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June 27, 2002, 9:00 AM ET, Alert No. 460.
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SEC Files Complaint Against WorldCom
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."
House Passes Homeland Security Information Sharing Act
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.
Venture Capitalists Host Hill Luncheon
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".
Rep. Eshoo Argues Against Requiring Expensing of Stock Options
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.
House Subcommittee Holds Hearing on FASB
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).
Akamai and Speedera Trade Complaints
6/25. Akamai filed a complaint in California Superior Court in San Francisco against Speedera Networks alleging theft of trade secrets. See, Akamai release. Speedera, in turn, filed a complaint in U.S. District Court (NDCal) against Akamai alleging unfair competition, false advertising, trade libel and intentional interference with prospective business advantage. See, Speedera release.
Adelphia Files Chapter 11 Petition
6/25. Adelphia Communications filed a Chapter 11 petition for bankruptcy in the U.S. Bankruptcy Court (SDNY). See, Adelphia release [PDF].
Cal App Holds eBay Has Section 230 Immunity
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."
News Analysis: Ninth Circuit Hands Bush a Campaign Issue
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 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 a 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. 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 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 when 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.
People and Appointments
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.
House Sends TPA Bill to Conference
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. 
Thursday, June 27
The House will meet at 10:00 AM for legislative business.
The Supreme Court will return from recess.
9:00 AM - 4:30 PM. The Agriculture Department's Rural Utilities Service (RUS) will hold a meeting to receive public input on "the challenges of deploying broadband services to rural America, the successes, the role of competition in providing access to rural areas". See, notice in Federal Register. Location: Room 0348, South Building, U.S. Department of Agriculture, 1400 Independence Ave., SW.
10:00 AM. The House Judiciary Committee will hold a hearing titled Revisions to the Attorney General's Investigative Guidelines. Attorney General John Ashcroft will testify. Webcast. Press contact: Jeff Lungren or Terry Shawn at 202 225-2492. Location: Room 2141, Rayburn Building.
10:00 AM. The House Science Committee will hold a hearing on the research and development aspects of the President's proposed bill to create a Department of Homeland Security. John Marburger (Science Advisor to the President and Director, White House Office of Science and Technology Policy) is scheduled to testify. See, notice. Webcast. Location: Room 2318, Rayburn Building.
10:00 AM. The Senate Judiciary Committee will hold an executive business meeting. The agenda includes consideration of S 2395, an untitled bill to prevent and punish counterfeiting and copyright piracy, and the nominations of Lavenski Smith (to be a Judge of the U.S. Court of Appeals for the 8th Circuit) and John Rogers (to be a Judge of the U.S. Court of Appeals for the 6th Circuit). See, notice. Press contact: Mimi Devlin at 202 224-9437. Location: Room 226, Dirksen Building.
10:00 AM. The Senate Finance Committee will hold a hearing on the nomination of Charlotte Lane to be a member of the USITC. Location: Room 215, Dirksen Building.
12:00 NOON - 1:30 PM. The FTC's Bureau of Competition will hold a public workshop on merger investigation best practices. This is the sixth workshop of a seven part, five city, series. See, FTC release. Location: FTC, Room 332, 600 Pennsylvania Ave., NW.
12:00 NOON. The Cato Institute will host a panel discussion titled Antitrust Flies High: Is the Orbitz Investigation Good News for Consumers? The scheduled speakers are Gary Doernhoefer (Orbitz), James DeLong (Competitive Enterprise Institute), Andrew Steinberg (formerly with, Thomas Lenard (Progress and Freedom Foundation), and Robert Atkinson (Progressive Policy Institute). Lunch will follow. Webcast. See, notice. Location: Cato, 1000 Massachusetts Ave., NW.
1:00 PM. The Senate Governmental Affairs Committee will continue its hearing to examine the relationship between a Department of Homeland Security and the intelligence community. Location: Room 342, Dirksen Building.
2:00 PM. The Senate Judiciary Committee will hold a hearing on several pending judicial nominations, including Dennis Shedd (to be a Judge of the U.S. Court of Appeals for the 4th Circuit). See, notice. Press contact: Mimi Devlin at 202 224-9437. Location: Room 226, Dirksen Building.
2:00 PM. The House Judiciary Committee's Subcommittee on Courts, the Internet and Intellectual Property will hold a hearing titled Unpublished Judicial Opinions. Webcast. Press contact: Jeff Lungren or Terry Shawn at 202 225-2492. Location: Room 2141, Rayburn Building.
Friday, June 28
The House will meet at 9:00 AM for legislative business.
8:30 - 11:00 AM. The Alliance for Public Technology (APT) and the High Tech Broadband Coalition (HTBC) will host a breakfast briefing titled From Debate to Deployment: Changing the Broadband Reality. The participants include FCC Commissioner Kathleen Abernathy, who is scheduled to speak at 9:05 AM. Other participants include Debbie Goldman (Communications Workers of America), Allen Hammond (University of Santa Clara School of Law), Edie Herman (Communications Daily), Edward Neaf (Cambridge Strategic Management Group), Paul Schroeder (APT), and Gary Shapiro (Consumer Electronics Association and HTBC). See, agenda. Press contact: Matt Bennett at 202 263-2972 or Location: Lowe's L'Enfant Plaza Hotel, 480 L'Enfant Plaza.
9:30 AM. The Senate Governmental Affairs Committee will hold a hearing to examine how the proposed Department of Homeland Security should address weapons of mass destruction, and relevant science and technology, research and development, and public health issues. Location: Room 342, Dirksen Building.
10:00 AM. The House Judiciary Committee's Subcommittee on Commercial and Administrative Law will hold an oversight hearing titled Administrative Law, Adjudicatory Issues, and Privacy Ramifications of Creating a Department of Homeland Security. Audio webcast. Press contact: Jeff Lungren or Terry Shawn at 202 225-2492. Location: Room 2141, Rayburn Building.
Deadline to submit comments to the FTC in response to its Notice of Proposed Rulemaking (NPRM) to amend its Telemarketing Sales Rule (TSR). The new rule would impose user fees on telemarketers, and their seller or telemarketer clients, for their access to the national do  not call registry, if one is implemented. See, notice in Federal Register.
Monday, July 1
Neither the House nor the Senate will meet Monday July 1 through Friday July 5, due to the Independence Day work period.
9:30 AM - 12:00 NOON. The Department of State's (DOS) International Telecommunication Advisory Committee (ITAC) will hold a meeting to address preparations for the CITEL Assembly. For more information, and security requirements, see notice in the Federal Register.
Copyright Office fee increases to into effect. Basic registration fees remain unchanged. However, renewal registrations, group registrations, supplementary registrations, and fees for services, all go up.
Extended deadline to submit reply comments to the FCC in response to its Notice of Proposed Rulemaking (NPRM) titled "In the Matter of Appropriate Framework for Broadband Access to the Internet over Wireline Facilities". This is CC Docket No. 02-33. See, May 29 notice [PDF] extending deadline from June 3 to July 1. See also, Order [PDF] extending deadline from May 14 to June 3, and original notice in Federal Register.
Deadline to submit nominations to the NIST for appointment to the Advanced Technology Program Advisory Committee. See, notice in Federal Register.
Deadline to submit nominations to the NIST for appointment to the Visiting Committee on Advanced Technology. See, notice in Federal Register.
Tuesday, July 2
President's Homeland Security Advisory Council (PHSAC) will meet. The meeting is closed to the public. However, written comments may be submitted Fred Butterfield at fred.butterfield See, notice in the Federal Register. See also, order establishing the PHSAC. Location: undisclosed.
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