TLJ News from June 1-5, 2007

SEC Orders IBM Not to Violate Reporting Requirements

6/5. The Securities and Exchange Commission (SEC) issued an administrative order [PDF] instituting cease and desist proceeding against IBM.

IBM and the SEC settled this matter, with the SEC alleging violation of Section 13(a) of the Exchange Act by IBM, but IBM admitting no wrongdoing. The SEC ordered IBM to cease and desist from violating federal securities laws. The SEC imposed no fine.

The order states that "This matter involves a misleading chart presented by IBM during an April 5, 2005 conference call with analysts, which was simultaneously webcast, and included in a Form 8-K filed with the Commission, relating to the impact that the company’s decision to expense employee stock options would have on its first quarter 2005 (``1Q05´´) and fiscal year 2005 (``FY05´´) earnings results."

It continues that "During the conference call, IBM announced that beginning in 1Q05 it would report stock options as an expense in its financial statements and advised analysts to adjust their earnings models to account for the change. At the time, IBM expected that its stock options expense for 1Q05 would have a $0.10 impact on first quarter earnings per share results and estimated a $0.39 impact on FY05 earnings per share results. IBM did not disclose this information during the conference call or in its subsequently filed Form 8-K. IBM included a misleading chart in its presentation which was understood by many analysts to indicate that the earnings per share impact of the stock options expense would be $0.14 for 1Q05 and $0.55 for FY05, thereby causing analysts to lower their 1Q05 and FY05 earnings per share estimates by these amounts. By engaging in this conduct, IBM violated the reporting provisions of the federal securities laws."

Specifically, the SEC stated that this violated Section 13(a) of the Exchange Act, which is codified at 15 U.S.C. § 78m(a), and Rule 13a-11 thereunder, which is codified at 17 C.F.R. § 240.13a-11.

Scott Friestad, Associate Director of Enforcement at the SEC, stated in a release that "IBM misled investors by failing to disclose information that would have allowed them to accurately determine the impact that the company's decision to expense stock options would have on its financial results. The facts here are particularly troubling because the disclosure decision was driven, in part, by management's perception of how the news would be interpreted by analysts."

This release adds that this is a "settled enforcement action".

IBM stated in a release that it "has consented to entry of an administrative order by the SEC directing that IBM cease and desist from committing or causing any violations of certain of the reporting provisions of the federal securities laws and related SEC rules. IBM consented to this order without admitting or denying any wrongdoing. The SEC's order contains no finding of securities fraud or violation of any antifraud provision of the federal securities laws and related SEC rules. No monetary penalty or fine was imposed in connection with the resolution of this matter."

Paulson Addresses Strategic Economic Dialogue with PR China and IPR

6/5. Henry Paulson, the Secretary of the Treasury, gave a speech titled "China and the Strategic Economic Dialogue" at the Heritage Foundation in Washington DC.

He said that "I believe it is in the best interest of the United States, China and the rest of the world that China move more quickly to adopt market-based reforms. And that is one of the primary objectives of the SED -- to speed the pace of reform in China.

He also explained the history of the strategic economic dialogue (SED). "In August, 2006, President Bush and President Hu agreed to create an on-going forum to manage our economic relationship, for our mutual benefit, on a long-term strategic basis. We held our inaugural meeting in Beijing, continued our efforts through a series of meetings among Chinese and U.S. officials, and held the second meeting two weeks ago here in Washington."

He also said that "Our discussions also focused on increasing government transparency and intellectual property rights. We signed an agreement to strengthen the enforcement of intellectual property laws, and to maintain an exchange between our respective Customs staff to share experiences on counterfeit goods and seizures."

But, he said that the task of the SED is "long term". He continued that "The dialogue is an on-going process. To get results, we must build relationships, and take smaller, deliberate steps forward together to create momentum for greater change. Through candid discussions, we will ease, rather than increase, tensions and get to solutions and action."

People and Appointments

6/5. The Senate confirmed James Glassman to be a member of the Broadcasting Board of Governors for a term expiring on August 13, 2007, and to be its Chairman. See, Congressional Record, June 5, 2007, at Page S7096.

USTR Discusses US Korea FTA

6/4. Susan Schwab, the head of the Office of the U.S. Trade Representative (USTR), gave a speech [9 pages in PDF] in which she discussed an agreement between Congressional leaders and the Bush administration regarding trade issues, and the free trade agreement (FTA) with Korea.

She said that "the bipartisan agreement offers a clear and reasonable path forward for all four pending FTAs -- even though each will move along that path in its own way and in its own time." The four FTAs are with Korea, Peru, Columbia, and Panama.

She also said that the agreement "opens the door for an extension of Trade Promotion Authority, which will be essential to complete the Doha Round. It does not guarantee TPA renewal, but it does lay the groundwork. A ``necessary but not sufficient´´ condition."

She said that the FTA with Korea will be "the most commercially significant FTA we have negotiated in over 15 years. Moreover, the KORUS FTA advances the strategic imperative for the United States to increase its economic footprint in Asia."

She also discussed the impact of the Korea FTA on the automobile and beef sectors, and its provisions regarding labor and environment.

See also, story titled "US and Korea Announce FTA" in TLJ Daily E-Mail Alert No. 1,559, April 2, 2007. See, text of the agreement, and particularly, sections regarding telecommunications [17 pages in PDF], electronic commerce [4 pages in PDF], intellectual property rights [35 pages in PDF].

2nd Circuit Vacates and Remands FCC Profanity Order

6/4. The U.S. Court of Appeals (2ndCir) issued its divided opinion [53 pages in PDF] in Fox Television v. FCC, a broadcast profanity case.

The majority wrote that "We find that the FCC’s new policy sanctioning ``fleeting expletives´´ is arbitrary and capricious under the Administrative Procedure Act for failing to articulate a reasoned basis for its change in policy. Accordingly, the petition for review is GRANTED, the order of the FCC is VACATED, and the matter is REMANDED to the agency for further proceedings consistent with this opinion."

The Court did not decide any of the Constitutional issues. However, it wrote in extensive dicta that "we are skeptical that the Commission can provide a reasoned explanation for its ``fleeting expletive´´ regime that would pass constitutional muster".

Federal Communications Commission (FCC) Chairman Kevin Martin issued a long release [PDF] in which he criticized the Court's opinion, and the broadcast programs at issue. Notably, he did not state that the FCC would issue another order. Instead, he suggested that Congressional action would be appropriate. In contrast, Commissioner Michael Copps wrote in a release [PDF] that this must remain a "Commission priority".

See, full story.

Rep. Jefferson Indicted

6/4. A grand jury of the U.S. District Court (EDVa) returned a 16 count indictment that charges Rep. William Jefferson (D-LA) with various crimes related to the performance of his official duties, including soliciting and offering bribes in connection with the award of telecommunications contracts. Arraignment is scheduled for June 8, 2007.

Charles Rosenberg, the U.S. Attorney for the Eastern District of Virginia, and other Department of Justice (DOJ) officials, held a news conference to publicize the indictment. He stated that the indictment includes "two counts of conspiracy to solicit bribes and to commit wire fraud, and in the first conspiracy also to violation the Foreign Corrupt Practices Act, two counts of soliciting bribes as a member of Congress, six counts of wire fraud, one count of violating the Foreign Corrupt practices act, three counts of money laundering, one count of obstruction of justice and one count of violating the Racketeer-Influenced Corrupt Organization or RICO Act through a pattern of activity including 11 different bribe schemes".

Rosenberg alleged that "Jefferson solicited bribes from IGate, a Kentucky telecommunications company. IGate paid those bribes to Mr. Jefferson so that he would use his position as a member of Congress to push IGate’s business interests in Nigeria and Ghana."

The DOJ alleged in a release that "Jefferson met with Nigerian Official A at the official's residence in Potomac, Md., and offered Official A a bribe to induce him to use his position to assist in obtaining commitments from NITEL, the government-controlled main telecommunications service provider in Nigeria."

Litigation regarding the legality of the DOJ's search of Rep. Jefferson's office in the Rayburn House Office Building is pending in the U.S. Court of Appeals (DCCir). See, story titled "District Court Denies Rep. Jefferson's Motion for Return of Property" in TLJ Daily E-Mail Alert No. 1,408, July 11, 2007. At issue is whether the DOJ's Federal Bureau of Investigation's (FBI) search violated the speech or debate clause of the Constitution and the doctrine of separation of powers.

The DOJ officials were asked at the news conference if this indictment is "tainted or suspicious or something because of the recent controversies involving the Justice Department". Rosenberg responded, "we don't give a damn about politics".

Rep. Jefferson was previously a member of the House Ways and Means Committee. He is a Democrat who supported trade promotion authority and free trade agreements. See for example, stories in TLJ Daily E-Mail Alert No. 323 , December 7, 2001.

People and Appointments

6/4. Sen. Craig Thomas (R-WY) died. He was a member of the Senate Finance Committee (SFC), and an advocate of free trade.

More News

6/4. The Supreme Court denied certiorari in JMC Telecom v. AT&T. See, Orders List [7 pages in PDF], at page 2. See also, Supreme Court docket. This lets stand the December 1, 2006, opinion [19 pages in PDF] of the U.S. Court of Appeals (3rdCir). See also, story titled "3rd Circuit Construes Sherman Act in Dispute Between AT&T and Prepaid Phone Card Seller" in TLJ Daily E-Mail Alert No. 1,498, December 4, 2006. This case is JMC Telecom, LLC v. AT&T Corp., Sup. Ct. No. 06-1314, a petition for writ of certiorari to the U.S. Court of Appeals for the 3rd Circuit, App. Ct. No. 05-1304. The Court of Appeals heard an appeal from the U.S. District Court for the District of New Jersey, D.C. No.99-cv-02578.

NTIA Seeks Contractor to Maintain US Top Level Domain

6/1. The National Telecommunications and Information Administration (NTIA) issued a Sources Sought Notice that states that it "intends to procure the services of a Contractor to manage, maintain, and operate the usTLD under NTIA's supervision".

In addition to managing the usTLD, the contractor must also achieve other objectives, including protection of intellectual property rights, especially in trademarks, and promotion of the use of the usTLD, especially in

The notice states that the contractor must "Adequately protect intellectual property in the usTLD and as developments in the expanded and the locality usTLD space may necessitate. In the event of further expansion of the usTLD space, the Contractor shall implement a ``sunrise period´´ for qualified trademark owners to pre-register their trademarks as domain names prior to the wider registration for non-trademark owners and a dispute resolution procedure to address ``cybersquatting´´ conflicts between trademarks and domain names in the usTLD."

The notice also states that the contractor must "Promote increased use of the usTLD, including, by the Internet community of the United States (including small businesses, consumers, not-for-profit organizations, and state and local governments), with a residence or bona fide presence in the United States by introducing enhanced technical and other services, disseminating information about the usTLD, and improving registration and customer services." (Parentheses in original.)

The notice adds that "Affirmative responses must be received Friday, June 22, 2007 by 12:00 p.m. Noon Eastern Standard Time."

DC Circuit Rules in Challenge to FCC Imposition of US Taxes on Interconnected VOIP

6/1. The U.S. Court of Appeals (DCCir) issued its opinion [22 pages in PDF] in Vonage v. FCC, vacating part of the Federal Communications Commission's (FCC) June 21, 2006 text [151 pages in PDF] imposing universal service taxes on interconnected voice over internet protocol (VOIP) providers. The Court of Appeals held that the FCC has statutory authority to tax VOIP service providers. However, it granted the petition for review, and vacated in part, because it found the FCC's "explanation wanting as to the pre-approval of traffic studies and the suspension of the carrier's carrier rule".

FCC Order Under Review. On June 21, 2006, the FCC adopted its Report and Order and Notice of Proposed Rulemaking. It provided, among other things, that the FCC will tax interconnected  VOIP providers. This expands the entities taxed to pay for the FCC's universal service subsidy program. This item also raises taxes on wireless service provides. However, it does not address the subsidy side of the program.

This order requires "interconnected VoIP services" to pay universal service taxes. It further states that the FCC has defined "interconnected VoIP services" as "those VoIP services that: (1) enable real-time, two-way voice communications; (2) require a broadband connection from the user’s location; (3) require IP-compatible customer premises equipment; and (4) permit users to receive calls from and terminate calls to the PSTN." The FCC's order also sets the percentage of revenues subject to taxation, and raises the rate at which wireless providers are taxed.

See, story titled "FCC to Tax Interconnected VOIP Service Providers" in TLJ Daily E-Mail Alert No. 1,397, June 22, 2006. The FCC released the text of this order on June 28, 2006. See, story titled "FCC Releases Order and NPRM Regarding VOIP and Universal Service Taxes" in TLJ Daily E-Mail Alert No. 1,403, June 30, 2006. This order is FCC 06-94 in Docket Nos. 06-122, 04-36, 96-45, 98-171, 90-571, 92-237, 99-200, 95-116, 98-170.

The Court of Appeals held that the FCC "has statutory authority to require VoIP providers to make USF contributions". The Court also wrote that the FCC "acted reasonably in analogizing VoIP to wireline toll service for purposes of setting the presumptive percentage of VoIP revenues generated interstate and internationally".

FCC Chairman Kevin Martin stated in a release that "I am pleased that the Court has affirmed the Commission's action which ensures that USF contribution obligations are administered in a competitively and technologically neutral manner on all phone providers, including interconnected Voice over Internet Protocol (VoIP) providers."

Walter McCormick, head of the US Telecom, stated in a release that this opinion "is a victory for the FCC and universal service. While the court had questions with some of the minor mechanical parts of the order, this ruling reaffirms that VoIP providers must continue to contribute to universal service. The decision is great news for consumers and will help secure the future for universal service."

More News

6/1. Proponents of regulation by the Federal Communications Commission (FCC) of ownership of publishers, broadcasters, and other media stated that News Corp. should not be allowed to purchase Dow Jones & Co., publisher of the Wall Street Journal (WSJ). The Free Press's (FP) Josh Silver stated in a release that "There are four broadcast TV networks in this country and three national newspapers: The New York Times, USA Today and the Wall Street Journal. These seven outlets are the most influential news sources in the nation. They effectively determine what's news and what's not. No single company should own two of them." The FP added that putting the WSJ and Fox News "under the same umbrella is bad for journalism and bad for democracy. The fact that no law currently prevents such a merger is a grave policy failure that Congress should address through changes in media ownership rules."

6/1. The Copyright Office (CO) published a notice in the Federal Register stating that it is now accepting requests for participation in the beta test of the CO's online copyright registration system, eCO. This notice states that registration and deposit of works currently "is primarily a paper-based operation". It continues that a major objective of its business process reengineering (BPR) initiative is "to increase the availability of Copyright Office services online. This objective will be met through the introduction of an automated registration system, electronic Copyright Office (eCO), which is scheduled for release to the public later this year. Currently in the alpha testing phase of development, eCO will allow users to submit applications, deposits, and fees electronically through a portal on the Copyright Office Web site." See, Federal Register, June 1, 2007, Vol. 72, No. 105, at Pages 30641-30643. See also, CO web page titled "eCO Beta-Test Announcement".

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