TOP STORIES--JUNE 16-21
Former and Current Rite Aid Execs Indicted
A federal grand jury indicted four former and current executives of the Rite Aid Corp. drugstore chain on charges of running a massive accounting fraud.
The grand jury alleged that Rite Aid’s former chief executive, Martin Grass, and other senior executives used bogus accounting maneuvers to inflate the company’s 1998 and 1999 earnings.
When the accounting practices later were questioned, the company made the biggest restatement of earnings in U.S. corporate history.
The case was the latest in the recent spate of corporate accounting revelations, which have spurred government regulators to propose the creation of a new accounting oversight board that would impose broad sanctions for wrongdoing.
Meanwhile, the Senate Banking Committee approved an accounting industry reform bill that would limit the amount of consulting firms could provide to companies they audit.
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Forecasters See Slow but Steady Recovery
UCLA business forecasters predict sluggish economic growth for the remainder of the year but see no evidence of a second recessionary dip.
Recent data showing flagging consumer confidence and a slowdown in retail spending have heightened nervousness that the recovery will falter.
But the quarterly UCLA Anderson Forecast says that, barring some unexpected shock, the U.S. and California economies should continue their slow but steady rebound.
Separately, a survey conducted by the Anderson Forecast showed that many employers are expecting health insurance rate increases of 20% or more and are preparing to make substantial changes in health plans to shift more of the burden of rising premiums to workers.
Most of the respondents said they were expecting health premiums to jump by double-digit percentages in the coming year.
As a result, about 75% of the managers polled said they were somewhat or very likely to substantially revise their companies’ health plans when annual renewals come up.
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U.S. Probing Memory Chip Manufacturers
The Justice Department has launched an antitrust investigation into whether semiconductor manufacturers manipulated prices in the $11.2-billion memory chip market.
Federal investigators issued subpoenas to Micron Technology Inc., Samsung Electronics Co. and Infineon Technologies.
In addition, Hynix Semiconductor Inc. received a request from U.S. regulators for information.
The investigation comes as the memory chip business struggles with weak demand for personal computers.
The four companies control 80% of the global market for dynamic random access memory, or DRAM, chips used in personal computers and other electronic devices.
Analysts estimate that Micron and Samsung each have a 25% share of the DRAM market, while Hynix has 20% and Infineon has about 10%.
Justice Department officials declined to answer questions about the investigation.
The companies said they would cooperate.
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IRS Can Estimate Tip Income, Justices Rule
The U.S. Supreme Court dealt restaurant owners a tax defeat, ruling that the Internal Revenue Service can use an estimate of tips received by servers and bartenders when determining tax bills.
The 6-3 ruling upholds a move by federal tax collectors to force employers to pay the 7.65% Social Security tax on all income, including tips, received by their workers.
The decision could help the IRS collect more taxes from tipped employees, if it results in restaurants requiring employees to more accurately report their tip incomes. Employees typically underreport such income to their employers.
The restaurant industry said the ruling could push struggling operators into insolvency.
But others painted a much less grim scenario. Richard Martin, managing editor of Nation’s Restaurant News, said the new method for calculating employees’ taxable income would add only pennies to the cost of a typical meal.
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Nonsmoker Wins Damages in Suit
The tobacco industry suffered two significant defeats, including its first in a secondhand-smoke case when a Miami jury awarded $5.5 million to a flight attendant who claimed she suffered sinus inflammation from working in smoky airplane cabins.
The size of the award was particularly striking because sinusitis is not a life-threatening illness and attorneys for plaintiff Lynn French, 56, had sought only $1 million in damages.
The award was intended as compensation for past and future pain and suffering, and French’s fear of getting cancer.
Philip Morris USA and R.J. Reynolds Tobacco Co. said they would ask Miami-Dade Circuit Judge Fredricka G. Smith to set aside the verdict. Failing that, they would appeal.
In a separate case, a U.S. District Court judge in Kansas City, Kan., set a $15-million punitive damages award against R.J. Reynolds in a case brought by a sick smoker of the company’s cigarettes.
The damages were in addition to $200,000 in compensatory damages awarded by the jury in February.
The company called the punitive damages excessive.
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XO Seeks Protection From Creditors
XO Communications Inc., a debt-laden telephone and Internet service provider founded by mobile phone pioneer Craig McCaw, added its name to the carnage in the telecom industry by filing for Chapter 11 bankruptcy protection.
The Reston, Va., company, which financiers Carl Icahn and Theodore J. Forstmann briefly haggled over this year, said it will try to complete a pending $800-million deal made in January with Forstmann’s company and Telefonos de Mexico. The offer will expire Sept. 15.
If it can’t complete the deal, the company said, it will go with its backup plan to raise $250 million, initially from shareholders, and remain a stand-alone operation.
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Reports Detail Payments by Global Crossing
In the months before filing for bankruptcy protection, Global Crossing Ltd. shelled out millions of dollars in cash to executives, consultants and companies with ties to Global Crossing officers.
The payments are included in the financial statements that list bills, salaries, severance, expense reimbursements and other items paid in 2001 by Global Crossing Ltd. and subsidiary Global Crossing Development Co.
The company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on Jan. 28.
The financial reports, part of the company’s Bankruptcy Court proceedings, are of interest to Global Crossing’s many creditors, who will comb the statements for signs of inappropriate--or fraudulent--payments that can be reclaimed to boost any potential payback.
The company, which has offices in Beverly Hills, declined to comment on the specifics in the report.
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Dixie Chicks, Sony End Feud With New Deal
After suing Sony Corp. for breach of contract, the musical group Dixie Chicks signed a lucrative new pact with the record company with an estimated $20-million signing advance.
The deal was made after the country music trio went public with its complaint that Sony was shortchanging the group on royalties.
Under the new pact, the group is required to reimburse Sony for about $15 million from record sales before collecting royalties, the rate of which was increased to about 20%.
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Southwest Plans New Boarding System
Southwest Airlines is retiring a waxy piece of airline history: plastic boarding cards.
The low-fare carrier, which doesn’t use assigned seating, is phasing out the reusable colored cards that have been a staple of the airline since its founding three decades ago.
Over the next two weeks, Southwest will shift to an automated system in which passengers will get a paper boarding pass at the ticket counter or at other locations in the airport, instead of waiting in line at the boarding gate for the plastic card.
With increased security and long lines at the airport since Sept. 11, waiting in one more line for the boarding card became too much of a nuisance, Southwest said.
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For a preview of this week’s business and economic news, please see Monday’s Business section.
