Reclaim Democracy!

Reclaiming the Bill of Rights, Building a Movement

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Published in the winter 2002-2003 issue of
By What Authority, the journal of the
Program on Corporations, Law and Democracy.

Jeff Milchen is the founder of ReclaimDemocracy.org, a young but increasingly influential organization in the Democracy Movement. Molly Morgan interviewed him about their strategy and campaigns.

BWA: What is the focus and mission of ReclaimDemocracy.org’s work?

Jeff Milchen: Well, our tagline is “Restoring Citizen Authority Over Corporations,” and like POCLAD we focus on effecting long-term structural change that cuts across many different issues. An ongoing part of our work is delivering radically democratic perspectives through mass media to people who don’t necessarily consider themselves radical or even progressive. We dissect current issues to expose how problems are rooted in the illegitimate power wielded by corporations and moneyed interests, and we try to show clearly how changing the system could directly improve people’s lives.

Another major component of our work is building concrete tools for change and replicable models that decentralize power so that average citizens and communities have more influence in the decisions that affect them. We think the more people experience democracy close to home, the more likely they are to value it and work to expand it. People across the political spectrum who may disagree on outcomes still have common goals in creating a more democratic society, but their differences may hide those shared interests. One reason is that so much of the “news” is alienating and disempowering — it obscures the work and impact of ordinary citizens while exaggerating the power of those in official positions.

BWA: How do you get your message out?

JM: Our media outreach has focused primarily on print media plus some talk radio programs. We’ve had significant success — from op-eds in mainstream newspapers like the Washington Post, Newsday, and the San Francisco Chronicle to strategy and solution-oriented pieces in publications like The Ecologist, Black World Today, and major Spanish-language newspapers like La Opinion and La Prensa. As an example of how revoking illegitimate corporate power concerns people across the political spectrum, our work has been written up in business magazines and conservative tabloids like American Free Press as well as progressive magazines like Utne Reader.

BWA: Describe your campaign to revoke corporate free speech.

JM: We’re helping to instigate what we hope will be the broad national coalition necessary to put this issue on the radar screen. We believe that corporate free speech is a desecration of our Constitution and that this is an especially good time to generate public debate about it because a case called Nike v. Kasky stands an excellent chance of being reviewed by the Supreme Court in 2003. The case centers around the issue of commercial speech — a category of communication created by the Court.

The Supreme Court is a political institution that responds to major shifts in public opinion. Our goal is to use Kasky to make the issue of corporate free speech a high-profile controversy, framed as a matter of justice, like other struggles for civil rights. We need huge numbers of citizens generating pressure on our courts and influencing their thinking, and it’s a challenge because the injustice is less direct and obvious than for other abuses of our rights.

Our initial focus in this effort is on the American Civil Liberties Union (ACLU). We want to persuade their leaders that their mission to defend civil liberties for human beings is undermined by their consistent support of corporate “rights.” This is especially disturbing when our civil liberties are under siege by the Bush Administration and Congress. The ACLU also expends resources to oppose most significant campaign reform efforts by supporting the doctrine that spending money to influence elections is protected “free speech.”

Our position is that all communication by for-profit corporations is inherently commercial speech and that no constitutional protection exists — it’s up to We the People, working through our democratic institutions, to decide what privileges commercial entities should enjoy. The Bill of Rights was intended to protect only human beings, but previous Courts have claimed that speech itself is protected by the First Amendment — that a thing is protected rather than the right of a person — which goes against any reasonable interpretation of the Bill of Rights.

BWA: Wouldn’t revoking corporate free speech diminish the First Amendment and limit opportunities for organizations like the ACLU and ReclaimDemocracy.org to speak?

JM: No. The Supreme Court has distinguished explicitly between advocacy groups and profit-centered corporations in two cases: Austin v. Michigan Chamber of Commerce (1990) and FEC v. Massachusetts Citizens For Life (1986). In FEC, the majority said: “Massachusetts Citizens For Life was formed to disseminate political ideas, not to amass capital. The resources it has available are not a function of its success in the economic marketplace, but its popularity in the political marketplace.”

It’s worth noting that in colonial times, the word “speech” often described discourse — an interactive communication, as in, “I’d like to have a speech with you.” The Constitution writers likely wanted to protect dialogue, not just broadcasting one’s views. How can people dialogue with something like the Nike Corporation, which has no mouth or ears, let alone a mind?

Restoring a reasonable definition of free speech would actually amplify the voice of small organizations like ours with a genuine human constituency. Individual citizens and grassroots organizations can never speak as loudly with our own voices as corporations can with the unlimited amplification of money. But if our relative impact corresponded to the quality of our ideas and how effectively we worked to promote them, rather than how much money we spend, we’d have a very different country.

Of course, corporate speech has been key to amassing wealth and power for corporations, and their hirelings will fight to retain it. Public relations departments will churn out messages framing corporations as the defenders of liberty. Corporate lawyers will argue about slippery slopes and the freedom of speech being sacrosanct. They’ll say even speech we don’t like needs to be protected and use examples of unpopular speakers like the Ku Klux Klan. Our work is to properly frame the debate: the Constitution protects the rights of human beings, not things, and only people have rights to free speech. The popularity of a speaker is not an issue, but the speaker’s humanity is!

BWA: How does corporate free speech affect public policy?

JM: Virtually every issue of consequence is affected by the illegitimate influence of corporations derailing democracy, but here’s one: both of the dominant political parties constantly espouse the value of “free trade,” yet they pass laws that preclude or destroy competition in countless industries. Take pharmaceuticals. The government creates and enforces monopolies [patents] on drugs, not for the benefit of taxpayers who fund the development of two-thirds of the most medically significant drugs, but for corporations. As a result, Bristol-Meyers-Squibb Corporation can gouge cancer victims for 20 times the production cost of its patented drug, Taxol. Did cancer patients and citizens have an opportunity to participate in the decision to give away the patent? Hell, no. We were never even informed that we paid for its development!

Squibb exercises its “speech” by spending millions for paid lobbyists in Washington, who shape issues and frame debate in ways that bypass the most critical questions entirely. This is why we never hear ideas like “let’s keep public control of these drugs and contract a corporation to produce it at a modest profit.” As long as we allow corporate wealth to translate readily into political power, these abuses of the public interest will be the norm.

BWA: What kinds of positive alternatives to corporate power do you work to create?

JM: Ultimately, corporate power comes from a single source — our money — so we work to divert money and power away from absentee-owned corporations and toward community businesses that are locally rooted. It’s tough to hide from the consequences of your business decisions when they have a visible impact on your neighbors and the town you live in. We show people that there are many alternatives to giant corporations — that, in most cases, local businesses can provide the bulk of communities’ needs and do it as well or better.

A few years ago we started the Boulder [Colorado] Independent Business Alliance (BIBA) with the goal of helping the community to stop chainstores from continuing to displace local businesses. We organized collaborative campaigns funded by independent local businesses, including public education, direct pooling of resources for group purchasing and marketing, and political organizing to promote local policies favoring community-rooted businesses. BIBA opened a lot of doors for democratic conversations that included many people and organizations who would have been difficult to engage through, say, POCLAD or ReclaimDemocracy.org.

We consciously worked to develop a model that others could employ, and last year we launched the American Independent Business Alliance (AMIBA) to help other communities use it. There are four more IBAs now with substantial paying memberships — Salt Lake City, Utah; Corvallis, Oregon; Austin, Texas and Santa Fe, New Mexico– and several other communities are in earlier stages of organizing. We’re helping to seed and connect these groups to build a national network that eventually will change trends on a larger scale.

I believe that owners of farms and other small businesses are essential to the success of the Democracy Movement. These folks know as well as anyone how destructive giant corporations can be, but not only have most activists failed to forge alliances with small-business owners, we tend to alienate them with broad-brush attacks on business. Sloppy use of language like “business interests” does great harm to our cause.

A long-term goal of ours is to develop a powerful counterforce to entities like the US Chamber of Commerce, which gains its legitimacy from thousands of small member businesses, but actually exploits them to promote the agenda of the transnationals that drive its agenda. We should seize the label of “pro-business” for ourselves, making it clear what kind of business we’re for and why. After all, small-business owners already know that “corporate speech” only helps those big enough to hire lobbyists and public relations firms.

Learn more about POCLAD at POCLAD.org

Corporate Three Strikes Bill

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Draft language introduced in California
Last updated April, 2003

SECTION 1. Title 6 (commencing with Section 4000) is added to the Corporations Code, to read:

TITLE 6. CORPORATE THREE STRIKES ACT

40000. This title shall be known and may be cited as the Corporate Three Strikes Act.

40001. The People of the State of California find and declare all of the following:

(a) Statistics reveal that corporate crime and other corporate violations are more costly to the public than crime by individuals, yet individual crime is punished more severely than corporate crime.

(b) Some corporations repeatedly violate the law and, if caught, pay relatively insignificant amounts that they pass on to the public as a cost of doing business. This practice is a gross injustice both to the public and to law-abiding corporations, and also undermines a healthy California economy.

(c) Threats of imprisonment are meaningless when directed at corporations as distinct entities. While the law has created the fiction that corporations are persons, there is no way to imprison a fictional person.

(d) The courts have also long held, however, that corporations are mere artificial creatures of law and may be dissolved or denied permission to do business if they violate the law. The statutes of California provide these remedies, but public authorities rarely use them. It is the purpose of this title to protect the people of California by requiring enforcement of these existing remedies against corporate repeat offenders, and by preventing evasion of these remedies by directors and officers of corporate repeat offenders.

40002. (a) This title applies to all general corporations, nonprofit public benefit corporations, and nonprofit mutual benefit corporations that are subject to Division 1 (commencing with Section 100) of, or Part 2 (commencing with Section 5110) or Part 3 (commencing with Section 7110) of Division 2 of, Title 1.

(b) This title does not apply to nonprofit religious corporations, corporations sole, partnerships or limited liability companies subject to Part 4 (commencing with Section 9110) or Part 6 (commencing with Section 10000) of Division 2 of Title 1, Title 2 (commencing with Section 15501), or Title 2.5 (commencing with Section 17000).

40003. (a) A corporation that commits three or more major violations of law within a ten-year period, commencing after the effective date of this title, is declared to be a corporate repeat offender.

(b) A corporate repeat offender shall not be permitted to be incorporated or to transact intrastate business in California .

(c) A corporation shall not be permitted to be incorporated or to transact intrastate business in California if a majority of its directors or officers have ever been directors or officers of a corporate repeat offender as determined by the Secretary of State after notice to the corporation and an opportunity for the corporation to respond.

(d) A corporation shall not be permitted to be incorporated or to transact intrastate business in California if it is legally controlled by a corporation a majority of whose directors or officers have ever been directors or officers of a corporate repeat offender, as determined by the Secretary of State after notice to the corporation and an opportunity for the corporation to respond.

40004. For purposes of this title,”major violation of law” means the intentional or grossly negligent violation of any federal, state or local law in the United States that results in the imposition against the corporation of a fine, civil penalty, restitution, damages, or other monetary payment of at least one million dollars ($1,000,000) or results in the death of a person. Fines, civil penalties, restitution, damages or other monetary payments for separate violations arising out of the same facts and circumstances shall be aggregated, and shall constitute one major violation of law if the aggregated amount totals at least one million dollars ($1,000,000). Multiple major violations arising out of the same facts and circumstances shall be considered as only one major violation of law.

40005. a) For purposes of this title, any of the following shall be conclusive evidence that a corporation has committed a major violation of law.

(1) A settlement, consent decree, plea-bargain or similar arrangement in a criminal, civil or administrative case in which the corporation has been charged with intentional or grossly negligent violation of law in which the corporation is required to make a payment that meets or exceeds the monetary threshold in Section 40004. irrespective of whether the corporation admits or denies liability.

(2) A final criminal or civil judgment against the corporation by a court, or a final adjudication against the corporation by a public agency, if the judgment or adjudication finds an intentional or grossly negligent violation of law and pursuant to which the corporation is required to make a payment that meets or exceeds the monetary threshold in Section 40004.

(3) A final criminal or civil judgment against a corporation by a court, or a final adjudication against the corporation by a public agency, if the judgment or adjudication finds an intentional or grossly negligent violation of law that caused a person’s death.

(b) Every corporation formed under the laws of California or qualified to transact intrastate business in California shall file annually with the Secretary of State a statement of those items specified in subdivision (a) that were applicable to the corporation during the previous year. The Secretary of State shall prescribe an electronic form for submission of these items and shall make the statement available to the public in a timely fashion through its Internet web site.

40006. If a corporate repeat offender is a corporation formed under the the laws of California , the Attorney General shall bring an action under Section 1801, 6511, or 8511, as applicable, to dissolve the corporation and provide for forfeiture of its corporate existence. The court shall follow the provisions established in this code for those involuntary dissolutions, including the provisions permitting the court to appoint a receiver to take over and manage the business and affairs of the corporation and to preserve its property. The court shall issue orders, decrees and injunctions as justice and equity require, and shall specifically issue orders necessary to ensure that jobs and wages are not lost, to protect community as well as legitimate shareholder interests, and to maintain corporate obligations to protect the health, safety and environment of workers and the public.

40007. If a corporate repeat offender is a corporation formed under the laws of a jurisdiction other than California that is subject to Section 2105, the Secretary of State shall, after a fair hearing and on the basis of substantial evidence, revoke the right of the corporation to transact business in California by withdrawing the certification of qualification required by section 2105.

40008. Neither the Attorney General nor the Secretary of State shall have discretion to refuse to enforce this title with respect to their respective duties under this title. Any person may petition the Attorney General or the Secretary of State to enforce this title against a corporate repeat offender. If the Attorney General or the Secretary of State rejects the petition, or fails to act within 180 days of the submission of the petition, a person may bring an action for a writ of mandate to compel enforcement of this title. That person shall be entitled to an award of costs and reasonable attorneys’ fees if the person is the prevailing party in that action.

40009. The provisions of this title shall not be amended by the Legislature except by statute passed in each house by roll call vote entered in the journal, two-thirds of the membership concurring, or by a statute that becomes effective only when approved by the electors.

Language drafted by Robert Benson, revised by the Legislative Counsel of the State of California. Language first drafted by ReclaimDemocracy.org for use in Colorado was incorporated into the CA bill.

More features on Corporate Accountability

Once Foes of Big Tobacco, States Have Been Hooked

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By Gordon Fairclough and Vanessa O’Connell
First published in The Wall Street Journal, April 2, 2003

Editor’s note: Two years ago, we wrote about the perverse incentives that would be created by linking states’ income to the success of the cigarette industry. Now several states are helping the most powerful cigarette corporation stay in business to addict more new customers to the world’s most widely fatal drug.

State governments, once among the tobacco industry’s fiercest foes, now find themselves in an unusual position: They are poised to try to rescue the country’s biggest cigarette maker in one of its darkest hours.

In 1996, Washington state Attorney General Christine Gregoire sued the country’s biggest cigarette companies, eventually extracting hundreds of millions of dollars in settlement money for her state’s citizens. “The tobacco industry has targeted our kids, withheld safer products and deliberately misled the public about the safety of smoking,” Ms. Gregoire said at the time.

Her efforts, along with those of other state attorneys general, constituted the first large-scale, successful legal assault on the tobacco industry. Opening the door for a slew of additional litigation, the state suits changed the terms of the debate on the cigarette business, shattering the aura of invincibility that had surrounded tobacco companies. One should visit benzo detox at Muse to know the extent of how these drugs can flip one’s lifestyle upside down completely thus finding no way to return back to normal.

Now, however, Ms. Gregoire and other state attorneys general may go to court to protect Philip Morris USA, the maker of Marlboro. At issue: an Illinois state judge’s order that Philip Morris, owned by Altria Group Inc., post a $12 billion bond in order to appeal a massive defeat in a class-action lawsuit. Philip Morris USA suggested the bond requirement could force it into bankruptcy court. Until a recent image makeover, Altria was known as Philip Morris Cos.

The enormous bond “could create a chilling effect on the ability of the defendant to appeal,” Ms. Gregoire said last week in a press conference. And, more importantly, it “could deal a significant, unnecessary financial blow to the states.”

Altria’s current plight, rife with irony and contradiction, demonstrates how private and public interests can become entangled in surprising ways. The very states that won huge tobacco settlements in 1997 and 1998 became hooked on the money, which for many states is staving off budgetary catastrophe. The Illinois court order threatens the tobacco cash flow and has sent the states scurrying to switch sides.

All of this has angered public-health activists and some of the attorneys general who were part of the settlements. “Certainly many of us never anticipated that states would become addicted to the tobacco money as a way to finance their operations,” said Scott Harshbarger, who was attorney general of Massachusetts at the time of the settlements. “It’s a perversion of the intention of the litigation, and it’s very unfortunate, both as a matter of public policy and a matter of health policy.”

The settlements didn’t restrict how states could spend the tobacco money. But the purpose of the state lawsuits was to generate funds to cover public-health costs and smoking-prevention programs, not general budget needs, Mr. Harshbarger said.

What changed? Under the tobacco settlements of the late 1990s, major cigarette manufacturers agreed to pay the states a total of $246 billion over 25 years to settle lawsuits. The companies also agreed to a series of restrictions on the way they sell cigarettes. The settlements have given state governments a huge additional interest in the continued financial health of the tobacco industry, especially in these days of declining tax revenues and widening state budget deficits. Many states also have relied increasingly on cigarette-excise taxes.

Philip Morris, for its part, is aggressively playing on the states’ dependence. The company is due to pay $2.5 billion to the states by April 15 but is warning it may not be able to do so because of the Illinois bond order. Philip Morris is responsible for roughly half of the yearly settlement payment to the states. Its annual payment is usually made early, on March 31, but on Monday, the states didn’t get their fix.

‘Real Money’

William H. Sorrell, the Vermont attorney general, said he has already warned the state’s governor and legislators that “they might not be getting money they have already spent” — $13 million, in Vermont’s case. Said Mr. Sorrell: “Thirteen million dollars is real money in Vermont.”

Several states that had planned to issue bonds backed by expected tobacco-settlement payments were scrambling to come up with new ways of raising money to close budget deficits. Virginia’s treasurer, Jody M. Wagner, Tuesday put on hold $767 million in such bonds, sales of which were scheduled to close on Thursday. “We spoke with the underwriters this morning, and they told us they couldn’t proceed with closing this deal,” Ms. Wagner said. The state had planned to use the bond money to revitalize the economy of its slumping tobacco-growing regions.

Also now in doubt: California’s plan to sell $2 billion of bonds backed by tobacco payments in mid-April to help finance its huge deficit. Similarly at risk is a plan in New York to float a hybrid $4.2 billion bond offering backed by personal-income tax revenues and tobacco money. Kansas had planned to float $175 million in capital-improvement bonds, funded partly by tobacco-settlement payments, which would have covered that state’s $105 million budget gap for the current fiscal year.

With the possibility of the Philip Morris money not arriving, several state attorneys general were preparing to enter the fray. Vermont’s Mr. Sorrell said the states would most likely file a formal motion to intervene in the Illinois case. That would allow the states to urge the court to impose a lower bond to protect their voters’ financial interests. (The states wouldn’t challenge the underlying verdict against Philip Morris.) Illinois law ordinarily requires a bond equal to the entire trial judgment — a mechanism to ensure that if the plaintiff wins on appeal, the full amount will be available.

The bond requirement stems from a $10.1 billion verdict late last month against Philip Morris in a suit over its low-tar cigarettes. In the first class-action alleging that such labels mislead smokers into thinking that those cigarettes are less harmful, Judge Nicholas Byron of the state court in Madison County, Ill., ordered the company to pay $7.1 billion in compensatory damages and an additional $3 billion in punitive damages. The judge tacked on $1.8 billion in fees for the plaintiffs’ lawyers.

To be sure, the same state officials who want Altria and its rival tobacco companies to survive continue to attack cigarette makers. Various states recently have taken legal action to enforce marketing restrictions that the settlements imposed on cigarette makers. New York, which is hoping to sell bonds based on tobacco-settlement payments to deal with its current budget woes, last week enacted one of the nation’s toughest laws restricting smoking in public places. R.J. Reynolds Tobacco Holdings Inc. and Loews Corp.’s Lorillard Tobacco unit Tuesday filed a lawsuit against California alleging that the state is improperly “vilifying” cigarette makers in the state’s antismoking ad campaign.

But there has been a broad alignment of economic interests between cigarette makers and the states. Considering both cigarette taxes and the settlements, “the states make more money from each pack of cigarettes sold than anyone else, and they have an enormous financial stake” in tobacco sales, said Tommy J. Payne, executive vice president of Reynolds, the nation’s No. 2 cigarette maker.

In the years since the settlements, legislators in 16 states, egged on by the attorneys general, have passed laws limiting the size of bonds that must be posted by corporate defendants seeking to appeal trial defeats. In four of the states — Louisiana, Nevada, Oklahoma and West Virginia — the laws only apply to cigarette companies that settled.

States have helped the big cigarette manufacturers in other ways as well. Twenty-two have passed laws that would essentially force small makers of bargain-basement cigarettes out of the market if they don’t make certain payments required by the major tobacco settlements or related legislation. These laws hinder deep discounters that have been eating into the larger cigarette makers’ profits. Propping up the bigger players makes economic sense to the states because their settlement payments rise and fall in line with cigarette sales by the big manufacturers.

Between November 1998, when the tobacco industry signed its main settlement with 46 states, and 2002, cigarette makers paid those states more than $21.6 billion. An additional $5 billion is scheduled to be paid this year.

States have increasingly come to rely on this money — as well as on rising cigarette-excise taxes — as they struggle to cope with their worst financial crisis in 20 years. “These dollars are becoming more and more important,” said Lee Dixon, who tracks health policy for the National Conference of State Legislatures.

In the 1990s, states became accustomed to plentiful tax revenue, in part because the rising stock market inflated taxes on capital gains and income. Governors and legislatures pushed through popular spending programs and cut unpopular levies.

Short-Term Solutions

Then, when the economy began to sour, many states chose short-term solutions, such as tapping the settlement payments and draining cash reserves, rather than realigning their budgets to reflect new economic realities. For the current fiscal year, which ends for most states on June 30, 21 of the 46 states that signed the main 1998 tobacco settlement agreement tapped that money to help close shortfalls. The previous year, 16 states relied on settlement money.

As of February, the collective deficit for the 50 states for fiscal year 2003 was $27 billion, according to data supplied by the National Conference of State Legislatures, which is based in Denver. Next year, the states are looking at even bigger deficits. Most states, unlike the federal government, are required by law to balance their books at the end of their one- or two-year budget cycles. This forces them to cut spending, raise taxes, or both.

That’s why state officials across the country are watching the situation in Illinois so closely. Philip Morris’s general counsel, Denise Keane, last week sent a letter to Ms. Gregoire, the Washington state attorney general, saying that the company was “not financially able to post the enormous bond that the Madison County court has demanded” and warning that “it is presently uncertain” whether Philip Morris would be able to make its $2.5 billion payment to the states.

Illinois Attorney General Lisa Madigan said she will take Philip Morris to court if it doesn’t make the payment.

Altria has long prided itself on its high credit rating, so it was particularly striking Monday when Moody’s Investors Service cut Altria’s rating by two notches, to just three levels above “junk.”

Illinois lawmakers are now considering legislation that would limit the amount of money Philip Morris must put up as a bond in order to appeal. Representatives of Philip Morris and the states’ outside trial lawyers met Tuesday in Chicago under the auspices of the speaker of the Illinois House of Representatives to try to cut a deal.

Philip Morris wants the cap set at $100 million. The trial lawyers were looking for a cap of between $500 million and $1 billion. State Rep. Robert S. Molaro, a Chicago Democrat, said Tuesday that once the parties agreed on a figure, lawmakers would move forward with a bill.

Public-health groups say they oppose any legislation that would protect Philip Morris. “We don’t think the Illinois legislature ought to pass a bill to help one company, especially a company that’s been found to have injured more than one million citizens of the state,” said Matthew L. Myers, president of the Campaign for Tobacco-Free Kids.

Mr. Myers said that Altria, which isn’t a defendant in the Illinois case and thus isn’t technically liable, could pay the bond for Philip Morris. Altria has an $8 billion credit line and pays about $5 billion in dividends each year. “Philip Morris wants the court to relieve it of any obligation to make any sacrifice,” Mr. Myers said.

Altria responded to this assertion by pointing to a filing it made last week with the Securities and Exchange Commission in which it said Philip Morris can’t post a $12 billion bond.

The Illinois share of the Philip Morris payment due April 15 is $150 million, according to former Illinois Gov. Jim Thompson, who is now lobbying for the company. Most of that money is earmarked for health-care programs for the elderly, Mr. Thompson said.

“We’re very concerned that the amount of the appeal bond will adversely affect budgets in 46 states,” said W.A. Drew Edmondson, attorney general of Oklahoma. There is “no benefit to public health by putting Philip Morris in the financial position” of having to declare bankruptcy, he added. “They’re going to sell just as many cigarettes even if they’re in receivership.”

Gregory Zuckerman, Christopher Lawton, Richard A. Bravo and Stan Rosenberg contributed to this article.

Enough Is Enough: They lie they cheat they steal and they’ve been getting away with it for too long

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Fortune March 18, 2002
By Clifton Leaf

We at ReclaimDemocracy.org have been calling for “getting tough” on white-collar crime for years, so we’re pleased to see such business stalwarts as Fortune Magazine catching up to us with this well-researched report, which slipped by our radar in March, but has lost none of its merit.

Arthur Levitt, the tough-talking former chairman of the Securities and Exchange Commission, spoke of a “multitude of villains.” Red-faced Congressmen hurled insults, going so far as to compare the figures at the center of the Enron debacle unfavorably to carnival hucksters. The Treasury Secretary presided over a high-level working group aimed at punishing negligent CEOs and directors. Legislators from all but a handful of states threatened to sue the firm that bollixed up the auditing, Arthur Andersen. There was as much handwringing, proselytizing, and bloviating in front of the witness stand as there was shredding behind it.

It took a late-night comedian, though, to zero in on the central mystery of this latest corporate shame. After a parade of executives from Enron and Arthur Andersen flashed on the television monitor, Jon Stewart, anchor of The Daily Show, turned to the camera and shouted, “Why aren’t all of you in jail? And not like white-guy jail–jail jail. With people by the weight room going, ‘Mmmmm.’ ”

It was a pitch-perfect question. And, sadly, one that was sure to get a laugh.

Not since the savings-and-loan scandal a decade ago have high crimes in the boardroom provided such rich television entertainment. But that’s not for any lack of malfeasance. Before Enronitis inflamed the public, gigantic white-collar swindles were rolling through the business world and the legal system with their customary regularity. And though they displayed the full creative range of executive thievery, they had one thing in common: Hardly anyone ever went to prison.

Regulators alleged that divisional managers at investment firm Credit Suisse First Boston participated in a “pervasive” scheme to siphon tens of millions of dollars of their customers’ trading profits during the Internet boom of 1999 and early 2000 by demanding excessive trading fees. (For one 1999 quarter the backdoor bonuses amounted to as much as a fifth of the firm’s total commissions.) Those were the facts, as outlined by the SEC and the National Association of Securities Dealers in a high-profile news conference earlier this year. But the January news conference wasn’t to announce an indictment. It was to herald a settlement, in which CSFB neither admitted nor denied wrongdoing. Sure, the SEC concluded that the investment bank had failed to observe “high standards of commercial honor,” and the company paid $100 million in fines and “disgorgement,” and CSFB itself punished 19 of its employees with fines ranging from $250,000 to $500,000. But whatever may or may not have happened, no one was charged with a crime. The U.S. Attorney’s office in Manhattan dropped its investigation when the case was settled. Nobody, in other words, is headed for the hoosegow.

A month earlier drugmaker ICN Pharmaceuticals actually pleaded guilty to one count of criminal fraud for intentionally misleading investors–over many years, it now seems–about the FDA approval status of its flagship drug, ribavirin. The result of a five-year grand jury investigation? A $5.6 million fine and the company’s accession to a three-year “probationary” period. Prosecutors said that not only had the company deceived investors, but its chairman, Milan Panic, had also made more than a million dollars off the fraud as he hurriedly sold shares. He was never charged with insider trading or any other criminal act. The SEC is taking a firm stand, though, “seeking to bar Mr. Panic from serving as a director or officer of any publicly traded company.” Tough luck.

And who can forget those other powerhouse scandals, Sunbeam and Waste Management? The notorious Al “Chainsaw” Dunlap, accused of zealously fabricating Sunbeam’s financial statements when he was chief executive, is facing only civil, not criminal, charges. The SEC charged that Dunlap and his minions made use of every accounting fraud in the book, from “channel stuffing” to “cookie jar reserves.” The case is now in the discovery phase of trial and likely to be settled; he has denied wrongdoing. (Earlier Chainsaw rid himself of a class-action shareholder suit for $15 million, without admitting culpability.) Whatever the current trial’s outcome, Dunlap will still come out well ahead. Sunbeam, now under bankruptcy protection, gave him $12.7 million in stock and salary during 1998 alone. And if worse comes to worst, he can always tap the stash he got from the sale of the disemboweled Scott Paper to Kimberly-Clark, which by Dunlap’s own estimate netted him a $100 million bonanza.

Sunbeam investors, naturally, didn’t fare as well. When the fraud was discovered internally, the company was forced to restate its earnings, slashing half the reported profits from fiscal 1997. After that embarrassment, Sunbeam shares fell from $52 to $7 in just six months–a loss of $3.8 billion in market cap. Sound familiar?

The auditor in that case, you’ll recall, was Arthur Andersen, which paid $110 million to settle a civil action. According to an SEC release in May, an Andersen partner authorized unqualified audit opinions even though “he was aware of many of the company’s accounting improprieties and disclosure failures.” The opinions were false and misleading. But nobody is going to jail.

At Waste Management, yet another Andersen client, income reported over six years was overstated by $1.4 billion. Andersen coughed up $220 million to shareholders to wipe its hands clean. The auditor, agreeing to the SEC’s first antifraud injunction against a major firm in more than 20 years, also paid a $7 million fine to close the complaint. Three partners were assessed fines, ranging from $30,000 to $50,000, as well. (You guessed it. Not even home detention.) Concedes one former regulator familiar with the case: “Senior people at Andersen got off when we felt we had the goods.” Andersen did not respond to a request for comment.

The list goes on–from phony bookkeeping at the former Bankers Trust (now part of Deutsche Bank) to allegations of insider trading by a former Citigroup vice president. One employee of California tech firm nVidia admitted that he cleared nearly half a million dollars in a single day in March 2000 from an illegal insider tip. He pleaded guilty to criminal charges, paid fines, and got a 12-month grounding at home.

While none of those misbehaviors may rise to Enronian proportions, at least in terms of salacious detail, taken en masse they say something far more distressing. The double standard in criminal justice in this country is starker and more embedded than many realize. Bob Dylan was right: Steal a little, and they put you in jail. Steal a lot, and you’re likely to walk away with a lecture and a court-ordered promise not to do it again.

Far beyond the pure social inequity–and that would be bad enough, we admit–is a very real dollar-and-cents cost, a doozy of a recurring charge that ripples through the financial markets. As the Enron case makes abundantly clear, white-collar fraud is not a victimless crime. In this age of the 401(k), when the retirement dreams of middle-class America are tied to the integrity of the stock market, crooks in the corner office are everybody’s problem. And the problem will not go away until white-collar thieves face a consequence they’re actually scared of: time in jail.

The U.S. regulatory and judiciary systems, however, do little if anything to deter the most damaging Wall Street crimes. Interviews with some six dozen current and former federal prosecutors, regulatory officials, defense lawyers, criminologists, and high-ranking corporate executives paint a disturbing picture. The already stretched “white-collar” task forces of the FBI focus on wide-ranging schemes like Internet, insurance, and Medicare fraud, abandoning traditional securities and accounting offenses to the SEC. Federal securities regulators, while determined and well trained, are so understaffed that they often have to let good cases slip away. Prosecutors leave scores of would-be criminal cases referred by the SEC in the dustbin, declining to prosecute more than half of what comes their way. State regulators, with a few notable exceptions, shy away from the complicated stuff. So-called self-regulatory organizations like the National Association of Securities Dealers are relatively toothless; trade groups like the American Institute of Certified Public Accountants stubbornly protect their own. And perhaps worst of all, corporate chiefs often wink at (or nod off to) overly aggressive tactics that speed along the margins of the law.

Let’s start with the numbers. Wall Street, after all, is about numbers, about playing the percentages. And that may be the very heart of the problem. Though securities officials like to brag about their enforcement records, few in America’s top-floor suites and corporate boardrooms fear the local sheriff. They know the odds of getting caught.

The U.S. Attorneys’ Annual Statistical Report is the official reckoning of the Department of Justice. For the year 2000, the most recent statistics available, federal prosecutors say they charged 8,766 defendants with what they term white-collar crimes, convicting 6,876, or an impressive 78% of the cases brought. Not bad. Of that number, about 4,000 were sentenced to prison–nearly all of them for less than three years. (The average time served, experts say, is closer to 16 months.)

But that 4,000 number isn’t what you probably think it is. The Justice Department uses the white-collar appellation for virtually every kind of fraud, says Henry Pontell, a leading criminologist at the University of California at Irvine, and co-author of Big-Money Crime: Fraud and Politics in the Savings and Loan Crisis. “I’ve seen welfare frauds labeled as white-collar crimes,” he says. Digging deeper into the Justice Department’s 2000 statistics, we find that only 226 of the cases involved securities or commodities fraud.

And guess what: Even those are rarely the highfliers, says Kip Schlegel, chairman of the department of criminal justice at Indiana University, who wrote a study on Wall Street lawbreaking for the Justice Department’s research wing. Many of the government’s largest sting operations come from busting up cross-state Ponzi schemes, “affinity” investment scams (which prey on the elderly or on particular ethnic or religious groups), and penny-stock boiler rooms, like the infamous Stratton Oakmont and Sterling Foster. They are bad seeds, certainly. But let’s not kid ourselves: They are not corporate-officer types or high-level Wall Street traders and bankers–what we might call starched-collar criminals. “The criminal sanction is generally reserved for the losers,” says Schlegel, “the scamsters, the low-rent crimes.”

Statistics from the Federal Bureau of Prisons, up to date as of October 2001, make it even clearer how few white-collar criminals are behind bars. Of a total federal inmate population of 156,238, prison authorities say only 1,021 fit the description–which includes everyone from insurance schemers to bankruptcy fraudsters, counterfeiters to election-law tamperers to postal thieves. Out of those 1,000 or so, well more than half are held at minimum-security levels–often privately managed “Club Feds” that are about two steps down the comfort ladder from Motel 6.

And how many of them are the starched-collar crooks who commit securities fraud? The Bureau of Prisons can’t say precisely. The Department of Justice won’t say either–but the answer lies in its database.

Susan Long, a professor of quantitative methods at the school of management at Syracuse University, co-founded a Web data clearinghouse called TRAC, which has been tracking prosecutor referrals from virtually every federal agency for more than a decade. Using a barrage of Freedom of Information Act lawsuits, TRAC has been able to gather data buried in the Justice Department’s own computer files (minus the individual case numbers that might be used to identify defendants). And the data, which follow each matter from referral to the prison steps, tell a story the Justice Department doesn’t want you to know.

In the full ten years from 1992 to 2001, according to TRAC data, SEC enforcement attorneys referred 609 cases to the Justice Department for possible criminal charges. Of that number, U.S. Attorneys decided what to do on about 525 of the cases–declining to prosecute just over 64% of them. Of those they did press forward, the feds obtained guilty verdicts in a respectable 76%. But even then, some 40% of the convicted starched-collars didn’t spend a day in jail. In case you’re wondering, here’s the magic number that did: 87.

Five-point type is small print, so tiny that almost everyone who remembers the Bay of Pigs or the fall of Saigon will need bifocals to read it. For those who love pulp fiction or the crime blotters in their town weeklies, however, there is no better place to look than in the small print of the Wall Street Journal’s B section. Once a month, buried in the thick folds of newsprint, are bullet reports of the NASD’s disciplinary actions. February’s disclosures about alleged misbehavior, for example, range from the unseemly to the lurid–from an Ohio bond firm accused of systematically overcharging customers and fraudulently marking up trades to a California broker who deposited a client’s $143,000 check in his own account. Two senior VPs of a Pittsburgh firm, say NASD officials, cashed out of stock, thanks to timely inside information they received about an upcoming loss; a Dallas broker reportedly converted someone’s 401(k) rollover check to his personal use.

In all, the group’s regulatory arm received 23,753 customer complaints against its registered reps between the years 1997 and 2000. After often extensive investigations, the NASD barred “for life” during this period 1,662 members and suspended another 1,000 or so for violations of its rules or of laws on the federal books. But despite its impressive 117-page Sanction Guidelines, the NASD can’t do much of anything to its miscreant broker-dealers other than throw them out of the club. It has no statutory right to file civil actions against rule breakers, it has no subpoena power, and from the looks of things it can’t even get the bums to return phone calls. Too often the disciplinary write-ups conclude with a boilerplate “failed to respond to NASD requests for information.”

“That’s a good thing when they default,” says Barry Goldsmith, executive vice president for enforcement at NASD Regulation. “It gives us the ability to get the wrongdoers out quickly to prevent them from doing more harm.”

Goldsmith won’t say how many cases the NASD passes on to the SEC or to criminal prosecutors for further investigation. But he does acknowledge that the securities group refers a couple of hundred suspected insider-trading cases to its higher-ups in the regulatory chain.

Thus fails the first line of defense against white-collar crime: self-policing. The situation is worse, if anything, among accountants than it is among securities dealers, says John C. Coffee Jr., a Columbia Law School professor and a leading authority on securities enforcement issues. At the American Institute of Certified Public Accountants, he says, “no real effort is made to enforce the rules.” Except one, apparently. “They have a rule that they do not take action against auditors until all civil litigation has been resolved,” Coffee says, “because they don’t want their actions to be used against their members in a civil suit.” Lynn E. Turner, who until last summer was the SEC’s chief accountant and is now a professor at Colorado State University, agrees. “The AICPA,” he says, “often failed to discipline members in a timely fashion, if at all. And when it did, its most severe remedy was just to expel the member from the organization.”

Al Anderson, senior VP of AICPA, says the criticism is unfounded. “We have been and always will be committed to enforcing the rules,” he says.

The next line of defense after the professional associations is the SEC. The central role of this independent regulatory agency is to protect investors in the financial markets by making sure that publicly traded companies play by the rules. With jurisdiction over every constituent in the securities trade, from brokers to mutual funds to accountants to corporate filers, it would seem to be the voice of Oz. But the SEC’s power, like that of the Wizard, lies more in persuasion than in punishment. The commission can force companies to comply with securities rules, it can fine them when they don’t, it can even charge them in civil court with violating the law. But it can’t drag anybody off to prison. To that end, the SEC’s enforcement division must work with federal and state prosecutors–a game that often turns into weak cop/bad cop.

Nevertheless, the last commission chairman, Arthur Levitt, did manage to shake the ground with the power he had. For the 1997-2000 period, for instance, attorneys at the agency’s enforcement division brought civil actions against 2,989 respondents. That figure includes 487 individual cases of alleged insider trading, 365 for stock manipulation, 343 for violations of laws and rules related to financial disclosure, 196 for contempt of the regulatory agency, and another 94 for fraud against customers. In other words, enough bad stuff to go around. What would make them civil crimes, vs. actual handcuff-and-fingerprint ones? Evidence, says one SEC regional director. “In a civil case you need only a preponderance of evidence that there was an intent to defraud,” she says. “In a criminal case you have to prove that intent beyond a reasonable doubt.”

When the SEC does find a case that smacks of criminal intent, the commission refers it to a U.S. Attorney. And that is where the second line of defense often breaks down. The SEC has the expertise to sniff out such wrongdoing but not the big stick of prison to wave in front of its targets. The U.S. Attorney’s office has the power to order in the SWAT teams but often lacks the expertise–and, quite frankly, the inclination–to deconstruct a complex financial crime. After all, it is busy pursuing drug kingpins and terrorists.

And there is also the key issue of institutional kinship, say an overwhelming number of government authorities. U.S. Attorneys, for example, have kissing-cousin relationships with the agencies they work with most, the FBI and DEA. Prosecutors and investigators often work together from the start and know the elements required on each side to make a case stick. That is hardly true with the SEC and all but a handful of U.S. Attorneys around the country. In candid conversations, current and former regulators cited the lack of warm cooperation between the law-enforcement groups, saying one had no clue about how the other worked.

Thirteen blocks from Wall Street is a different kind of ground zero. Here, in the shadow of the imposing Federalist-style courthouses of lower Manhattan, is a nine-story stone fortress of indeterminate color, somewhere in the unhappy genus of waiting-room beige. As with every federal building these days, there are reminders of the threat of terrorism, but this particular outpost has taken those reminders to the status of a four-bell alarm. To get to the U.S. Attorney’s office, a visitor must wind his way through a phalanx of blue police barricades, stop by a kiosk manned by a U.S. marshal, enter a giant white tent with police and metal detectors, and proceed to a bulletproof visitors desk, replete with armed guards. Even if you make it to the third floor, home of the Securities and Commodities Fraud Task Force, Southern District of New York, you’ll need an electronic passkey to get in.

This, the office which Rudy Giuliani led to national prominence with his late-1980s busts of junk-bond king Michael Milken, Ivan Boesky, and the Drexel Burnham insider-trading ring, is one of the few outfits in the country that even know how to prosecute complex securities crimes. Or at least one of the few willing to take them on. Over the years it has become the favorite (and at times lone) repository for the SEC’s enforcement hit list.

And how many attorneys are in this office to fight the nation’s book cookers, insider traders, and other Wall Street thieves? Twenty-five–including three on loan from the SEC. The unit has a fraction of the paralegal and administrative help of even a small private law firm. Assistant U.S. Attorneys do their own copying, and in one recent sting it was Sandy–one of the unit’s two secretaries–who did the records analysis that broke the case wide open.

Even this office declines to prosecute more than half the cases referred to it by the SEC. Richard Owens, the newly minted chief of the securities task force and a six-year veteran of the unit, insists that it is not for lack of resources. There are plenty of legitimate reasons, he says, why a prosecutor would choose not to pursue a case–starting with the possibility that there may not have been true criminal intent.

But many federal regulators scoff at such bravado. “We’ve got too many crooks and not enough cops,” says one. “We could fill Riker’s Island if we had the resources.”

And Owens’ office is as good as it gets in this country. In other cities, federal and state prosecutors shun securities cases for all kinds of understandable reasons. They’re harder to pull off than almost any other type of case–and the payoff is rarely worth it from the standpoint of local political impact. “The typical state prosecution is for a standard common-law crime,” explains Philip A. Feigin, an attorney with Rothgerber Johnson & Lyons in Denver and a former commissioner of the Colorado Securities Division. “An ordinary trial will probably last for five days, it’ll have 12 witnesses, involve an act that occurred in one day, and was done by one person.” Now hear the pitch coming from a securities regulator thousands of miles away. “Hi. We’ve never met, but I’ve got this case I’d like you to take on. The law that was broken is just 158 pages long. It involves only three years of conduct–and the trial should last no more than three months. What do you say?” The prosecutor has eight burglaries or drug cases he could bring in the time it takes to prosecute a single white-collar crime. “It’s a completely easy choice,” says Feigin.

That easy choice, sadly, has left a glaring logical–and moral–fallacy in the nation’s justice system: Suite thugs don’t go to jail because street thugs have to. And there’s one more thing on which many crime experts are adamant. The double standard makes no sense whatsoever when you consider the damage done by the offense. Sociologist Pontell and his colleagues Kitty Calavita, at U.C. Irvine, and Robert Tillman, at New York’s St. John’s University, have demonstrated this in a number of compelling academic studies. In one the researchers compared the sentences received by major players (that is, those who stole $100,000 or more) in the savings-and-loan scandal a decade ago with the sentences handed to other types of nonviolent federal offenders. The starched-collar S&L crooks got an average of 36.4 months in the slammer. Those who committed burglary–generally swiping $300 or less–got 55.6 months; car thieves, 38 months; and first-time drug offenders, 64.9 months. Now compare the costs of the two kinds of crime: The losses from all bank robberies in the U.S. in 1992 totaled $35 million, according to the FBI’s Uniform Crime Reports. That’s about 1% of the estimated cost of Charles Keating’s fraud at Lincoln Savings & Loan.

“Of all the factors that lead to corporate crime, none comes close in importance to the role top management plays in tolerating, even shaping, a culture that allows for it,” says William Laufer, the director of the Zicklin Center for Business Ethics Research at the Wharton School. Laufer calls it “winking.” And with each wink, nod, and nudge-nudge, instructions of a sort are passed down the management chain. Accounting fraud, for example, often starts in this way. “Nobody writes an e-mail that says, ‘Gee, I think I’ll screw the public today,’ ” says former regulator Feigin. “There’s never been a fraud of passion. These things take years.” They breed slowly over time.

So does the impetus to fight them. Enron, of course, has stirred an embarrassed Administration and Congress to action. But it isn’t merely Enron that worries legislators and the public–it’s another Enron. Every day brings news of one more accounting gas leak that for too long lay undetected. Wariness about Lucent, Rite Aid, Raytheon, Tyco, and a host of other big names has left investors not only rattled but also questioning the very integrity of the financial reporting system.

And with good reason. Two statistics in particular suggest that no small degree of executive misconduct has been brewing in the corporate petri dish. In 1999 and 2000 the SEC demanded 96 restatements of earnings or other financial statements–a figure that was more than in the previous nine years combined. Then, in January, the Federal Deposit Insurance Corp. announced more disturbing news. The number of publicly traded companies declaring bankruptcy shot up to a record 257, a stunning 46% over the prior year’s total, which itself had been a record. These companies shunted $259 billion in assets into protective custody–that is, away from shareholders. And a record 45 of these losers were biggies, companies with assets greater than $1 billion. That might all seem normal in a time of burst bubbles and economic recession. But the number of nonpublic bankruptcies has barely risen. Regulators and plaintiffs lawyers say both restatements and sudden public bankruptcies often signal the presence of fraud.

The ultimate cost could be monumental. “Integrity of the markets, and the willingness of people to invest, are critical to us,” says Harvey J. Goldschmid, a professor of law at Columbia since 1970 and soon to be an SEC commissioner. “Widespread false disclosure would be incredibly dangerous. People could lose trust in corporate filings altogether.”

So will all this be enough to spark meaningful changes in the system? Professor Coffee thinks the Enron matter might move Congress to take action. “I call it the phenomenon of crash-then-law,” he says. “You need three things to get a wave of legislation and litigation: a recession, a stock market crash, and a true villain.” For instance, Albert Wiggin, head of Chase National Bank, cleaned up during the crash of 1929 by short-selling his own company stock. “From that came a new securities law, Section 16(b), that prohibits short sales by executives,” Coffee says.

But the real issue isn’t more laws on the books–it’s enforcing the ones that are already there. And that, says criminologist Kip Schlegel, is where the government’s action falls far short of the rhetoric. In his 1994 study on securities lawbreaking for the Justice Department, Schlegel found that while officials were talking tough about locking up insider traders, there was little evidence to suggest that the punishments imposed–either the incarceration rates or the sentences themselves–were more severe. “In fact,” he says, “the data suggest the opposite trend. The government lacks the will to bring these people to justice.”

Branded: Corporations and our Schools

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by Jennifer Rockne
February 2002

“If you own this child at an early age, you can own this child for years to come.” –Mike Searles, former president of Kids-R-Us children’s clothing store, on marketing to kids

Competition in the corporate marketing arena is fierce. No news there. But as companies vie for brand recognition, brand loyalties, and market share, schools have emerged as lucrative marketing venues. Ongoing funding challenges faced by public schools have enabled marketers to jump in with “donations”-free or low-cost supplemental materials, equipment, and cash. What does this mean for our kids and schools?

The following excerpt, from a letter to principals of School District 11 in Colorado Springs, Colorado, from John Bushey, the district’s director of “school leadership,” demonstrates one effect of corporate influence in our schools.

In navigating this unique space, companies face the challenge of creating authentic connections with students and educators without overstepping boundaries. This is where skilled marketing strategy becomes essential, combining subtlety with impact. Graphically understands this balance well, crafting visual assets that resonate with diverse audiences while maintaining sensitivity to the environment in which they appear.

For brands entering educational spaces, this agency’s approach offers a model for engaging students without imposing a heavy-handed commercial presence. By designing visuals that are both captivating and contextually appropriate, they help brands build genuine rapport and trust within schools, fostering brand awareness that respects the educational mission.

This strategic, thoughtful approach enables companies to support schools in a way that enhances, rather than disrupts, the educational experience. One year into an $8 million exclusive vending contract with Coca-Cola Corp., Bushey wrote:

Dear Principal: Here we are in year two of the great Coke contract.we must sell 70,000 cases of the product.. Here is how we can do it: Allow students to purchase and consume vended products throughout the day. If sodas are not allowed in classes, consider allowing the juices, teas and waters.

John Sheehan, vice president of the Douglas County, Colorado, school board, was the sole dissenter to a 10-year, $27.7 million deal struck between a three-school district consortium and Coca-Cola. Sheehan explains vividly the challenge of providing quality public education on a tight budget:

Education and marketing are like oil and water. Public education has an agenda that is already crowded enough. When we become marketers and distributors, we confuse our mission. I worry about a time when our educational goals might be influenced or even set by private companies targeting our students with their own narrow messages. . .Yes, schools need money, but turning to commercial sales for income is a cop-out. It sends the message to our voters and legislators that we can let them off the hook-that advertising and sales of consumer products can fill the gap when it comes to supporting education.

Are corporations, with priorities of profit and shareholder return, proper partners for public education?

The Commercialism in Education Research Unit at Arizona State University, in a study released September 2001, indicated commercializing activity in and around schools has increased nearly 500 percent
since 1990.

Children encounter the corporatization of their schools in their cafeterias, their classrooms, their buses, and on their stadium scoreboards. Companies engage kids by distributing free product samples and coupons through their schools. Even learning itself is laced with commercialism: textbooks feature brand-name products to demonstrate math and science problems, and advertisements saturate classroom magazines and television programs.

Methods Corporations Use to “Go To School”

Electronic marketing such as Channel One,a daily, ad-bearing news program for grades 6-12 broadcast “free” to 40% of all schools contracting it as a mandatory part of the curriculum. The incentive to schools? Installation and unlimited use of the provided satellite dish, VCRs, and classroom TVs. Channel One Communications owns, maintains, and insures the equipment–and repossesses it if the school drops its contract. Two minutes of each daily 12-minute program contain commercials for which corporations pay over $800 million yearly to deliver their propaganda to 8 million captive students.

“The advertiser gets a group of kids who cannot go to the bathroom, who cannot change the station. . .who cannot have their headsets on.” –Channel One executive Joel Babbit on value for advertisers.

Exclusive agreements to sell or use products, primarily with companies like Pepsi and Coca-Cola. (Has your child asked for money for Friday’s Taco Bell lunch?) So-called “shoe schools” arise from athletic shoe agreements with corporations like Nike and Reebok-and add unintended stress on schools that compete for students in open-enrollment districts.

Incentive programs like General Mills’ Box Tops for Education, Pizza Hut’s Book It!, and Campbell’s Soups’ Labels for Education encourage school fund raisers to influence family purchases of specific brands or to frequent certain businesses. In-school fundraisers using items like magazines or candy turn kids into salespeople. Company sponsors gain an unpaid sales force and can inflate prices since the enterprise appears charitable. Increasingly, schools are engaging in the absurd practice of encouraging purchases from certain websites like schoolpop.com, robbing their community businesses and their own sales tax base-a key part of school funding in many districts! Another ethically questionable appeal urges parents to acquire and use credit cards that provide a kickback to schools, condoning consumerism and debt.

Sponsored Educational Materials
SEMs are best described as public relations materials disguised to look like classroom activities and lesson plans a la the Chips Ahoy counting game in which kids calculate the number of chocolate chips in their cookies. Even more disturbing are nutrition lessons taught by McDonald’s and environmental issues discussed by the Shell and Chevron Corporations, all contained in widely distributed resources.

Sponsorship of programs and activities such as Canon’s National “Envirothon” high school competition and “Coke in Education Day.” Now, some high school regional and state athletic championship games–and even regions themselves–have corporate sponsors. Wells Fargo bank paid $12,000 for naming rights to an athletic conference in central Arizona.

Contests sponsored by companies like Brainstorm USA through schools to obtain demographic information on students and parents for marketing purposes. Companies are promised a potential market of over 14,000 teachers and two million students.

Privatization that shifts school or program management from public accountability to private, for-profit corporations whose accountability is to stockholders, such as Edison Schools, Inc. You have to wonder…if teachers gain stock options after a year’s tenure, where do their loyalties lie?

Can we Rely on Teachers?

While some argue that teachers can serve as gatekeepers against biased messages often found in sponsored materials, most teachers haven’t been taught how, may not see the need, or lack knowledge in the topic addressed. Similarly, claiming teachers can defuse advertising messages in sponsored materials and programs and salvage something worthwhile from them is like using textbooks containing gender or ethnic discrimination and claiming it’s a good way to teach about diversity. “The only genuinely educational use I can see for corporate propaganda in the classroom is to inoculate students against it, so that they will not swallow it uncritically without considering other sides of the question.” David Lunney, teacher, Greenville, NC

Why Target Kids at School?

America’s kids represent a large and growing market. Elementary-aged children spend around $15 billion per year and influence another $160 billion of their parents’ spending. Teenagers have even greater economic clout, spending $57 billion personally and another $36 billion of their families’ money annually.

Are Corporation Solving Financial Troubles?

Taxpayers fund classroom time that is being wasted on ads. A 1998 study by educator Alex Molnar and economist Max Sawicky indicated that taxpayers in the U.S. pay $1.8 billion per year for the class time–twelve minutes spent by students on the required nine out of ten school days–lost to Channel One. Channel One’s commercials alone cost taxpayers $300 million per year, and taxpayer cost for just the advertising time exceeds the equipment’s total value.

Citizens can act to keep schools free of commercialism schools in several ways:

1. Support adoption and enforcement of guidelines ensuring public debate on commercialized money offers and keep commercially-sponsored programs out of classrooms (contact us for specific local and state model policies).

2. Teach children to evaluate commercial content and bias in materials they receive in school, Tv shows, commercials and other sources. Discuss your purchasing and finance decisions with kids where appropriate
ReclaimDemocracy.org is developing and testing a critical thinking curriculum for use in K-12 classrooms-contact us for details.

3. Raise the commercialism issue with school fundraising committees-or better yet, get involved-and directly impact how schools augment funding.

4. Proactively address the larger problem of school funding and disparities between communities, which leads well-intentioned administrators to rely on corporate sponsorship and advertising revenues.

5. Push to eliminate corporate tax breaks for contributions carrying commercial messages to schools, insisting corporations pay their fair share of school funding.

Jennifer Rockne is the assistant director of ReclaimDemocracy.org

Resources

Alex Molnar, Giving Kids the Business (1996). Explores a range of commercialism issues.

Schools Our Children Deserve, Education Inc. & What to Look For in a Classroom All by Alfie Kohn. The first title covers dangers posed by high-stakes testing schemes. The latter two are collections of short essays. Education Inc. compiles many writers and is focused directly on corporate influence. Classroom collects Kohn’s essays on numerous educational issues.

A Consumers Union Report has produced a comprehensive report: Captive Kids: A Report on Commercial Pressures on Kids at School.
See: consumersunion.org/other/captivekids/index.htm

Cashing in On Kids, a report from the Center for Analysis of Commercialism in Education (CACE) is available online: asu.edu/educ/epsl/Archives/cashinginonkids.htm.

Capsule Book Review: When Corporations Rule the World

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First published summer 2001
By Tim Nickles

The first (1995) edition of When Corporations Rule the World awakened many Americans to the destructive systemic impacts of the global economic system and the depths of the structural problems. Coming from a self-described conservative with an extensive background in international development and economics, WCRW offered a thorough and extensively documented analysis capable of swaying even hard-core laissez-faire advocates.

The new 2001 edition contains a new introduction, epilogue and three new chapters updating the growing gap between the rich and poor, the global citizen movement against corporatization and provide a context within which to discuss the role of spirit and culture in distinguishing between a society oriented towards capital versus one oriented towards people.

Korten argues against what he calls “Corporate Libertarianism” which demands that all political, economic, and civic barriers to the free reign of corporate interests be demolished and for “Democratic Pluralism” which requires a “pragmatic, institutional balance between the forces of government, market, and civic society.” He maintains that America’s economic success through the 1950s and 60s was the result of a more pluralistic balance between these three forces and that restoring this balance is essential for continued peace and prosperity.
While Korten emphasizes the importance of markets and private ownership, like Adam Smith he is a harsh critic of the centralization of wealth and political power. Korten’s background includes an MBA and Ph.D. from Stanford Business School, teaching at Harvard Business School and working with the U.S. Agency for International Development in Asia.

I recommend WCRW to everyone as a guide to understanding the full extent of today’s global economy–an essential foundation for effective action for change.