How About a Little Our-Brand-Name-Pharmaceutical with Your Sandwich, Doctor?

Way back in 2009, I argued that "gimme" pens, cups, T-shirts, lunches, and all the rest were a bad idea in the medical industry (and others, too, for that matter). (Full post, here) At the time, I wasn't sure that something so small as a pen could affect a doctor's purchasing decision, but even the appearance of being so influenced was bad.

It turned out, of course, that doctors could be influenced by something so small as a pen. (Another 2009 post, here)

I wrote about it again in 2012 (here) and 2014 (here) and probably a bunch of other places that I haven't found in a quick scan.

And... here we are again.

Today's New York Times has a "Well" blogpost from Nicholas Bakalar (article, here) that reports, depressingly but not surprisingly, that "...[a] free lunch may be all it takes to persuade a doctor to prescribe a brand-name drug instead of a cheaper generic, a new study suggests."

Sigh.

And, of course, "[the] more meals doctors had, the more likely they were to prescribe the promoted drug."

The full article on which Bakalar's post is based is from JAMA Internal Medicine, and can be found online, free, here.

None of us like to think of ourselves as this susceptible, but study after study has shown that we are. So why are we still OK with this system?

West TX: Still What a Regulation-Free Universe Looks Like

Three years ago, an explosion at a fertilizer plant in West TX leveled the building, destroyed or damaged hundreds of homes, killed 15 (10 of whom were volunteer firefighters or other emergency responders trying to contain the disaster, and wounded hundreds.

A year later, the US Chemical Safety Board released preliminary findings, stating that the fire and explosion were entirely preventable, and that part of the responsibility for the death and destruction lay in the fact that there is no state fire code, and that "counties under a certain population are prohibited from having them."

Something like 50 tons of ammonium nitrate was stored in wooden bins in a wooden warehouse that had no sprinkler system (ammonium nitrate was used in the Oklahoma City bombing in 1995). As New York Times reporter Manny Fernandez wrote then, "Federal investigators have determined that a lack of oversight and regulations at the local, state and federal levels contributed to the deadly fertilizer plant explosion that devastated ...(West TX)." (Fernandez' article, here)

And as I wrote at the time (full post, here): Ya think?!?

The full and final responsibility for the fire and explosion has gotten murkier, as the Bureau of Alcohol, Tobacco, Firearms and Explosives has just released the results of its investigation: the fire was deliberately set.

In an article in today's Times, Fernandez writes, "All accidental and natural fire possibilities were tested and eliminated..."

As a result, the case is now being pursued as a crime, and officials announced a reward of "up to $50,000 for information leading to the arrest of those responsible."

A senior ATF official was quoted as saying, "It required extensive scientific testing to determine the cause of this... We took our time because we knew we had to get this right. For a fire of this size, I wouldn't say this is unreasonable."

If the West TX disaster was a crime, how can I continue to say that "this is what a regulation-free universe looks like"?

Easily.

The crime was as "successful" as it was because of lax regulation. Fernandez's story today reminded me that the explosion "left a crater 93 feet wide and 10 feet deep." Just think about that for a moment.

More than a quarter of the town's homes were destroyed or severely damaged. Fernandez also noted that "three schools, a nursing home and a 50-unit apartment complex were destroyed or heavily damaged."

A key contributing factor to the extent of the disaster? "The nearest cluster of houses was about 370 feet from the plant's property line and most of those injured were within 1,500 feet of the blast."

What does that say to you? To me, it says that the Chemical Safety Board was right: lax regulation and oversight. Who would allow houses to be built that close to a warehouse that stores a potential explosive? Who would allow a potential explosive to be stored in a warehouse with no sprinkler system? Who thinks no fire codes are a good idea?

None of these failures has been addressed.

Meanwhile, a civil suit against the West Fertilizer Company and the ammonium nitrate supplier, filed three years ago, is slowly wending its way through the justice system. The suit, according to a 2013 Waco Tribune article, seeks "unspecified damages".


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Good News Shouldn't Be So Rare, But Let's Celebrate Anyway

It's been a while since I've posted anything, for a variety of reasons. Among them -- the business news has been depressing: how many times can I write, Trust and Transparency?!?

So I'm happy to pass on a little bit of good news, the story of an entrepreneur who realizes that it's not all about me, Me, ME.

A little more than ten years ago, Hamdi Ulukaya, founded Chobani Greek yogurt, buying a shuttered factory in upstate New York and turning an $800,000 Small Business Administration loan into a wild success. The company, still privately held, is currently valued at several billion dollars.

What has Mr. Ulukaya done? He's turned around and given a 10 percent stake in the company to his 2,000 full-time employees (the longer you've been with Chobani, the larger the number of shares you've received).

New York Times reporter Stephanie Strom, in an article in today's paper, quoted one long-time employee: "It's better than a bonus or a raise. It's the best thing because you're getting a piece of this thing you helped build."

Exactly.

Ulukaya said the same thing: "I've built something that I never thought would be such a success, but I cannot think of Chobani being built without all these people."

The only depressing thing about this news is how rarely it occurs. I wrote a piece six years ago about Bob Moore's gift of his company, Bob's Red Mill, to his employees (full post, here), but I can't think of another recent example.

Strom notes that the Chobani employees will be able to sell their shares "if the company goes public or is bought by another business, neither of which seems imminent. Employees can hang onto the shares if they leave or retire, or the company will buy them back."

Given the current hot-button political issue of income inequality, this is particularly good news. And especially for upstate New York which has struggled for many years.

Not to mention -- given another hot-button political issue -- that Ulukaya is a Turkish immigrant to the United States.

Could It Happen to a Nicer Guy?

Since I don't know him personally, I'll grant that it's possible that Martin Shkreli is indeed a genuinely nice guy. But it seems unlikely.

If the name seems familiar, it's because a lot of news stories since late summer (and a 1 Dec blog post, here) covered the dramatic price increase Turing Pharmaceuticals instituted when it acquired an old, but still highly effective drug, Daraprim, which is primarily used to treat a serious and often life-threatening parasitic ailment. Overnight, Turing, the start-up pharmaceutical company Shkreli runs, raised the per-dose price of Daraprim from $13.50 to $750. No, the decimal point is not misplaced.

An uproar followed, which Shkreli seemed to enjoy (He should have raised the price more, he said.).

What goes around eventually comes around, I thought.

I just didn't expect it to come around so quickly.

Yesterday, Shkreli was arrested on securities fraud and wire fraud charges at his Manhattan home by the FBI, and arraigned in Brooklyn's federal district court.  (And, yes, I will admit to a little schadenfreude over the "perp walk" pictures.) (And yes, through a spokesperson, Shkreli said that he is "confident" that he will be cleared of all charges.)

The arrest has nothing to do with Turing, but rather with Shkreli's earlier career as a hedge-fund manager and with his first biopharmaceutical company. As reported by Stephanie Clifford and Matthew Goldstein in today's New York Times (full DealBook article, here),

Martin Shkreli told investors that his hedge fund had an auditor, that it had posted a 36 percent return since its inception and that it had $35 million in assets under management.

None of it was true, federal authorities say.

According to the authorities, what Shkreli was really doing was running a small-time Ponzi scheme. The article reports,

His former hedge fund, MSMB Capital Management, had recorded losses of at least 18 percent and was essentially broke by 2011, having less than $1,000 in its bank account.... The hedge fund had no auditor.

The authorities described Mr. Shkreli, 32, as a failed trader with a habit of spreading falsehoods and running his business on fumes and misappropriated money. His Ponzi-like scheme, they said, involved looting Retrophin, a biopharmaceutical company he used to run, to pay back his disgruntled investors.

Note that MSMB Capital was Shkreli's second hedge fund; his earlier effort, Elea Capital Management, which he ran from 2006 to 2007, had also lost money.

The indictment mirrors some of the accusations contained in a civil lawsuit filed in August [2015] by Retrophin, which ousted Mr. Shkreli as chief executive in 2014. The company had accused him of using Retrophin as his personal piggy bank to help pay off upset investors in the hedge fund by hiring some of them for sham consulting jobs.

Am I surprised? Of course not. Only that it's taken so long for things to unravel. And, please, a 36 percent return? Repeat after me, class, "If it sounds too good to be true..."

More concerning, however, is a second New York Times article today, by Andrew Pollack, who notes that Shkreli was "a walking, talking (incessantly) personification of one of the pharmaceutical industry's worst nightmares -- the greedy drug company executive."

With his arrest, many in the industry hope, things will quiet down ...and they can go on doing many of the things that Shkreli was doing so boastfully. While most companies are smart enough not to raise prices by 5,500% overnight, they do often "increase prices 10 percent or more a year", which is way above the current rate of inflation. And since the drugs involved often involve common diseases like diabetes or cancer, those increases "have a far bigger impact on health care spending" than did the increase on Daraprim.

Pharmaceutical companies had been hoping that most people wouldn't notice the price increases. Daraprim made it harder, so they now hope that the spotlight will turn away. I wouldn't be so sure. As Pollack writes,

Unlike many other countries, the United States does not control drug prices, making the American market a big source of profits for drug makers worldwide. In the last two decades or so, price increases on existing drugs in the United States accounted for fully half the growth of the entire multinational pharmaceutical industry...

I recognize that it costs an amazing amount to do the research and testing to bring new drugs to the market, some of which are true breakthroughs (although many are only marginally, if at all, better than existing ones). But at some point, too much is just that: too much.

Sometimes A "Disappointing" Result Is Good Enough

Ever since the horrific deaths of 29 mine workers at Massey Energy's Upper Big Branch mine in 2010, I've been wondering how long it would take to impose criminal penalties on the company (Massey Energy is now owned by Alpha Natural Resources).

Given the enormous power and influence that coal companies still wield in West Virginia, I didn't expect much. After all, while a 2011 Mine Safety and Health Administration report explicitly blamed safety violations at the mine for allowing coal dust and methane gas to collect and ignite, it wasn't until November 2014 that former Massey CEO Don Blankenship was indicted on four criminal counts by a federal grand jury. (Two of several prior blogposts on the Massey situation can be found here and here.)

As Alan Blinder wrote in today's New York Times (full article, here):

The prosecution of Mr. Blankenship was one of extraordinary political, legal and emotional significance in West Virginia, a state where many residents have long believed that coal companies and their leaders faced only cursory scrutiny.

Alpha Natural Resources had agreed four years ago to a $209 million settlement in civil and criminal penalties with the Justice Department, Some of that money ($46.5 million) was earmarked for the families of the miners who died. The settlement protected Alpha executives, but not Massey executives, from prosecution. 

Blankenship's trial, scheduled for January of this year, was postponed until October; jury deliberation began in mid-November.

Yesterday, Blankenship was convicted on one of those four counts -- the misdemeanor of conspiring to violate federal safety standards, to be sure, rather than any of the felonies. Question: Why is a conspiracy to violate federal safety standards only a misdemeanor?

As Blinder wrote,

Mr. Blankenship was not tried on any charges that accused him of direct responsibility for the deaths at Upper Big Branch.... But prosecutors argued that his leadership had laid the groundwork for catastrophe. There was not necessarily a formal conspiracy, prosecutors acknowledged, but they said that Mr. Blankenship's example and tone had set Massey on a course that put profits ahead of lives.

Massey had, under Blankenship's "leadership", collected thousands of citations for violations of safety standards. Blinder noted,

His lawyers are nonetheless "disappointed" with the verdict, and are planning an appeal. Me, I'm disappointed that he was only convicted on one count. But I agree with Blinder that this trial was of "extraordinary political, legal and emotional significance", so a disappointing outcome is actually OK.

Blinder quoted a West Virginia University law professor: "A century of mine disasters and failing to hold coal company executives responsible is over."

Dear God, I hope so.

What Goes Around Usually Does Come Around.

If you look up "arrogant jerk" in the dictionary, I suspect you'll find a photograph of Martin Shkreli, CEO of Turing Pharmaceuticals.

If you haven't been following this story -- and I sort of wish I hadn't been, because it's so depressing -- Shkreli, a former hedge fund manager, runs Turing, a start-up pharmaceutical company. How do you start up a pharma? By buying existing drugs.

In August, Turing acquired Daraprim, a 60-plus year old drug that is used primarily to treat a serious and often life-threatening parasitic ailment, toxoplasmosis, and is also used to treat malaria. Overnight, the price of the drug went from $13.50 a tablet to $750 a tablet. That's right, $750. Take the original price and increase it more than 50 times. (For expanded discussion of the original price increase and of the problems Shkreli has seen and/or caused in previous careers, see the Sept. 20 New York Times article by Andrew Pollack, here.) 

Despite a storm of protests, late last month Turing refused to lower the price (Times article, also by Andrew Pollack, here). It did say, however, that "it would offer discounts of up to 50 percent to hospitals and would take other measures to help patients afford the medicine."

Protests have been ineffective, obviously, but now Turing faces a new foe: Express Scripts, the nation's largest prescription drug manager.

According to Andrew Pollack of the New York Times, Express Scripts "will promote use of a compounded medicine that contains the same active ingredient as the Turing drug." (Full story, here)

Nathan Bomey of USA Today (article, here) reported that Express Scripts will "speed access to a $1 treatment offered by San Diego-based Imprimis Pharmaceuticals" and noted that while the Food and Drug Administration has not approved Imprimis' compounded drug formulations as a recommended treatment for toxoplasmosis," doctors can immediately prescribe the treatment.

Not surprisingly, Turing reacted negatively. Bomey reported that a Turing statement termed the move "potentially unsafe and ineffective", and added that the compounded version is "unnecessary" because "patient assistance programs" can reduce the cost to an insured patient to a $10 copay (last time I checked, $10 was still a lot more than $1), and free of charge to qualified uninsured patients.

Business 101: The Truth Will Out

A number of companies have found themselves in, um, unfortunate situations this month because of problems that they should have known would eventually come to light.

You may think I'm talking about GM's ignition switch issues (which I've written about plenty of times before, e.g., here), and for which the company agreed last week to pay $900 million (some details of the settlement can be found in a New York Times article sourced from Reuters, here), and in some ways, I guess I am: did they really think the problems would just go away? That no one would notice?

Or were they just hoping that no one would notice on my watch?

But I was also thinking about the ouster of United Airlines CEO Jeff Smisek, in part due to the turbulent investigation of "Bridgegate". According to Chicago Tribune reporter Gregory Karp, Smisek is accused of "improperly currying favor with former Port Authority of New York and New Jersey David Samson. United reinstated a money-losing route from Newark to an airport near Samson's South Carolina vacation home." (full article, here)

Smisek was apparently hoping for, among other things, subsidies for a new United airplane maintenance hangar at Newark. The Thursday-down and Monday-back flights (I want a three-day workweek too!) were cancelled four days after Samson resigned from the Port Authority in 2014.

Did he think no one would notice?

Smisek is out, but not exactly hurting: According to a New York Times article from the Associated Press (here), the ex-CEO "would get a severance payment of $4.9 million and be eligible for a bonus. Smisek, 61, will have health insurance until he is eligible for Medicare and keep flight benefits and parking privileges for the rest of his life. He gets to keep his company car."

I particularly like that he is "eligible for a bonus."

And then there's Volkswagen (September has been a sadly great month for these stories).

In last Friday's New York Times, reporters Coral Davenport and Jack Ewing wrote that the Environmental Protection Agency was ordering the carmaker to recall some 500,000 diesel automobiles because:

...the German automaker [was] using software to detect when the car is undergoing its periodic state emissions testing. Only during such tests are the cars' full emissions control systems turned on. During normal driving situations, the controls are turned off, allowing the cars to spew as much as 40 times as much pollution as allowed under the Clean Air Act...

Why would VW do such a thing? "Experts in automotive technology said that disengaging the pollution controls on a diesel-fueled car can yield better performance, including increased torque and acceleration."

Did they think no one would notice?

It does take a while sometimes (the VW and Audi models involved in the recall, for example, are 2009-2015 model year vehicles), but:

The Truth Will Out.

What Does It Take to Get a Banker to Perp Walk?

Thank you, Gretchen Morgenson, for regularly asking the right questions. I have complained before (most recently here and here) that bankers -- despite nearly imploding the US economy -- have never had to undergo an individual "perp walk" but have merely paid (at a corporate level) fines.

In the business section of Sunday's The New York Times, Morgenson asked, "How can we expect Wall Street's me-first culture to change when regulators won't pursue or even identify the me-firsters who are directly involved?" (full column, here)

In a settlement between the Securities and Exchange Commission and Citigroup, the bank has agreed to pay $180 million, mostly to investors, for a "disastrous" municipal bond deal that Citigroup "concocted and peddled" to wealthy investors from 2002 until 2008, which ended up losing said investors some $2 billion.

As is often the case in these settlements, the bank "neither admitted nor denied" the allegations. And the bank has already paid out over $700 million to compensate some of its investors for some of their losses. But....

The SEC case also comes more than seven years after the Citigroup investment strategy imploded. Unfortunately, six years is the time limit given to clients wishing to bring an arbitration case. So the facts laid out in the SEC's complaint against Citi are of no help to any investor who had not yet sued to recover from the bank.

Most disturbing, though, is the settlement's lack of accountability. As is all too common, Citigroup's shareholders are footing the $180 million bill associated with it. But they didn't devise the toxic bond strategy, sell it or hide its risks to investors. 

That was the work of Citi employees, as the SEC's order makes clear. Indeed, it contains chapter and verse about the crucial role played by the fund manager overseeing these investments. Some 50 references to actions taken by the fund manager and his staff are contained in the order.

What the SEC's order doesn't do, however, is name that fund manager. Morgenson has done her research, however, and does. That may embarrass that former Citi employee, but what I want to know is...

Why hasn't he been charged with anything?

The Merchants of Doubt Are Back in Town

In 2010, historians of science Naomi Oreskes and Erik Conway published a terrific book called The Merchants of Doubt (the book was followed last year by a documentary of the same title, directed by Robert Kenner).

In their book, Oreskes and Conway outlined the way some key scientists, political conservatives, have manipulated scientific data to cast doubt on the dangers of smoking, the reality of human-caused climate change, the existence of a hole in the earth's ozone layer, etc.  (More information about the book can be found at the Merchants of Doubt website.)

Coca-Cola seems to have found the technique compelling.

In today's New York Times, Anahad O'Connor reports that Coca-Cola is providing funding to scientists who argue that obesity is caused, not by eating too much, but by exercising too little (full article, here).

Global Energy Balance Network, the non-profit receiving Coke funds, is described on its website as "a newly formed, voluntary public-private, not-for-profit organization dedicated to identifying and implementing innovative solutions -- based on the science of energy balance -- prevent and reduce diseases associated with inactivity, poor nutrition and obesity. It is a premier world-wide organization led by scientists working on the development and application of an evidence-based approach to ending obesity." ("Energy balance" is the simple equation of calories in, from food and drink, to calories out, from physical activity.)

So much for all that pesky criticism about the role that sugary soft drinks play in weight gain and obesity.

So it's really all about getting up off that couch, and not so much about getting your hand out of the cookie jar, right?

Sadly, no.

As Aaron Carroll wrote in the New York Times last June, research clearly shows that, to lose weight, eating less is far more effective than exercising more (article, here).

Among other points, Carroll noted that studies have shown that "total energy expenditure and physical activity levels in developing and industrial countries are similar, making activity and exercise unlikely to be the cause of differing obesity rates."

Moreover, exercise can raise appetite, so if all you do is exercise more... you may find that you're eating more too.

That's not to say exercise is unimportant. Carroll wrote that:

Many studies and reviews detail how physical activity can improve outcomes in musculoskeletal disorders, cardiovascular disease, diabetes, pulmonary diseases, neurological diseases and depression....

But that huge upside doesn't seem to necessarily apply to weight loss. The data just don't support it. Unfortunately, exercise seems to excite us much more than eating less does.

So why would Coca-Cola be funding this Global Energy Balance Network? Let's see...

As O'Connor reports today, regular Coke sales are down ("In the last two decades, consumption of full-calorie sodas by the average American has dropped by 25 percent."), there are widespread efforts to tax sugary drinks and/or to remove them from school vending machines.

Hmmmmmm.

Should "Cost of Doing Business" Include Product Safety?

Over the years, I've spent a lot of time thinking about the "cost of doing business".

Traditionally, that has meant a pretty simple calculation: add up all the expenses needed to run your business (renting office space, buying and supporting the tech equipment you'll need, phones, lights, insurance, your own salary and that of any needed support staff, etc., etc.); divide that by the number of days per year that you expect to have to work; and you end up with a daily break-even: make more than that, on average, and you'll be profitable; make less, and you'll go broke. The difference can be small... but the results dramatic.

As Charles Dickens' Mr. Micawber says in David Copperfield:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery.

What else should you include in the "cost of doing business"?

For a while now, it's become apparent that fines related to failure to comply with government regulations are part of that "cost" calculation in many industries. I've written about that in regards to banking (here and here, for example), agriculture (here), technology (here), and automotive (here).

Today's New York Times has a Bill Vlasic article that sheds more light, unfortunately, on that cost calculation.

According to the article, the National Highway Traffic Safety Administration (NHTSA) has fined Fiat Chrysler a record $105 million "for failing to complete 23 safety recalls covering more than 11 million vehicles."

Let me repeat myself: 23 safety recalls, and 11 million vehicles.

Fiat Chrysler has admitted to violating federal safety rules.

...[The] civil penalty was broken down into a cash penalty of $70 million, and an agreement that Fiat Chrysler would spend at least $20 million on meeting performance requirements detailed in the consent order. An additional penalty of $15 million will be assessed on the company if an independent monitor, who has yet to be announced, discovers further violations of safety laws or the consent order. 

Under the order, Fiat Chrysler is required to buy back as many as 500,000 vehicles with defective suspensions that can cause drivers to lose control. Also, owners of more than one million Jeeps with rear-mounted gas tanks that are prone to fires will be given an opportunity to trade in their vehicles at rates above market value.

As I've written before -- about General Motors in that case -- If your product has a problem, please don't wait for people to die to address it.

As of a few hours ago, Fiat Chrysler stock was down, following the fine announcement, but who knows how seriously the penalty will affect the stock price. After all -- it's just a cost of doing business, right?

Wrong.

Paid Leave: Do the Right Thing. I Don't Care If It's For the Wrong Reason.

The United States likes to celebrate its "exceptionalism", except when it's exceptional on the wrong side of the bell curve. Did you know, for example, that the US is the only developed nation that doesn't require employees to have some sort of guaranteed paid leave -- either sick leave (to care for themselves or a child) or family leave (to care for a newborn or newly-adopted child or seriously ill family member)?

The only protection workers have is the 1993 Family and Medical Leave Act which guarantees some workers up to 12 weeks of unpaid leave to care for a child or a family member or themselves. (More info about the FMLA is available from the Department of Labor; for example, here and here)

As reported in Claire Cain Miller's "Upshot" column in today's New York Times, maybe paid leave will finally get traction here. A few states require sick leave; a few cities require family leave. But there has been to date no political will for a national policy. This despite the fact that, as Miller notes,

Polls show that the vast majority of Americans support both. Eighty-five percent are in favor of requiring employees to offer paid sick leave, and 80 percent support paid family leave.

You'd expect politicians to want to get in front of that parade. And really - sick leave? Isn't that a no-brainer? I don't want my waiter serving me food when she's fighting off a cold. Ugh. And I don't want my financial analyst mis-entering data because he's focused on what's happening to his sick child at home.

So who's against this idea?

 Corporate America, as a whole, has long fought paid leave. Executives, especially at small businesses, say it burdens employers with additional costs and the need to temporarily replace employees. Some studies have found that when governments require paid leave, employers pay for it by decreasing employees’ wages.

But this argument is the same one that got trotted out in opposition to the Family and Medical Leave Act. It was used to argue against overtime laws. It is used every time increases in the minimum wage are proposed. And yet, somehow, every time those small steps are taken to improve workers' lives, businesses manage to adapt and succeed.

Moreover, not all small businesses agree. Miller interviewed the owner of one small business who offers her employees 12 weeks of paid parental leave because "It was not just the right thing to do but also a really important retention policy."

With the unemployment rate now below 6 percent, retention rates are more and more important. So maybe we can get employers to focus on doing the right thing. I don't care if it's for the wrong reason.

Once Again: If People Are Dying Because of Your Product, Admit It, and Fix It. Fast.

Most of us hate publicly admitting our failings. We're good at not admitting them to ourselves, and we're really good at hiding them from those whose opinions matter to us.

In this case, corporations are people too!

I've written before (here and here) about the problems with Takata airbags. The story -- which is now "resolving" itself with the largest automotive recall in U.S. history (32 million vehicles) -- continues to unfold. In an article in today's New York Times, reporters Hiroko Tabuchi and Danielle Ivory write that "Takata halted global safety audits at its manufacturing plants in 2009, a year after Honda had started recalling a small number of cars to replace the airbags."

Let's think about that for a moment: Your product has been identified as having a potentially life-threatening problem (to date, eight deaths have been attributed to the defect). One of your customers has started recalling vehicles in which your product was installed. And this is the moment when you choose to stop doing safety audits???

Wow.

This was only one of several "serious safety lapses", according to a report released yesterday by Senator Bill Nelson (D - FL). According to the article, "a Takata executive is among those scheduled to testify before the [Senate] committee [on Commerce, Science, and Transportation] about its defective airbags."

I'm looking forward to reading that testimony.

Takata has already claimed that the report is inaccurate, based on out-of-context reading of corporate emails:

The company said that it had conducted regular reviews of product quality and safety and that the halted global audits referred to in the report related only to worker safety, not product quality or safety.

I feel much better, don't you?

In a previous post, I shared reports that Takata had conducted secret tests, using airbags from junked cars, as much as a decade ago, and came up with some alarming results. More alarming, however, was that those results didn't prod the company to take action. Something similar appears to have happened with the global safety audits:

When Takata eventually restarted the safety audits in 2011, auditors identified quality lapses in the plants [in Monclova, Mexico, and Moses Lake, WA], the report said, citing internal company emails....

But those findings were not shared with Takata's headquarters in Tokyo, the report said, citing internal emails from Takata's safety director at the time.

Then, when the safety director returned to the plant months later to conduct a follow-up audit, employees appeared to scramble to create the appearance of a safety committee within the plant. 

It just gets worse.

We do know that the propellant, which is intended to help the airbag inflate very fast in the event of a crash, can degrade. When that happens, the airbag may inflate with too much force, rupturing the steel canisters that hold the propellant and spewing metal shards into the passenger compartment. But it's not altogether clear what causes the propellant to degrade (moisture and high temperatures help, but not all propellant exposed to those conditions degrades in the same way). Nor is it completely clear what causes the inflater ruptures. So it's likely that "replacement airbags being fitted in recalled cars [will] ...eventually have to be recalled."

And you wonder why I like regulators with teeth?

Will Coal Finally Clean Up its Act?

I started writing about how dirty "clean coal" is back in 2010 and 2011 (here, here, and here), originally driven by the horrific death of 29 miners in the Upper Big Branch mine in April 2010, the worst mine disaster in the US in more than four decades. Massey Energy, owner of the Upper Big Branch, had come to see fines for safety violations as simply a cost of doing business, and it seemed as though no one could do anything about it.

Finally, maybe, someone is.

A 2011 Mine Safety and Health Administration report explicitly blamed safety violations at the mine for allowing coal dust and methane gas to collect and ignite (MSHA report, here), but it wasn't until November of last year that Don Blankenship, Massey Energy's former chief executive, was indicted on four criminal counts by a federal grand jury in West Virginia (13 November 2014 New York Times article by Trip Gabriel, here; indictment, here). Massey Energy is now owned by Alpha Natural Resources, which acquired Massey in 2011.

Penalties for the criminal counts Blankenship is facing, which include conspiracy to violate mine safety and health standards and conspiracy to defraud the United States (by obstructing the Labor Department and MSHA efforts to enforce mine safety standards), could add up to more than 30 years of prison time.

Blankenship's trial has not yet begun (originally scheduled to begin in January, it has been postponed to October; Blankenship has pleaded not guilty and is free on $5 million bond), but something has changed in West Virginia.

In a long article in Sunday's New York Times, David Segal recounts what brought down Blankenship, a man who had long acted as though the state in general and his coal mines in particular were a private fiefdom. The short answer is: hubris.

...How did Mr. Blankenship become the first coal chief in the region to face charges that could put him in prison? One answer is that the tragedy of Upper Big Branch was of such a scale and its apparent causes so mercenary -- prosecutors say the explosion stemmed from a hellbent emphasis on production at the expense of safety -- that a criminal case may have been inevitable. It came, too, at a time when economic shifts have reduced the power of coal kinds, who now rule over fiefs in decline.
Then there is Mr. Blankenship himself, a man who can come across as a cartoon of a corporate villain. He tangled with inspectors and buffaloed rivals. He is a Republican in a state that was long a Democratic redoubt, and he seemed to relish making public officials his enemies.

And while many senior managers -- think of the bankers who nearly ran this economy off the rails in 2008 -- insulate themselves from criminal liability with layers of middle management, Blankenship was micro-manager par excellence. There's no way he can pretend not to have know what was happening at Upper Big Branch.

Segal quotes a West Virginia University law professor: "One reason that Blankenship is being prosecuted is that he was different from other top coal executives. Most CEOs don't get production records every half-hour by fax. That places him right in the mine, hands on. That makes him vulnerable."

How vulnerable? We'll have to wait and see.

How Long Should It Take to Admit to Product Defects?

That, of course, is a very different question from, "How Long Will It Take to Admit to Product Defects?"

About six months ago, I wrote (here) about the growing number of automotive recalls related to Takata airbags, involving millions of vehicles in the US and elsewhere. The first hints of problems arose more than a decade ago. At the time, Takata was still denying that its airbags were at fault.

If you haven't been following the issue: The propellant, designed to help the airbag inflate very fast in the event of a crash, can under certain circumstances degrade; when that happens, the airbag may inflate with too much force, rupturing steel canisters that hold the propellant, and spewing metal shards into the passenger compartment. To date, six deaths have been linked to the defect, and more than 100 injuries, many of them very serious.

Yesterday, at long last, Takata admitted that its airbags were defective. According to an article in today's The New York Times by Danielle Ivory and Hiroko Tabuchi, Takata has now agreed to a massive recall of nearly 34 million cars and light-duty trucks, "about one in seven of the more than 250 million vehicles on American roads". This recall is "the largest automotive recall in American history."

It shouldn't have taken this long to get here.

The National Highway Traffic Safety Administration, which is "dedicated to achieving the highest standards of excellence in motor vehicle and highway safety" (according to its website, here), began  receiving complaints about airbag-caused injuries nearly 15 years ago. Ivory and Tabuchi report that, "in 2009, the agency opened an investigation into Takata and its airbags, only to close it six months later, citing 'insufficient evidence.'"

Oops.

Fortunately, the new NHTSA administrator "has shown greater assertiveness towards companies like Takata."

Evidence kept piling up, and Takata kept denying any problem. Finally,

in the face of mounting evidence, federal safety regulators in February began to fine Takata $14,000 a day because it had not cooperated fully in the agency's investigation. The company disputed the agency's assertions. With the expansion of the recall, though, regulators said they would suspend that fine, which had reach more than $1 million. It is unclear if it will be collected.

So is your car one of the "lucky" ones? It's not clear. Ten automakers (BMW, Chrysler, Ford, Honda, Mazda, Mitsubishi, Nissan, Pontiac, Subaru, and Toyota) have already recalled 14 million vehicles due to the defect. The agency had posted a list on its website of the relevant models, but Ivory and Tabuchi report that

...[NHTSA] would not know exactly which models of cars would be recalled until it coordinated with automakers, which could be several days. The final number may change as more tests are performed....

Of concern to most motorists is that a recall of 1 in 7 vehicles now on the road obviously can't be done all at once.

It could in fact take several years; NHTSA recommends that owners continue to drive their cars in the interim.

At the risk of repeating myself yet again: If people are dying because of your product, you should really do something to fix the problem. Sweeping it under the rug will not make it go away.

What Does It Take to Get Fired?

If you're a stockbroker, apparently, more than can be believed.

As The New York Times' Susan Antilla wrote in today's paper (here),

In most professions, it would take only one or two acts of egregious conduct before troubled employees were shown the door. In the case of one stockbroker who has repeatedly had complaints from investors, it took 69 customer disputes filed over the last 13 years before he was barred from the business. [Emphasis added.]

Customers starting complaining about Jerry Cicolani Jr. in 2002. Despite that, he continued working for Merrill Lynch until 2010 (he started there in 1991), collecting a total of more than 60 complaints before his departure, during which time Merrill "paid $12 million in settlements to his customers". So we're not talking about showing up late for work on a regular basis, or parking in the boss's space.

In 2004, Mr. Cicolani was subject of an inquiry by the New York Stock Exchange over his handling of "numerous customer accounts" at Merrill, according to regulatory records, but wasn't sanctioned.

Moreover,

The Securities and Exchange Commission had already sued him, in May 2014, over his role in a Ponzi scheme. His most recent employer, PrimeSolutions Securities, based in Cleveland, fired him a day after that lawsuit was filed.

Despite all that, it wasn't until September 2014 that the Financial Industry Regulatory Authority (Finra), which is responsible for monitoring stockbrokers, decided to bar Cicolani from the business.

Back in November, there was a flurry of headlines in the business press suggesting that Finra was becoming more aggressive in pursuing broker-miscreants (example, here), but it's not clear that this is actually happening. (Antilla does quote a Finra spokesperson who claims that the agency "has refocused its resources over the last two years to aggressively pursue repeat offenders.")

Meanwhile, Antilla reports, there were clients who had been with Cicolani for years, who learned, from the FBI, that their money was gone. One 83-year-old retired doctor was quoted as saying, "It floored me because I always have trusted my brokers and their guidance. It was almost impossible to believe he would have done that to me."

Cicolani denies all claims, taking the Fifth.

Surprise! Looks Like Us Non-Bankers Were Right About the Bankers

Every since the 2008 financial crisis nearly imploded the whole global financial system, we non-bankers have been hoping for a perp walk in addition to the mounting array of fines.*

The bankers themselves have been adamant that they have done nothing wrong, pointing the finger of blame at lowered US interest rates after the dotcom bust in 2000, the flow of savings out of China, the long-standing US policy of increasing homeownership rates, Freddie Mac and Fannie Mae for encouraging "low-quality" buyers to invest in homes, and even the regulators (click here for a 2009 blogpost discussing this, and referencing an excellent Atlantic magazine piece by Simon Johnson).

We non-bankers remained skeptical.

And Monday, a federal district court judge in Manhattan sided with us against Nomura Holdings and Royal Bank of Scotland (RBS).

As Peter Eavis writes in a DealBook article for The New York Times today, the judge found that the "two banks misled Fannie Mae and Freddie Mac in selling them mortgage bonds that contained numerous errors and misrepresentations."

The full 361-page decision can be found on the Times website, here. Right up front, the judge writes:

This case is complex from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous. [Emphasis added] 

Given the magnitude of the falsity, it is perhaps not surprising that in defending this lawsuit the defendants did not opt to prove that the statements in the Offering Documents were truthful. Instead, defendants relied, as they are entitled to do, on a multifaceted attack on plaintiff's evidence. That attack failed, as did defendants' sole surviving affirmative defense of loss causation. Accordingly, judgment will be entered in favor of plaintiff. 

The plaintiff is the Federal Housing Finance Agency (FHFA), the independent regulatory agency "responsible for the oversight of vital components of the secondary mortgage markets", mostly Fannie Mae and Freddie Mac (from their website, here).

Nomura and RBS were the only two banks included in this case because sixteen others settled with the government, paying, according to Eavis, "nearly $18 billion in penalties but avoiding public airing of their conduct."

The judge has asked FHFA "to submit a proposal for damages, which are expected to be about $500 million."

So, still no perp walk. But a lot more clarity.



* Fines: (n.) For bankers, "cost of doing business". Ugh. Me, I think close to $18 billion in fines is pretty clear evidence of a massive criminal operation (see previous post, here).

It's a STEAL! But From Whom, Exactly, Are You Stealing?

I've complained a lot in this blog about corporations and executives, about bankers behaving badly (example, here) and about corporations blaming everyone for a disaster except themselves (I'm talkin' 'bout you, BP, here).

But I've also tried to look at the things that I do wrong, the things that we all as consumers do (and don't do) that could make a difference in the ethical landscape in which we move and breathe. My very first post for this blog (here) asked us all to think about toilet tissue, recycling, and whether softness was worth deforestation.

And I've thought about whether a $101 pair of sneakers would be as nice as $100 pair (here). Read the labels, I exhort (here), even though those labels rarely provide any real information.

So here I am, back again, asking us all to think about ... nail salons. And what that mani-pedi is really worth.

Yesterday's New York Times carried a devastating piece by Sarah Maslin Nir on "the price of nice nails" (full article, here), since picked up by outlets as varied as Business Insider (here) and Jezebel (here). Nir spent months researching salons, talking to the Korean, Chinese, and Hispanic women who work in them, detailing the wage theft (including tip-skimming), horrendous hours, and deep racism. It's a depressing read.

As Nir said herself in a follow-up interview (here),

There is no such thing as a cheap luxury. It's an oxymoron. The only way that you can have something decadent for a cheap price is by someone being exploited. Your discount manicure is on the back of the person giving it. Everybody I asked said, "I know it's too cheap." Everybody knows that something is off...

Many of the salon workers are immigrants, often without documentation. Many don't speak English. So they don't know that $3 / hour, or even $10 per day, is an illegally low wage. Most work insane hours (because how else can you get by on $3 per hour?), and get no overtime pay. Most also pay fees to their employers for "training".

Of the "more than 100" employees Nir interviewed (with the assistance of Spanish, Chinese, and Korean translators), less than one-quarter were making anything close to New York's minimum wage of $8.75 an hour (slightly less for "tipped" jobs), but when tip-skimming, no overtime, and fees were factored in, only three had salaries close to the minimum.

The racism is jarring. In Manhattan, 70-80 percent of nail salons are Korean-owned. And if you're not Korean yourself, you will not get a shot at the best jobs there.

Many Korean owners are frank about their prejudices. "Spanish employees" are not as smart as Koreans, or as sanitary, said [one Korean salon owner]....

Salon owners may also exploit their Hispanic employees because they know their desperation, "often drowning under large debts owed to 'coyotes' who smuggled them across the border."

Even if salon owners are caught cheating their employees, things don't necessarily improve:

In rare instances when owners have been found guilty of wage theft, salons have often been quickly sold, sometimes to relatives. The original proprietors vanish, along with their assets, according to prosecutors. Even if they do not, collecting back wages is difficult. Owners can claim they do not have the means to pay, and it is often impossible to prove otherwise, given how unreliable salons' financial records are.

Despite winning a landmark court award of over $474,000 in 2012 for underpayment [April 2012 Times story, here], six manicurists from a chain of Long Island salons under the name Babi have so far received less than a quarter of that, they said. The chain's owner, In Bae Kim, said he did not have the money, even though records show he sold his house for $1.13 million and a commercial property for $2 million just before the trial.

So what's a woman who just wants nice nails to do?

Well, there's always the do-it-yourself route.

Nir does have three suggestions, in a follow-up article that appeared today:

Her first suggestion is to talk to your manicurist: Ask her what she's being paid, or if she get to keep her tips, or if her employer charges a "training fee". If you're not satisfied with the answers, Nir's article includes a hotline for the state labor department.

Nir also recommends being observant:

At one shop in SoHo, manicurists do something unusual when they walk in the door: They punch in with a timecard at a machine near the front desk. Such a device... suggests that [workers'] hours are being tabulated accurately by their employer, and that they are being paid overtime if necessary. But it is not a guarantee. Salons frequently keep a second set of books, according to salon owners, which lists people they are paying under the table.

Nir's final recommendation is simple: pay more. There's no way a salon can pay Manhattan rents, heat, light, etc., and a living wage to its employees, while charging customers $10.50 for a manicure. A higher price, of course, does not guarantee that your extra dollars are going to the women caring for your hands, but a lower price pretty much guarantees that wages are being stolen. Note that this does not necessarily mean "tip more" -- tips are frequently skimmed, and according to Nir, if paid by credit-card, are often not delivered at all.

So now how do you feel about that mani-pedi "steal"? Personally, I feel sick.

Why Are We Talking about a $10 or $15 Minimum Wage? What About $33.65?

The news has been full of reports lately about planned increases to the minimum wage by various large employers (and for those who haven't gotten the message, there's a planned nationwide walkout for tomorrow -- coincidentally or not, Tax Day -- to rally support for a $15 / hour minimum wage).

If you haven't been paying attention (or trying to live on it), the current federal minimum wage is $7.25 / hour; at 40 hours per week and 52 weeks per year (what -- you thought you could afford a vacation on that salary?), that comes to the "generous" gross pre-tax sum of $15,080.

Some politicians, including the President, have come out for $10.10 an hour. Others, like Sen. Patty Murray (D-Washington) have come out in favor of $12 / hour (by 2020).

In an article in today's New York Times, reporter Noam Scheiber quotes a co-founder of a grass-roots organizing group, Progressive Change Campaign Committee: "The days of debating $9 or $10 an hour are over. The active debate is in the realm of $12 to $15."

Maybe it should be higher still -- $20 / hour. Or maybe $33.65.

There is at least one business owner out there who isn't waiting for new regulations to be written. And, apparently, reads scholarly journals in his spare time.

In an article published in 2010 in the Proceedings of the National Academy of Sciences (here), psychologist Daniel Kahneman (a 2002 Nobel Prize winner in economics, with Vernon Smith, and now professor emeritus of psychology and public affairs at Princeton's Woodrow Wilson School) and economist Angus Deaton (currently Dwight D. Eisenhower professor of economics and international affairs, also at the Woodrow Wilson School) wrote that "High income improves evaluation of life but not emotional well-being" ... above a threshold of about $70,000 per annum. In other words, making more money will make you happier up to about $70,000 annually. Or, as the authors put it, "high income buys life satisfaction but not happiness, and ...low income is associated both with low life evaluation and low emotional well-being."

Having read that, and as the owner of your own company, what would you do?

Here's what Dan Price, founder and president of Seattle-based Gravity Payments (a credit card processor), did: He announced that, over the next three years, he will raise the annual salary of his entire 120-person staff to a minimum of $70,000.

What are his employees making now? On average, $48,000. For about 30 members of his staff, their salaries will double.

As reported by Patricia Cohen in today's New York Times (here), Price will pay for the increase in his employees' salaries "by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company's anticipated $2.2 million in profit this year."

Cohen noted,

The United States has one of the world's largest pay gaps, with chief executives earning nearly 300 times what the average worker makes, according to some economists' estimates. That is much higher than the 20-to-1 ratio recommended by Gilded Age magnates like J. Pierpont Morgan and the 20th century management visionary Peter Drucker.

"The market rate for me as a C.E.O. compared to a regular person is ridiculous, it's absurd," said Mr. Price, who said his main extravagances were snowboarding and picking up the bar bill.

Can I buy Price his next round of drinks?

Of course Gravity Payments is a special case. It's not Walmart; it's not Target; it's not Bank of America. But I can hope that it gets more CEOs thinking seriously about what their workers are worth.

When is That "Great Deal" Not So Great?

I've written before (for example, here) about the difficulty in buying ethically-sourced clothing. Most of us don't have our clothes made by local tailors from cloth woven in local (regularly inspected!) factories from fabric grown organically and sustainably. 

So we take a lot on faith. Even those of us who read labels (most of the time), are unsure: Is "Made in Cambodia" better or worse than "Made in Bangladesh"? Is cotton grown in Egypt better or worse than cotton grown in India? 

Because of disasters like the factory fires in Bangladesh and Pakistan in 2012 and 2013, and the Bangladeshi factory collapse in 2013, reminded us that a lot of human suffering and rule-bending (and, usually, rule-breaking) goes into making that cute $9.99 blouse. But Bangladesh and Pakistan are far away, and our memories are short.

Yesterday, Salon republished a Global Post article on how little has changed. As reporter Patrick Winn writes:

Americans have reason to cringe over the sad conditions forced on Cambodian clothing makers. The United States is the top destination for "Made in Cambodia" clothes. Major brands such as Gap, Marks & Spencer and Adidas all rely on Cambodians to stitch their clothing.

Outlets such as H&M can sell hoodies for as little as $25 because Cambodian women (almost all the workers are women) will sew for roughly 50 cents per hour.

Cambodia's clothing factories are notoriously unpleasant. They're hot and loud. Workers routinely flop on the floor in mass fainting episodes. Last year, strikes for better pay were crushed by authorities who shot dozens dead.

And yet half a million Cambodians work in this sector -- namely because the main alternative, toiling in rice paddies, can be even worse.

Winn references a Human Rights Watch report, "Work Faster or Get Out" (available here). Cambodian labor laws are routinely flouted, and brands have taken actions that make it harder to conduct inspections.

Do you still wonder why I'm such a strong proponent of regulation and verification? The poor are routinely exploited because they can be. Cambodian women will work for 50 cents per hour because their other options are worse. And no, 50 cents / hour is not a living wage in Cambodia. Cambodia agreed in November of last year to raise garment workers' minimum wage to $128 / month, less than the $140 / month sought, but above the $120 / month poverty level. You do the math to see how many hours a month you have to sew at 50 cents / hour if you are trying to get to $128. Not to mention that the minimum wage does not equal a living wage.

The "Market" cannot be relied on to do the right thing. There will always be people willing to do the wrong thing for greater profit for themselves. 

Legal, Ethical: Not Synonyms

The reason we have two different words -- "legal" and "ethical" -- is that they are not synonyms. We do of course hope that they run together, but every now and then the divergence is breathtaking.

Object lesson #1: Steven Davidoff Solomon's DealBook column in today's New York Times, on "How loopholes turned Dish Network into a 'Very Small Business'".

As Solomon explains, the Treasury is about to receive more than $40 billion from the auction of wireless spectrum. Yay, us! Alas, that sum is also about $3.25 billion less than it should be, because Dish Network, a satellite TV provider, bid for those wireless licenses "through a newly formed vehicle that claimed to be a 'very small business' under the Federal Communications Commission rules and was entitled to a 25 percent discount."

Hunh, you say. Solomon understands:

At this point you may be scratching your head. How can Dish, a company with a $34 billion market value, be a "very small business"? Indeed, to qualify for the discount, a very small business must have revenue not "exceeding $15 million for the preceding three years." Dish in its last full fiscal year had almost $14 billion in revenue.

Millions, billions, it's all the same, right? No, of course not. So how did Dish manage this sleight of hand?

I won't take you through the whole sequence that Solomon lays out, complete with gory details, involving an "Alaska Native regional corporation" and a "former chief of the FCC's wireless telecommunications bureau". Even my eyes glazed over. Suffice it to say, it does appear to have been a completely legal process.

Solomon notes:

No doubt Dish and its lawyers are high-fiving one another and patting themselves on the back.... [With these maneuvers,] they have saved themselves billions.

Well, what's wrong with that, you may ask. After all, weren't the lawyers  doing exactly what they're paid to do -- crafting the best possible deal for their clients?

Yes.

But.

Solomon continues:

Taxpayers, however, may want to ponder what those billions of dollars could have done in the coffers of the government -- a new bridge or money for schools, perhaps.

Might this be the moment to remind Charles Ergen (the billionaire who controls Dish Network) that he too is a U.S. citizen. And that by cheating the government of that $3.25 billion, he was really cheating all of us -- including himself.

Solomon adds that

The "small firm" exemption has been know to be a problem at the FCC for years. The Congressional Budget Office in 2005 wrote a report highlighting how it was used mostly by big companies instead of the small firms it was intended to benefit. Moreover, the office found that the program provided little benefit to consumers while providing a big discount to companies. 

And yet... nine years later, nothing has been done to close that loophole. Wonder why so many of us are cynical about big corporations, high-priced lawyers, and government officials?

Legal, yes. Ethical, not even close.