Tech Law Journal Daily E-Mail Alert
June 28, 2002, 9:00 AM ET, Alert No. 461.
TLJ Home Page | Calendar | Subscribe | Back Issues
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 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. 
SEC Chairman Addresses WorldCom
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.
Congressional Committees to Hold Hearings on WorldCom
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.
Sen. Feingold Introduces Radio Ownership Regulation Bill
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."
Rep. Tauzin Writes FCC Re Ownership Rules
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."
Cyber Security Provisions of President's DHS Bill Criticized
6/27. 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).
President's DHS Bill Creates Cyber Security FOIA Exemption
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.
Groups Raise Privacy Implications of Driver's License Bill
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."
Microsoft Meets with FCC Commissioners
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."
Microsoft Signs MOU with Chinese Government
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."
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.
POSTPONED. 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.
10:00 AM. The House Judiciary Committee's Subcommittee on Commercial and Administrative Law will meet to mark up HR 4561, the "Federal Agency Protection of Privacy Act". 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 to amend its Telemarketing Sales Rule. 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 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 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.
Wednesday, July 3
The TLJ Daily E-Mail Alert will not be published because of the Independence Day holiday.
Thursday, July 4
Independence Day. The FCC and other government offices will be closed. The National Press Club will be closed.
The TLJ Daily E-Mail Alert will not be published because of the Independence Day holiday.
FTC Reports on Internet Gambling and Children
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.
People and Appointments
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.
6/25. Wilson Lowery was named Executive Assistant Director for Administration of the Federal Bureau of Investigation (FBI). He has been a special assistant to the FBI Director, tasked with overseeing the FBI's reorganization and re-engineering implementation. He previously worked for IBM. He replaces Robert Chiaradio. See, FBI release.
More News
6/27. The Office of the U.S. Trade Representative (USTR) announced a reorganization. See, USTR 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.
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 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.
About Tech Law Journal
Tech Law Journal publishes a free access web site and subscription e-mail alert. The basic rate for a subscription to the TLJ Daily E-Mail Alert is $250 per year. However, there are discounts for entities with multiple subscribers. Free one month trial subscriptions are available. Also, free subscriptions are available for law students, journalists, elected officials, and employees of the Congress, courts, and executive branch, and state officials. The TLJ web site is free access. However, copies of the TLJ Daily E-Mail Alert and news items are not published in the web site until one month after writing. See, subscription information page.

Contact: 202-364-8882; E-mail.
P.O. Box 4851, Washington DC, 20008.
Privacy Policy
Notices & Disclaimers
Copyright 1998 - 2002 David Carney, dba Tech Law Journal. All rights reserved.