Is This America's Top Corporate Crime Fighter?
Some leading public pension funds are getting over timidity and making more aggressive demands themselves. CalPERS joined the New York and North Carolina employee pension funds recently to warn dozens of Wall Street investment firms that unless they eliminated their internal conflicts of interest, along the lines that New York Attorney General Eliot Spitzer imposed on Merrill Lynch, the three funds won't let them manage any of their pension money. Altogether, that represents more than $400 billion--a huge loss of business for bankers who don't comply. Feeling the general disgust, the New York Stock Exchange has proposed its own substantial list of corporate governance reforms to cover the exchange's listed companies, and its rules embrace many longstanding reform goals of shareholder activists. "I'm as surprised as anyone," Teslik said. "I've always referred to them as dinosaurs." These rules, however, apply only to "self-regulation," and the NYSE has a dismal record in getting tough with the people who pay its bills. Nevertheless, Teslik noted, the exchange's new rules will provide good ammunition for enforcement by Bill Lerach's lawsuits.
Lerach is building his own wish list for reforming companies: Require the rotation of auditors every three years. Install a corporate ethics officer with real authority and independent reporting responsibility to the board. Also a regulatory compliance officer with similar power. Rigorous controls to prevent "option flipping," insider trading and other forms of self-dealing. A holding period on stock options that prevents CEOs from cashing out in a falling market when other shareholders are losing. "These are our companies," Lerach said. "We own them. There are reasons beyond money to litigate."
Lerach is also examining the widespread mismanagement of 401(k) pension funds. "I think we may be sitting on a real powder keg here," he said. "In many instances, while 401(k) money was being shoved into the company's stock, the executives were bailing out of the company's stock. That doesn't look too pretty in hindsight. The executives have $50 million or $70 million in their pocket and Joe Sixpack, who spent forty years working for the company and thought he had $150,000 to retire, has got $9,000. That's not nice." The pension-fund trustees could be sued for violating their fiduciary obligations to the employee investors by pushing them into a stock they knew was in trouble and failing to disclose the true condition of the company. There are dozens and dozens of these cases, Lerach said, that would test the limits of the federal government's own pension-fund supervision and insurance liabilities.
In terms of broader social objectives, some of the most intriguing possibilities in Lerach's arsenal are the union-backed lawsuits against companies, brought by workers who are also shareholders, either directly or as beneficiary owners of pension-fund capital. Union-sponsored pension funds hold about $400 billion (modest compared with the company-sponsored funds), and Lerach argues that as lead plaintiffs in securities cases, they can win settlements that force businesses to accept union-friendly conditions, the right to organize, improved workplace safety, limits on moving production offshore and other concrete goals. "The labor union pension funds adhere to a view that I happen to agree with," he said. "Public companies that allow their workers to organize, treat them fairly and compensate appropriately--you know what? Those companies do better long-term. They don't get sued for violating wage and hour laws or civil rights or environmental laws. Good corporate citizenship pays off in performance. Labor pension funds have every right to advance their values as investors who happen to be workers. This could be a way for labor to makes its capital work for it."
A lawsuit backed by the Service Employees International Union against Fruit of the Loom accuses CEO William Farley and other executives of destroying the corporation's value with more than $700 million in losses and 16,000 US jobs shipped offshore, then bankruptcy. The Teamsters are supporting a suit against Overnite Transportation and its owner, Union Pacific, for violating labor and environmental laws. The Teamsters, Plumbers and Carpenters unions are suing Cisco Systems executives for defrauding shareholders by overstating earnings, while selling more than $600 million of their own stock.
The distinctive feature in most of these actions is that the workers, as shareholders, are suing the executives on behalf of the corporation itself, seeking to recover wasted company assets and perhaps win governance reforms in the settlements. Al Meyerhoff, a Milberg Weiss partner who is a former lawyer with the Natural Resources Defense Council, said that so-called derivative lawsuits "give a whole new line of attack to labor unions, environmentalists and others to go after corporate malfeasance. And it hits them where they live because the executives can be held personally responsible for the damage to the company." Milberg Weiss is applying similarly aggressive tactics against US multinationals operating overseas. It has won substantial cash settlements for workers exploited in the notorious Saipan sweatshops by brand-name clothing makers. "There wouldn't have been any settlement on Saipan if it weren't for Milberg Weiss," one labor-fund official said. "They really carry a big stick. The companies treat them viciously because they know this is real."
Of course, the overbearing power of American corporations is not going to be dismantled one lawsuit at a time. The larger structural elements of the corporation--the reach and purpose and unique legal privileges of these large private organizations--are artifacts embedded in law and politics. They are unlikely to be altered significantly as long as the alliances of corporations dominate public life so thoroughly, like latter-day political machines. But what trial lawyers bring to the abstraction of corporate governance is a sharp new blade that is cutting into some substantive territory. Together with shareholder activists, labor's working capital, environmentalists and others, the litigators can help make long-neglected questions of corporate power visible again, a necessary predicate for new politics.