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ENRON AND APPLE AND BERNIE MADOFF

August 25, 2012

ENRON AND APPLE AND BERNIE MADOFF

My followers will recall the Enron saga of several years ago, especially when the company decided to withhold electricity from the State of California. The “lights out” for California was ultimately followed by “lights out” for Enron. Most of us can also recall that Enron’s CEO, a good friend and big contributor to George Bush, was convicted but committed suicide before serving time. We can also recall that when the company went under not only did their employees lose their jobs; they also lost their pensions and all of their investments in the company’s stock. Enron’s national accounting firm went out of business as it was implicated in the various frauds and stock swindles practiced on the public by Enron. The whole story is fraught with drama far beyond Bernie Madoff’s Ponzi adventures.

Other people and entities were affected. The Houston Astros baseball field had been named “Enron Field.” George Bush was there for the ceremony and a picture of George and the now deceased CEO in a fervent embrace was widely circulated. Neither made it to the UNNAMING of Enron Field. When after Enron’s criminal conduct became known and George was asked if he knew Ken, the CEO, he replied, “Oh yes, I knew Mr. . . . . . .,” giving their acquaintance a formality not evident in their brotherly embrace earlier (when Ken was his #1 campaign contributor). There are business swindles and there are political swindles. “Alas, poor Ken, I knew him well” would have been an honest answer (apologies to Yorick), but when the heat is on, honesty is at a premium, as George so plainly demonstrated in the run up to Iraq.

What is not well remembered is the way Enron and its accountants schemed to inflate the value of Enron’s stock. They conjured up hundreds of offshore “partnerships” to which they assigned their losses and expenses. Without these debits to their U.S. operations, they were fantastically profitable, and as publicly traded, their stock went through the roof. This, of course, provided ample opportunity for the corporate officers and other insiders to take big capital gains on their stock. Then came the blowup. The overseas expense and loss numbers became known, and the rest is history: the company and its national accounting firm went under, indictments and convictions of some of its officers were had, the convicted CEO committed suicide, and the final scene resembled that of a Greek tragedy. However, it was not a play, it was a real world exercise, and the final scene of this play was bloody, both literally and figuratively.

It happened because federal regulators were lied to but believed Enron’s story of how it could make such stratospheric profits. As in the case of Bernie Madoff, who told federal regulators that his success in investing was because of his “gut calls,” regulators should have been more suspicious. (If his “gut calls” were that good, Bernie should have been a bond trader – where you can make real money.)

Perhaps federal regulators should dig a little deeper into Apple’s operational scheme. I heard on TV this last week that Apple is now worth 724 billion in market value, easily the number one corporation ever in this country. Apple has avoided billions of dollars in taxes annually by playing jurisdictional games under the Internal Revenue Code from Luxembourg to Reno, assigning “headquarters” for marketing, R & D etc. The company also allocates roughly 70% of its profits overseas per its filings. Tax rates in such countries are frequently much lower than they would be if such income were reported as based here. Some of their income is from licensing and patent agreements, and some is from a subsidiary that invests in the stock market. So far, all seems legal (though that is a relative term these days since it is Apple and its rich and corporate cohorts who effectively write the code that creates and/or preserves the loopholes for its accountants and tax lawyers to exploit).

For the above reason (a wishy-washy code) I have repeatedly blogged on the great need for a redo of the code. We the people and our Treasury are being grossly underpaid by entities such as Apple, and they have plenty of company. As pointed out in an article in the April 29th edition of the Kansas City Star:

“Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments. In Apple’s last annual disclosure, the company listed its world-wide taxes – which included cash taxes paid as well as deferred taxes and other charges – at $8.3 billion, an effective tax rate of almost a quarter of profits.” That sounds fairly decent when you consider that GE has paid an effective rate of 2.3 percent over the last decade, but read on: “However, tax analysts and scholars said that figure most likely overstated how much the company would hand to government because it include sums that might NEVER BE PAID (my emphasis). “The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.” Farce or (a la Enron) criminal?

We have a code now that allows deferred taxes which Apple may pay in future years or decide to defer indefinitely. We have a code now that allows American multinationals to stack up profits in the Caymans or other tax haven jurisdictions while they negotiate with the IRS ON THE RATE TO BE PAID. We even have Apple taking credit for the taxes paid by its employees on THEIR stock gains where Apple is clearly a mere withholder of such monies. The list goes on, and on, and on. YOU try to defer taxes on current income and sending your money to the Caymans pending an agreement on rate, and see how far you get. Be prepared to advise your spouse and children what the visiting hours are at the federal lockup.

There are many reasons why we must revise the internal revenue code, and “we” does not include the corporations who have been writing the code for years. A new code should note but not coddle their interests. They should have to pay taxes like anyone else, and pay them THIS YEAR and at THE DESIGNATED RATE, as the rest of us must do. We cannot afford these constant and accelerating giveaways, and it’s time to end it. America needs help, not more accounting tricks.

Apple to date is only avoiding taxes, not evading them, or so it seems from what we can tell from their perhaps meaningless filings. Avoiding taxes is not illegal, but having been conditioned by the Enron experience, I always worry about what is really going on tax-wise and stock-value wise when high-flying companies like Enron and Apple have overseas money handlers under one guise or another. Apple indeed has more of these arrangements than Enron had. Apple has such connections (other than Chinese producers and their sub-contractors from all over) in Luxembourg, Ireland, Holland, the Caribbean et al.

I worry about that, but I hope my fears are unfounded. Ken and Steve Jobs are gone, but their drive to maximize profit at public expense has survived. Let us hope that a new tax code and more stringent regulation will make better tax-paying people (per Citizens United) out of these corporations. GERALD  E

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