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Aggressive accounting methods that public companies have used to pump up their earnings were roundly lambasted at an investors conference here sponsored by Crabbe Huson, a mutual fund company specializing in value investing.

How companies record items such as noncore investment gains, pension income, writeoffs of purchased research and development, and pro forma earnings have given investors a distorted view of earnings in the past five years, said Edward S. Loeb, partner and director of institutional portfolios for Harris Associates L.P.

"What's amazing is that all this information was in black and white over this period, so we have no one to blame but ourselves," Loeb told about 100 investors and financial managers at the conference. Crabbe Huson, Portland, is a subsidiary of Liberty Financial Companies Inc.

Many companies, including Intel Corp. and Cisco Systems Inc., pumped up their profits in the past three years by including noncash investment gains in income statements and "tricking investors into thinking this was an ongoing event," Loeb said.

Some companies, including International Business Machines Corp. and Northrup Grumman Corp., boosted their gains by including pension income in their earnings statement, Loeb said.

"I question whether these gains should be in the income statement anyway," Loeb said. "The money doesn't belong to the shareholders; it belongs to the retirees."

Merger and acquisition accounting, particularly how to account for goodwill, has been particularly abused, Loeb said.

As examples, he pointed to JDS Uniphase Corp., which recently had a $45 billion goodwill writeoff, and Nortel Networks Corp., which had a goodwill writeoff of about $12 billion, virtually eliminating the value of all the acquisitions done by these two companies in the last few years.

"It puts some perspective on why these companies' stocks are down by 90%," Loeb said.

He also criticized the writeoff of purchased research and development, saying that it is difficult to value.

"So accountants throw up their hands and say, 'I don't know what it's worth; let's write it off," Loeb said. "When you buy all this vapor, what do you think will happen when the market turns?"

Companies that put out earnings releases highlighting pro forma numbers, while burying actual results, are also misleading investors, Loeb said, adding that Harris defines pro forma results as "earnings before all the bad stuff." "If companies are going to report pro forma, the real numbers should be in the news release with the same emphasis so we can all know what's going on," he said.

Some companies would argue that pro forma reporting smooths out areas of operations that aren't a factor in every quarter, Loeb said.

"But where does smoothing end and outright manipulation begin?" Loeb asked. "Manipulation and illusion have ruled the day for the last few years. What we're seeing now is the price we pay for all this aggressiveness."

A federal judge has granted plaintiffs their request for class-action status in their pension lawsuit against IBM Corp., making 140,000 people part of the suit.

The ruling by G. Patrick Murphy, chief U.S. District Court judge in the Southern District of Illinois, was issued Monday and made public Wednesday by the IBM Employees Benefit Action Coalition, an advocacy group that pushed the suit.

It means that if and when the case is tried, the results would affect all individuals who have been in the IBM Personal Pension Plan any time after Dec. 31, 1994. Plaintiffs seek to force IBM to amend the plan to remedy alleged illegalities, chiefly that the revised plans failed to provide as large a pension benefit as required.

Age bias claimed

The suit claims IBM's plan does not treat identically situated employees equally, but gives less to older ones, causing age discrimination.

If the plaintiffs win, IBM would be forced to change its plan and pay more, but they have not specified amounts.

''I think it will be a big win,'' said Janet Krueger, a leader of the action coalition and a spokeswoman for the plaintiffs. ''All the precedents are being settled our way. There's a mounting set of case law that says that these plans are illegal.''

IBM, which lost its motion to strike the plaintiffs' class-action brief, plans to appeal the ruling, said spokeswoman Carol Makovich in Armonk.

''I would like to point out that the certification itself has nothing to do with the merits of the case,'' she said…

About 11,000 people work for IBM in Dutchess County, and most would be covered by the suit, as would many who left the company in 1995 or later.

It was at the start of 1995 that a major pension plan change was implemented by IBM, which the plaintiffs charge violated federal pension law. Another change that went into effect July 1, 1999, sparked an even broader reaction by IBMers, and one result was this lawsuit.

IBM had argued that the original plaintiff, Kathi Cooper, an IBMer from Illinois, was not a suitable example to lead a class-action suit, in which the lead plaintiff represents all others who are similarly situated.

The plaintiffs argued that this could be cured by creating three subclasses to reflect three varying situations:

• Anyone in the pension plan after Dec. 31, 1994, whose benefits will be ruled by the 1995 plan, with Kathi Cooper as the plaintiff.

• Anyone who was in the plan after Dec. 31, 1994, whose benefits will be set by the 1999 ''cash balance'' plan, represented by plaintiff Beth Harrington.

• Anyone employed by IBM as of July 1, 1999, and who has left IBM, or will leave IBM, before meeting its vesting requirement of working five years to qualify for a pension. That group is represented by plaintiff Matthew Hillesheim.

Hillesheim and Harrington live in Rochester, Minn.

Murphy rejected IBM's argument that the plaintiffs had unfairly introduced expert testimony on technical pension issues and exceeded a local rule on the number of pages in a brief. He noted he found that a proposed order provided by the plaintiffs' lawyers ''very helpful,'' and adopted parts of it into his order.

Murphy found the plaintiffs had met all four tests of class-action status: large number of people involved, questions of law common to all people in the class, claims typical of the others in the class and that the representatives would adequately protect the interests of the others.

IBM also argued there was potential for conflicting remedies and that some class members may prefer the status quo to the future changes that might be made to the plan if this litigation succeeds.

William Costine of Beacon, an IBM employee active in union advocacy, said, ''It's a significant step to right what most people will agree are the major injustices that IBM has put on their employees. We consider it a major victory at this point, even though there's a long way to go.''

Yesterday, The Wall Street Journal announced that the employee’s pension lawsuit against IBM has been certified as a class action by a U. S. District Judge. This is terrific news for the IBM employees, who have fought the pension battle long and hard.

Violations of the Employee Retirement Income Security Act is charged by the lawsuit. As the employees get older, pension accrual gets smaller and smaller.

The Cooper v. IBM case could involve as many as 140,000 people. No estimates of the amount involved were given.

The employee’s pension lawsuit against Onan is another important case to keep tabs on.

The Watson Wyatt Insider reports that a cash balance plan’s method of calculating lump sums has been ruled against by another federal court. This is the third cash balance whipsaw victory for employees in less than one year!

Employees of many companies are winning pension victories. Incredibly, some employees are sleeping through it all.

A motivational speaker addressed the August Duke Energy “Leadership Development Network” meeting. He talked about personal values and morals having an impact on one’s reputation.

He said that building and preserving a strong reputation is built on a foundation of honesty and integrity and that a company's reputation is built by people.

He should have made his presentation in the Duke Energy board room. His message would have been a revelation to those who feel that any scandal can be covered up with spin doctoring and news paper ads. Speaking of newspaper ads, Duke is now running two-pagers about the California energy debacle. The intended message is, of course: “I’m Not a Crook.” After citizens read the ads, they could turn the page and read about Duke’s newest scandal: $100 million in Alleged Overcharges! These headlines were not about Brazil or California operations. The story was about power charges made in North and South Carolina!

The speaker said that leaders have the responsibility to be the best they can be, and that leaders must treat people fairly and ethically. In fairness, this was a guest speaker. He probably had no knowledge of the cash balance pension conversion. One cannot use “ethics” in the same sentence with it. He probably did not know of the lost health and early retirement benefits that were taken from employees, after years and years of promises that they were ours.

The speaker said: “…You owe it to people to tell them what they are doing right and wrong." But you see, that’s the problem! Senior management is so busy telling others what they are doing right and wrong that they fail to look at their own actions!

Three questions were asked regarding ethics. We will apply those questions to the cash balance conversion:

• Is it legal? The crucial cases regarding cash balance pension legality have not come to trial yet. Some related cases have been won by employees. At the very least, the company chose to exploit some very gray areas in pension law.

• Is it fair and moral? Absolutely not! The employees were systematically wiped out for the benefit of senior management.

• Can you live with yourself after the decision is made? Sure, if they had not been exposed, they could have lived very well indeed! Ethics, morality, and honor are meaningless words to amoral people. Any remorse is experienced only because they were exposed.

If you feel that there is an orchestrated effort to deprive Americans of their earned pension benefits, you are probably right. The money-grab is bigger than many suspect; it is a global problem. Antonia Senior (The Times) tells of the pension problems cropping up in England.

Equitable Life mismanaged the retirement fund of millions of people. Victims have been clipped to the tune of £14 billion! Robert Maxwell, of Mirror pension scheme fame, raided the savings of his employees.

Even if you survive bear markets, fraud may be perpetrated by an insurance company or an employer. Pensions can suffer if a company is taken over or goes out of business. If you escape the fraud and bear market problems, there is always managerial incompetence to be concerned about.

In England, as here, pension risk is also being transferred from the company to the employees. And the risks have never been greater. William M Mercer, actuarial consultants, reported that some have seen their pension projections cut in half over the past decade! William M Mercer was responsible for the Duke Energy cash balance conversion. The firm also had a hand in the IBM pension scheme. The IBM case should be approaching a trial date.

The advice is given that Employees must learn to become whistle-blowers. Nick Edmans, spokesman for a British governmental agency stated: “If you feel that your employer is in financial difficulties, there may be cause for concern. The members may need to put pressure on trustees to find out what is going on. If there is something happening at your company that you don’t like, report it to us.”

That is also good advice for Americans. The only difference is that the agencies will have different names. There are also some news reporters that take an interest in such matters.

The U.S. District Court for the District of Maryland has issued a temporary restraining order in a lawsuit filed by the Department of Labor seeking to prevent a Bethesda, Md.-based engineering firm from taking money out of its pension plan to pay company expenses. The case is Chao v. Malkani (Civil Action No. S-00-3491).

Information Systems and Networks Corporation (ISN) is an engineering and systems integration services firm that sponsors a pension plan and a profit-sharing plan. The pension plan covered 398 participants in 1996 and is funded primarily by employer contributions. The profit-sharing plan is funded by both employer and employee contributions.

In an amended lawsuit filed in August, the DOL named ISN as a defendant to its original lawsuit, which was filed in November 2000. In the amended suit, the DOL alleges that ISN and plan administrator Roma Malkani violated ERISA by improperly attempting to transfer plan assets to reimburse the company for purported expenses from 1994 through 2000. Immediately after the DOL filed its original lawsuit, the defendants sought reimbursement from the plan. The amended suit also alleges that the defendants directed the plans' custodian to forfeit the account balances of certain participants who already were vested under the plan.

The FBI has broken up a criminal ring that rigged the games at McDonald’s, according to the Associated Press. Anytime there is big money involved, it is hard to keep the crooks out.

Attorney General John Ashcroft said: ``This fraud scheme denied McDonald's customers a fair and equal chance of winning,. Those involved in this type of corruption will find out that breaking the law is no game.''

Has Mr. Ashcroft looked at the pension scams in America today? Employees have lost more millions in their pension funds that have ever been lost due to rigged hamburger joint games.

What is the difference between fraudulent games at a hamburger stand and pension games rigged to never pay off what was promised? Is a formal complaint needed? That can be arranged.

“Will the bear market spoil the pension party?” (Pittsburgh Post-Gazette), tells the story of how greedy firms deny retirees a cost of living adjustment. The picture painted of greedy companies refusing to share their enormous wealth with retirees is bad enough, but it does not tell the complete story.

The article states that many companies will pay retirees only what was promised to them and no more. Well, many companies do not even pay what was promised to retirees. And some companies are cutting out promised pension money before the employees even retire!

The article implies that if a company falls upon hard times, it may convert to a less valuable pension plan. The fact is that many companies are converting to cheap cash balance plans, when they are making more money than ever!

Will the bear market spoil the pension party?

There have been many articles lately about employer’s providing investment advice for 401-K accounts. Well, big deal!

Employees do not need companies trying to tell them what to do with their money. They need companies to provide all the pension money that was promised to them. Employees need everything that was promised to them, including the early retirement subsidy and retirement health coverage.

We want no investment advice from those who cannot be trusted to deliver on their promises.

“Plan Sponsor” is continually running articles about employers providing on-line access to retirement accounts. The companies that have raided pension plans are not going to smooth it over with a cheesy on-line program.

Give the employees everything that was promised to them. Don’t expect bells and whistles to compensate for lost benefits.

Bean counters are everywhere, doing their thing: cutting off their noses to spite their faces; throwing out the baby with the bath water; and spending millions of dollars to save a dollar. They have been doing their thing at Firestone Inc. also.

The Associated Press reports that the company knew that their tires would be a lot safer with a 90-cent nylon layer built into each tire. Enter the bean counters. They concluded that eliminating the nylon layer would save a cool 90-cents per tire.

This information was learned from internal company correspondence. What big savings did the bean counters reap for the company? Well, so far, 203 deaths and 700 injuries have been liked to faulty Firestone tires. Six and one-half million tires have been recalled. Firestone is facing a $1 billion lawsuit. Let’s hear it for the bean counters!

Of course, Firestone spokespeople are denying all.

Many large corporations have their Bean Counter Brigades trying to squeeze out a dime in cost by any means possible. They downsize their most experienced workers, destroy benefits for those left employed, and, in general, sully everything that they touch. There is inevitably a price to be paid for the bean counters “savings.” Sometimes the price is extracted immediately; sometimes the price is extracted years later. The only concern of the bean counters is what looks good on the bottom line today.

Some pension plans are accumulating millions of dollars as never before! The catch is that these are special plans for top executives only.

Ellen Schultz has again exposed the pension skullduggery practiced by many large corporations. It is bad enough that a few people at the top are allowed to reap such obscene pensions. But they often add to their bloated pension plans at the expense of the other employees.

The golden rule of business is applied once again. Not only does the one who has the gold make the rules, but the one who makes the rules gets the gold.

In “While Executives See Their Pensions Grow, Regular Workers See Their Benefits Shrink,” Ms. Schultz gives many examples of the pension games played at various companies. Read this one article, and you will understand much of how the pension scams are being run today. Find out how money is being taken from your pocket, then vow to do something about it.

While Executives See Their Pensions Grow, Regular Workers See Their Benefits Shrink

Walter Williams brings up some political truths in “When Ignorance is Rational” (Creators Syndicate). He correctly points out that when a person is elected to office, he is not magically now motivated by the public interest; he will still be motivated by self-interest. Some are worse than others; some are very blatant about it.

The sugar industry was used as an example of how rational ignorance is applied. People pay more for sugar than necessary because the industry pays big money lobbying to get their way. There is no one to counter the industry. The public is not concerned over an issue that only costs them a small amount per year.

What politician in his right mind is going to challenge the sugar industry when the public is apparently happy with the current situation? Mr. Williams goes on to point out that these small overcharges on various items mount up to thousands of dollars a year per person.

Extrapolating the figures over a lifetime, a person could spend hundreds of thousands of dollars in unnecessary charges, due to rational ignorance. As you see, these small gouges can mount up.

Now consider the huge losses that employees are suffering due to corporations raiding the pension funds, denying promised health care coverage, and reneging on early retirement promises. Over time, these losses can be truly staggering!

It might not be worthwhile for the average citizen to complain to Congress about being overcharged by a few dollars per year for sugar. But the pension, health care coverage, and early retirement issues are quite another matter. It is certainly worth your time to write and call all of your elected officials.

Congress will tackle only the issues that the public demands action on. If the workforce appears unconcerned that their financial future is being destroyed by corporate greed, the issue will be assigned all of the importance of the price of sugar.

The Wall Street Journal reports that Xerox may owe retired workers $300 million due to “miscalculated” lump-sum pension payments. Lawyers for former employees said that the U.S. District Court for the Southern District of Illinois made the ruling on July 3.

The formal ruling has not been made; the estimated settlement is between $100 million and $300 million. Xerox is in the denial mode.

Attorneys Doug Sprong and Bill Carr, are also representing IBM employees in the Cooper v. IBM cash balance plan lawsuit. Janet Krueger, employee spokesperson, related to us that this case is waiting for the Chief Justice to certify the class. This case was also filed in the 7th district court, in Southern Illinois. It is assigned to the Honorable G. Patrick Murphy, Chief Judge.

This is the third time in one year that a firm has been ruled against by federal courts, due to bogus lump-sum cash balance plan calculations! We have not heard of any employees being over-compensated; they always seem to come up short on their pension money. Georgia-Pacific Corp. and BankBoston Corp. (FleetBoston) have also had their wings clipped because of low lump-sum pension payments. There is a strong possibility that this will not be the last such settlement.

Ceridian Corp. made a $51 million pension settlement in 1997. Say, that is the year that Duke Energy made big money off of the employee’s pension fund by converting it to a cheap cash balance plan. Stay tuned for developments.

Xerox Hit with Shareholder Lawsuit

Barron's article, “Red Handed,” is one of the latest articles to expose the methods used to boost executive pay at the expense of the employee’s pensions. Qwest Communications was used as an example, but the same pension games are being played by many corporations.

“Indeed, pension accounting is beginning to raise a lot of eyebrows on Wall Street. For example, a June report from Credit Suisse First Boston entitled ‘A Pension Accounting Primer’ noted that pension income contributed about 12% to the pretax profits of the 30% of companies in the S&P 500 that report pension income.”

“Jack Ciesielski, publisher of the Analyst's Accounting Observer, notes that ‘the easiest and most direct way for a company to boost the current year's reported earnings is to raise the expected rate of return on pension assets.’ If you do that, during the year, ‘it will go right to the operating line,’ he says.”

“Interestingly, Ciesielski notes that as recently as 1997, defined-benefit pension plans were a liability for the 81 companies in the S&P 100 that have plans, not an asset to be drawn upon to increase reported earnings. ‘From a nearly $5 billion in cost in 1997, pension plans now chip in nearly $7 billion of cost reduction in 2000.’" Does anyone need the pension problem spelled out any more plain than this?

Boeing also profited by $428 million from its “overfunded” pension plan. Verizon Communications, Southern Company, and General Electric were also mentioned for profiting at the expense of the employee’s pensions.

According to Reuters, LTV, a Cleveland-based steelmaker that filed bankruptcy last year, was looking for ways to save money. Well, guess where they looked first – that’s right – the employee’s benefits. LTV concluded it could save $4 billion in five years by cutting the pension fund and eliminating the retiree medical benefits!

Hey! Is that not what Duke Energy did to the employees? The difference is that Duke was far from being bankrupt – they just wanted the money! It worked out for the executives; they are rolling in bonuses as never before! And, as for the employees? Their benefits have never been worse.

The LTV employees are represented by The United Steelworkers of America, and it is fortunate that they are. The union stepped in and negotiated a tentative agreement to save benefits, give members 20 percent of the company, two seats on the Board of Directors, and a profit sharing plan!

Think about it – unionized employees of a firm in bankruptcy are getting superior benefits to employees of a company enjoying unprecedented wealth accumulation! It is doubtful that these employees are complaining about having to pay union dues.