Congress must battle spyware and adware

Lee Drutman: Congress must battle spyware and adware

01:00 AM EDT on Friday, June 24, 2005

BERKELEY, Calif.

PERHAPS the following scenario sounds familiar. After downloading a new program, you start to see pop-up ads everywhere. The ads are relentless, promoting all manner of useless and even insulting products.

Try as you might, you can't stop them from invading, and hijacking your ability to use your computer in peace and quiet. Perhaps you also notice that your browser home page has been changed, with your browser favorites replaced by links you never would have selected in a million years.

And, perhaps most insulting of all, you get an ad that asks whether you are tired of the pop-ups. It promises to free your computer from their maddening grip for just $50.

If this sounds familiar, you are not alone. If it doesn't, it probably will soon. A 2004 survey by America Online and the National Cybersecurity Alliance found that 80 percent of people surveyed had some kind of spyware or adware program on their computer. (Generally, spyware refers to programs that monitor your computing activities, potentially stealing sensitive information; adware refers to programs that merely launch pop-up ads.)

Both of these programs are disruptive and sometimes destructive. They slow our computers, create frustration, and, if left unchecked, could render the Web virtually uninhabitable.

In short, somebody ought to do something about this. That somebody is, of course, Congress.

Actually, the House recently passed two bills dealing with the problem. One, the I-SPY Act, would toughen criminal penalties for spyware activities, although it ignores adware. The other bill, the SPY Act, would also toughen penalties for spyware, but would essentially make adware legal, by carving out protections for opt-in programs. A related bill is moving through committee in the Senate, and if approved, a compromise bill could become law this year.

Yet it's far from clear that what Congress is proposing would do the trick. The problem with the opt-in approach is that almost none of the adware programs are up-front about what they're doing. They bury the user's consent deep in the lengthy legalese of the terms of agreement, which Internet users "approve" when they download unrelated programs. According to the recent National Spyware Survey, sponsored by Unisys, 61 percent of respondents didn't remember consenting to adware.

One solution would be to require adware companies to be straight with potential downloaders: "If you download this program, you will be bombarded with pop-up ads."

The difficulty in dealing with adware is, of course, the advertisers, who aren't afraid to fight for the right to pester you till you throw your computer out the window.

At a recent Senate hearing on spyware, the executive director of the Network Advertising Imitative, J. Trevor Hughes, put it diplomatically: "Our responses to spyware must carefully balance our need to aggressively meet the threat, while protecting the continued legitimate use of a channel that is beginning to show its true promise. We must also be wary of spyware legislation that inappropriately includes online privacy standards."

The more thuggish approach comes courtesy of the Web-advertising firm WhenU, which last year sued after Utah enacted the country's toughest anti-spyware law. WhenU -- whose software tracks the Web sites a person visits and then sends the person targeted ads -- successfully asserted that the Utah law was unconstitutional, on the grounds that it interfered with interstate commerce and restricted freedom of (commercial) speech.

Utah has since enacted a toned-down anti-spyware law, but is still bracing itself for legal challenges.

Unfortunately, the legislative strategies that are emerging show that lawmakers aren't willing to do battle with advertisers. This was exactly the mistake that Congress made two years ago with its CAN-SPAM Act, which was supposed to deal with the problem of spam: unsolicited e-mail. The law served only to make deceptive e-mail illegal -- clearing the way for hopeless amounts of all other e-mail.

Spam thus continues unabated. Experts estimate that some 75 percent of all e-mail is spam -- about 15 billion messages a day -- costing businesses tens of billions of dollars a year in lost productivity.

Legislators now have a chance to do better in dealing with the latest threats. If Congress is serious about letting the Internet develop as it should, its members should take a tough line on both spyware and adware, and be far more willing to stand up to greedy advertisers.

If Congress doesn't do this, the Internet could become a lot less habitable a place in the near future.

Lee Drutman, a frequent contributor, is the author of The People's Business: Controlling Corporations and Restoring Democracy (Berrett-Koehler).

http://www.projo.com/opinion/contributors/content/projo_20050624_24lee.1a47dc3.html

Cox In The Henhouse

Cox In The Henhouse

Lee Drutman

TomPaine.com

June 10, 2005

Lee Drutman is the communications director of Citizen Works and the co-author of the book The People’s Business: Controlling Corporations and Restoring Democracy.

In Washington this past week, leaders of Delta Air Lines and Northwest Airlines told a Senate panel that they didn’t have the money to cover the pensions of 150,000 workers and retirees, and that they’d probably go bankrupt on account of it. If so, they would join their troubled competitors, U.S. Airways and United Airlines, who also broke their pension promises to thousands of employees and then turned to the government to cover at least part of the difference. (At $10 billion, United’s pension default is almost as big as WorldCom’s record-setting accounting fraud—though for whatever reason it has hardly produced the same uproar.)

These latest pension failures come closely on the heels of the resignation of William Donaldson as the chairman of the Securities and Exchange and the speedy nomination of free-market ideologue and corporate sycophant extraordinaire Rep. Christopher Cox, R-Calif., to be the agency’s new head. Though the two events are certainly unconnected on the surface, both bode poorly for the ability of hard-working Americans to enjoy an adequate retirement.

The fact that more and more companies are unable to provide promised pension benefits is troubling for obvious reasons. According to the Pension Benefit Guaranty Corporation, the taxpayer-funded agency responsible for providing partial insurance on corporate pensions, pension plans for 15 million employees at 1,108 major companies were underfunded by $353.7 billion last year, up a whopping 27 percent from the year before. That’s a lot of workers who are unlikely to get their promised retirement benefits.

The bigger and even more significant trend, however, is not the companies who are unable to provide. It is the companies who are simply unwilling. Over the last two decades, there has been a steady erosion of guaranteed pension benefits and a steady rise of corporations instead giving employees a 401(k) account, a few bucks to invest, and a hearty piece of advice: “Good luck. Go strike it rich.”

Problem is, it’s not so easy to strike it rich. Most people know very little about investing, and the recent wave of financial scandals has shown, it’s quite easy to get taken for a wild ride. Corporate financial reporting remains stubbornly obfuscatory, and the investment banks and mutual funds that are supposed to help individual investors get rich are riddled with conflicts of interest and, on the whole, seem far more concerned about making money off small investors than helping them to make money on their own.

This is where the Securities and Exchange Commission is supposed to come in. Unfortunately, in the years leading up to Enron and the cascade of accounting, investment banking and mutual fund scandals that followed, the SEC was consistently underfunded and undermined by a Republican Congress caught in the deregulatory fervor of self-regulating markets. As a result, the agency was unequipped to prevent or even really monitor the greedy corporate self-dealing that grew rampant go-go 1990s.

In the almost three years since the Sarbanes-Oxley accounting reform legislation was passed in a rare fit of Congress actually doing something productive, the SEC has been gradually revitalized. Under Donaldson, who took over early in 2003, the agency has doubled its budget, hired lots of new blood (though it is now on a hiring freeze that does not bode well), and begun to start to matter (even if New York Attorney General Eliot Spitzer still matters more).

In doing so, however, it has ruffled the feathers of business groups like the influential Business Roundtable and the powerful U.S. of Chamber of Commerce (which spent $193 million on lobbying between 1998 and 2004, almost $70 million more than the next biggest spender on Washington lobbying, Altria—formerly Phillip Morris). These groups have gone after Donaldson somewhat relentlessly (with the Chamber even suing over a rule to make mutual fund boards more independent), and may have had something to do with his resignation. Certainly, they have frustrated some important pieces of his agenda, including an unnecessarily controversial proposal to give shareholders some minimal say in nominating candidates to the board of directors. (Under the current system, management controls the process, and director elections are almost all done Soviet-style: one and only one slate of candidates. As a result, it’s very difficult for shareholders to hold directors accountable.) Donaldson also unsuccessfully pushed to require companies to clearly and straightforwardly disclose executive compensation packages, instead of engaging in an elaborate hide-and-go-seek game with investors, as most companies do.

Cox, however, comes pre-approved by the Chamber of Commerce, which gives him an 87 percent lifetime rating. David Hirschmann, senior vice-president of the chamber, pronounced that Cox would “bring the kind of philosophy that's needed to move the SEC forward at this time.”

But looking at Cox’s legislative record, the main philosophy that emerges is one of doing favors for business, happily taking their campaign contributions, and then proclaiming that the free market works. (According to the Center for Responsive Politics, 97 percent of Cox’s 2004 re-election campaign was funded by corporate political action committees or executives of companies and their family members. Since first being elected to Congress in 1988, he has received more than $254,000 from the securities industry). Though there were surely many causes of the recent wave of corporate scandals, two of the most often cited are the 1995 Private Securities Litigation Reform Act (PSLRA)—which made it harder for defrauded investors to hold companies accountable for securities fraud and essentially absolved accountants, lawyers and bankers of responsibility for fraud—and the explosion of unexpensed stock options, which allowed companies to distort their financial statements and made it easier to give executives massive compensation packages with perverse incentives to get the stock as high as possible and then sell out before it collapsed. Cox was a primary author of the PSLRA in 1995 and has been a key player in the shameless battle to preserve the stock options loophole. In short, Cox is no friend of the small investor.

We know from the recent scandals that, left to their own devices, much of corporate America and much of the investment industry is quite comfortable playing tricks on small investors. We also know now that more Americans are now more dependent on the investment industry for their retirement security than ever before. Certainly, the SEC cannot guarantee that the stock market will go up or down. For better or worse, there is a good deal of volatility in this arrangement that is far beyond anybody’s control. What the SEC can do, however, is make sure that investors are protected from the kind of corporate scams, frauds and inside-dealing that seems to proliferate when left unregulated. An SEC Chairman who ignores this regulatory responsibility, either out of ideological certitude or mere corporate toadyism, will do so at the peril of the retirements of millions of Americans, as well as the stability of the economy as a whole.

http://www.tompaine.com/articles/20050610/cox_in_the_henhouse.php

Hypothetical future-value accounting -- The tragicomedy that was Enron

Lee Drutman: Hypothetical future-value accounting -- The tragicomedy that was Enron

01:00 AM EDT on Wednesday, June 8, 2005

BERKELEY, Calif.

FILMMAKER ALEX GIBNEY, the man behind the recently released film about Enron, entitled The Smartest Guys in the Room, has done us a great service. He has reminded us that, 3 1/2 years after the company's befuddling bankruptcy made bombshell news, the Enron story is still as infuriating as ever, and perhaps, thanks to Gibney's film, even more so.

And yet, the very brilliance of the film -- devilish, devastating portraits of Enron's gang of gonifs, Ken Lay, Jeffrey Skilling, Andrew Fastow, and friends -- may distract from the political message that the film seems to be trying to get at: that Enron was as much a product of the collective evil genius of Lay, Skilling, and Fastow as it was the product of the Arthur Andersen and Merrill Lynch firms, energy deregulation, and an entire financial press, which was far more the reckless cheerleader than the mindful watchdog.

Enron was a rotten apple, sure, but it needed rotten soil and a rotten climate to make it so. Unfortunately, film culture being what it is -- to entertain for two hours -- one can't get lost in too many big-picture details. There must be characters, personal conflict, human tragedy, and, of course, suicide and strippers. Fortunately, the tortuous path of Enron provided plenty of all of the above.

Indeed, the film is a treasure trove of the real-life tragicomedy that was Enron's insatiable hubris, including some priceless internal footage of Jeffrey Skilling laughingly telling Enron employees to put all their 401(k) money into Enron stock -- and, even better, an internal video of Skilling parodying himself, suggesting that he had come up with a new form of accounting known as "HPV," or hypothetical future-value accounting, which would boost Enron's profits even higher.

The joke, of course, is that Enron's mark-to-market method of accounting (which was approved by the once-trusted gatekeepers known as Arthur Andersen and the Securities and Exchange Commission) was actually just that: outlandish predictions about future profits on such business schemes as trading weather derivatives, booked as if they were current earnings.

Of course, now we know that they were making it up, whole-cloth. And so it's both fascinating and instructive to see exactly how they did it: from the fudged accounting to the political connections that helped deregulate energy markets for the manipulating (the film has choice footage of both Presidents Bush and their Enron connections) to the creatively named shell companies used to hide debt in a game of 3,000-subsidiary monte so ridiculously complex that in the end only Andy Fastow could figure it out (and so rewarded himself with $45 million off the top).

Watching Enron build and build is a heck of a ride, a roller coaster of corporate insatiability, in which every new height promises an even more terrifying plummet -- because we in the audience know that it ends in a train wreck. And as Enron climbs to ever higher heights, we can't help enjoying a little Schadenfreude in seeing Enron's leaders sweat. On an investor call in 2001, Skilling refers to a Wall Street analyst as an obscenity for having asked how exactly Enron makes its money.

Late in 2001, Lay reads a question during an employee session: "Are you on crack? If you are, that might explain a lot of things. If you aren't, maybe you should be." (In another priceless moment, Lay compares Enron's being under attack to 9/11.)

Yet the $30 billion question remains: How did it happen? Was it just a brilliant scheme concocted by "The Smartest Guys in the Room"? If so, why was Enron far from alone in the cascade of corporate scandals that rocked the economy in 2002?

What about WorldCom, which managed to overstate its earnings by $11 billion -- more even than Enron -- with a far less complicated fraud? (Both Enron and WorldCom did share the accounting expertise of Arthur Andersen.) And why are we still seeing accounting scandals, with AIG's complex offshore dealings merely the latest iteration?

On screen, Enron's testosterone-soaked culture exasperates, it is hardly unique. Nor was Enron the only company to remind employees of the company stock price by posting it in such places as the elevator -- making very clear what mattered -- and it was far from the only company to pit employees against each other by firing the worst performers.

And though the film shows us Enron's energy traders exchange snide comments as they make millions by manufacturing California's energy crisis (the traders' commentary is wonderfully juxtaposed with car accidents and other forms of suffering caused by their behavior), Enron was just one of 70 energy and utility companies accused of artificially driving up prices during the California energy crisis.

Nor is it clear that the minds behind Enron -- or the leaders at any of the companies that have recently collapsed under the weight of their own arrogance -- could have accomplished so much on their own. Big accounting firms gave the company's financial statements their then-meaningful seal of approval. Lawyers signed off on dubious deals -- of which many of the worst were made possible by major financial institutions.

For example, four Merrill Lynch executives were recently sentenced to prison for having helped Enron hide debt through a fraud involving the sale of Nigerian barges. And between 1997 and 2001 Citigroup sold $167 million of financial services to Enron.

Then there are the numerous state and federal regulatory agencies that should have detected something -- as should have the financial press.

Thanks to Gibney's The Smartest Guys in the Room, we have a lasting and engaging testimony of Enron's financial and moral bankruptcy. Nevertheless, those who care about the integrity of the economy must remember that Enron was not merely a stunning tale about a bunch of evil geniuses. It was also an indictment of an economic and political system that allowed a company based almost entirely on hot air become the seventh-largest firm in America.

Unfortunately, the latter is a much more difficult story to tell.

Lee Drutman, a frequent contributor, is the author of The People's Business: Controlling Corporations and Restoring Democracy (Berrett-Koehler).

http://www.projo.com/opinion/contributors/content/projo_20050608_08lee.1db5d77.html