Thursday, June 30, 2011

On “Admitting” Guilt

How Barbara Swearengen Ware and James Kelsoe are alike and different.

Posted By on Thu, Jun 30, 2011 at 4:00 AM

Former Memphis City Council member Barbara Swearengen Ware pinned money on her clothes on her birthday.

Former Morgan Keegan fund manager James Kelsoe Jr. pinned bogus dollar valuations on complicated investment products backed by subprime mortgages.

Investigators pinned charges on both of them, and last week Ware and Kelsoe settled their cases and ended their careers.

Until they wound up in the local news on the same day, these fallen stars did not have much in common.

Ware, 72, is an evangelist and former post office employee who served on the council from 1994 until 2011 and rarely missed a meeting. She got thrown off for using her influence as a public official to get herself and others out of motor vehicle inspections. Her offense is understandable to any fourth-grader who has forged a hall pass to go to the bathroom.

Kelsoe, 49, was a star fund manager whose notoriety was such that he made The Wall Street Journal several times but rarely was he in the news in Memphis. His fraud has kept the lawyers with the Securities and Exchange Commission (SEC) busy for a few years. Former Treasury secretary Henry Paulson once said the investments in mortgage-backed funds were "so complex that even the most sophisticated didn't understand them."

Ware was charged criminally. Kelsoe was charged with civil fraud. "I can't comment on that," said William Hicks, associate regional director of the SEC in Atlanta.

Ware's case was handled in open court in Memphis. After taking her medicine, Ware met with reporters and her prayer circle. Kelsoe's "enforcement action" was announced in Atlanta. Morgan Keegan and Kelsoe laid low and made no comments.

Ware gets diversion, which means she won't go to jail, and resigned from the council. She must pay $100 to CrimeStoppers. Kelsoe was fined $500,000 and is banned from the securities business for life. Morgan Keegan agreed to pay $200 million to resolve civil-fraud charges.

Ware and Kelsoe are alike in this respect: They were both experts in valuation. Ware knew the value in time and trouble of going through the lines at inspection stations only to be told that your turn signal, windshield wiper, or oxygen sensor is screwed up and you have to fix it before you can pass. Kelsoe knew the value of the "collateralized debt obligations" in the Morgan Keegan bond funds he managed in 2007.

Ware didn't tell her colleagues or the district attorney general's office about her little deal, which deprived her constituents of representation during this year's budget battle. Someone, probably in the clerk's office, blew the whistle on her.

"She illegally obtained a benefit not available to some 200,000 other vehicle owners in Memphis who obeyed the law," said former district attorney Bill Gibbons when the indictment was announced last year.

Kelsoe didn't tell his firm's compliance department and Morgan Keegan investors about the true value of his funds. According to the SEC's 2010 complaint, some of his colleagues were frustrated by his arrogance. One of them wrote in an email that even the firm's financial advisers didn't understand the funds.

"The falsification of fund values misrepresented critical information exactly when investors needed it most," said Robert Khuzami, director of the SEC's Division of Enforcement. "Such misconduct does grievous harm to investors."

Ware and Kelsoe have this in common, too: Neither of them apologized or admitted guilt. In her "retirement" letter to the city council, Ware went on and on about her personal struggles, illness, service, and dedication. Only in a separate document accepting diversion did she acknowledge the facts of the criminal complaint against her. Kelsoe was charged in an administrative proceeding. Investors have heard nothing at all from him.

You wonder. What if Ware and Kelsoe had simply told the truth when it counted? Ware could have said, "People, you are wearing me out. Inspection is a pain. Deal with it. I have better things to do." Kelsoe could have told compliance, "We can take a hit now or risk a much bigger one down the road." But they didn't.

In his new book Tangled Webs, author and journalist James Stewart says lying and perjury are undermining America.

"A society that depends only on prosecutors and the judicial system to curb perjury will never succeed," he writes. "It must be stopped when it happens by others who recognize it for what it is and condemn it. It requires a capacity for moral outrage. ... But the ultimate responsibility for lying rests with the liar."

Wednesday, June 22, 2011

Will the Rich Save Us?

Memphis Tomorrow: On compensation, do as we say, not as we do.

Posted By on Wed, Jun 22, 2011 at 5:06 PM

All together now ... tighten your belt, share the sacrifice, and be thankful you have a job that gives you an annual raise of 2 or 3 percent and a 401(k) plan, if that.

Such are the buzz phrases of budget making in a recession. It looks like some of the casualties could be public golf courses and tennis courts, library hours, pensions and benefits, jobs in the fire department, free chow for Memphis City Council members, and money for cutting grass.

The austerity campaign is being preached by, among others, the blue-chip business group Memphis Tomorrow. An outreach called Memphis Fast Forward urged elected officials to shrink government, appoint a private-sector advisory committee of financial experts, and overhaul fees, fines, and pensions.

It is against raising property taxes but in favor of using tax incentives to lure businesses to Memphis or keep them here. And it is wary of public unions but for lavish spending on corporate executives as long as it is "market-based."

While the wages and benefits of ordinary Memphians are declining or stable, the 24 members of Memphis Tomorrow have recovered from the recession and then some. At least eight of them made more than $2 million last year. Such salaries don't merit a second glance in The Wall Street Journal, but they're jarring in the context of Greater Memphis, particularly with the recent focus on members of the AFSCME union for sanitation workers.

As The Washington Post reported this week in a story by Peter Whoriskey, "With executive pay, rich pull away from the rest of America." Income disparity has reached levels not seen since the Great Depression. In Memphis, the median household income is $53,000 a year. Mayoral appointees making $65,000 a year get public criticism and media scrutiny. Memphis mayor A C Wharton makes just over $170,000, but I'm guessing that in the eyes of Memphis Tomorrow he's worth more.

Memphis Tomorrow was started in 2001 as a "do-tank" (as opposed to a think tank) by businessmen Dean Jernigan and Joseph R. Hyde III. According to the organization's website, "members are the men and women who lead Memphis' largest enterprises. Together they generate over $50 billion in annual revenues and employ more than 80,000 local people." They have been involved in the consolidation push, the Shelby Farms Conservancy, and Operation Safe Community. There is turnover when a member such as former Pinnacle Airlines CEO Phil Trenary retires or leaves Memphis. Don't call them, they'll call you.

Here is a list of the members of Memphis Tomorrow. Compensation figures are taken from the most recent public documents available. Tennessee does not have an income tax, and Memphis does not have a payroll tax.

Bill Rhodes, chairman of Memphis Tomorrow's executive committee, president and CEO of AutoZone: $3,809,927.

Steve Reynolds, president of nonprofit Baptist Memorial Health Care Corp.: $4,149,406.

Bryan Jordan, president and CEO of First Horizon: $3,573,270.

Gary Shorb, co-chair of Memphis Fast Forward, CEO of nonprofit Methodist Healthcare: $1,293,801.

Eric Bolton Jr., chairman and CEO of Mid-America Apartment Communities: $1,410,687.

John Faraci, chairman and CEO of International Paper: $17,849,343.

David Bronczek, president and CEO of FedEx Express: $5,328,017.

John Carson, CEO of Morgan Keegan: $2,217,324.

Kriner Cash, superintendent of Memphis City Schools: $270,000.

Richard Shadyac Jr., CEO of nonprofit ALSAC/St. Jude Children's Research Hospital: $210,941.

William Evans, director and CEO of nonprofit St. Jude Children's Research Hospital: $795,538.

Shirley Raines, president of the University of Memphis: $297,848.

The compensation of the following members is undisclosed: Steven Fitzpatrick (Accredo Health); Ben C. Adams, attorney; Joseph DeVivo (Smith & Nephew Orthopaedics); Martha Beard (the Federal Reserve Bank of St. Louis); and O. Mason Hawkins (Southeastern Asset Management).

Also, Joseph R. Hyde III (chairman of the Hyde Family Foundation); Tom McGuinness (Biologics); Hank Mullany (ServiceMaster); Johnny B. Moore Jr. (SunTrust Bank); Joseph Pepe (president and publisher of The Commercial Appeal); Diane Rudner (the Plough Foundation); and David Slott (American Residential Services).

The group is not very diverse. It includes three African Americans and three women. While they are not necessarily the most highly paid Memphians, they are, as baseball player Dizzy Dean once said, "amongst 'em."

Wednesday, June 15, 2011

“There’s No Music”

How race and the lack of a 13th member change City Council dynamics.

Posted By on Wed, Jun 15, 2011 at 11:44 AM

Since 1995, the Memphis City Council has had an uneasy and unofficial working arrangement that acknowledges the fact that seven members are black and six are white.

That has changed this year with the forced absence of black council member Barbara Swearengen Ware because of her alleged involvement in a car-inspection kickback scheme. The council is now evenly divided between blacks and whites, and a vote along racial lines is possible next week when it takes up the budget.

A budget must be approved before the end of June. So far, so-called shared sacrifice proposals from Mayor A C Wharton and various council members have flopped. Last week the council voted 8-4 against a proposal from Councilman Harold Collins to increase property taxes 18 cents, but that was basically a parliamentary move that did not settle the issue.

Raising the tension at City Hall, along with the absence of Ware — a veteran known for her budget savvy and civil rights credentials — is another proposal to privatize the city's sanitation department. Several members of the AFSCME union came to last week's meeting wearing T-shirts or carrying signs saying "I Am A Man." Privatization proponents Kemp Conrad and Reid Hedgepeth were targeted in a YouTube video that compared them to Henry Loeb, the mayor of Memphis during the 1968 strike that led to the assassination of Dr. Martin Luther King Jr.

The net effect of all of this is gridlock, an unbalanced budget, and some hard feelings. Council chairman Myron Lowery, who has served since 1991, says members are aware of the negative message sent by votes along racial lines and work to avoid them when they can. But that's tough to do this year.

"Lets face it, in this case, the 13th member is African-American and we have a majority African-American council, and the main subject that has hit us this year has been sanitation workers," he said. "And that is an emotional issue that lends itself to history and sensitivity of African-Americans because of the '60s."

Councilman Shea Flinn, who is white and joined the council in 2008, put it another way.

"A vote only matters if it creates or breaks a tie. We are conscious of the racial divide and oftentimes go to great lengths to avoid it," he said. "Members who don't want it to be a black-white vote concede some stuff. But now it's like there's no music at the dance. Everyone retreats to their corner."

He said the budget experience this year has been "awful" and was made worse by the videos featuring members of Conrad's and Hedgepeth's families in campaign clips juxtaposed with documentary clips from 1968. AFSCME has denied making the videos, which appear under the "Tennessee Labor" banner.

On Collins' motion to hike property taxes by 18 cents, black council members Wanda Halbert and Edmund Ford Jr. joined their six white colleagues in opposition.

Halbert said she is unsatisfied with the options on the table so far but could possibly vote for a tax increase as a "last resort." Ford did not rule out changing his vote but also said a tax increase "needs to be last on our list." He said Collins' proposal "was not a good offset" for the discarded proposal to privatize parking meters and raise some $20 million in a one-time deal.

Several weeks ago, Flinn proposed a "one-time special assessment" to property owners to settle the lingering $57 million debt to Memphis City Schools. He said he has "not seen the council take anything out of the budget" that would make him vote for a permanent property tax increase.

The history of Memphis for at least 50 years has been driven by race. Legal remedies, such as busing and the 1991 federal court ruling eliminating runoffs in mayoral and at-large city elections, have had unintended results. White candidates can win African-American district races if multiple black candidates split the vote, and some black candidates have won at-large elections, including Minerva Johnican in 1983 and Lowery and Kenneth Whalum Sr. in 1995, when blacks first became a majority on the city council.

Lowery said that, except for the AFSCME issue, the budget conflicts are not so much issues of race as they are differences of philosophy. But he sees another storm coming this summer.

"Mark this: The story in the next months will be redistricting," he said. "Raleigh is becoming blacker than anticipated."

Raleigh is represented by Bill Morrison, one of the council's six white members.

Wednesday, June 8, 2011

Do You Feel Sick?

Paid time off gets a hard look in budget discussions.

Posted By on Wed, Jun 8, 2011 at 10:31 AM

A little bit sick is how I felt when I saw that city of Memphis employees get, on average, 55 paid days off every year, including 18 "sick days" that can be accumulated and rolled over year after year.

My first reaction was that if you get 55 paid days off every year then you are either working in France or a senior member of the United Auto Workers. And if you miss 18 days a year at work because you are sick, then maybe you should change your lifestyle or think about retirement.

With 18 accumulated sick days you could take off the month of January and come back to work knowing that you still had 12 holidays, a few weeks vacation, and 18 more sick days to use or bank. Hearty employees who don't use their sick days each year get four bonus days off.

Pretty sweet package? Yes and no. On closer inspection, the city and county benefits deals are not quite the bonanza they appear to be at a glance.

The sick-days policy and the broader issue of holidays and vacation days are on the table this year in budget discussions. Memphis mayor A C Wharton has proposed cutting the number of paid holidays from 13 to one as a money-saving measure in lieu of layoffs or salary reductions. City councilman Kemp Conrad zeroed in on the "average 55 days off work per year" in his "City of Memphis Reform Plan" last week. He proposed a cap of 30 to 35 paid days off per year.

With politicians always insisting that they are "cutting the fat," it's surprising that this focus on benefits has not happened sooner. I asked Dick Hackett, mayor of Memphis from 1982 to 1991, about it, and he said the debates in his day nibbled around the edges. There was a brouhaha over an additional Martin Luther King Jr. holiday and another one over accumulated overtime.

Hackett himself accumulated some $70,000 worth of accrued vacation and sick leave days as mayor, mayoral assistant, and county clerk. Like his mayoral successor, Willie Herenton, he liked to say that he rarely missed a day at work.

Sick days have been something of a sacred cow, but no more.

"This is a national trend," said Hackett. "It's probably the biggest issue in human resources departments in the public and private sector all over the country."

The biggest private-sector employer in Memphis, FedEx, doesn't give its employees a set number of sick days each year and does not let employees accumulate sick time and get paid for it, said spokeswoman Sally Davenport.

"If you are sick you stay home," she said, adding that department supervisors can ask for confirmation from a doctor in some cases.

The city and county benefits plans are less generous than they were 20 years ago. Bonus days have to be used within a year and cannot be accumulated. Elected officials don't earn sick leave. The maximum number of sick days per year is 18 for employees hired after 1993. They can be accumulated indefinitely, but a retiring employee can only get paid for 75 unused sick days on a maximum salary of $20,000, which works out to $5,700. Theoretically, an employee could call in sick 18 days every year, but a supervisor is supposed to check it out after three days, according to the policy manual.

Conrad said his budget ideas are "reasonable and doable, but some are harder than others." He proposes putting a cap on paid time off of 30 to 35 days a year for all employees, except those in public safety whose shift differentials mandate a different standard. He did not put a dollar-figure on the estimated savings, but he says it stands to reason that capping paid time off would require fewer people in city government.

"The mayor is the one guy who can put together a broad coalition for a reasonable package of budget reforms," said Conrad. "I would like to see him lead on it this year. He has the most political capital of anyone."

Wharton's proposed balanced budget has $60 million in cuts and new revenue from one-time sources. A cap on paid days off is an attention grabber and may well be reasonable and doable. Any politician who thinks 55 days a year and a rollover is standard practice in this economy should hold a town hall meeting and ask for a show of hands from people who get that from their employer.

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