Article 43

 

Friday, June 30, 2006

Perfect Payday

Stock Option Practices Newest in Long Line of CEO Pay Abuses

Some CEOs reap millions by landing stock options when they are most valuable. Luck - or something else?
By CHARLES FORELLE and JAMES BANDLER
Wall Street Journal
March 18, 2006

On a summer day in 2002, shares of Affiliated Computer Services Inc. sank to their lowest level in a year. Oddly, that was good news for Chief Executive Jeffrey Rich.

His annual grant of stock options was dated that day, entitling him to buy stock at that price for years. Had they been dated a week later, when the stock was 27% higher, they’d have been far less rewarding. It was the same through much of Mr. Rich’s tenure: In a striking pattern, all six of his stock-option grants from 1995 to 2002 were dated just before a rise in the stock price, often at the bottom of a steep drop.

Just lucky? A Wall Street Journal analysis suggests the odds of this happening by chance are extraordinarily remote—around one in 300 billion. The odds of winning the multistate Powerball lottery with a $1 ticket are one in 146 million.

Suspecting such patterns aren’t due to chance, the Securities and Exchange Commission is examining whether some option grants carry favorable grant dates for a different reason: They were backdated. The SEC is understood to be looking at about a dozen companies’ option grants with this in mind.

The Journal’s analysis of grant dates and stock movements suggests the problem may be broader. It identified several companies with wildly improbable option-grant patterns. While this doesn’t prove chicanery, it shows something very odd: Year after year, some companies’ top executives received options on unusually propitious dates. (Read an explanation of the methodology.)

The analysis bolsters recent academic work suggesting that backdating was widespread, particularly from the start of the tech-stock boom in the 1990s through the Sarbanes-Oxley corporate reform act of 2002. If so, it was another way some executives enriched themselves during the boom at shareholders’ expense. And because options grants are long-lived, some executives holding backdated grants from the late 1990s could still profit from them today.

Mr. Rich called his repeated favorable option-grant dates at ACS “blind luck.” He said there was no backdating, a practice he termed “absolutely wrong.” A spokeswoman for ACS, Lesley Pool, disputed the Journal’s analysis of the likelihood of Mr. Rich’s grants all falling on such favorable dates. But Ms. Pool added that the timing wasn’t purely happenstance: “We did grant options when there was a natural dip in the stock price,” she said. On March 6, ACS said that the SEC is examining its option grants.

Stock options give recipients a right to buy company stock at a set price, called the exercise price or strike price. The right usually doesn’t vest for a year or more, but then it continues for several years. The exercise price is usually the stock’s 4 p.m. price on the date of the grant, an average of the day’s high and low, or the 4 p.m. price the day before. Naturally, the lower it is, the more money the recipient can potentially make someday by exercising the options.

Which day’s price the options carry makes a big difference. Suppose an executive gets 100,000 options on a day when the stock is at $30. Exercising them after it has reached $50 would bring a profit of $20 times 100,000, or $2 million. But if the grant date was a month earlier and the stock then was at, say, $20, the options would bring in an extra $1 million.

A key purpose of stock options is to give recipients an incentive to improve their employer’s performance, including its stock price. No stock gain, no profit on the options. Backdating them so they carry a lower price would run counter to this goal, by giving the recipient a paper gain right from the start.

Companies have a right to give executives lavish compensation if they choose to, but they can’t mislead shareholders about it. Granting an option at a price below the current market value, while not illegal in itself, could result in false disclosure. That’s because companies grant their options under a shareholder-approved “option plan” on file with the SEC. The plans typically say options will carry the stock price of the day the company awards them or the day before. If it turns out they carry some other price, the company could be in violation of its options plan, and potentially vulnerable to an allegation of securities fraud.

It could even face accounting issues. Options priced below the stock’s fair market value when they’re awarded bring the recipient an instant paper gain. Under accounting rules, that’s equivalent to extra pay and thus is a cost to the company. A company that failed to include such a cost in its books may have overstated its profits, and might need to restate past financial results.

The Journal’s analysis raises questions about one of the most lucrative stock-option grants ever. On Oct. 13, 1999, William W. McGuire, CEO of giant insurer UnitedHealth Group Inc., got an enormous grant in three parts that—after adjustment for later stock splits—came to 14.6 million options. So far, he has exercised about 5% of them, for a profit of about $39 million. As of late February he had 13.87 million unexercised options left from the October 1999 tranche. His profit on those, if he exercised them today, would be about $717 million more.

The 1999 grant was dated the very day UnitedHealth stock hit its low for the year. Grants to Dr. McGuire in 1997 and 2000 were also dated on the day with those years’ single lowest closing price. A grant in 2001 came near the bottom of a sharp stock dip. In all, the odds of such a favorable pattern occurring by chance would be one in 200 million or greater. Odds such as those are “astronomical,” said David Yermack, an associate professor of finance at New York University, who reviewed the Journal’s methodology and has studied options-timing issues.

Options grants are made by directors, with details often handled by a compensation committee. Many companies make their grants at the same time each year, a policy that limits the potential for date fudging. But no law requires this.

Until last year, UnitedHealth had a very unusual policy: It let Dr. McGuire choose the day of his own option grants. According to his 1999 employment agreement, he is supposed to choose dates by giving “oral notification” to the chairman of the company’s compensation committee. The agreement says the exercise price shall be the stock’s closing price on the date the grants are issued.

Arthur Meyers, an executive-compensation attorney with Seyfarth Shaw LLP in Boston, said a contract such as that sounded “like a thinly disguised attempt to pick the lowest grant price possible.” Mr. Meyers said such a pact could pose several legal issues, possibly violating Internal Revenue Service and stock-exchange listing rules that require directors to set a CEO’s compensation. “If he picks the date of his grant, he has arguably set a portion of his pay. It’s just not good corporate governance.”

UnitedHealth called the process by which its grants were awarded “appropriate.” It declined to answer specific questions about grant dates but noted that on all but two of them, grants were made to a broad group of employees.

William Spears, a member of UnitedHealth’s compensation committee, said the October 1999 grant wasn’t backdated but was awarded concurrently with the signing of Dr. McGuire’s employment contract. Mr. Spears said a depressed stock price spurred directors to wrap up negotiations and get options to management. The board revised terms of the employment contract last year and will start making stock-option grants at a regular time each year, Mr. Spears added.

The SEC’s look at options timing was largely prompted by academic research that examined thousands of companies and found odd patterns of stock movement around the dates of grants. One study was by Erik Lie of the University of Iowa. He found that share prices generally fell before option grants and rose afterward, with the result that recipients got options at favorable times. He concluded this was so unlikely to happen by chance that at least some grant dates had to have been filled in retroactively.

Another possible explanation for big rises in stock prices following grants is that executives knew favorable company news was coming and timed the grants just before it. But academics think timing for company news is a less likely explanation for the patterns, given the consistency of the stock climbs after grant dates. Also, for many of the companies the Journal examined, no obvious company news followed closely upon the option grants.

It’s also possible companies sometimes award options after their stock has taken a fall and seems to them to be undervalued. In point of fact, the companies can’t possibly know what the stock will do next, but that doesn’t mean they might not feel confident enough about a recovery to think they are hitting a favorable time to grant options.

The use of stock options surged in the late 1990s as young firms that had bright prospects but little revenue used them to attract and pay executives. As dot-com and telecom shares exploded, stock options became a source of vast wealth.

They also grew controversial. Critics worried that big options grants tempted executives to do whatever it took to get the stock price up, at least long enough to cash in their options. At the same time, during a general bull market, the options sometimes richly rewarded executives for stock buoyancy that had little to do with their own efforts.

At Mercury Interactive Corp., a Mountain View, Calif., software maker, the chief executive and two others resigned late last year. Mercury said an internal probe found 49 cases where the reported date of options grants differed from the date when the options appeared to have been awarded. The company said it will have to restate financial results. The SEC is still looking at Mercury, said someone familiar with the situation.

Analog Devices Inc. says it reached a tentative settlement with the SEC last fall. It neither admitted nor denied that it had misdated options or had made grants just before releasing good news that would tend to push up the stock. The Norwood, Mass., computer-chip maker tentatively agreed to pay a $3 million civil penalty and re-price some options. CEO Jerald Fishman tentatively agreed to pay a $1 million penalty and disgorge some profits. Analog didn’t make him available for comment. The company said it will not restate its financial records.

In some instances, backdating wouldn’t be possible without inattentive directors, securities lawyers say. At one company the SEC is looking at, lawyers say, it appears that someone picked a favorable past date for an option grant and gave it to directors for retroactive approval, perhaps counting on them not to notice. In another case, the lawyers say, a space for the grant date appears to have been left blank on paperwork approved by directors, or dates were later altered.

Until 2002, companies didn’t have to report option grants until months later. The Sarbanes-Oxley law, by forcing them to report grants within two days, left less leeway to retroactively date a grant.

The new rule reduced stock patterns suggestive of backdating, but didn’t eliminate these altogether, according to a study by M.P. Narayanan and H. Nejat Seyhun of the University of Michigan. They found that companies report about a quarter of option grants later than the two-day deadline—and that such delayed reporting is associated with big price gains after the grant dates. It is a pattern Mr. Narayanan calls “consistent with backdating.”

Before the stricter rules, Brooks Automation Inc., a semiconductor-equipment maker in Chelmsford, Mass., gave 233,000 options to its CEO, Robert Therrien, in 2000. The stated grant date was May 31. That was a great day to have options priced. Brooks’s stock plunged over 20% that day, to $39.75. And the very next day it surged more than 30%.

A June 7 Brooks report to the SEC covering Mr. Therrien’s May options activity made no mention of his having gotten a grant on May 31, even though the report—which Mr. Therrien signed—did cite other options-related actions he took on May 31. Not until August was the May 31 grant reported to the SEC.

It wasn’t the only well-timed option grant he got. One in October 2001 came at Brooks stock’s lowest closing price that year, once again at the nadir of a sharp plunge. The Journal analysis puts the odds of such a consistent pattern occurring by chance at about 1 in nine million.

Mr. Therrien, who stepped down as CEO in 2004 and retired as chairman this month, didn’t return messages seeking comment. Chief Financial Officer Robert Woodbury said Brooks is “in the process of revamping” practices so grants come at about the same time each year. Mr. Woodbury, who joined in 2003, said no one at Brooks would be able to explain the timing of Mr. Therrien’s grants.

The highly favorable 2000 grant also benefited two others at Brooks—the compensation-committee members who oversaw the CEO’s grants. Although Brooks directors typically got options only in July, that year a special grant was awarded just to these two directors, Roger Emerick and Amin J. Khoury. Each got 20,000 options at the low $39.75 price. By the time of their regular July option-grant date, the stock was way up to $61.75, a price far less favorable to options recipients.

Mr. Emerick, a retired CEO of Lam Research Corp., declined to be interviewed. Mr. Khoury, the CEO of BE Aerospace Inc. in Wellington, Fla., didn’t return messages left at his office.

Another company, Comverse Technology Inc., said Tuesday that its board had started a review of its past stock-option practices, including “the accuracy of the stated dates of options grants,” following questions about the dates from the Journal. The announcement reversed a prior Comverse statement—given a week earlier in response to Journal inquiries—saying all grants were made in accordance with applicable laws and regulations.

The Journal’s analysis spotlighted an unusual pattern of grants to Kobi Alexander, chief executive of the New York maker of telecom systems and software. One grant was dated July 15, 1996, and carried an exercise price of $7.9167, adjusted for stock splits. It was priced at the bottom of a sharp one-day drop in the stock, which fell 13% the day of the grant and then rebounded 13% the next day.

Another grant, on Oct. 22, 2001, caught the second-lowest closing price of 2001. Others also corresponded to price dips. The odds of such a pattern occurring by chance are around 1 in six billion, according to the Journal’s analysis.

Before Comverse announced its internal probe, John Friedman, a member of the board’s compensation committee, said directors had noticed the scattered nature of the grants—eight between 1994 and 2001 fell in six different months—but management assured them there were valid reasons. Mr. Alexander, the CEO, didn’t return phone calls.

This week, Comverse said that, as a result of the board’s review of its options grants, it expects it will need to restate past financial results.

Propitious option timing can help build fortunes even at companies where the stock doesn’t steadily rise. Shares of Vitesse Semiconductor Corp., although they zoomed in the late 1990s, now rest at about the level of a decade ago. But Louis R. Tomasetta, chief executive of the Camarillo, Calif., chip maker, reaped tens of millions of dollars from stock options.

Mr. Tomasetta got a grant in March 1997 that, adjusted for later stock splits, gave him the right to buy 600,000 shares at $5.625 each. The date they were priced coincided with a steep fall in Vitesse’s stock, to what turned out to be its low for the year. He pocketed $23.1 million in profit when he exercised most of these options between 1998 and 2001. Had the grant come 10 days earlier, when the stock price was much stronger, he would have made $1.4 million less.

In eight of Mr. Tomasetta’s nine option grants from 1994 to 2001, the grants were dated just before double-digit price surges in the next 20 trading days. The odds of such a pattern occurring by chance are about one in 26 billion.

Alex Daly, a member of the Vitesse board’s compensation committee, said a review of the grants found “nothing extraordinary” about their timing, and “absolutely no grants have been made to anyone, least of all the CEO, that are out of sequence with our normal grant policy.” Vitesse’s finance chief, Yatin Mody, said the grants were “reviewed and approved” by the compensation committee, “and the exercise price set as of the date of the approval, as documented by the related minutes.” He declined to provide a copy of those minutes. Mr. Tomasetta said the grants were “approved by the board and the price set at the close of the day of approval.”

At ACS in Dallas, Mr. Rich helped turn a small technology firm into one with more than $4.4 billion in annual revenue and about 55,000 employees. ACS handles paperwork, accounting and data for businesses and government agencies. It is a major outsourcer, relying on global labor. “It is a pretty boring business,” Mr. Rich told the University of Michigan business school in 2004, “but there is a lot of money in boring.”

While most of Mr. Rich’s stock-option gains were due to rises in ACS stock, the exceptional timing of grants enhanced his take. If his grants from 1995 through 2002 had come at each year’s average share price, rather than the favorable dates, he’d have made about 15% less.

An especially well-timed grant, in which Mr. Rich received 500,000 options at $11.53, adjusted for stock splits, was dated Oct. 8, 1998. This happened to be the bottom of a steep plunge in the price. The shares fell 28% in the 20 trading days prior to Oct. 8, and rose 60% in the succeeding 20 trading days.

ACS’s Ms. Pool said the grant was for Mr. Rich’s promotion to CEO. He wasn’t promoted until February 1999. Ms. Pool said there was a “six-month transition plan,” and the Oct. 8 option grant was “in anticipation” of his promotion.

Mr. Rich would have fared far worse had his grant come on the day ACS announced his promotion. The stock by then was more than twice as high. The grant wasn’t reported to the SEC until 10 months after the stated grant date. Ms. Pool said that was proper under regulations in place at the time.

A special board committee oversaw Mr. Rich’s grants. Most years, its sole members were directors Frank Rossi and Joseph O’Neill. Mr. Rossi declined to comment. Mr. O’Neill said, “We had ups and downs in our stock price like any publicly traded stock. If there were perceived low points, would we grant options at that point? Yes.”

Mr. Rich said grants were made on the day the compensation committee authorized them, or within a day or so of that. He said he or Chairman Darwin Deason made recommendations to the special board committee about option dates.

Mr. Rich, who is 45 years old, resigned abruptly as ACS’s chief executive on a Thursday in September to “pursue other business interests.” Again, his timing was advantageous. In an unusual separation agreement, the company agreed to make a special payment of $18.4 million, which was equal to the difference between the exercise price of 610,000 of his outstanding stock options and the closing ACS stock price on the day of his resignation.

But the company didn’t announce the resignation that day. On the news the next Monday that its CEO was departing suddenly, the stock fell 6%. Mr. Rich netted an extra $2 million by cashing in the options before the announcement, rather than on the day of it.

Mr. Rich said ACS signed his separation agreement on Friday, using Thursday’s price for the options payout. He said it waited till Monday to release the news because it didn’t want to seem “evasive” by putting the news out late Friday.

SOURCE

Posted by Elvis on 06/30/06 •
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Wednesday, June 28, 2006

Is Microsoft About to Release A Windows Kill Switch?

DRM lets software companies plant back doors, hack your computer, or anything else you can think of - to allow them control of the software (and your computer) they sold you, to protect their interests.  Microsoft Windows is the latest to bring this to public awareness.  Our laws protect big-business, not consumer privacy.

ED BOTT’S Microsoft Report
June 27, 2006

Two weeks ago, I wrote about my serious objections to Microsofts latest salvo in the war against unauthorized copies of Windows. Two WINDOWS GENUINE ADVANTAGE components are being pushed onto users’ machines with insufficient notification and inadequate quality control, and the result is a big mess. (For details, see MICROSOFT PRESSES THE STUPID BUTTON.)

Guess what? WGA might be on the verge of getting even messier. In fact, one report claims WGA is about to become a Windows “kill switch” and when I asked Microsoft for an on-the-record response, they refused to deny it.

Last week, a correspondent on Dave Farber’s Interesting People list posted some COMMENTS ABOUT HIS EXPERIENCES with Windows OneCare Live. In the middle of the post, he added this tidbit:

I like to review updates before they are installed. The only update that I have not installed is the latest WGA because of the security issues related to it.

I called Microsoft support to see if there is a hidden option to say, “yep, I’ve got updates turned to manual it’s okay.” The rep said, “No and why wouldn’t you want to get the latest updates to Windows.”

I responded with the issues relating to WGA. He spent some time telling me that WGA was a good thing, etc. I reiterated that I have accepted all the updates except WGA and just want to review the updates before they’re installed on my machine.

He told me that “in the fall, having the latest WGA will become mandatory and if its not installed, Windows will give a 30 day warning and when the 30 days is up and WGA isn’t installed, Windows will stop working, so you might as well install WGA now.” [emphasis added]

I’m wondering if Microsoft has the right to disable Windows functionality or the OS as a whole (tantamount to revoking my legitimate Windows license) if I do not install every piece of software that they send it updates.

That canŒt be true, can it? Im always suspicious of any report that comes from a front-line tech support drone, so I sent a note to Microsoft asking for an official confirmation or, better yet, a denial. Instead, I got this terse response from a Microsoft spokesperson:

As we have mentioned previously, as the WGA Notifications program expands in the future, customers may be required to participate. [emphasis added] Microsoft is gathering feedback in select markets to learn how it can best meet its customers’ needs and will keep customers informed of any changes to the program.

That’s it. Thats the entire response.

Uh-oh. Currently, Windows users have the ability to opt out of the Windows Genuine Advantage program and still get security patches and other Critical Updates delivered via Windows Update. The only thing you give up is the ability to download optional updates. Hackers have been working overtime to find ways to disable WGA notification. If WGA becomes mandatory, would it mean that Microsoft could prevent Windows from working if it determines - possibly erroneously - that your copy isnt genuineҔ? Thats a chilling possibility, and Microsoft refuses an easy opportunity to deny that that option is in its plans.

Over at Ed Botts Windows Expertise, Ive been soliciting feedback from Windows users who’ve been burned by WGA. So far, Ive received 20 comments. Here’s a sampling:

· I have an XP Media center with a promise RAID 0 4-disc array. When I installed the WPA it broke the drivers for the array by causing failed delayed writes (half of the array just disapears.) If I do a system restore to before the installation of the WPA everything goes back to working just fine.

· [S]ince installing WPA I’ve had blue screens and a total inability to boot. I had to run the XP repair function to get the computer to boot. I had a damaged boot sector on the hard drive. I am running two drives on a RAID 1 config.

· I purchased a SEALED OEM copy of XP Professional. WGA said the license key was already used. I called MS and they said I should uninstall and buy another copy. I told them I wasnt made of money and hung-up.

· Microsoft rejected the product key that came with the ThinkPad I’m using. I had to call in and they gave me another code to enter which supposedly worked but now I get the blue screen of death about every other time I reboot. Ive also lost all internet connectivity.

· I sent my Compaq Presario notebook for service repair, and it fails the WGA check. I have a legal version of windows xp professional on it. But I have no way to correct this problem.

What’s most disturbing about this whole saga is Microsofts complete lack of transparency on the issue. And before the ABM crowd jumps in with predictable “What did you expect?” comments, let me argue that Microsoft actually has a fairly good track record on transparency issues in recent years. Windows Product Activation is very well documented, and when a similar uproar occurred in 2001, it was squelched quickly by some fairly prominent postings from high-level executives who provided details without a lot of spin. Likewise, the Microsoft Security Response Center has done an exceptional job at providing quick responses to security issues. (Just ask Adam Shostack.)

Currently, no one at Microsoft is blogging about this fiasco. No executive has been quoted on the record about it. There are very few technical details available, and those that have been published are being tumbled through the spin machine and spit out as press releases.

If Microsoft really does plan to turn WGA into a kill switch in September, be prepared for an enormous backlash

SOURCE

Posted by Elvis on 06/28/06 •
Section Privacy And Rights • Section Microsoft And Windows
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Bush vs New York Times

Attacks on the New York Times aren’t about national security, they’re about muting criticism.

By Robert Scheer, Truthdig.
ALterNet
June 28, 2006

UPDATE: The GOP will introduce a RESOLUTION to condemn the NEW YORK TIMES for its reporting.

The Bush administration’s JIHAD against newspapers that reported on a SECRET program to monitor the personal-banking records of unsuspecting citizens is more important than the original story. For what the president and his spokesmen are once again asserting is that the prosecution of this ill-defined, open-ended “war on terror” inevitably trumps basic democratic rights in general and the CONSTITUTIONALLY enshrined freedom of the press in particular.

The stakes are very high here. We’ve already been told that we must put up with official lies about weapons of mass destruction in Iraq, the unprecedented torture of prisoners of war and a massive electronic-eavesdropping program and other invasions of privacy. Now the target is more basic - the freedom of the press to report on such nefarious government activities. The argument in defense of this assault on freedom is the familiar refrain of dictators, wannabe and real, who grasp for power at the expense of democracy: We are in a war with an enemy so powerful and devious that we cannot afford the safeguard of transparent and accountable governance.

“We’re at war with a bunch of people who want to hurt the United States of America, and for people to leak that program, and for a newspaper to publish it, does great harm to the United States of America,” President Bush said Monday.

The “bunch of people” Bush says we are fighting was originally believed to be those behind the Sept. 11, 2001, attacks, specifically Osama bin Laden and his decentralized Al Qaeda terrorist organization. Yet Bush, prodded by the neoconservative clique, quickly expanded this war beyond what should have been a worldwide manhunt for Al Qaeda operatives into an open-ended occupation of Saddam Hussein’s Iraq—which, as we know from the Sept. 11 commission report, had nothing to do with Al Qaeda or Sept. 11.

In fact, if the media, or Congress, had aggressively pursued the truth earlier, rather than being overwhelmed by the shock of Sept. 11, anti-U.S. terrorists of every stripe would not now be swarming over Iraq. Nor would the degenerating situation in Afghanistan and the enhanced power of religious fanatics throughout the Mideast, from Tehran to Gaza, pose such threats to peace if a fully informed public had held this president in check. Even today, the Bush administration continues to place the situation in Iraq in the “war on terror” framework, instead of acknowledging the primary role of religious and nationalist passions unleashed by the unwarranted U.S. invasion.

As Bush has continued to stretch it to cover all of his leadership failings, the “war on terror” has become a meaningless phrase, to be exploited for the political convenience of the moment. Terrorism, which should be treated clinically as a dangerous pathology threatening all modern societies, instead has been seized upon as an all-purpose PROPAGANDA opportunity for consolidating this administration’s political power. In such a situation, the press’ role as a conduit of both information and debate is more essential than ever. Freedom of the press, enshrined in our Constitution at a time when our fragile nation was besieged by enemies of the new republic, is not an indulgence to be allowed in safe periods but rather an indispensable tool for keeping ourselves safe. That is just the point that Vice President Dick Cheney, the high priest of excessive secrecy - even in domestic matters, such as refusing to reveal the content of his negotiation with Enron lobbyists in framing the administration’s energy policy - is bent on obscuring.

“Some in the press, in particular the New York Times, have made the job of defending against further terrorist attacks more difficult,” said Cheney, all but calling the newspaper traitorous.

How convenient to leave out the Wall Street Journal, which editorially supports the administration but which also covered this latest example of Bush’s abuse of power in its news pages. The administration’s attack on the Times, in fact, is not really about national security, but rather follows a domestic political agenda that requires attacking free media that dare offer criticism.

On Monday, following the pattern, Cheney also attacked the Times’ earlier disclosure that the National Security Agency had simply ignored the legal requirement of court warrants in monitoring telephone calls. “I think that is a disgrace,” he said of the Times winning a Pulitzer Prize for the stories.

What is truly a disgrace, though, is an administration that has consistently deceived the public about its intentions and which continues to shamefully exploit post-Sept. 11 fears to ensure its grip on the body politic.

Robert Scheer is the co-author of THE FIVE BIGGEST LIES BUSH TOLD US ABOUT IRAQ. See more of Robert Scheer at TRUTH DIG.

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Tuesday, June 27, 2006

AT&T’s New Privacy Policy - Phone Records For Sale

attnsa.jpg

Sticking with AT&T? You’re a fool
ComputerWorld
June 27, 2006

[Editor’s note: In a discussion on June 29, AT&T stated their view that this column misrepresents the terms of their privacy policy and invites you to take a look for yourself. Click HERE to see AT&T’s privacy policy in their provided link.]

[Ira’s response, June 30: The link provided by ATT is not relevant to the article. It is the link to a high level description of privacy policy to AT&Ts retail customers and Web visitors. Two links further into the site, you get to the actual privacy policy for AT&T. That policy then states that “certain AT&T Internet services and AT&T U-VERSE TV and HOMEZONE services are subject to an additional privacy policy.” This is the policy that this article addresses, and it is not available at the link provided by AT&T. I believe that the choice to provide such a link for this article speaks for itself.]

AT&T’s new privacy policy for its Internet and video services is way out of line - an insult to genuine security efforts and a brassy attempt to make its profits your problem. The announced policy changes may just be a sign that cynically attaching the “war on terrorism” label to business initiatives has reached a new low, but anyone out there who believes that AT&T has announced this sweeping new data-collection policy to support the government’s fight against terrorism is truly a fool. This new privacy policy goes way beyond even the most absurd arguments for monitoring Internet users.

Recapping the basics, AT&T claims that it “reworded” the privacy policy for its Internet service to reflect what was previously “implied.” What the company claims was implied is to the effect that while you consider your account information personal, AT&T owns it.

Once you’ve caught your breath, let’s unpack what’s happening here. First, ask yourself how AT&T benefits from a clearly controversial policy change such as this. Do you think that AT&T is changing this privacy policy just so it can provide data to the U.S. government for good will, or because the government told it to? No. If the government wants your data it has, as we know, various mechanisms to acquire it - whatever AT&T’s privacy policy. A legal warrant is a legal warrant, for example.

The implication is that AT&T is making a profit from selling the data to the federal government. And that profit must be substantial; after all, there are clearly many customers who are dropping AT&T services as a result of this proposed change. (Including me—I actually stopped a switch to AT&T’s Cingular cellular services when I heard of this development.) Clearly, AT&T will lose business by implementing or even announcing such a profound change in privacy policies. I can only imagine how much money AT&T is receiving from the government for all those records if they believe it’s worth the hit.

Next, let’s look at what this change entails. The new privacy policy basically lets AT&T do anything it wants with your information. (Remember, according to the company, it’s its information.) The specific claim is that AT&T can do whatever it wants with your/its data “to protect [the company’s] legitimate business interests.”

But think: Making a profit is a legitimate business interest. Therefore, whatever the company wants to do with any of your information, for whatever it considers within its interests, is covered. AT&T makes no pretense about it. Not only would this explicit ownership claim help the company avoid lawsuits in the future for selling data to the National Security Agency for data-mining purposes, it basically lets AT&T do whatever it wants with any of your information. This isn’t merely a knee-jerk reaction to current lawsuits, but is a profit-making venture for it forevermore.

Not disturbed yet? Ponder this: The privacy policy can be theoretically used to justify AT&T offering a service that consists of selling your corporate e-mail messages to your competitors. If AT&T offers that “service” at a profit, it’s a legitimate business interest for the company. This sounds like an extreme, but the privacy policy allows for such extremes. Posing another problem, if you deal with data protected by such regulations as the Health Insurance Portability and Accountability Act or the Sarbanes-Oxley Act, you now have a whole new set of eyes potentially on that data, with no accountability to your firm or your customers and no means by which you can keep an eye on things.

AT&T isn’t protecting its ability to work with the government—it’s granting itself the right to do whatever it wants with any of your information or data passing through its service. While AT&T’s spokesmen may well say, “We would never do that,” you’d be a fool to believe them. The company employs any number of lawyers, and they didn’t pull the “complete ownership” language out of a hat. They are stating, as they mean to state, that they are claiming complete ownership of your data. That is a huge leap from cooperation with government for perceived national security purposes.

Even if you don’t use AT&T, you must potentially consider that one of your vendors, or anyone else you exchange e-mails with, might use AT&T. While you may not technically want to give up rights to your information, what happens if these other parties send your data, or data relating to you, through AT&T? The implications are really scary. Again, AT&T says that it’s protecting its legitimate business interests, not yours or those of the parties that you deal with.

It gets better. AT&T has also extended its claims on your information by claiming that it can monitor your video usage. There are laws on the book that state that cable companies can’t monitor or collect data on viewing habits. AT&T claims that it isn’t bound by those regulations because it’s an Internet provider and not a cable operator. Unless AT&T is offering pay-per-view terrorist training videos on its network, I don’t see how the company can claim that monitoring your video consumption is a matter of cooperating with law enforcement. That data contains value only for commercial interests.

AT&T’s concerns are not about national security, but about profit and future profits. So far, even other Internet providers are disagreeing with AT&T’s position. Unless there is a substantial backlash, though, it is likely that AT&T will extend this privacy policy to other AT&T operating units. Likewise, other Internet providers may follow suit if AT&T doesn’t take a big hit. They might want to start selling your data ... I mean their data ... as well.

So there you have it: You’d be a fool to continue to use AT&T now that its data grab is on the table. For that matter, you are a fool to do business with anyone who uses AT&T themselves. This isn’t about security in any way, shape or form—the motivation is clearly profit. Since AT&T isn’t cutting you in on its profit from your—I mean its data—don’t give it to the company in the first place.

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Posted by Elvis on 06/27/06 •
Section Privacy And Rights
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Rising Of The Telecom Equipment Vendor Underclass

ComputerWorld
June 27, 2006

Nortel Networks Corp. today announced a net reduction of 1,100 jobs globally, part of a previously announced business transformation plan designed to improve its performance.

The Brampton, Ontario-based company also announced changes to its North American pension program that will reduce its pension liability deficit by $400 million by 2012.

“Today’s announcements continue our efforts to increase competitiveness, better manage our costs and secure the resources to fuel Nortel’s innovation,” Nortel CEO Mike Zafirovski said in a statement.

In all, the company announced that it will cut 1,900 jobs, while creating 800 new positions in two planned facilities known as operations centers of excellence in MEXICO and Turkey. Prior to the cuts announced today, Nortel had about 35,000 employees. The exact positions that will be trimmed have not yet been determined, and the cuts will be spread across a variety of job titles, a spokesman said.

The company said that it expects 1,200 of the 1,900 cuts to be in operations, while 350 will be in middle-management positions and another 350 will be the result of undefined “business unit efficiencies.” Nortel expects savings from the cuts to total $175 million by 2008.

Mexico and Turkey were chosen as the locations of the new centers because of their strong labor pools, cost competitiveness and proximity to major customers, Nortel said. In all, the company wants to consolidate 100 sites globally into fewer operations centers that focus on delivering engineering, product and technical support, order management, purchasing and data analysis, Nortel said.

Nortel will eliminate pension plans for current employees and move affected employees to “defined contribution” retirement plans, to which Nortel will contribute 2% of an employees’ eligible earnings for a retirement fund. In addition, Nortel will provide a 50% match on employee contributions of up to 6% of eligible earnings, for a total maximum of a 5% employer contribution.

Current retirees will not see any change to their pension income in the U.S. and Canada, although the cost-sharing formula for medical benefits will change for some U.S. retirees.

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Posted by Elvis on 06/27/06 •
Section Telecom Underclass
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