a “segmented recession” over the next 24 months. Ms. Whitney’s terminology is a bit too clever (only whole economies can be in a recession), but many overleveraged borrowers are very vulnerable.
  • A tribute to …..Wal-Mart (HT Don Luskin via Greg Mankiw) — It and similar big-box stores may be responsible for as much as 75% of the growth in productivity.
  • An outfit called just sold its business for $9.5 mil (HT Techdirt); if that doesn’t raise eyebrows, the fact that $7.5 million of the value was in the domain name should. If this ever comes to pass, it may be one of the bigger wastes of $7.5 million ever.
  • Apple just celebrated the five-year anniversary of its entry into the retail store arena, which has to be seen as a stunning success. Update: But am I really supposed to believe that to get a “student discount” the student has to physically be in the store (this was a requirement at Apple’s Kenwood store, which lost a sale as a result)? What if the computer is a gift, you dingalings?
  • Japan’s first quarter 2006 economic growth was 1.9%, so zero interest rates (you read that right) may be ending.
  • Read this, and you’ll quickly conclude that the “Culture of Corruption” is not linked to only one of the two major parties.. You’ll also see that this one literally does involve cold, hard cash.
  • John McCain was subjected to heckling at his New School commencement speech last Friday — even before he could say something supposedly offensive. Imagine if a genuine conservative had been selected instead.
  • Here’s an interesting concept — “Fair Use” may even include the use of copyrighted material in a for-profit setting.
  • I guess they should really call themportable desktops” (HT Techdirt) — Apple says you shouldn’t use their new MacBook laptop computers on your, uh, lap, unless you want to risk “discomfort and potentially a burn.”

Positivity: Murderer Proven Innocent Graduates from Law School

Filed under: Positivity — Tom @ 6:03 am

Christopher Ochoa has been through a lot. Friday, May 12, he went through a graduation ceremony at the University of Wisconsin Law School (more details on the evolution of the case and the exoneration are here and here):