Request to AL DOR and AG re AT&T Mobility

January 31, 2011

The Honorable Julie Magee

Revenue Commissioner

Alabama Department of Revenue

50 North Ripley Street

Montgomery, AL  36132

The Honorable Luther Strange

Office of the Attorney General
501 Washington Avenue
Montgomery, AL 36130

Request for ADOR and AAG to make appearance in class action lawsuit

Dear Ms. Magee and Mr. Strange,

As a cellphone customer of AT&T Mobility, I received a class action notice about a lawsuit against AT&T Mobility that is pending in federal court in Illinois and that affects the State of Alabama. (You can find more information about the lawsuit on the Internet at  http://attmsettlement.com/ .)

The class action notice says AT&T Mobility included in customer charges certain taxes that AT&T paid over to state and local taxing jurisdictions and these taxes were allegedly not permitted under the federal Internet Tax Freedom Act.  The notice says AT&T denies that it did anything wrong.

The State of Alabama is one of the taxing jurisdictions that collected the taxes.

It seems to me that all the taxing jurisdictions that collected the taxes have a significant interest in this litigation and should be notified and be allowed to appear in the litigation. 

As a customer receiving the class action notice, I have filed an objection in the lawsuit. In my objection, I said the foregoing, to wit, that the taxing jurisdictions should be notified of the litigation and be allowed to appear.  I further said I would would contact the Alabama Department of Revenue and the Alabama Attorney General requesting that they make an appearance in the litigation.   You can read the entirety of the objection I filed on the internet here:  http://robertshattuck.blogspot.com/2011/01/objections-in-at-class-action.html 

It seems to me that, as soon as there was a question about the legality of the taxes in question, the taxing jurisdictions and/or AT&T should have filed a declaratory judgment action for a determination of whether the taxes were permitted under the Internet Tax Freedom Act.   For this purpose, the parties could have paid some law professors to do legal research and file briefs on the question, and the Court ideally would then make a prompt determination of the legality of the taxes, and, if held legal, the taxing jurisdictions could proceed with their collection.

Instead, it appears that the taxes have been included in customer charges and paid over to hundreds of state and local taxing jurisdictions for at least five years.  These taxes were presumably counted on in governernmental budgets and have presumably now been spent.  Now, five years later, all of this is in the process of being revisited at signficant cost and expense to AT&T Mobility and its customers, as well as to hundreds of taxing jurisdictions and all their taxpayers.

I have no idea what the total amount of taxes in question is or how much cost and expense all this is going to entail.  It seems nonsensical that I, as a customer, should be notified to say whether I object or not to the proposed settlement agreement, and not notify and allow the taxing jurisdictions to appear and say whether they object or not, including about all the cost and expense that will be borne by the respective taxing jurisdictions and their taxpayers, and to have an opportunity to suggest alternative ways to the proposed agreement in order to resolve the matter.

Accordingly I hope either the Department of Revenue or the Attorney General, or both, will make an appearance in the case and express their views on behalf of Alabama taxpayers.  Maybe you will even contact Revenue Departments and Attorney Generals in other states and inform them of this matter and suggest they make appearances in the litigation as well.

Since the Internet Tax Freedom Act is a federal law, I will probably contact Senators Shelby and Sessions and Representative Bachus and urge that Congress consider ways that the laws Congress enact can be accompanied by procedures and rules that will allow for better and more economical ways for getting certainty about the law and for getting disagreements about the law resolved.

I am both mailing this letter to you by US mail and using your offices, electronic messaging systems to direct you to this webpage where I have posted this letter: http://robertshattuck.blogspot.com/2011/01/request-to-al-dor-and-ag-re-at-mobility.html

Thank you for your attention.

Sincerely,

Robert Shattuck

3812 Spring Valley Circle

Birmingham, AL 35223

rdshatt@aol.com

(205) 967-5586

cc.  The Honorable Robert Bentley

Objections in AT&T Mobility class action

[I submitted the below objections in this class action:  http://attmsettlement.com/ ]

Class Counsel: Bartimus Frickleton Robertson & Gorny, P.C. 715 Swifts Highway Jefferson City, MO 65109		Class Counsel: The Huge Law Firm PLLC P.O. Box 57277 Washington, D.C. 20037-0277
Counsel for AT&T Mobility: Thompson Coburn LLP Roman P. Wuller, Esq. One US Bank Plaza Suite 3500 St. Louis, MO 63101		Counsel for AT&T Mobility: Mayer Brown LLP Evan M. Tager Archis A. Parasharami 1999 K Street NW Washington, DC 20006

Objections of Robert  Shattuck in In Re: AT&T Mobility Wireless Data Services Sales Tax Litigation, case No. 1:10-cv-02278 


PROCEDURAL

My name, current address, which is the same address when I was charged the Internet taxes, and telephone number are Robert Shattuck, 3812 Spring Valley Circle, Birmingham, AL 35223, (205) 967-5586.   These objections are being sent hard copy by US mail and are also being transmitted by email to counsel for AT&T Mobility (but not to Class Counsel because I cannot find email addresses on websites for Class Counsel).  These objections contain links to Internet webpages ("cited webpages"). The cited webpages can be accessed by means of clicking on the links in an electronic version of these objections.  An electronic version of these objections can be found at the following URL http://robertshattuck.blogspot.com/2011/01/objections-in-at-class-action.html and, to access the cited webpages more easily if one has only a paper copy of these objections, one can go to the foregoing URL on the Internet to view an electronic copy and clink on links in that electronic copy to go to the cited webpages. 

NOTICE OF INTENT TO APPEAR:

I live in Alabama.  I may appear through an attorney or other authorized representative at the March 10, 2011, Fairness Hearing.    I am seeking an attorney or other authorized representative in Illinois to appear on my behalf.  For reasons that are further indicated below, I am asking the Alabama Attorney General and the Alabama Department of Revenue to make appearances in this case.

PREDICATE OF MY OBJECTIONS

A.  Getting rich off multitudinous small amounts

Society is well populated with self-seeking human beings.  They find it very advantageous to be in a legal position, or other practical circumstance, in which they collect or have power over multitudinous small amounts of money belonging to large numbers of other persons individually.  The small amounts are very significant in the aggregate from the perspective of the first party.  From the perspective of  the individuals to whom the small amounts belong, the individual amounts are small and provide little incentive for those individuals to challenge the taking or other use of their small amounts, including when a taking or use is illegal or wrongful, or otherwise objectionable. (In this discussion, a party who collects or controls small amounts belonging to large numbers of other persons will sometimes be referred to as an "Aggregating First Party"  and the large numbers of other persons to whom the small amounts beneficially belong will be referred to as the "Multitudinous Second Parties"  The multitudinous small amounts, and their aggregate, shall be referred to interchangeably as the "Multitudinous Small Amounts" or the "Big Amount" as may be reflective of, or call attention to, the two perspectives from which the same can be  viewed.)

Aggregating First Parties are highly motivated to preserve the privileged position that allows them to collect or have power over Multitudinous Small Amounts from which the Aggregating First Parties can realize significant  personal benefit.    Aggregating First Parties may be tempted to do wrongful acts connected to the use of and benefits they gain from Multitudinous Small Amounts.  The acts may result in the damaging of significant societal interests of the public at large.  Aggregating First Parties frequently have special prerogatives in  preserving their power and in warding off challenges that are attempted by Multitudinous Second Parties who, notwithstanding the insignificance of the small amounts to themselves individually, are moved to challenge how those amounts are taken or exploited by the Aggregating First Parties for their personal benefit.. 

Aggregating First Parties desire to have the benefits of control over the their respective Big Amounts, but at the same time they seek to avoid being held accountable if something untoward happens connected with their use of the Big Amount under their stewardship.

Given the above described phenomenon of Aggregating First Parties and Multitudinous Second Parties, there is significant reason for society and its citizens to be very watchful about exploitation, abuse and wrongdoing by Aggregating First Parties relative to Multitudinous Small Amounts belonging to Multitudinous Second Parties.

The foregoing phenomenon in question manifests itself in many ways in our society and the economy

One way that is very much in the public eye is that of corporations and their management.  Multitudinous Small Amounts that beneficially belong to tens of thousands, or millions, of shareholders of a corporation total to an extremely large corporate asset value.  Managements of corporations have command over those huge corporate values, and management can utilize and deploy the same in ways that can justify paying themselves huge compensation.   That huge compensation is derived from small portions of the Multitudinous Small Amounts beneficially owned by  shareholders individually.  The shareholders may think management is paying themselves too much, but it is practically impossible for the shareholders to keep management from taking small portions (that add up to a lot) of the Multitudinous Small Amounts beneficially owned by the stockholders.

Recently, there has been much focus on  management abuse of shareholder value.  See, e.g., a  March 2010 white paper of the Ethics Resource Center entitled "Ethical Leadership and Executive Compensation: Rewarding Integrity in the C-Suite" ( URL  http://www.ethics.org/files/u5/execComp.pdf ).

Another example of the Aggregating First Party phenomenon, also in the public eye, is the legislative practice of "earmarks."  The amount of the "earmark" is a significant amount from the perspective of both the legislator  who engages in the "earmarking" and the beneficiary who receives the "earmark."   The "earmark" is derived from very small amounts of taxes that are paid by millions of taxpayers.  The "earmarks" are highly objectionable to virtually all taxpayers, but the amount of their individual contributions to the "earmarks" is very small, and taxpayers have found that their legislator Aggregating First Parties, and the concomitant "earmark" beneficiaries, have made the "earmark" practice seemingly impregnable by taxpayers.  

Class action lawsuits and the plainfitfs' attorney fees that ultimately come out of the pockets of a multiplicity of Multitudinous Second Parties in small individual amounts make plaintiffs lawyers another class of  Aggregating First Parties that society should be very watchful about.  More will be said about this.

B. Collusion between corporate management and plaintiffs' lawyers

As stated, both corporate managements and plaintiffs' lawyers are Aggregating First Parties, and they have their respective Multitudinous Second Parties from which they get their respective Big Amounts.  Sometimes there is overlap among the sets of Multitudinous Second Parties. 

More importantly, I contend there is a significant amount of mutual accommodation, and implicit collusion, that goes on between corporate managements and plaintiffs attorneys in getting the benefits of their respective Big Amounts. 

The Enron story, and the investment banks that were involved with Enron and certain ensuing class action litigation, are very revealing of this.  For details, see this article I wrote http://robertshattuck.blogspot.com/2007/11/writing-i-did-about-enron.html  entitled "Enron's smartest guys, crooks, victims and other saps." 

Sometimes corporate management's willingness to throw in the towel to the plaintiffs' lawyers is both amazing and outrageous.  A galling example of this was a class action lawsuit against Xerox Corporation of which I received notice.  I wrote a letter to Judge Thompson in the case ( http://robertshattuck.blogspot.com/2008/04/letter-to-judge-thompson.html ) and complained to the Xerox board of directors (my activities concerning the Xerox case are detailed here at this webpage http://robertshattuck.blogspot.com/search/label/J1.%20Xerox%20Corporation ).  Whatever throwing in the towel the Xerox board of directors did in the Xerox case, it is happening all over the place.  Bloody murder, I would say;  in fact I did say.  See http://robertshattuck.blogspot.com/2008/11/why-arent-retirement-plan-trustees.html

From the foregoing cases and from other study, investigation and experiences, I have concluded that there should be significant societal concern about implicit collusion between corporate managements as one set of Aggregating First Parties and plaintiffs's lawyers as a second set of Aggregating First Parties.  In this collusion, the chief motivation of corporate management is to avoid individual accountability and responsibility in their stewardship of the Big Amount they control, and the chief motivation of plaintiffs' lawyers is to get their Big Amounts coming out the Multitudinous Small Amounts beneficially owned by innocent shareholders and other non-wrongdoing Multitudinous Second Parties.  The plaintiffs lawyers are willing to act as aiders and abetters to management in achieving the latter's objective of avoiding accountability and responsibility, in return for management not opposing the raid by plaintiffs' lawyers on the Multitudinous Small Amounts of the Multitudinous Second Parties the plaintiffs' lawyers have targeted.

Settlements in class action lawsuits are a main tool in the foregoing collusion.  The settlements avoid determinations of whether there has been any wrongdoing, and thereby accommodate corporate management's desire to avoid individual accountability for wrongdoing, and the settlements spring wide open the pocketbooks of Multitudinous Second Parties for pilfering by the plaintiffs' attorneys..

If the Court does not accept the foregoing description and characterization about mutual accommodation or collusion by corporate management and plaintiffs lawyers, the Court might give fuller review of my blog How To Combat Plaintiffs' Lawyers (URL http://robertshattuck.blogspot.com/ ), and the Court may change its mind.  

In all events I wish to emphasize that the collusion or mutual accommodation that I contend exists between corporate management and plaintiffs lawyers is a chief predicate for my objections in this case.

C.  Societal objectives of loss compensation and deterrence

Civil law liability is supposed to serve two societal purposes, first, that of compensation where one party wrongfully injures another party, and second that of deterrence.

As to the deterrence objective, I contend that class action lawsuits undermine that objective and do not promote it.  For a full statement of this contention, see my article Does the Civil Liability System Undermine Business Ethics?  (URL http://robertshattuck.blogspot.com/2007/11/i-thought-this-would-be-effective-email.html ). 

As to the societal objective of loss compensation, I contend that the class action litigation system as it has operated has done very poorly in serving the objective of compensation when one party wrongfully harms another party.  Among other things, that system has resulted in (i) a coercive environment in which payments can be extracted without any determination that there has been wrongdoing that supports a liability (the aforementioned collusion being one contributing factor to the creation of such environment), (ii) a disregard of  legitimate distinctions between intentional wrongdoing, negligent wrongdoing, and no wrongdoing or no fault, in the process of fixing liability under the law, (iii) a similar disregard of the role of the plaintiff in contributing to the harm that is properly a reasonable factor in fixing liability, (iv) inadvisable expansions of liability where there is no fault and of the types of injury for which one party is called on to compensate another party, (v) a failure to be discriminating about whether or not a defendant or other party paying for or bearing the burden of a payment for an alleged harm received a benefit, (vi) a failure to consider alternative ways of loss compensation, or reasonable substitutes, and (vii) lack of controls over administrative costs in accomplishing the loss compensation goal.

D. The augmented public impact of class action and other litigation

Much civil litigation has far outgrown the concept of the judiciary and the courts as merely a societal means of resolving disputes between two parties, in which the two parties are viewed as the only parties that have a material interest in how the dispute is resolved and only those two parties need to have their say in a court of law  about how the court should decide the case under the law.   

Now the effects and ramfications of much civil litigation are very widespread beyond the actual parties to litigation, and there is a legitimate question whether all the persons who will be materially affected by the outcome of a court case have been afforded a proper opportunity to be heard related to the resolution of the case before the court. 

Further, the publicly widespread consequences of litigation arguably signifies there is a need for more say, input and guidance from democratically responsive legislative bodies about how this "public" litigation should get handled and disposed of.

Insofar as the Court believes it is legally obliged to hear this and similar "public" litigation before it, at a minimum the Court ought to be mindful of all the public ramifications and the extent to which persons who are not parties before the Court  will be materially affected. Also, the Court should consider its discretion to provide for more persons to have the opportunity to be heard by the Court.  If the Court feels it is being called on to act in ways for which the Court believes more guidance and input should be provided by democratically responsive legislative bodies, the Court should find ways to signal this, including by how it exercises its discretion in approving a settlement agreement or not.

MY OBJECTIONS TO THE PROPOSED SETTLEMENT IN THIS CASE

I object to the proposed settlement in this case because I contend it is another instance of  the above referenced collusion between corporate management and plaintiffs' lawyers at the expense of innocent parties, because there is a failure on the deterrence front, because public impact and ramifications are not sufficiently taken into account, and because there are reasonable and acceptable alternatives of achieving the compensation objective that avoid the foregoing drawbacks.

The information that has been made available through the notice of the class action is that management of AT&T Mobility, either corruptly, or negligently, or in exercise of its business judgment, or ignorantly,may have caused AT&T Mobility to collect from customers the internet taxes and to pay such internet taxes over to the taxing authorities, which internet taxes were not legally owing to the taxing authoritities. 

If the internet taxes were in fact not legally owing to the taxing authorities, it would further seem to be the case that the officials of the taxing authorities were guilty of corruption or negligence or incompetence in collecting the internet taxes.

The proposed settlement will avoid any determination of whether management has been guilty of corruption or negligence and thus fails in achieving the deterrence objective of civil law liability.  Among other things, the proposed settlement will tend to prevent shareholders of AT&T Mobilility from getting information about any such corruption or negligence and impair them in holding management accountable.

There are alternative loss compensation routes for affected customers that can achieve reasonable loss compensation without the disadvantages of this class action litigation and the proposed settlement.  These include the various refund claim routes that the lawmakers of the taxing jurisdictions  provide to the customers in their individual capacities.  Also customers have open to them requesting state attorney generals to seek loss compensation on their behalf, and state attorney generals are likely to proceed in ways that do not have the disadvantages discussed here about the proposed settlement. 

There is a public interest of taxpayers and voters being informed about the manner and extent to which the officials of their taxing authorities have been corrupt, negligent or incompetent in collecting taxes.  Approving the proposed settlement will adversely affect the investigating of the facts and publicizing what the investigation reveals.

The settlement will empower the plaintiffs attorneys in a way that will result in the imposition on taxing jurisdictions of the cost and expense in defending refund litigation and may result in the deprivation of funds from governments that will have to be made up from other revenue sources.  The Court should be cognizant of this public impact and should at least consider whether the Court should require notifying the taxing authorities in question of the litigation and offering them an opportunity to make argument to the Court about whether the plaintiffs' attorneys should be armed in the fashion the Court proposes.

The settlement effectively overrides the rules and limitations that lawmaking bodies have enacted regarding refunding of taxes.

The proposed settlement agreement runs roughshod over the business judgement rule.  Corporations have many dealings with outside parties, including customers, suppliers, and taxing authorities.  Officers and directors are empowered to exercise their business judgment, and the shareholders and a court of law are supposed to defer to management's decision.  If shareholders want to press their disagreement about business judgment decisions, they are relegated to voting their stock against directors and management whom they disagree with. 

Under the business judgement rule, management may make mistakes that cost the corporation money and that lessen shareholder values, but the law considers the above shareholder vote as a substitute remedy for shareholders, or shareholders can sell their stock.  By the same token, if AT&T Mobility made a mistake in collecting and paying over internet taxes that was an injury to customers, it could be reasonable for the law to say monetary damages are not needed in the case and the substitute remedy that the customers have of switching service providers is adequate.

Riding roughshod over the business judgment rule in this case is an invitation for plaintiffs lawyers to go fishing for dealings a corporation has with third parties in which the corporation may have not fully asserted legal or contractual rights available to the corporation, and get a court to vest control in the plaintiffs' lawyers over the corporation's rights so that the plaintiffs' lawyers can sue on the corporation's behalf.  Based on the precedent set by the proposed settlement, the plaintiffs' lawyers would be allowed to do this without a determination of whether there was a decision by management that is entitled to deference under the business judgment rule.  

There is currently in the public eye "whistleblower rules" that the SEC has proposed under a Congressional mandate.  The rules have provoked significant controversy, and the rules are being subject to extensive public  debate.  These rules are mentioned because, to some extent, plaintiffs' lawyers act in a whistleblower capacity, and given the public interest and scrutiny the SEC rules are provoking, the Court might wonder about the extent class action litigation  sanctions whistleblowing by plaintiffs' lawyers and that provides compensation to them without the benefit of legislative consideration and sanction that is subject to public scrutiny and debate about the same.

I personally think that there is jumping of the gun with the proposed whistleblower rules because the law has been and continues to be deficient in dealing with the matter of personal accountability for wrongs of officers and employees of corporations.  I have submitted a comment to the SEC to this effect.  http://www.sec.gov/comments/s7-33-10/s73310-252.htm  

PLAINTIFFS' ATTORNEYS FEES

  

In evaluating the foregoing objections to the proposed settlement, the most potent discretion that the Court has is in the approval of attorney's fees.  If the Court approves the settlement and requested attorneys fees, this will be an incentive for more class action lawsuits to be filed and more settlements to be entered into that may be subject to the same criticisms that are stated above about the proposed settlement in this case.  If the Court does not approve the requested attorneys fees and approves a significantly lesser fee, that will tend to lessen the bringing of class action lawsuits and their attendant settlement agreements, and less prevalence of the foregoing objectionable features.

I contend the Court should only approve a reasonable fee, and in determinging what is reasonable the Court has discretion to evaluate all the factors and public impact that are discussed above.If the Court engages in the foregoing evaluation, I believe it would be reasonable for the Court to conclude that plaintiffs attorneys fees should not exceed $100,000.

ADDITIONAL CONDITIONS TO APPROVAL OF SETTLEMENT

The Court should require notice to be given to all shareholders of AT&T Mobility or its parent that management of AT&T Mobility may have corruptly or negligently caused AT&T Mobility to impose internet taxes on customers, that the settlement agreement will prevent the Court from determining the same, and shareholders ought to decide whether they should take action to make their own investigation and determination of the same.

The Court should require notice to be given to all state attorneys general and all taxing jurisdictions of the proposed settlement and invite them to submit their views on whether the proposed settlement agreement should be approved.

If and to the extent the plaintiffs obtain refunds from taxing jurisdictions, the Court should require that specified percentages of the refunds be used to publish notices in newspapers in the taxing jurisdiction that give notice to the taxpayers and voters of this litigation and its disposition and of the amounts of taxes that were collected by the taxing jurisdiction and the amounts that were refunded, plus the costs and expenses that the taxing jurisdiction incurred in defending against the refund litigation.

CONCLUSION

I consider myself one of Multitudinous Second Parties whose small amounts are taken advantage of by 
Aggregating First Parties that include corporate managements,  legislators and their earmark beneficiaries, and also, I contend, plaintiffs' lawyers, including the plaintiffs' lawyers in this case. 

I want my taxing authorities to be competent in the collection of taxes and not collect  amounts that are not legally due and owing under the tax laws.  I want my service providers not to mistakenly include in charges and pay over to taxing authorities amounts that are not due and owing.  If the foregoing goes on, I want to learn about it.  I am willing to contribute a small amount to provide reasonable compensation to a party who makes an investigation and informs me that the foregoing is happening and to inform the taxing jurisdictions and service providers of the same.  If the Court wants to require At&T Mobility to pay, say $100,000 to the plaintiffs' attorneys for having investigated the internet taxes and to pay additional amounts for the notices to shareholders and others and notices in newspapers, I would find such use of a small amount from me as one of Multitudinous Second Parties to be entirely satisfactory.

As one of the Multitudinous Second Parties in this case, I strongly object to the proposed settlement agreement.  I believe the direct and indirect costs and expenses, and other disadvantages and burdens, the proposed agreement will result in, of which I will pay my small amounts, directly or indirectly, immensely exceeds (possibly on the order of magnitude of 50 times) the aforementioned $100,000 plus the cost of notices that I would be happy to pay my share of.  Paying 50 times more than what I consider reasonable under the circumstances is highly, highly objectionable to me personally.

I further think the Court should be realistic about what inference can be drawn if only a few of the Multitudinous Second Parties affected by this case file an objection.  The Court should ask itself, if  the Multitudinous Second Parties were called before the Court and given a fair explanation of this case and the possible remedies and ramifications (including whatever part of the above objections the Court considers part of a fair explanation), what would those Multidudinous Second Parties say should be done by the Court?  Whether the Court is capable of that exercise and acting on that exercise, I will find out in due course. 

Respectfully submitted,

_____________________________  /s/

Robert Shattuck

January 30, 2011

AVALA director on Lee Davis radio talk show today

Skip Tucker, the executive director of Alabama Voters Against Lawsuit Abuse, will be on the Lee Davis radio talk show, 101.1 FM WYDE in Birmingham, starting at 4:45 p.m. today.  The call in numbers are (205) 941-1011 (local) and 866-551-9933 (toll free).

Emails to other whisteblower commenters

[I sent the below form of email to most of the listed persons (other than those submitting comments in their personal capacity and who did not give contact information).]

Subj:  Your comments on the SEC whistleblower rules

                                            

Dear ____________,

I am a fellow commenter (my comment is here). 
 

The law frequently entails the consideration and balancing of potentially competing interests, and the whistleblower rules are in this vein.  As the SEC said  in its press release, "The proposed rule reflects the consideration of a number of potentially competing interests, and balances the need to encourage whistleblowers to come forward without promoting unintended consequences." 

You, and many other commenters, have been very assiduous (verbose one might even say) in performing needed balancing exercises in offering suggestions for the whistleblower rules. 

My comment I submitted to the SEC on January 3rd takes a different tack from most others, and may even be unique in what it advocates. It takes a step back from the proposed rules and states:

It is submitted that (i) in dealing with corporate wrongdoing, the law is unacceptably deficient from a deterrence standpoint in the way the law fails to punish officers, employees and other individuals who participate in and are responsible for the design, implementation, and carrying out of corporate acts that comprise corporate wrongdoing, (ii) the law is mistaken in its willingness to assume punishment of a corporation can achieve adequate deterrence, and (iii) the law fosters a mindset and a willingness of some persons to take advantage of the foregoing deficiencies and to benefit from them at the expense of innocent parties, such as shareholders . Until these deficiencies are addressed by lawmakers, regulators, judges and others, there will be similar deficiencies connected with the whistleblower program, the program will fall short in achieving deterrent objectives, and the program will be at risk of being unduly exploited for personal gain and benefit in a fashion similar to that referred to in the preceding sentence.


Accordingly, lawmakers, regulators and others should first correct the foregoing deficiencies in the law before the proposed whistleblower program is put in place.

The main driver of my comment is the regime of class action litigation that prevails in the country. 

I think the class action litigation regime has a number of important, and sometimes competing, public policy goals and is deserving, even more so than the whistleblower rules because of the greater impact of the former, of assiduous "balancing"  of "competing interests" and avoiding "unintended consequences;"  however, in contrast to the meticulous balancing that commenters and the SEC are going through in the narrow niche of the whistleblower rules, I think there has been a gross absence of balancing, by lawmakers, judges, lawyers, public policy advocates and scholars, and others, of the important, and sometimes competing, public policy goals the civil law is supposed to serve.  In my view, those persons have not been mindful of the potential for harm that an "unbalanced" class action litigation regime presents. The risks include compensating plaintffs' lawyers in a way that creates incentives for, and that has resulted in, (i) disregarding distinctions between intentional wrongdoers, negligent wrongdoers and innocent parties, especially in the context of corporations comprised of a conglomeration of officers, employees, shareholders and customers, (ii) irrational in terrorum levels of potential liability and legal cost that improperly coerce unjust settlement payments, particularly from inadequately represented innocent parties, (iii) avoidance of determinations of wrongdoing in cases at bar and a concomitant avoidance of putting the world on notice about what is wrongful and what is not wrongful, so that any action or decision going forward can be subject to extracting a settlement payment ex post facto, (iv) disregard of rational cost/benefit principles, (v) impairment of deterrence by distracting attention from, and diverting available resources away from, imposing punishment on culpable officers and employees, and (vi) blindness to a matrix of societal mechanisms that should be working in tandem for achieving objectives of providing compensation  to harmed parties and of deterrence (such mechanisms including, besides civil liability, private insurance, governmental and charitable welfare, natural disaster relief, the criminal law and criminal prosecutors, state attorneys general, and regulatory agencies).

While I commend you, other commenters, and the SEC for sensitivities to proper balancing being accomplished in the whistleblower rules, I fault many lawmakers, judges, lawyers, and policy advocates and scholars, for, in my view, a colossal failure to bring similar perspicacity to the establishment and maintenance of the class action litigation regime.  As my January 3rd comment points out, I believe that failure is relevant to the whistleblower rules. 

I hope, by means of my January 3rd comment, and other communications, such as this email, I am able to inform and persuade others about my advocacy.

Thank you for your attention.

Sincerely,

Robert Shattuck

ABA Securities Regulation Committee whistleblower comments

From: RDShatt@aol.com
To: businesslaw@abanet.org
Sent: 1/9/2011 4:11:44 P.M. Central Standard Time

Subj: Federal Regulation of Securities Committee comments on SEC whistleblower rules

Dear Mr. Rubin,

Your Committee's comments on the SEC's proposed whistleblower rules are perspicacious about Dodd Frank "involving the balancing of a number of important, and sometimes competing, public policy goals," that the SEC rules should "operate in tandem with, and support and strengthen, the existing matrix of laws, regulations and policies" relative to whistleblowing, and the importance of "the establishment of effective controls and procedures by companies to ensure legal compliance."

Your Committee's comments caution:

In considering its final rules, the Commission should also be mindful of the potential for harm that an unbalanced whistleblower program may present. The risks include rewarding and even encouraging wrongdoers, creating incentives (by reason of over-broad anti-retaliation provisions and substantial monetary awards) to bypass or upend effective company programs for the investigation of and response to wrongdoing, and eroding significant attorney-client protections. An unbalanced program could lead to a flood of frivolous and ill-informed whistleblower claims that would require the devotion, at considerable expense, of significant investigative resources by the Commission and the companies implicated. None of these undesirable results would benefit companies, their shareholders or the investing public generally.

Your Committee's letter then proposes, "by refining certain of the proposed provisions and by adopting additional provisions to further enhance the integrity of Regulation 21F, the Commission can satisfy its statutory mandates and policy objectives, while at the same time minimizing the risks referred to above."

Your Committee's comments then go on for 30 pages meticulously articulating suggested modifications to the rules and discussing how better balances will be attained by the changes.

The Committee's meticulous perspicacity is highly laudable. Similar sensitivities to "important, and sometimes competing, public policy goals" are manifested by many commenters across a range of perspectives, including managment, investors, ethics and compliance officers, and lawyers, as well as the SEC itself. (In its press release, the SEC says, "The proposed rule reflects the consideration of a number of potentially competing interests, and balances the need to encourage whistleblowers to come forward without promoting unintended consequences." Your Committee acknowledges this, saying: "The Committees [referring also to the Committee on Corporate Laws] understand that the Commission has been sensitive to many of these considerations in its Proposing Release.")

The comment I submitted to the SEC on January 3rd takes a different tack, and may even be unique in what it advocates. In my January 3rd comment, I say,

It is submitted that (i) in dealing with corporate wrongdoing, the law is unacceptably deficient from a deterrence standpoint in the way the law fails to punish officers, employees and other individuals who participate in and are responsible for the design, implementation, and carrying out of corporate acts that comprise corporate wrongdoing, (ii) the law is mistaken in its willingness to assume punishment of a corporation can achieve adequate deterrence, and (iii) the law fosters a mindset and a willingness of some persons to take advantage of the foregoing deficiencies and to benefit from them at the expense of innocent parties, such as shareholders . Until these deficiencies are addressed by lawmakers, regulators, judges and others, there will be similar deficiencies connected with the whistleblower program, the program will fall short in achieving deterrent objectives, and the program will be at risk of being unduly exploited for personal gain and benefit in a fashion similar to that referred to in the preceding sentence.

Accordingly, lawmakers, regulators and others should first correct the foregoing deficiencies in the law before the proposed whistleblower program is put in place.

The main driver of my comment is the regime of class action litigation that prevails in the country.

I think the class action litigation regime has its own "number of important, and sometimes competing, public policy goals"and is deserving, even more so than the whistleblower rules because of the greater impact of the former, of assiduous "balancing" of "competing interests" and avoiding "unintended consequences;" however, In contrast to the meticulous balancing that commenters and the SEC are going through in the narrow niche of the whistleblower rules, I think there has been a gross absence of balancing, by lawmakers, judges, lawyers, public policy advocates and scholars, and others, of the "important, and sometimes competing, public policy goals" the civil law is supposed to serve. In my view, those persons have not been "mindful of the potential for harm that an unbalanced" class action litigation regime presents. The "risks include rewarding" plaintiffs' lawyers in a way that creates incentives for, and that has resulted in, (i) disregarding distinctions between intentional wrongdoers, negligent wrongdoers and innocent parties, especially in the context of corporations comprised of a conglomeration of officers, employees, shareholders and customers, (ii) irrational in terrorum levels of potential liability and legal cost that improperly coerce unjust settlement payments, particularly from inadequately represented innocent parties, (iii) avoidance of determinations of wrongdoing in cases at bar and a concomitant avoidance of putting the world on notice about what is wrongful and what is not wrongful, so that any action or decision going forward can be subject to extractomg a settlement payment ex post facto, (iv) disregard of rational cost/benefit principles, (v) impairment of deterrence by distracting attention from, and diverting available resources away from, imposing punishment on culpable officers and employees, and (vi) blindness to a "matrix" of societal mechanisms that should be working "in tandem" for achieving objectives of providing compensation to harmed parties and of deterrence (such mechanisms including, besides civil liability, private insurance, governmental and charitable welfare, natural disaster relief, the criminal law and criminal prosecutors, state attorneys general, and regulatory agencies).

While I commend your Committee, other commenters, and the SEC for their sensitivities to proper balancing being accomplished in the whistleblower rules, I fault many lawmakers, judges, lawyers, and policy advocates and scholars, for, in my view, a colossal failure to bring similar perspicacity to the establishment and maintenance of the class action litigation regime. As my January 3rd comment points out, I believe that failure is relevant to the whistleblower rules.

I hope, by means of my January 3rd comment, and other communications, such as this email, I am able to inform and persuade others about my advocacy.

Thank you for your attention.

Sincerely,
Robert Shattuck

Email to E&C professionals re whistleblower rules

From: RDShatt@aol.com
To: ________
Sent: 1/__/2011 ____ _.M. Central Standard Time

Re: Ethics & compliance comments on SEC proposed whistleblower rules

Dear ____________,

The SEC's proposed whistleblower rules pursuant to Dodd Frank have drawn hundreds of comments, including many comments from the ethics and compliance community. I have submitted this comment on January 3rd, in which I state the following basic contention:

It is submitted that (i) in dealing with corporate wrongdoing, the law is unacceptably deficient from a deterrence standpoint in the way the law fails to punish officers, employees and other individuals who participate in and are responsible for the design, implementation, and carrying out of corporate acts that comprise corporate wrongdoing, (ii) the law is mistaken in its willingness to assume punishment of a corporation can achieve adequate deterrence, and (iii) the law fosters a mindset and a willingness of some persons to take advantage of the foregoing deficiencies and to benefit from them at the expense of innocent parties, such as shareholders . Until these deficiencies are addressed by lawmakers, regulators, judges and others, there will be similar deficiencies connected with the whistleblower program, the program will fall short in achieving deterrent objectives, and the program will be at risk of being unduly exploited for personal gain and benefit in a fashion similar to that referred to in the preceding sentence.

Accordingly, lawmakers, regulators and others should first correct the foregoing deficiencies in the law before the proposed whistleblower program is put in place.

I hope you will read and think about the entirety of my submitted comment.

Thank you.

Sincerely,

Rob Shattuck

My 1/3/11 whistleblower comments

Subject: File No. S7-33-10
From: Robert Shattuck
Affiliation: none

January 3, 2011

Expanded comments of Robert Shattuck on File No. S7-33-10
Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934
(submitted electronically on January 3, 2011)

I. Prior submission on December 28, 2010

I was out of the country from December 8 through December 16. I first learned of the proposed rules on December 26. I desired to make a submission even though it was past the stated deadline of December 17. I quickly drafted and made a submission on December 28, 2010. I have now had time to prepare a longer submission that I wish to make. I request that these expanded comments be received and considered by the SEC even though not submitted on or before December 17th.

II. Background of submitter

I am a retired lawyer with no professional or corporate affiliation.

I have an acute interest in corporate wrongdoing and what society can do to lessen the same. I have had a special interest in whether the work of plaintiffs lawyers aids in the deterrence of corporate wrongdoing. I have concluded that their work undermines business ethics and deterrence. I have urged ethics professionals to evaluate my arguments that plaintiffs lawyers undermine the deterrence objective of the civil law, and, if they agreed, in turn for those ethics professionals to raise the matter with management and/or make advocacy to lawmakers and others regarding how to increase the deterrence efficacy of the civil law.

I have a blog How To Combat Plaintiffs' Lawyers (URL http://robertshattuck.blogspot.com) in which I report my work. I have an article Does the Civil Liability System Undermine Business Ethics? (URL http://robertshattuck.blogspot.com/2007/11/i-thought-this-would-be-effective-email.html) in my blog in which I set forth my argumentation that plaintiffs' lawyers undermine business ethics and deterrence.

III. Expanded comments

A. Basic contention

It is submitted that (i) in dealing with corporate wrongdoing, the law is unacceptably deficient from a deterrence standpoint in the way the law fails to punish officers, employees and other individuals who participate in and are responsible for the design, implementation, and carrying out of corporate acts that comprise corporate wrongdoing, (ii) the law is mistaken in its willingness to assume punishment of a corporation can achieve adequate deterrence, and (iii) the law fosters a mindset and a willingness of some persons to take advantage of the foregoing deficiencies and to benefit from them at the expense of innocent parties, such as shareholders . Until these deficiencies are addressed by lawmakers, regulators, judges and others, there will be similar deficiencies connected with the whistleblower program, the program will fall short in achieving deterrent objectives, and the program will be at risk of being unduly exploited for personal gain and benefit in a fashion similar to that referred to in the preceding sentence.

Accordingly, lawmakers, regulators and others should first correct the foregoing deficiencies in the law before the proposed whistleblower program is put in place.

B. Supporting discussion and argumentation

1. Basic context

It is indisputable that corporate dishonesty is a big problem.

At the same time, whistleblower payments are an extreme tool.

Honest citizen cannot be pleased if corporate dishonesty is such an intractable problem that we need to transplant, into the corporate business world, street crime fighting tactics of paid informants such as entertain us on TV crime shows. Then, life is life, and honest citizens cannot be pleased either to read in their local newspapers that an almost Gestapo like FBI has come into their state or city, armed with the latest, sophisticated surveillance technologies, and have followed or resurrected specific trails of crooked politicians taking bribes from local businessmen in transgressions that local law enforcement does not seem up to the task of policing.

The SECs whistleblower payment rules, mandated by Dodd-Frank, are limited to the SECs jurisdiction over securities law violations. There are other types of corporate wrongdoing in which whistleblower payments could be utilized, and their broader potential use should be kept in mind when thinking about their limited use for SEC purposes.

The proposed rules, published on November 3, have attracted hundreds of comments and have sparked strongly worded opinions on opposing sides. Average citizens, evidencing anger about perceived orgies of corporate wrongdoing, have expressed brief, simple, unqualified support for whistleblower payments. Corporate management, in house counsel, and corporate ethics and compliance officers have submitted numerous comments voicing their concern about undermining internal corporate compliance programs. Media reporting includes The Wall Street Journal, Whistleblower Bounties Pose Challenges, December 14, 2010 The New York Times, For Whistle-blowers, Expanded Incentives, November 14, 2010 CNBC, Sustained Ethical Corporate Culture at Risk From Proposed SEC Whistleblower Rules NACD National Association of Corporate Directors details chilling effect in comment letter to the SEC Internal compliance systems undermined by Dodd-Frank Provision, December 20, 2010.

This public interest in the proposed rules potentially lends itself to a teachable moment about corporate dishonesty, what society does to battle it, whether additional steps can be taken short of the tool of paid informants inside corporations, and, after considering those things, whether whistleblower payments should be employed or not.

2. Current problems of corporate wrongdoing

Commercial wrongdoing is as old as commerce, but it was a simpler problem in simpler earlier times. Now, societal organizational structures are very large and complex, and they are a daunting challenge to police and regulate.

Modern day bigness and complexity introduce or augment significant difficulties in trying to contain corporate dishonesty. The activities of large corporations are designed and carried out through the collective action of numerous corporate officers, employees and other agents, and identifying those persons and determining their respective responsibilities for a wrongdoing can be extremely difficult, time consuming and expensive. Amidst complexity there are more nooks and crannies for employing deceptions and tricks to obtain wrongful gains. Bigness and complexity create more conflicts of interest in which persons can improperly exercise their authority in one position to favor another economic interest they have in a different position. More expansive involvement of the government in the economy increases political corruption, and that can foster an acceptance of dishonesty that infects the business mindset generally. Larger scales of commerce, greater geographical mobility, an increase in transient business and personal relationships, and new means of anonymity, undermine the nurturing of trust and integrity in the commercial world.

Other factors contributing to corporate dishonesty are more constant, such as human selfishness and greed, and propensities of many human beings to use their human intelligence to scheme in their commercial dealings.

3. Some current theories, approaches and techniques

A longstanding multi-faceted effort against wrongdoing is provided by lawmakers, regulatory bodies, state attorneys general, prosecutors, judges, and plaintiffs' lawyers

The wrongdoing of big corporations is a priority concern because of their potential to cause greater amounts of loss, injury and damage to the public. In recognition of this, elaborate internal compliance and ethics programs have been developed by bigger corporations.

Within the business ethics commumity, there has been extensive debate, purportedly backed up by academic research, about how best to achieve deterrence. Illustrative of this is the comment submitted by the Business Roundtable Institute for Corporate Ethics, which cites a notable Harvard Business Review article that the Institute uses as a teaching tool in its ethics seminars. This comment states that the Harvard Business Review article

"provides a useful distinction between organizations that manage ethical behavior either through (1) compliance-based programs, for organizations which focus activity and resources on threats, deterrence, and punishment for legal and ethical breaches, or (2) integrity-based programs, in which companies promote internally-developed values and self-governance to drive ethical decision making and behavior. The article asserts that companies with integrity-based programs are most effective at discouraging misconduct, a conclusion that is also confirmed by further academic research."

The compliance-based programs referred to in the above comment are internal to the corporation. They are an add on to societys previously mentioned external compliance based programs created and carried out by lawmakers (in enacting criminal and civil laws), regulatory bodies (of which the SEC is one), state attorneys general, prosecutors, plaintiffs' lawyers, and judges.

In external compliance based programs, there is debate about whether the corporation should and can be punished to achieve deterrence and whether it is needed to punish individual officers, employees and agents to deter. Also there is debate about whether lengthy, specific, detailed rules work better for regulating behavior or whether general principles are better for guiding conduct.

All in all, there is a muddle in the theories, approaches, techniques, and practices currently employed or advocated as means to regulate corporate conduct. Whistleblower payments are but one item in a confused bigger picture.

The whistleblower payment rules are an expansion of society's external "compliance-based" programs and are a clear sign that there is no serious movement afoot to shift to an exclusive reliance on self-policing by corporations. Advocates, designers and implementers of internal corporate compliance and ethics programs at a minimum need to manage an interfacing of their internal programs with society's external compliance based programs.

The concept of integrity based internal corporate compliance programs touted in the above comment by the Business Roundtable Institute of Corporate Ethics is, notwithstanding its asserted support by academic research, in a particularly tenuous position, given the seeming insistence of society on its "external" compliance-based programs. The extreme tool of whistleblower payments is an especial effront to the sensibilities of those advocating "integrity-based" programs.

Given that the SEC's whistleblower payment rules are a high profile attack on the sufficiency of internal corporate compliance programs, one upshot should hopefully be soul searching by advocates of internal programs about deterrence and what is needed to accomplish deterrence. It should further prompt consideration of whether anything is impeding the efficacy of internal compliance-based programs (and external compliance-based programs) for achieving deterrence.

4. Failure of law to punish corporate officers and employees

There is one central element in the big picture muddle that needs pressing, to wit, getting a better handle on the question of punishing the corporation to achieve deterrence versus punishing responsible officers, employees and other agents who conceive and implement the corporate activities that constitute the wrongdoing.

It is not as though this question does not come up, both frequently and in highly publicized ways. It is relevant not only to deterrence, but raises questions of fairness in punishing innocent shareholders for wrongdoings perpetrated by management. Several years ago this question was front and center in the public eye in connection with the Justice Department's criminal indictment of Arthur Andersen over Enron. More recently federal judges have refused to approve SEC fines levied on Citigroup and Bank of American.

Let us be clear that this is a seriously unresolved question. Without oversimplifying, it is probably reduces to some quantum of belief that it is simply too difficult, time consuming and expensive, or politically impossible, to have legal machinery that will, in a standard way, undertake determinations about, and impose punishments on, responsible officers and employees, and, and in default of having such machinery, the approach shall be to hit the corporation with a big punishment (such as a fine or seeking a criminal conviction of the corporation) and have a hope that, but not think too hard about whether, deterrence objectives are being adequately served in fact..

There is a lot of high level pushing on this question. A Congress that believes the personal incentive of whistleblower payments is needed to encourage whistleblowing is probably hard put not to think that some kind of personal punishment of officers, employees and other individuals will better achieve deterrence than no punishment of them. This is demonstrated by Sarbanes-Oxley and its provisions increasing personal liability of CEOs and CFOs for fraudulent financial statements.

As previously mentioned, there is a consequence of modern day complexity and bigness that makes for diffusion of responsibility among multiple individuals who are officers and employees, making it difficult and expensive to carry out investigations and determininations of responsibilities of officers and employees and punishing them individually. Should skepticism be put aside and should a commited attempt be made to a create the new legal machinery, with its attendant expense.

The views of affected parties need consideration here.

Management might say such machinery will make a corporations officers and employees too cautious and impair the development and carrying out of valuable and useful business activities.

If that argument is accepted, and punishing officers and employees is limited or foregone as a means of improving deterrence because it might deter the devleopment of some desirable business activities, the question would arise of what is the justification for punishing the corporation and innocent stockholders in order to achieve deterrence that is similarly unknown or indeterminate in its consequence.

Of course, management may oppose machinery for identifying and punishing responsible officers and employees because wrongdoing can be profitable, that profitability can justify greater compensation of officers and employees so long as it goes on undetected, and, if it is uncovered, management would want the protection that only the corporation is punished.

Plaintiffs lawyers will oppose the development of machinery for identifying and punishing officers and employees responsible for wrongdoing, because that would undermine their business. Machinery for identifying and punishing officers and employees entails determinations that wrongdoing has taken place. Plaintiffs lawyers work hard at creating a judicial environment in which no determinations of wrongdoing are ever made and in collecting large sums in small amounts from innocent stockholders and others, which is defended as serving a deterrence objective, as well as a compensation objective. If there was working machinery to achieve deterrence by punishing officers and employees, the deterrence purpose of plaintiffs' lawyers lawsuits would be reduced or disappear, and, with deterrence out of the way, more proper attention could be given to serving the compensation objective, including greater sensitivity to situations in which compensation to injured parties will come out of the pockets of other innocent parties, some or all of whom may have received no benefit or gain from the wrongdoing. This would significantly reduce amounts of recovery and reduce plaintiffs' lawyers' compensation.

Further a hard look at the work of plainitffs' lawyers might conclude that there is much waste of economic resources in the lawsuits that plaintiffs lawyers bring, and that these wasted resources could be beneficially used instead as a source of funding for the expense of having machinery that identifies and punishes officers and employees.

I have urged ethics and compliance officers, academics and other ethics professionals to consider whether the law undermines them in achieving their deterrence goals, including that it wastes corporate resources that could be better deployed in support of their ethics and compliance programs. Those business ethics professionals have evidenced little or no interest in considering and evaluationg my contentions. My speculation is that these persons have not wanted to embark on something that corporate managaement might oppose or that would turn out to be a futile battle against plaintiffs' lawyers.

5. Conclusion

I have stated my basic contention above, which should be considered repeated here.

If my contention is correct, and if corporate management and plaintiffs' lawyers exploit the failure of the law to punish officers and employees and benefit themselves at the expense of innocent parties such as stockholders, the same deficiency carries over with respect to the whistleblower program, to wit. the target of the whistleblower program will remain the corporation and not the responsible officers and employees. In a similar way, the whistleblower program will fall short in its deterrent objectives and would be whistleblowers will tend to adopt the mentality of corporate management and plaintiffs' lawyers to profit at the expense of innocent parties.

To try to establish its correctness or incorrectness, my basic contention needs more consideration and input from affected parties. Corporate management needs to consider and take a position and to put forth a justification for the position it takes. The same goes for plaintiffs' lawyers. Corporate ethics and compliance officers should speak up on the question and not be governed by management opposition. The SEC needs to wrestle more with its own views on the subject before it passes judgment on the deterrence effect of a whistleblower program. Congress needs also to pass judgment.

One final note about an insistence on holding officers and employees accountable in a way that has bite and about not sloughing punishment off in small amounts on large numbers of innocent parties: I think it is a frequent phenomenon in human affairs that there will be more circumspection and reasonableness when significant personal punishment and cost needs to be imposed on identifiable persons whose faces are before one and who will strenuously defend themselves, compared to the ease with which cost or punishment can be imposed in small amounts on a large number of anonymous persons who don't have a sufficient interest at stake to strenuously resist. For example, in plaintiffs' lawsuits there are a large number of anonymous parties who bear the burden of a large liability shared in small amounts, and who don't have enough at stake to strenuously resist, including not insisting on a determination of wrongdoing. Compare that to a small number of officers or employees who are to be held accountable, who potentially face bankruptcy if they have participated in wrongdoing, and who will make strenuous efforts to defend themselves, and insist on determinations that wrongdoing indeed took place.

Translate that to the whistleblower situation. If a whistleblower knows that payment will come from the corporation and be borne by a large number of stockholders in small amounts, the whistleblower may have inadequate restraint in proceeding. Compare that to a whistleblower who knows that, if his whistleblowing claim is to bear fruit, fellow employees will suffer significantly penalties personally. That would potentially promote restraint and lessen abuse of the whistleblower program.


Respectfully submitted,

Robert Shattuck
Birmingham, AL 35223
rdshatt@aol.com