Washington, D.C., November 20, 2008—The notorious tobacco Master Settlement Agreement (MSA) was signed 10 years ago this month by 46 state attorneys general and major tobacco companies. The deal imposed a $250 billion hidden tax on smokers and set up a cartel between the states and Big Tobacco, all without any elected official openly taking responsibility.

A new video by the Competitive Enterprise Institute re-imagines the backroom deal.

CEI is challenging the tobacco settlement in federal district court, on the grounds that states failed to get Congress to approve the deal. Article I, Section 10 of the U.S. Constitution forbids states to enter into compacts with one another without the consent of Congress.

“The tobacco Master Settlement Agreement is a corrupt, unconstitutional agreement between state attorneys general and Big Tobacco,” said Sam Kazman, CEI General Counsel. “It represents the highpoint of using lawsuits and settlement agreements to impose new taxes and regulations on citizens, and it should be halted by the courts.”

In the 1990s, state attorneys general launched massive, unprecedented lawsuits against major tobacco companies, claiming the companies owed the states for the past costs of treating sick smokers. The tobacco “Master Settlement Agreement” was signed in November 1998 by 46 state attorneys general and major tobacco companies. Four states reached separate settlement agreements.

Read more about the tobacco Master Settlement Agreement.

View CEI’s list of the Ten Worst State Attorneys General.

Washington, D.C., November 19, 2008—On a 5 to 4 split, the U.S. Court of Appeals for the D.C. Circuit this week declined to review a constitutional challenge to the Public Company Accounting Oversight Board. The Competitive Enterprise Institute, together with the law firm of Jones Day, plans to appeal the case to the U.S. Supreme Court.

“While the court’s decision is, of course, disappointing, the 5-4 split among the judges demonstrates that this is an extremely important issue. We are hopeful that the Supreme Court will accept this case for review,” said Sam Kazman, CEI General Counsel.

The plaintiffs are challenging the constitutionality of the PCAOB on the grounds that the Board violates the Appointments Clause of the Constitution, which requires that major officers be appointed by the President with the advice and consent of the Senate. The Board’s members were selected by the Securities and Exchange Commissioners acting as a body, rather than by the President or by the SEC’s chairman. This avoided the individual accountability that the Framers viewed as crucial to reining in government.

Plaintiffs had requested a rehearing by the full court after three-judge panel in August rejected this argument, in a 2-1 decision, saying that the SEC had adequate power to supervise the Board. In a lengthy dissent, Judge Brett M. Kavanaugh argued that the Board’s structure violated both the President’s appointment and removal powers, and was contrary to previous Supreme Court rulings on the issue. He characterized it as “the most important case” on the issue “in the last 20 years.”

The vote in this week’s decision to deny the petition for rehearing en banc was extremely close. Of the 9 participating judges, 4 voted for rehearing.

The plaintiffs in the case are the Free Enterprise Fund and Beckstead & Watts, a small Nevada accounting firm that was being investigated by the Board They are represented by Jones Day and CEI.

Read more about the Sarbanes-Oxley Act.

“[It] effectively imposed a massive nationwide cigarette tax increase, even though no elected legislator ever voted for it.”

While acknowledging the health risks of smoking, Mr. Kazman explains how tobacco taxes and regulation have become equally addictive.

Read the full article from Cigar Magazine (PDF).

Dissent Finds Constitutional Violations

Washington, D.C., August 22, 2008— In a 2-1 decision, the U.S. Court of Appeals for the D.C. Circuit today rejected a constitutional challenge to the Sarbanes-Oxley Public Company Accounting Oversight Board. The challenge had been brought by the Free Enterprise Fund and Beckstead & Watts, a small Nevada accounting firm that was being investigated by the Board.

The plaintiffs claimed that the Board violated the Appointments Clause of the Constitution, because the Board’s members were selected by the Securities and Exchange Commissioners acting as a body, rather than by the President. They argued that this resulted in a lack of the individual accountability that the Framers viewed as crucial to reining in government.

The majority rejected this argument, ruling that the SEC had adequate power to supervise the Board. In a lengthy dissent, Judge Brett M. Kavanaugh argued that the Board’s structure violated both the President’s appointment and removal powers, and was contrary to previous Supreme Court rulings on the issue. He characterized it as “the most important case” on the issue “in the last 20 years.”

Sam Kazman, general counsel for the Competitive Enterprise Institute and one of the attorneys in the case, stated: “The Accounting Board has acted in a manner befitting an unconstitutionally structured agency, imposing incredibly excessive regulations on the American economy.” While the lengthy decision was still being analyzed, a petition for rehearing by the full circuit court is likely.

Federal Accounting Board Itself Unaccountable

Washington, D.C., April 15, 2008—Today, as Americans scurried to get their tax forms into the IRS, the D.C. Circuit Court of Appeals heard arguments about another agency that can impose big fines and reams of paperwork on small businesses. The very structure of this agency makes the IRS look like a model of accountability, the Competitive Enterprise Institute and others argued in court.

The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board, giving it authority to set accounting standards, impose its own set of taxes, and open investigations of accounting firms big and small. Yet unlike counterparts wielding similar authority, such as the IRS commissioner and Federal Reserve governors, PCAOB members are never vetted by the President or by the Senate, as neither of these bodies have a say in who will be appointed.

In today’s oral argument in Free Enterprise Fund v. PCAOB, attorneys for the Jones Day law firm and for the Competitive Enterprise Institute asked a three-judge panel – consisting of the Hon. Brett Kavanaugh, Judith Rogers, and Janice Rogers Brown – to declare the PCAOB unconstitutional under the Appointments Clause of the U.S. Constitution. This clause requires that officers of the United States, wielding the authority the PCAOB does, be appointed by the president and confirmed by the Senate. This process helps ensure agencies remain accountable to elected officials and ultimately the American people.

The PCAOB’s interpretation of Sarbanes-Oxley’s section 404 has cost public companies more than $35 billion a year and has proved especially burdensome to smaller public companies. Bipartisan critics have observed that the PCAOB standards have burdened firms with minutiae while overlooking many of the practices that led to the subprime shenanigans.

As accounting issues become of increasing importance to the electorate, it’s imperative that the PCAOB be accountable to elected officials. “Next year – whether it’s President McCain, President Clinton, or President Obama – America’s new president should not be faced with a powerful government body that lacks accountability to them and members of Congress,” says John Berlau, director of CEI’s Center for Entrepreneurship. “Unaccountable government makes the American people the ultimate losers.”

For more background on the legal issues underlying today’s arguments, see CEI’s study: The Public Company Accounting Oversight Board: An Unconstitutional Assault on Government Accountability by John Berlau and Hans Bader.

Washington, D.C., February 6, 2008—A lawsuit challenging the 46-state tobacco “Master Settlement Agreement” (MSA) proceeds today, amid fresh reports of states misspending settlement revenue.

The lawsuit, brought by the Competitive Enterprise Institute, is the subject of a hearing in federal district court on Monday. The lawsuit seeks to overturn the $246 billion tobacco settlement reached by state attorneys general and major tobacco companies in 1998.

“The tobacco settlement was an unconstitutional, corrupt power grab by state attorneys general and trial lawyers,” said Sam Kazman, CEI General Counsel. “The corrupt, backroom tobacco deal imposed a massive, permanent tax on consumers and funded countless wasteful government programs, without helping a single sick smoker,” said Kazman.

The case against the settlement proceeds just as new reports emerged about wasteful spending of the settlement money. In Virginia, for example, lawmakers have questioned whether more than $1 billion in settlement money had been spent well (see story). In fact, the Government Accountability Office reports annually on how states are spending settlement money and found that very little of it goes to health or smoking-related programs.

The CEI lawsuit alleges that the tobacco Master Settlement Agreement violates the Compact Clause of the Constitution, which explicitly prohibits states from entering into agreements (“compacts”) with one another without the consent of Congress.

“We want to send a message to states and to attorneys general, in particular, that they are not above the law,” said Kazman. “The Founding Fathers wanted to explicitly put Congress in charge of the power of states to form multi-state agreements. Looking at the tobacco settlement, which was used to force even the most reluctant states to join, it’s understandable why the Founders were suspicious of multi-state agreements.”

Washington, D.C., July 17, 2007—The Senate health committee on Wednesday is scheduled to mark up a bill that would put the Food and Drug Administration in charge of regulating tobacco, despite major problems associated with the agency’s current regulatory duties.

“Tobacco does not need FDA regulation, and regulating tobacco is the last thing that FDA needs to being doing,” said Sam Kazman, General Counsel for the Competitive Enterprise Institute. “The agency is already performing poorly in making new drugs available to the public, and a major new regulatory program would only worsen that situation.”

A recent CEI survey of orthopedic surgeons, for example, showed that most of these specialists view the current FDA approval process as already too slow. And a CEI report explains why FDA already labors under a deadly culture of risk aversion, which unnecessarily delays product approvals.

“Ultimately, FDA’s inclinations are ‘prohibitionist’; it would come as close as it could to making cigarettes unpalatable, unaffordable, and possibly unavailable,” Kazman explained.

The FDA-tobacco bill is troubling for other reasons, too.

“Philip Morris sees FDA regulation as a major competitive advantage,” said Kazman. “As the dominant company in the industry, Philip Morris is able to absorb regulatory costs that many competitors cannot.”

Washington, D.C., March 21, 2007— A federal district judge on Wednesday dismissed a constitutional challenge to the Public Company Accounting Oversight Board (PCAOB) brought by the Competitive Enterprise Institute and the Free Enterprise Fund. The case will be appealed to the circuit court. Read the decision.

The lawsuit, filed on February 7, 2006, alleges that the PCAOB violates the appointments clause (Article II Section 2) of the U.S. Constitution, which grants the power to appoint high level government officials to the President, the courts, or the heads of departments– not a commission such as the Securities and Exchange Commission. The PCAOB was created by Congress as part of the Sarbanes-Oxley Act of 2002.

The board wields great power over the businesses it regulates, and its regulations and mandates have produced costly and unintended consequences for publicly traded U.S. businesses, as well as for entrepreneurs and capital markets. Yet it is entirely unaccountable to any elected official. The board’s five members are appointed for five-year terms, not by the President or the head of an executive branch, but by the SEC acting as a collective body.

Statement by John Berlau, Director of the Center for Entrepreneurship:

The court said that PCAOB members are appointed by a multimember body—the SEC– not by the head of an agency, as required by the Constitution but that, in this particular case, the error was harmless, because the SEC’s Chairman voted for them.  But when constitutional safeguards are at stake, there are no harmless errors.

The appointment scheme for members of the Public Company Accounting Oversight Board, created by the law when Congress passed it in 2002, violates what the Framers saw as one of Constitution’s core provisions to ensure accountability in government.  And the importance of the Appointments Clause has been recognized by Supreme Court justices across the political spectrum. In a sense, Congress’s mistake in vesting appointment of the Board collectively in all the SEC Commissioners, rather than the SEC Chairman, allowed the court to throw this case out on a technicality.

The case, Free Enterprise Fund v. The Public Company Accounting Oversight Board, was filed in U.S. District Court for the District of Columbia. Plaintiffs include the Free Enterprise Fund and Beckstead and Watts, LLP, a small Nevada accounting firm. CEI is co-counsel in the case.

Washington, D.C., December 20, 2006—Tomorrow the U.S. District Court of the District of Columbia will hear arguments in a lawsuit brought by the Free Enterprise Fund and the Competitive Enterprise Institute to have the Public Company Accounting Oversight Board declared unconstitutional. The Board was created under the Sarbanes-Oxley Act of 2002 to regulate the auditing of American businesses.

The Fund and CEI, along with a small accounting firm nearly forced out of business by the Board, are asking the Court to declare it unconstitutional under the Appointments Clause of the Constitution. That clause requires major government officials to be appointed by the President and confirmed by the Senate. However, the five-member accounting oversight board is virtually a quasi-private organization with no accountability to the President or the Congress that created it. It has the power to micro-manage companies’ accounting procedures, impose taxes, and fine companies up to $2 million. Complying with the Board’s rules cost the economy more than $35 billion in its first year alone.

Read CEI’s study: The Public Company Accounting Oversight Board: An Unconstitutional Assault on Government Accountability.

In 1998, state attorneys general and Big Tobacco formed a tobacco cartel as part of the biggest settlement agreement in history. In exchange for $240 billion paid by major tobacco companies and their consumers, states agreed to protect Big Tobacco from smaller competitors.

“If state attorneys general are going to lean on Hollywood to promote an anti-smoking message, they should also warn consumers about an addictive threat—the $240 billion tobacco racket that hooks state governments on tobacco revenues, undermines democracy, and enriches trial lawyers,” said Sam Kazman, CEI’s general counsel.

“Right after the anti-smoking announcement, all movies could feature an announcement warning Americans against phony lawsuit settlements that do more to fill state coffers and help tobacco companies than to improve public health,” said Kazman.

Of the billions of dollars states have so far received from the tobacco settlement, they’ve never spent more than 5 percent of it on tobacco control programs, according to an annual survey by the General Accounting Office. Instead, most of the money has been spent on budget shortfalls and health programs unrelated to treating sick smokers.

Meanwhile, trial lawyers who worked on contingency contracts during the state tobacco lawsuits of the 1990s walked away with an estimated $13 billion windfall.

Thirty-two state attorneys general sent a letter to Hollywood film studios on Wednesday regarding the anti-smoking PSA initiative. The AGs involved represent Alaska, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Hawaii, Iowa, Idaho, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, Washington, Wisconsin, West Virginia, and Wyoming.