Previous bond oversight language was far stricter. It only allowed the use of long-term borrowing to pay for school buses if there were a reasonable expectation that they would last at least 20 years. But in Proposition 39’s wake — especially when operating funds were squeezed because of the state revenue plunge from 2008-2012 — bonds have been used for everything from graffiti cleanup, minor repairs and painting to purchases of short-lived laptops, iPads and other tablet computers.

SEC wades into LAUSD mess

But now regulators with the federal Securities & Exchange Commission are questioning the propriety of what California school bonds have been used to buy. Their angle isn’t the legality of these uses under state law. It’s whether these uses conform with what bond buyers were told — specifically when it comes to L.A. Unified’s troubled iPads-for-all program:

The federal agency is charged with protecting investors and maintaining fair, orderly and efficient markets. Its enforcement division frequently looks into “misrepresentation or omission of important information about securities,” according to the commission.

With the help of an outside law firm, L.A. Unified prepared a presentation, dated March 31, that outlined measures it took to inform the public and potential investors about how the taxpayer-approved bond funds would be spent. …

California law allows school construction bonds to be spent on technology; districts also list the intended uses of bond funds in ballot materials available to voters.

L.A. Unified clearly designated funds for technology, but did not mention tablets. At the time of the district’s most recent bond issue, in November 2008, iPads were still two years away from entering the marketplace.

But officials have maintained that tablets are a modern equivalent of the traditional computer lab and therefore a legal and appropriate use of bond funds.

That’s from the L.A. Times.

Boilerplate bond language used across state

Though the SEC probe is informal for now, it could have alarming implications for school districts throughout California that have used 30-year borrowing on short-lived electronics. That’s because the bond descriptions that LAUSD provided to potential buyers were boilerplate of the sort routinely used by all districts.

If the SEC decides the language is so vague as to be illegally deceptive, that would be a problem for dozens of school districts, only starting with LAUSD and the state’s second-largest district, San Diego Unified.

“SACRAMENTO, Calif. (AP) — California’s $68 billion bullet train project should be exempt from the state’s strict environmental review process now that it is subject to federal oversight, the state attorney general’s office argued Tuesday in a state appellate court. …

“If the judges agree the project is no longer subject to the California Environmental Quality Act, the state rail authority would be freed from a host of regulatory and procedural requirements that could slow construction. Opponents of the project would also lose one of their most significant legal tools. …

“Attorneys who argued against the state Tuesday characterized it as another legal ploy by the state in the disputed project for which voters approved selling nearly $10 billion in bonds in 2008.

“‘It’s clear that the voters were told that CEQA would apply,’ attorney Stuart Flashman told the judges. He also noted that the state Legislature, which approved selling bonds for the project, discussed the idea of exempting high-speed rail from CEQA several times but never did so.”

CEQA a guiding document for crucial initial plans

Not only were Californians assured that CEQA would apply before they approved Prop. 1A in 2008, environmental compliance was a central selling point. A Nov. 15, 2007, press release illustrates this:

“Authority staff presented recommendations for the route connecting Central Valley with the Bay Area — the final component to solidifying the statewide high-speed train route. … In accordance with the California Environmental Quality Act (CEQA) and the National Environmental Policy Act (NEPA), the staff recommends the Pacheco Pass as the alignment that will attract the greatest number of riders with the least environmental impact … .

“The draft program EIR/EIS was made available to the public in accordance with the California Environmental Quality Act (CEQA) and the National Environmental Policy Act (NEPA) … .”

One more insulting detail for the rail authority to ignore.

One more reminder of how this is, or should be, such an abject embarrassment for Jerry Brown.

One more file for the Grand Canyon-sized cabinet of examples of how the public sector routinely behaves in dishonest, irresponsible ways that would lead to SEC, FBI, NYT and LAT crusades if they happened in the private sector.

By Wayne Lusvardi

A recent lawsuit filed by the Securities and Exchange Commission alleged Victorville city officials and bond underwriters defrauded bondholders of $13.3 million in 2008 due to failure to disclose actions and risks of “inflated property values” backing redevelopment bonds.  SEC prosecutors alleged Victorville and its bond underwriters failed to disclose these risks to bond investors in the bond prospectus. 

Another charge made by the SEC is that Victorville undertook a so-called “ill conceived” gas-fired power plant project financed with redevelopment bonds.

The president of Inland Energy Tom Barnett, developer of the proposed Victorville 2 Hybrid Power Plant, had his personal bank account records subpoenaed on Jan. 26, 2013 to peek into his political campaign contributions. 

Victorville: Texas West

Victorville is a community of about 115,000 people in the high desert area of inland Southern California. It is about 100 miles east of Los Angeles. It has a Texas-like feel to it due to its desert topography, former military residents, libertarian newspaper and pro-growth policies.

Victorville was the second fastest growing area in the U.S. in 2008.  Its economy is dependent on the conversion of the former George Air Force Base into a cargo transport airport, rail transport hub and warehousing center for wholesale goods.

In 2006, California mandated a shift to 33 percent green power by 2020 under AB 32, the Global Warming Solutions Act of 2006.  Victorville poised itself to benefit from this shift toward cleaner power.  In 2008, Victorville and Inland Energy had obtained permits to build a 563-megawatt hybrid natural gas-solar power plant on the land near the former George Air Force Base, now called the Southern California Logistics Airport.

In 2007, BNSF Railway Company, the largest railroad company in the U.S., had also tentatively picked Victorville for the site of a new regional transport hub.

The boom in Victorville took about 5 years to emerge but only about a month to bust. 

Inflated or deflated property values?

At the heart of the SEC’s complaint is that Victorville and its consultants inflated property values on four airport hangars that served as collateral for redevelopment bonds.  However, prior to issuance of the bonds during a worsening credit market, the bond markets demanded a higher debt coverage ratio of 1.25 from the 1.10 ratio of prior bonds issues.  A debt coverage ratio is the amount of the prospective future rental income from the four hangars above the amount of bonds issued.  It serves as a cushion in the event of an unanticipated downturn in the economy.

As a result of the higher debt coverage ratio, Victorville hardly had any resources left to continue redevelopment activities. So it borrowed $35 million, of which $13.3 million was to be paid back in debt (e.g., bonds).  The $13.3 million bond was secured by the $65 million value in four airport hangars.  The SEC claims the value of the hangars was only about $28 million.  But the bond underwriter — Kinsell, Newcomb and DeDios — claims it spent $56 million just to build the four hangars, let alone the value of the land.  But did the underwriter inflate the value or did market values plummet?

Reportedly, the County Assessor’s office assessed value for property tax purposes fell far short of $65 million for the hangars.  A sufficient assessed value was needed to issue tax increment bonds used in redevelopment.  The assessor’s low valuation ran against Rule 6 (a) of the State Board of Equalization’s “Assessor’s Handbook 410, Assessment of Newly Constructed Properties,” which states on p. 19:

 “The reproduction or replacement cost approach to value is used in conjunction with other value approaches and is preferred when neither reliable sales data nor reliable income data are available and when the income from the property is not so regulated as to make such cost irrelevant.  It is particularly appropriate for construction work in progress and for other property that has experienced relatively little physical deterioration….” 

How could the bond underwriter have reasonably foreseen that the assessed value would fall 57 percent less than $65 million? The state’s own assessment rules would have indicated a much higher value based on the cost to construct the hangars.   And the assessor’s valuation reportedly did not come until after the bonds were issued.

Moreover, Standard and Poor’s bond rating service originally rated Victorville’s $13.3 million tax increment redevelopment bond BBB.  This is considered a borderline non-investment speculative grade bond (“junk bond”). Victorville’s subordinated bonds involved in the lawsuit were given a “CC-” rating by Moody’s bond rating service in 2009 (on a scale of Aaa1 is best and C worst).

Backdrops and contexts

A backdrop totally ignored in the SEC lawsuit was the effect of the sudden collapse of credit, bond and real estate markets in 2008.  What drives land values in Victorville’s import-based economy is the amount of incoming goods at the Ports of Los Angeles and Long Beach.  Container counts at the Port of Los Angeles dropped from 8.4 million in 2007 to 6.7 million by 2009.  That had a ripple effect that could be felt 100 miles away in Victorville.  Demand for wholesale warehouse space and a regional air and rail hub suddenly vanished.

With the deep depression also came an unplanned decline in the consumption of electricity in California.  Electricity use dropped by 19,564 gigawatts from 2007 to 2011.  A gigawatt is enough to supply the demand of about one million average homes.  California used 264,234,911 gigawatt hours in 2007, but only 250,384,248 by 2010.  Demand for the 563-megawatt Victorville 2 hybrid power plant vanished almost at the flip of a switch. A megawatt is 1/1,000th of a gigawatt.

Power plants in California are not built “on spec.”  The California Energy Commission and the California Independent System Operator schedule new plants to fill growing demand and the loss of power from the decommissioning of older, dirtier power plants.

The California Energy Crisis of 2001 was partly caused by not issuing enough permits for new power plants and banning power plant operators from coordinating power demands during the crisis. How could Victorville’s proposed power plant have been “ill-conceived,” as the SEC alleges, when the market for new power plants is so highly regulated?

Probable cause for prosecution? 

There remain a lot of questions about the SEC action.

For example, why has the SEC singled out Victorville, a Republican-run city, and not bond deals in the Democratic-leaning City of Stockton with its $59.6 million in nearly defaulted redevelopment bonds?

Or why has the SEC not delved into the widely known conflicts of interests involved with the California Communities Development Authority and its creation of Public Financing Authorities that are being copied throughout the country?  California State Treasurer Bill Lockyer has opened a conflict-of-interest probe.

But the SEC seems obsessed with $2.3 million in “management fees” used by Victorville’s bond underwriter Kinsell, Newcomb, and DeDios.  The SEC is concerned that a 10 percent bond-underwriting fee is excessive. But even Investopedia.com says 10 percent is a typical fee for issuance of a revenue bond.

The attorney representing Victorville and the Airport Authority is Terree Bowers, a former U.S. Attorney for the Central District of California. He said, “It’s a mistake for the SEC to treat municipalities the same way they treat corporations.”  Bowers added, “These actions [the SEC lawsuit] are somewhat questionable given the city’s emerging recovery from the Great Recession.  It is certainly worth debating whether this lawsuit is in anyone’s best interest.”

The SEC’s case could be rendered unneeded by the same forces that brought about the bondholder’s losses.  Port of Los Angeles container volumes are up significantly in 2013.  But redevelopment bonds are no longer available after Gov. Brown shut down redevelopment agencies in Feb. 2011.  Victorville’s 2007 and 2008 bonds were reported by the SEC to be currently trading in bond markets around 45 cents to the dollar in value.  Perhaps a settlement could be reached with bondholders?

The SEC wants to protect bondholders from further losses. But given the backdrop of the Obama-administration’s IRS scandal, and the circumstances surrounding Victorille’s $13.3 million redevelopment bond loss, the public will surely be debating whether there is any merit to the SEC’s case.

By Chris Reed

The federal indictments this week of CalPERS’ former president and his alleged briber show that the federal government does occasionally notice the outrageous behavior of our state government. But what about the Securities and Exchange Commission? It went after the state of New Jersey in 2009 for pension deceptions. It went after the state of Illinois last week for pension deceptions. When is it going to come after CalPERS for its 1999 campaign to give away retroactive pension benefits costing billions to state workers with the insane argument that it would cost taxpayers little if any money?

Stephen Malanga of the Manhattan Institute has some interesting, and disturbing, insights into how the SEC operates:

“Unlike its investigations into corporate issues, the SEC’s probe of the states seems largely limited to what you could learn by reading newspapers and perusing bond documents. As legal scholar Philip Grommet observed in a 2012 Journal of Legislation article about the New Jersey case, which the SEC initiated after reading about the state’s suspect disclosure practices in the New York Times, ‘This antifraud action was hardly the result of an in-depth investigation.'”

SEC ignores California’s scores of outrages

But the SEC doesn’t even necessarily to read the media when it comes to our pension outrages. What Malanga writes about Illinois — which was targeted by the SEC — largely applies to the Golden State as well:

“State officials consistently tout their dubious achievements in ways that would get a corporate executive whose firm is in registration for an offering in trouble. In its complaint against Illinois, for instance, the SEC notes that the state stopped misleading investors and took remedial actions to fix its bond documents in 2009. But in a June of 2010 roadshow presentation for potential investors, state officials were ballyhooing recent pension legislation as a significant reform and cost-savings even while the press and independent budget experts were deriding the changes as insignificant. Today, Illinois continues to have one of the worst-funded pension systems in the country, evidence of how little improvement the so-called reforms touted by the state achieved.

“These kinds of omissions and misleading statements by municipal issuers are especially pertinent now because of the ways that state and local governments are using debt. As Grommet points out, whereas once states and cities used the bond market principally to raise money to build roads and bridges and other capital projects, increasingly governments are employing borrowing to plug budget shortfalls, sometimes with creative forms of debt that stretch the limits of what states’ own laws allow. This makes state and local debt increasingly ‘intertwined’ with the ability of some municipal issuers to pay their basic operating bills.”

Ring a bell? If California school districts’ financial integrity were investigated by federal regulators with one-tenth the rigor the SEC employs with Fortune 500 companies, scores of superintendents and school board members would be heading off to jail.

By Katy Grimes

It’s rare that a bad bill fails to pass one or the other houses in the California Legislature. However, Tuesday a bill failed which would have required private sector, publicly traded corporations to file annual income and benefits statements with the California Secretary of State for the top five highly compensated employees.

It was another witch hunt on the private sector. However, this attempt surprisingly failed because so many Democrats would not vote on SB 1208, by Sen. Mark Leno, D-San Francisco.

Unfortunately, that doesn’t mean the bill won’t live to see another day. I fully expect to see this bill language stuck into a trailer bill, late in the night on the last day of session.

This bill isn’t about requiring more transparency, as Assemblyman Charles Calderon stated during floor debate Tuesday. Calderon, a Democrat from Montebello, made it very clear that this is a get-even-with-the-wealthy bill. “Stockholders have a right to know whether there are lucrative pension plans that are underfunded,” Calderone said. “The reality is, the SEC gave us Bernie Madoff, and under the SEC this economy was brought to its knees.”

Corporate envy

“In recent years, CEO pay at corporations across America has grown exponentially, while wages for workers have remained relatively stagnant,” the bill’s analysis states. Much of this increased pay comes in the form of incentive compensation, which rewards an executive for performance while on the job.”

According to Democrats, this is an outrageous free market concept.

The opposition to the bill states, “Adding new nonconformity to federal reporting requirements exacerbates California’s job-killing reputation for excessively burdensome regulation of business. Furthermore, because the information required to be reported under SB 1208 is not currently public information, the bill erodes important confidentiality that taxpayers and their employees expect.”

Sunshine and transparency

Assemblyman Tom Ammiano, D-San Francisco, defended the bill, and said that the state was right to put some sunshine on  these entities, particularly if they have nothing to hide.

“If this is about sunshine, how about union representation and what they are doing?” Assemblyman Curt Hagman, R-Chino Hills, asked. “This just puts another nail in the coffin of California businesses.”

“Bain, Bain, Bain,” Ammiano kept loudly saying while Hagman spoke, referring to the venture capital firm Republican Presidential Candidate Mitt Romney once ran.

“It’s amazing that such an effort is being made to force private corporations to disclose more,” Assemblywoman Diane Harkey, R-Dana Point, said. Harkey added that California should worry about its own balance sheet before and credit rating, before deflecting attention away onto the private sector. And she pointed out that publicly traded companies are already required to disclose a great deal of information to the U.S. Securities and Exchange Commission.

“Speaking of nothing to hide, it wasn’t that long ago that this body gave CARB the authority to allow WCI, Inc. to register as a corporation in Delaware and operate in security,” said Assemblywoman Shannon Grove, R-Bakersfield.

Bill fails

“I almost got this through,” Calderon said. But in the end, the bill failed with a 32-36 vote, with 12 Democrats not voting at all.

By Steven Greenhut

SACRAMENTO – Municipal bonds have long been among the safest investments, but a coming wave of municipal bankruptcies in California — and the disturbing way one of those cities is stiffing its bondholders — could change perceptions about the wisdom of lending money to cities.

The struggling port city of Stockton has declared bankruptcy after a spending spree where officials granted city workers an absurdly generous lifetime medical care benefit, dramatically increased pensions and floated debt to finance dubious downtown redevelopment projects.

When the city couldn’t make its pension payments in 2007, it borrowed $125 million — by selling bonds — to cover the mess it created by its pension increases. Now the city government is as upside-down as many Stockton homeowners, and officials are blaming the foreclosure crisis, conveniently neglecting that the current reduction in property tax revenue followed years of dramatic revenue increases.

Now, Stockton officials want to stiff Assured Guaranty, a Bermuda-based bond insurance company, for about $103 million. The company — noting that Stockton is going under in part because it can’t make its pension payments to the California Public Employees Retirement System — argued in a statement, “If Stockton is disappointed with CalPERS’ investment performance, it should be taking that up with CalPERS rather than reneging on the city’s obligation to holders of the pension bonds.”

Stockton City Manager Bob Deis accused Assured Guaranty of “bad faith” and “whining” even as he whined that Assured Guaranty doesn’t care about anarchy in Stockton’s streets, as the city’s crime rate soars following policing cutbacks.

But it’s not the fault of lenders that city officials were so unconcerned about their residents that public safety concerns were placed behind the demands of wealthy city pensioners. Like many cities in this state, Stockton’s infrastructure is crumbling as government becomes more a benefit provider to current and retired city employees.

Deis sounds like a wastrel who spent 10 years running up debt on luxurious living, then gets mad at his bank for wanting to get paid back: “Hey, you don’t care that I can’t feed my kids!”

CalPERS arrogance

Of course, it’s hard to top the arrogance of CalPERS, which has responded to Assured Guaranty’s complaints by insisting that “obligations owed to the public workers of the city have priority” over creditors such as Assured Guaranty. CalPERS also insists the media is “hyping” the idea that pension promises have anything to do with cities going belly-up. CalPERS, which in 1999 advocated retroactive pension increases based on assumed rates of investment returns that essentially required the Dow Jones industrial average to reach 25,000 by 2009, is backed by taxpayers whether its projections are right or wrong.

As cities run out of money, and pension obligations grow, we can expect to see more local officials faced with the choice of protecting city workers or taxpayers. It’s not hard to understand why the politically powerful CalPERS is so confident that the demands of public employees always come first.

As the Stockton Record reported recently, CalPERS “dwarfs all other creditors with a $245 million liability in the city over the next decade. Yet National Public Finance Guarantee Corp., an insurer of several Stockton bonds, contends in court papers that CalPERS is conspicuously missing from the list of those Stockton engaged in pre-bankruptcy negotiations.”

That insurer argues persuasively that Stockton never had any intention to seek reduced payments from CalPERS. Typically in bankruptcies, the debtor can’t pay everyone what’s owed, so then the creditors fight it out. Here, it seems like city officials cherry-picked which creditors to stiff, which certainly backs the insurer’s contention that Stockton officials have showed bias, a distortion of the bankruptcy process.

While the municipal bond markets aren’t yet spooked, they do have reason for concern, given that pension debts are growing, and there are few other places to trim if public employee retirement plans are off the table.

SEC warning

Even the feds are sounding some warning bells. As Bloomberg reported last month, “The U.S. Securities and Exchange Commission said it plans to seek power to force better disclosures from states and cities participating in the $3.7 trillion municipal bond market.” The SEC should add this disclosure: Your retirement investments will always lose out to public employee pension demands.

Those of us who have viewed Chapter 9 bankruptcy as a useful option to help troubled cities get their books in order have miscalculated.

Public employee unions and their allies in the courts and the retirement systems are so powerful that even during dire financial circumstances, their selfish demands trump everything else. Although bankruptcy can be a valuable tool, as Orange County’s 1994 bankruptcy made clear, the process is no panacea for incorrigibly wasteful, union-controlled local governments.

The crisis is not going away, despite CalPERS’ insistence otherwise.

Former Los Angeles Mayor Richard Riordan, for instance, said this week that the state’s largest city faces “disaster” if officials there don’t fix L.A.’s underfunded pension system.

We should closely watch the unfolding proceedings in Bankruptcy court, as Stockton goes through this process. But a more significant battle is being fought in San Jose, as courts determine whether voters’ support for a June ballot measure that cuts pensions for existing city workers is legal. The key is pensions for current workers, given that simply cutting retirement benefits only for new hires will not defuse the pension-debt time bomb.

If the courts side with reformers, there may be hope for rolling back pension costs and saving city services. If not, Californians better get ready for even higher taxes and fewer municipal services, given that there are precious few options left. And without a reform path that touches pensions for existing workers, investors might want to rethink the long-term safety of their municipal bond holdings, which will become an even bigger target.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. Write to him at: steven.greenhut@franklincenterhq.org.

By Dave Roberts

SAN FRANCISCO — The left, which has championed the media and legislative crusade against bullying, is itself engaged in the bullying of one of the few groups you’re still allowed to demonize in this country: corporations. Not content with dominating the media, academia, unions, the courts and much of the government, leftists are now trying to shut down the free speech of businesses.

“What they are trying to do is to cow corporations from supporting free market-oriented groups, including trade associations and even government affairs type of operations,” said former Securities and Exchange Commissioner Paul Atkins, speaking at a Pacific Research Institute luncheon in San Francisco on June 27. “In the wake of Citizens United, the unions and state pension funds and shareholder activists have been agitating because they are, of course, not happy about Citizens United.”

The Supreme Court in that 2010 case upheld the free speech rights of corporations and unions to make political contributions. So, having lost in the highest court, leftists are taking the low road, a chapter out of the Saul Alinsky playbook, in an attempt to muzzle opposition to their political agenda. Alinsky advocated getting individual and institutional shareholders in corporations to assign their proxy votes to leftist groups in order to pressure boards of directors to do their bidding.

The latest campaign seeks to push corporations into disclosing their contributions to political action committees, advocacy organizations, trade associations and any other political or quasi-political activities. That information will then be used to organize boycotts, shareholder meeting protests and other campaigns in an effort to shut off corporate contributions to groups and causes with whom they disagree.

“They are basically trying to subvert the shareholder proposal process in order to try to influence corporate behavior,” said Atkins. “Usually corporations, especially in the retail area, want to try to avoid controversy. Because they are pulled and tugged by people on both sides. And so they don’t want to be subject to boycotts or negative publicity or things like that.”

Target boycott

A good example is the 2010 boycott against Target. The retail giant had committed the “crime” of contributing $150,000 to Minnesota Forward, a political group that supported the campaign of a gubernatorial candidate who opposed gay marriage. In response to the boycott, Target apologized for the contribution.

“Going forward, we will soon begin a strategic review and analysis of our decision-making process for financial contributions in the public policy arena,” said Target CEO Gregg Steinhafel in a letter. “Target will take a leadership role in bringing together a group of companies and partner organizations for a dialogue focused on diversity and inclusion in the workplace, including GLBT issues.”

Caving into leftist groups like Moveon.org worked — the boycott fizzled out. Target’s website notes that, while the company continues to belong to trade associations and other policy-based organizations, “the positions they take do not always reflect Target’s views.” A Target pie chart shows nearly equal contributions to Republican and Democratic PACs.

Attacking ALEC

Having tasted Target’s blood in the water, the leftist sharks recently went after corporations that had joined the American Legislative Exchange Council.

“It’s kind of a nerdy group, sort of behind the scenes,” said Atkins. “They work towards building model statutes for state legislatures, things like tax reform, regulation and health care and all sorts of things. Among the things they were asked to help with was ‘Stand Your Ground’ laws and also ‘Voter Identification.’ So, in the wake of the Trayvon Martin shooting, Van Jones’ group called Color of Change and another group figured out that Pepsi and Coke and Wendy’s and McDonald’s and a few other companies had contributed to ALEC. So they blew all this up and said, ‘Ah ha, look, Pepsi, Coke and all of these other companies are helping Voter ID, so it’s racial profiling’ or whatever their charge was.”

More than a dozen corporations have reportedly dropped out of supporting ALEC, producing more blood in the water.

Now some companies are considering buckling under to the latest pressure to disclose their contributions — or perhaps get out of politics altogether in order to make the sharks go away. But Atkins is hoping that the companies stand their ground.

“Sure you have some corporations that might support something that might not be in the best interest of their shareholders,” he said. “But overall, for the most part, corporations really do support things like a push for a better tax system, push for a better regulatory system, support things like the National Association of Manufacturers, the Chamber of Commerce, the American Petroleum Institute and things like that, which really do a lot of good.

“For example, in Washington right now, one of the big issues before the SEC is the Conflict Mineral provision of the Dodd-Frank rule. The American Petroleum Institute is doing a great job in trying to argue against this particular provision of Dodd-Frank, which will be very harmful to business and cost shareholders a huge amount of money. The reason why you have trade groups is so they have the guts, hopefully, to stand up. Because one individual corporation can always get cut down and have pressure put against it. That’s why you need the trade groups to get into it, or groups like PRI or others who are supported by corporations, or the Competitive Enterprise Institute in Washington, which has filed suit against Dodd-Frank and they had sued against the public company accounting oversight board in Sarbanes-Oxley before that. So, these groups are very valuable with respect to some of the disputes with government and regulation and those sorts of things.”

PRI, the Pacific Research Institute, is CalWatchDog.com’s parent think tank.

One of the challenges for corporations in resisting leftist pressure is that the issue is framed in terms of the laudable goal of seeking more information and transparency for shareholders.

‘Materiality’

“Why not just put all the chips out on the table and let the chips fall where they may?” asked Atkins rhetorically. “Well, the thing is when we talk about disclosure with public companies, the main rubric behind the securities laws and behind SEC rules is ‘materiality.’ Materiality means what a reasonable, rational investor would take to be an important fact that he would want to know in trying to decide whether to buy, sell or hold a particular company’s stock. This materiality concept goes back and is embedded in the Securities Act and been upheld by the Supreme Court time and again as giving a standard by which companies should decide what to disclose and what to put into their prospectus and annual report and what to leave out.

“So these sorts of contributions by public companies are clearly not material. They don’t rise to any level that would affect the corporation as far as the bottom line. A number of these shareholder activists argue, ‘Well, it’s material in that it could be controversial, and shareholders need to know it because it might cause a boycott like you saw with Target or whatever.’ But that’s very much a circular argument. Because the very same groups who are arguing for disclosure are the ones who then light the fuse to have these boycotts and other things go on. Ultimately, it’s the board of directors that oversees these sorts of contributions in the end who have a fiduciary duty to the shareholders to decide what is or is not in their best interest and how they should build shareholder value.”

Atkins pointed out that disclosure requirements are already in place for contributions to candidates, and that Congress always has the option of requiring similar disclosure for super PACs.

“But it should not be where the shareholders themselves disarm unilaterally and say, ‘OK, we will disclose and open ourselves up to criticism and what not,’” he said. “So what we are trying to do is encourage boards and others basically to stand their ground if they choose to do so. Some companies disclose and others don’t. But it is a very slippery slope if you start going down that road.”