By Chad Terhune and Keith Epstein

As the health reform fight shifts this month from a vacationing Washington to congressional districts and local airwaves around the country, much more of the battle than most people realize is already over. The likely victors are insurance giants such as UnitedHealth Group, Aetna, and WellPoint. The carriers have succeeded in redefining the terms of the reform debate to such a degree that no matter what specifics emerge in the voluminous bill Congress may send to President Obama this fall, the insurance industry will emerge more profitable. Health reform could come with a $1 trillion price tag over the next decade, and it may complicate matters for some large employers. But insurance CEOs ought to be smiling.

Executives from UnitedHealth certainly showed no signs of worry on the mid-July day that Senate Democrats proposed to help pay for reform with a new tax on the insurance industry. Instead, UnitedHealth parked a shiny 18-wheeler outfitted with high-tech medical gear near the Capitol and invited members of Congress aboard. Inside the mobile diagnostic center, which enables doctors to examine distant patients via satellite television, Representative Jim Matheson didn’t disguise his wonderment. “Fascinating, fascinating,” said the Democrat from Utah. “Amazing.”

UnitedHealth on Capitol Hill

Impressing fiscally conservative Democrats like Matheson, a leader of the House of Representatives’ Blue Dog Coalition, is at the heart of UnitedHealth’s strategy. It boils down to ensuring that whatever overhaul Congress passes this year will help rather than hurt huge insurance companies.

Some Republicans have threatened to make health reform Obama’s “Waterloo,” as Senator Jim DeMint of South Carolina has put it. The President has fired back at what he considers GOP obstructionism. Meanwhile, big insurance companies have quietly focused on what they see as their central challenge: shaping the views of moderate Democrats.

The industry has already accomplished its main goal of at least curbing, and maybe blocking altogether, any new publicly administered insurance program that could grab market share from the corporations that dominate the business. UnitedHealth has distinguished itself by more deftly and aggressively feeding sophisticated pricing and actuarial data to information-starved congressional staff members. With its rivals, the carrier has also achieved a secondary aim of constraining the new benefits that will become available to tens of millions of people who are currently uninsured. That will make the new customers more lucrative to the industry.

Matheson, whose Blue Dogs command 52 votes in the House, can’t offer enough praise for UnitedHealth, the largest company of its kind. “The tried and true message of their advocacy,” he says, “is making sure the information they provide is accurate and considered.”

Representative Mike Ross, an Arkansas Democrat who leads the Blue Dogs’ negotiations on health reform, also welcomes input from UnitedHealth. “If United has something to offer on cutting costs, we should consider it,” says Ross, a former small-town pharmacy owner. “We need more examples that work, and everything should be on the table.”

DEMOCRATIC WELCOME

Fifteen years after the insurance industry helped kill then-President Bill Clinton’s health-reform initiative, Ross is frustrating the Obama White House by opposing proposals for a government-run insurance concern that would compete with private-sector companies. The President argues that without a public plan, premiums and medical bills will remain prohibitively high. Ross and Matheson have given strong voice to the industry’s contention that such a public insurer would actually reduce competition by undercutting private plans on price and driving them out of business. “We have concerns about a public option if it’s not done on a level playing field,” Ross says.

Obama launched his Administration vowing to extend coverage to all Americans and help pay for it by reining in insurance costs. Seven months later, insurers and pharmaceutical manufacturers that appeared vulnerable to a regulatory crackdown have been welcomed to the negotiating table by the President’s own party.

The several competing bills pending in Congress would guarantee all Americans access to health coverage, addressing the plight of the 47 million who are now uninsured. Congress plans to achieve that by expanding Medicaid, the government program for the poor and disabled; requiring insurers to accept all applicants regardless of their health; and mandating that everyone purchase coverage. Government subsidies would make the obligatory coverage more affordable. The legislation would do little, however, to slow spending by Medicare, the public program for senior citizens, or cut overall medical costs. Congress is considering taxes on the wealthy and on benefits now provided to many white-collar workers.

During the UnitedHealth road show in July, Democrat after Democrat clambered into the company’s promotional vehicle beneath a sign declaring: “Connecting You to a World of Care.” Judah C. Sommer, who heads the company’s Washington office, looked on with satisfaction. “This puts a halo on us,” he explained. “It humanizes us.”

And that Democratic proposal to tax insurance companies? It seems to be fading after the industry said it would raise rates for workers and their families.

UnitedHealth’s relationship with Democratic Senator Mark R. Warner of Virginia illustrates the industry’s subtle role. Elected last fall, Warner, a former governor of his state and a wealthy ex-businessman, received a choice assignment as the Senate Democrats’ liaison to business. The rookie senator landed in the center of a high-visibility political drama—and in a position to earn the gratitude of a health insurance industry that has donated more than $19 million to federal candidates since 2007, 56% of which has gone to Democrats.

UnitedHealth has periodically served as a valuable extension of Warner’s office, providing research and analysis to support his initiatives. Corporations and trade groups play this role in all kinds of contexts, but few do it with the effectiveness of the insurers. In June, Warner introduced legislation expanding government-backed Medicare and Medicaid coverage for hospice stays for the terminally ill and other treatment in life’s final stages. The issue isn’t a top UnitedHealth priority. But the corporation wanted to help Warner with his argument that in the long run, better hospice coverage would save money. UnitedHealth prepared a report for lawmakers finding that 27% of Medicare’s budget is now spent during the last year of older patients’ lives, often on questionable hospital tests and procedures. Expanded hospice coverage and other services could save $18 billion over 10 years, UnitedHealth asserted.

When Warner went to the Senate floor on June 15 to offer his bill, he cited those exact figures. He thanked the company for its support and put a letter from UnitedHealth applauding him in the Congressional Record.

Warner acknowledges in an interview that he worked on the hospice-care legislation with UnitedHealth executives. But he stresses that he has long experience with health issues and has formed his own views. The senator echoes UnitedHealth’s contention that a so-called public option could be a “Trojan horse for a single-payer system,” meaning government-run medical care. Warner has heard from some of UnitedHealth’s largest employer clients, such as Delta Air Lines. Delta CEO Richard H. Anderson, a former UnitedHealth executive, has told Warner and other lawmakers that big companies don’t want government to limit their flexibility in crafting employee health benefits.

ACTUARIAL ASSUMPTION

Obama’s promise to boost competition and lower costs by having the government play a much broader role in health coverage has been steadily compromised because of the resistance of such Democrats as Warner. “There are different ways to skin this and get competition” in the insurance market, Warner says.

Warner and other opponents of a public plan have relied on an estimate by John Sheils, an actuary who says that 88 million people, or 56% of those with employer-provided coverage, would desert private insurance for a government-run program. That would destabilize the marketplace and potentially kill the private insurance industry, according to Sheils, who works for the Lewin Group, a corporate consulting firm in Falls Church, Va.

UnitedHealth lobbyists routinely cite Lewin’s work, as do Senator Orrin G. Hatch (R-Utah), the second-ranking Republican on the Senate Finance Committee, and Eric Cantor (R-Va.), the House Republican Whip. Left out of these testimonials or buried in the fine print is that a UnitedHealth unit owns the Lewin Group and thus is ultimately responsible for Sheils’ paycheck. In an interview, Sheils says UnitedHealth gives him and the Lewin firm complete independence: “We call it like we see it,” he adds.

Some Democrats differ. Says Representative Pete Stark, the liberal California Democrat who chairs the House Ways & Means health subcommittee: “The Lewin Group’s so-called analysis is suspect.” The nonpartisan Congressional Budget Office has stated that the Sheils-Lewin figure is far too high.

UnitedHealth brings a mixed record to its role helping to guide health reform. The company has repeatedly hit smaller employers and consumers with double-digit rate hikes in recent years, far greater than the overall rate of inflation. An investigation last year by New York’s Attorney General will force the company to stop running two huge databases used widely within the insurance industry. By allegedly setting medical reimbursements too low—that is, skewing statistics in favor of insurers by understating “usual and customary” physician fees—the databases had resulted in the overcharging of consumers by billions of dollars nationwide. In January, UnitedHealth agreed to resolve the situation by paying $400 million in a pair of agreements with the New York Attorney General and the American Medical Assn., although it didn’t admit any wrongdoing.

In a separate case last year, UnitedHealth was forced to stop selling “limited benefit” plans with capped payouts under the imprimatur of the senior citizen group AARP. It turned out that the policies provided very modest coverage, catching many customers off guard, according to Senator Charles E. Grassley (R-Iowa), who helped bring the practice to light. Grassley pointed out that UnitedHealth paid as little as $5,000 toward surgery costing several times as much.

Despite such episodes, UnitedHealth is generally well received in legislative circles in Washington. In late May its in-house point man on reform, Simon Stevens, hand-delivered a report to key senators detailing ways to save an estimated $540 billion in federal spending over 10 years. A week later, on June 4, Stevens accompanied UnitedHealth’s chief executive, Stephen J. Hemsley, to a meeting with Senator Kent Conrad (D-N.D.), an influential moderate member of the Senate Finance Committee. Conrad has since led an effort to create nonprofit medical cooperatives that would operate much like utility co-ops as a substitute for a federally run plan. With less heft than a proposed national plan, the state medical cooperatives would pose a far weaker competitive threat to private insurers.

Conrad says in an interview that the co-op idea evolved independently of any industry input. Skirmishing over the public plan could jeopardize efforts at reform, he warns. Co-ops, he argues, are “the only alternative that’s got much of a shot” to gain sufficient votes in the Senate.

BRITISH EXPERIENCE

UnitedHealth followed up on June 30 with another report for lawmakers pinpointing $332 billion in savings through better use of technology and administrative simplification. If enacted, those changes would potentially benefit UnitedHealth’s Ingenix data-crunching unit. Ingenix, with annual revenue of $1.6 billion, is poised to establish a national digital clearinghouse to ensure the accuracy of medical payments and provide a centralized service for checking the credentials of physicians.

UnitedHealth's Stevens

Stevens, an Oxford-educated executive vice-president at UnitedHealth, once served as an adviser to former British Prime Minister Tony Blair. In that capacity, Stevens tried to fine-tune the U.K.’s nationally run health system. Today he tells lawmakers that the U.S. need not follow Britain’s example. Concessions already offered by the U.S. insurance industry—such as accepting all applicants, regardless of age or medical history—make a government-run competitor unnecessary, he argues. “We don’t think reform should come crashing down because of [resistance to] a public plan,” Stevens says. Many congressional Democrats have come to the same conclusion.

UnitedHealth has traveled an unlikely path to becoming a Washington powerhouse. Its last chairman and chief executive, William W. McGuire, cultivated a corporate profile as an industry insurgent little concerned with goings-on in the capital. From its Minnetonka (Minn.) headquarters, the company grew swiftly by acquisition. McGuire absorbed both rival carriers and companies that analyze data and write software. Diversification turned UnitedHealth into the largest U.S. health insurer in terms of revenue. In 2008 it reported operating profit of $5.3 billion on revenue of $81.2 billion. It employs more than 75,000 people.

In 2006, McGuire lost his job after getting caught up in the manipulation, or “backdating,” of company stock options. UnitedHealth was forced to restate earnings over a 12-year period to reflect the extra compensation it had granted McGuire and other executives. McGuire’s chief lieutenant, Stephen Hemsley, took over as CEO in December 2006. Two independent inquiries concluded that Hemsley wasn’t involved with the backdating. Nevertheless he forfeited $190 million in past stock compensation and unrealized gains to resolve the matter.

CEO Hemsley

Hemsley, a former chief financial officer of the now-defunct Arthur Andersen accounting firm, generally shuns the spotlight. But when health reform became a central issue in the runup to the last Presidential election, company executives say they realized UnitedHealth needed to go on the offensive. Hemsley met with White House officials on May 15 and May 22 to promote his company’s prescription for cutting federal health spending.

In August 2007, the company hired Sommer, who previously headed global lobbying for Goldman Sachs (GS). He quickly built a new Washington team of former congressional aides and other K Street operatives. One key acquisition: Cory Alexander, former chief of staff for House Majority Leader Steny Hoyer (D-Md.), an influential moderate Democrat. Alexander had been lobbying for the huge mortgage financier Fannie Mae (FNM). Today, Sommer directs a team of nearly 50 people from UnitedHealth’s spacious Washington office on Pennsylvania Avenue, equidistant between the Capitol and White House. The company spent more than $3.4 million on in-house and outside lobbying in the first half of 2009.

Sommer has retained such influential outsiders as Tom Daschle, the former Democratic Senate Leader who now works for the large law and lobbying firm Alston & Bird. Daschle, a liberal from South Dakota, dropped out of the running to be Obama’s Secretary of Health & Human Services after disclosures that he failed to pay taxes on perks given to him by a private client. He advised UnitedHealth in 2007 and 2008 and resumed that role this year. Daschle personally advocates a government-run competitor to private insurers. But he sells his expertise to UnitedHealth, which opposes any such public insurance plan. Among the services Daschle offers are tips on the personalities and policy proclivities of members of Congress he has known for decades.

Conceding that he doesn’t always agree with his client, Daschle says: “They just want a description of the lay of the land, an assessment of circumstances as they appear to be as health reform unfolds.” He says he leaves direct contacts with members of Congress to others at his firm.

What people in Washington tend not to discuss, at least on the record, is the open secret that insurers are minimizing their forecasts of the eventual windfall they will enjoy from expanded coverage for Americans. UnitedHealth has given certain key members of Congress details about its finances and tax liability—both historical numbers and figures projected under various cost-sharing scenarios. But some on Capitol Hill are skeptical. “The bottom line,” says an aide to the Senate Finance Committee, “is that health reform would lead to increased revenues and profits [for the insurance industry]. … There will be [added] costs [to the companies], but we’re not sure the revenues and profits will be as low as they say.”

A fundamental question about the health overhaul is what minimum standards will apply to the coverage all Americans will be required to have. UnitedHealth has been exchanging a high volume of information on the topic with members of the Senate Finance Committee and their staff. Stevens, the former British health aide, regularly scans PowerPoint presentations generated by the committee staff that attempt to calculate the actuarial value of proposed benefit packages. Senators stung by the projected $1 trillion price tag are winnowing down the required coverage levels to cut costs.

This is good news for UnitedHealth, which benefits when patients pick up more of the tab. In late spring, the Finance Committee was assuming a 76% reimbursement rate on average, meaning consumers would be responsible for paying the remaining 24% of their medical bills, in addition to their insurance premiums. Stevens and his UnitedHealth colleagues urged a more industry-friendly ratio. Subsequently the committee reduced the reimbursement figure to 65%, suggesting a 35% contribution by consumers—more in line with what the big insurer wants. The final figures are still being debated.

Stevens says UnitedHealth and its corporate clients want to steer Congress toward benefit levels and cost sharing that can help control overall health spending: “We are providing another resource of actual modeling and advice on how proposals in the committees are structured and some potential unintended consequences of going down certain routes.”

Perhaps more than any other insurer, UnitedHealth is poised to profit from health reform. Its decade-long series of acquisitions has made the company a coast-to-coast Leviathan enmeshed in the lives of 70 million Americans.

United’s AmeriChoice unit is the largest government contractor administering state Medicaid programs for the poor and federally sponsored plans for children. AmeriChoice’s revenue rose 34% last year, to $6 billion, and it has 2.7 million people enrolled. Those numbers should continue rising under reform since congressional Democrats are proposing an expansion of Medicaid to help achieve universal coverage. More of the working poor would qualify for Medicaid, and AmeriChoice can sell itself to states as the leading service provider.

HEALTH COACH AT THE OFFICE

Another of the big beneficiaries among UnitedHealth’s stable of subsidiaries is OptumHealth. It’s the company’s one-stop shop for managing the chronically ill, offering wellness programs and guiding consumers on treatment options. Even before the reform debate, these services were growing in demand as big employers, state and local governments, and others tried to curb health-care spending by supervising patients more aggressively.

OptumHealth provides a broad range of services, from a 24-hour hotline where nurses can suggest the best hospital for a transplant to “health coaches” who dole out meal plans, to-do lists, and motivational messages. Some OptumHealth clients bring coaches into the office or onto the factory floor to teach about diet and exercise. Many of the cost-containment strategies Democrats are pushing call for more of the preventive care that OptumHealth sells.

“We are extremely well positioned for a much broader adoption,” says Dawn Owens, OptumHealth’s chief executive. Her division, based in Golden Valley, Minn., already boasts $5.2 billion in annual revenue.

Stevens argues that while UnitedHealth will likely benefit financially from health reform, the company will also aid the cause of reducing costs. He cites what he says is its record of “bending the cost curve” for major employers.

During a media presentation in May in Washington, Stevens said medical costs incurred by UnitedHealth’s corporate clients were rising only 4% annually, less than the industry average of 6% to 8%. But that claim seemed to conflict with statements company executives made just a month earlier during a conference call with investors. On that quarterly earnings call, UnitedHealth CEO Hemsley conceded that medical costs on commercial plans would increase 8% this year.

Asked about the discrepancy, Stevens says the lower figure he is using in Washington represents the experience of a subset of employer clients who fully deployed UnitedHealth’s cost-saving techniques, including oversight of the chronically ill. “These employers stuck at it for several years,” he says. “We are putting forward positive ideas based on our experience of what works.”

—-

Questions About Golden Rule

A UnitedHealth subsidiary draws heat on the Hill

By Chad Terhune and Keith Epstein

Even as UnitedHealth Group has helped shape the reform debate, some lawmakers have accused it of harming consumers. Several members of the House Energy & Commerce Committee chastised UnitedHealth during hearings on June 16 and July 27 for the conduct of its Golden Rule Insurance subsidiary.

Acquired by UnitedHealth in 2003, Golden Rule has sold individual and family policies for more than 60 years. State regulators have repeatedly fined and disciplined Golden Rule for allegedly deceptive practices. In 2002 it resolved a nine-state investigation by paying $660,000, but it denied wrongdoing. Since taking over, UnitedHealth has let Golden Rule continue one of its most controversial methods: selling individual policies through a nonprofit group. This gives some buyers the misimpression they are getting group coverage and better value, regulators allege. But states have only rarely taken formal action.

House members scolded Golden Rule and other insurers for allegedly rescinding coverage entirely after sick policyholders make credible claims. Richard Collins, Golden Rule’s CEO, defended such cancellations, prompting Representative John Dingell (D-Mich.) to say: “This is precisely why we need a public option [to compete with private insurers].”

Collins responded that rescissions, used sparingly, root out fraud by dishonest consumers. That’s only fair, he added, to families who play by the rules.

Plain Dealer – Feburary 28, 1993

SERIES: DEADLY DELAYS: RED TAPE COST LIVES

Part One of a five-part series.
by KEITH EPSTEIN

PLAIN DEALER REPORTER

WASHINGTON

In swirling snow, USAir’s Flight 405 pulled away from the terminal at New York’s LaGuardia Airport, bound for Cleveland. The two men at the controls had taken the usual winter precautions, checking for ice and having the wings sprayed with antifreeze.

Moments later, as they waited for takeoff, they wished their Fokker F-28 could get a last-minute shower of de-icing chemicals the way jets do in Denver and at many European airports.

“The only sure-fire safe way,” the pilot said to his co-pilot.

They didn’t realize just how precarious their situation was.

The federal government knew for seven years.

U.S. safety officials repeatedly had pinpointed the cause of nine crashes of planes with wing designs similar to that of Flight 405 – the wing’s high vulnerability to trace amounts of ice.

Yet Washington had done nothing to require simple, proven remedies advocated for years, such as checking the wings by hand or spraying with a stronger antifreeze just before takeoff.

As a result, the pilots of Flight 405 last March were forced to use outmoded methods of coping with ice on wings. The plane barely lifted before flipping into Flushing Bay in a fiery crash that claimed 27 lives.

Passenger Denise Miller watched her father die in the final burst of flames. Miller, who now must use a wheelchair, asks: “How many plane crashes have to occur? How many people have to die, before somebody finally does something?”

These deadly delays by the federal bureaucracy are not limited to air travel.

A Plain Dealer investigation found that long after wreckage is examined for clues, causes determined and solutions urged – thousands of Americans still risk death or injury in accidents because the causes weren’t fixed.

Motorists have died because many big trucks have faulty brakes – while for 14 years the government failed to require proven solutions such as anti-lock brakes and automatic brake adjusters costing only $204.

Children trapped in school buses when front or rear doors jammed were drowned or burned – while for 19 years the government failed to require an extra emergency exit costing $557. One manufacturer has offered emergency side doors as an option since the 1950s.

Passengers have died in commuter airliners that crashed on routine approaches to airports – while for 18 years the government failed to require the same low-altitude alarms it mandated for large jets. It would seem to be a bargain for commuters even at $14,600 for each $3 million aircraft.

Engineers and conductors have died in collisions on freight trains – while for 22 years the government failed to require automated warning systems to help keep trains apart.

Pilots and their passengers died in planes whose single engines choked, sputtered and crashed – while the government failed to require $655 remedies for carburetor flaws identified in 1963 and despite efforts of the manufacturer to alert owners.

And this year more than an estimated 100 motorists will be decapitated on the nation’s highways when their vehicles slide under the rear of big trucks – while for 25 years the government failed to require a $112 protective guard.

“We know when we investigate an accident we’re going to see it again,” said Jim Burnett, former chairman of the National Transportation Safety Board.

Train crews die and poisonous gases turn neighborhoods into ghost towns because of defective track, federal safety records show. Even on the ground at the nation’s airports, commercial jets repeatedly ram one another for want of a ground radar system advocated for 20 years. Planes have collided on runways 175 times since 1982, claiming 56 lives.

“The same stupid stuff keeps happening,” observed retired federal aviation accident investigator Rudolf Kasputin, who first urged the ground radar in 1972. “It’s not just frustrating. It makes me want to throw up.”

Federal agencies have acted on only two of 18 long-ignored safety improvements identified by the safety board in 1990 as urgently needed safety improvements that could save nearly 3,000 lives each year.

Transportation Department policy makes “safety … the top priority.” Yet regulators acknowledge their increasing inability to take prompt action, even when it would save lives.

“Everything takes too long nowadays,” said Anthony J. Broderick, the Federal Aviation Administration’s associate administrator.

Transportation experts describe a bureaucracy increasingly paralyzed by fear of lawsuits from regulated industries, hobbled by conflicts with other agencies, buffeted by meddling members of Congress and political appointees, and crippled by weak leadership unable to choose priorities or stick to deadlines.

“If the average American knew how things work here, they wouldn’t believe it,” said Fred Emery, former director of the Federal Register, the official publication of government rules. “They’d think it’s a God-awful mess.”

—————–

Other stories from this series:

Ice on Jets – Recurring Risk, Tolerated for Years – Despite pinpointing causes of multiple commercial airliner crashes, Washington does nothing to require simple, proven remedies advocated for years

Flight 405: The Story of Four Passengers- Strangers on a plane, going about the routine business of flying, trusted that commercial aviation had become as safe as airlines and the government could make it.  They were wrong.

Killer Trucks – Why the Slaughter Won’t Stop – Trucks with self-adjusting brakes would have fewer accidents, causing less damage and saving hundreds of lives.  Yet the government dawdled in requiring them.

While Grownups Squabbled, Children Died – Battles between automakers and regulators for more than a decade stalled development of safer child seats.

Feds Shrug Off a Life-Saver for Commuter Planes – Commuter airline flights crashed repeatedly into the ground for lack of a simple device  urged for years by federal safety officials. The  FAA declined. Planes kept crashing.

Cessnas Crash, but Agencies Do Nothing -  For decades, Cessnas chocked from a carburetor flaw known to the manufacturer and the government. Yet pilots had never heard of the problem, and the government required no fix.

Yellow Coffins – Modern school buses are among the safest means of transport. Yet when accidents occur, children are often trapped. Still, the government for years allowed preventable tragedies to recur.

Safety Board Has No Teeth – The National Transportation Safety Board is widely known for investigating accidents. What many people don’t realize is that it’s powerless – a toothless tiger.

BusinessWeek Cover Story

February 12, 2009

By Brian Grow, Keith Epstein and Robert Berner

The bad mortgages that got the current financial crisis started have produced a terrifying wave of home foreclosures. Unless the foreclosure surge eases, even the most extravagant federal stimulus spending won’t spur an economic recovery.

The Obama Administration is expected within the next few weeks to announce an initiative of $50 billion or more to help strapped homeowners. But with 1 million residences having fallen into foreclosure since 2006, and an additional 5.9 million expected over the next four years, the Obama plan—whatever its details—can’t possibly do the job by itself. Lenders and investors will have to acknowledge huge losses and figure out how to keep recession-wracked borrowers making at least some monthly payments.

So far the industry hasn’t shown that kind of foresight. One reason foreclosures are so rampant is that banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem. Industry lobbyists are still at it today, working overtime to whittle down legislation backed by President Obama that would give bankruptcy courts the authority to shrink mortgage debt. Lobbyists say they will fight to restrict the types of loans the bankruptcy proposal covers and new powers granted to judges.

The industry strategy all along has been to buy time and thwart regulation, financial-services lobbyists tell BusinessWeek . “We were like the Dutch boy with his finger in the dike,” says one business advocate who, like several colleagues, insists on anonymity, fearing career damage. Some admit that, in retrospect, their clients, which include Bank of America, Citigroup, and JPMorgan Chase, would have been better off had they agreed two years ago to address foreclosures systematically rather than pin their hopes on an unlikely housing rebound.

In public, financial institutions insist they’ve done their best to prevent foreclosures. Most argue that giving bankruptcy courts increased clout, known as cramdown authority, would reward irresponsible borrowers and result in higher borrowing costs. “What we’re trying to do now is target the bill to make it as narrow as possible,” says Scott Talbott, a lobbyist for the Financial Services Roundtable. On the defensive, the industry nevertheless benefits from one strain of popular opinion that home buyers who took on risky mortgages—even if the industry pushed those loans—don’t deserve to be rescued.

AN INDUSTRY IN DENIAL

However the skirmish ends, the industry’s contention that it has done as much as possible to limit foreclosures seems hollow. Some statistics it cites appear to be exaggerated. Even pro-industry figures such as Steven C. Preston, a Republican businessman who headed the Housing & Urban Development Dept. late in the Bush Administration, concede that many lenders have dragged their heels. “The industry still has not stepped up to the volume of the problem,” Preston says. One program, Hope for Homeowners—which Bush officials and banks promised last fall would shield 400,000 families from foreclosure—has so far produced only 25 refinanced loans.

Meanwhile, an already glutted market sinks beneath the weight of more foreclosed homes. Borrowers whose equity has evaporated have nothing to tap into if the recession costs them their jobs. Some lawmakers and regulators are calling for a foreclosure moratorium. “People are falling through the cracks,” Preston says. “That’s bad for communities, bad for the individuals losing their homes, and bad for investors.”

In early 2007, as overextended borrowers began to default on too-good-to-be-true subprime mortgages, housing experts sounded an alarm heard throughout Washington. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, wanted to push a bill requiring banks to modify loans whose enticingly low “teaser” interest rates soon give way to tougher terms. But he knew that with Republicans strongly opposed, he lacked the muscle, according to Senate aides. So Dodd did what politicians often do. He convened a talkfest: the Homeownership Preservation Summit.

A who’s who of banking executives gathered on Apr. 18, 2007, behind closed doors in an ornate hearing room in the marble-faced Dirksen Senate Office Building. Dodd told them they needed to get out in front of the foreclosure fiasco by adjusting loan terms so borrowers would continue to make some payments, rather than stopping altogether. Foreclosure proceedings typically cost banks about 50% of a property’s value. That’s assuming the home can be resold—not a certainty when empty houses multiply in a neighborhood. “What are you doing?” Dodd asked the executives. “What do you need me to do to help you modify loans?”

Some from the industry denied a foreclosure problem existed, including Sandor E. Samuels, at the time chief legal officer of subprime giant Countrywide Financial. They vowed to continue selling loans with enticing introductory rates as well as those requiring minimal evidence of borrowers’ income. “We are going to keep making these loans until the last second they are legal,” Samuels later told a fellow participant.

On May 2, 2007, Dodd’s office issued a “Statement of Principles” stemming from the summit. It outlined seven vaguely worded industry aspirations, such as making “early contact” with strapped borrowers and offering modifications that could include lowering loan balances. The principles had no effect, some summit participants now concede.

Senate Banking chairman Chris Dodd

Much of Dodd’s attention shifted to his campaign for the Democratic Presidential nomination. Senate Banking Committee spokeswoman Kate Szostak says Dodd aggressively pursued the foreclosure issue, but “both the industry and the Bush Administration refused to heed his warnings.” The lawmaker accepted $5.9 million in contributions from the financial-services industry in 2007 and 2008.

Asked about his role at the summit, Samuels confirmed in an e-mail that he “did speak—formally and informally—about the performance” of subprime loans. But he declined to elaborate. He now works as a top in-house lawyer for Bank of America, which acquired Countrywide in July 2008.

A major reason financial institutions and investors are so determined to avoid modifying loan terms more aggressively has to do with accounting nuances, say industry lobbyists. If, for example, a bank lowered the balance of a certain mortgage, there would be a strong argument that it would have to reduce the value on its balance sheet of all similar mortgages in the same geographic area to reflect the danger that the region had hit an economic slump. Under this stringent approach, financial industry mortgage-related losses could far surpass even the grim $1.1 trillion estimated by Goldman Sachs (GS) in January. A desire to postpone this devastating situation helps explain lenders’ intransigence, says Rick Sharga, vice-president of marketing at RealtyTrac, an Irvine (Calif.) firm that analyzes foreclosure patterns.

By mid-2007, Bush Administration officials were deeply worried about the financial industry’s unwillingness to confront the growing catastrophe. Even banking lobbyists say they realized that their clients had lapsed into denial. The K Street representatives agreed that Treasury Secretary Henry Paulson needed to step in, says Erick R. Gustafson, then the chief lobbyist for the Mortgage Bankers Assn. “It was like an intervention,” he says. “We had to get Treasury involved to get the banks to give us information.”

That summer, Paulson, a former CEO of Goldman Sachs, summoned industry executives to the Cash Room, one of Treasury’s most elegant venues. There, beneath replica gaslight chandeliers, Neel T. Kashkari, a junior Goldman banker whom Paulson had brought to Treasury, urged industry leaders to move swiftly to keep more consumers from losing their homes. Bankers know how to adjust interest rates, extend loan durations, and, if necessary, lower principal, said Kashkari, who has temporarily remained in his post. A couple of months later, Paulson summoned the executives again, this time to his conference room. “We told them we need to get over the goal line,” recalls a former top Treasury official. “Cajoling is a euphemism for what we did. We pounded them.”

One product of the Treasury conclaves was the Hope Now Alliance, a government-endorsed private sector organization announced by Paulson on Oct. 10, 2007. Lenders promised to cooperate with nonprofit credit counselors who would help borrowers prevent defaults. Faith Schwartz, a former subprime mortgage executive, was put in charge.

WINDOW DRESSING?

The alliance got off to a shaky start. An early press release contended that there had been more foreclosures nationally than the Mortgage Bankers Assn. was conceding at the time. “We looked like the Keystone Kops,” says an industry lobbyist. Soon it became apparent that the program was primarily a public-relations effort, the lobbyist says. “Hope Now is really just a vehicle for collecting and marketing information to the Treasury, people on the Hill, and the news media.”

In a press release last Dec. 22, Hope Now said it had prevented 2.2 million foreclosures in 2008 by arranging for borrowers to catch up on delinquent payments and, in some cases, easing terms. But the data don’t reveal how many borrowers are falling back into default because many modifications don’t, in fact, reduce monthly payments. The alliance doesn’t receive this information from banks, says Schwartz.

There’s reason for skepticism. Federal banking regulators reported in December 2008 that fully 53% of consumers receiving loan modifications were again delinquent on their mortgages after six months. Alan M. White, a law professor at Valparaiso University, says the redefault rates are high because modifications often lead to higher rather than lower payments. An analysis White did of a sample of 21,219 largely subprime mortgages modified in November 2008 found that only 35% of the cases resulted in lower payments. In 18%, payments stayed the same; in the remaining 47%, they rose. The reason for this strange result: Lenders and loan servicers are tacking on missed payments, taxes, and big fees to borrowers’ monthly bills.

Consider the case of Ocbaselassie Kelete, a 41-year-old immigrant from Eritrea who called Hope Now last fall. Kelete, a naturalized U.S. citizen, bought a $540,000 townhouse in Hayward, Calif., in November 2006 with no down payment and 100% financing from First Franklin Financial, a subprime unit of Merrill Lynch. At the time, he and his wife earned $108,000 a year from his two jobs, with a pharmacy and an office-cleaning service, and hers as a janitor. Kelete says First Franklin and his realtor convinced him that he could afford a pair of mortgages, one with a 7.5% initial rate that would rise after three years, and a second with a fixed 12% rate. His monthly payment would total $3,600.

“WORK WITH ME”

“The realtor said, ‘Just make sacrifices for two years. Home prices will go up, and you can refinance at a lower rate,’ ” Kelete recalls. He regrets signing a mortgage he couldn’t afford—a mistake many people made during the subprime craze. Home prices didn’t go up. He lost his office-cleaning job. First Franklin modified his loans, but added on property taxes it had failed to collect earlier. Kelete’s monthly bill rose to $3,900. In October 2008, he called Hope Now. A counselor set up a conference call with First Franklin. The lender’s representative said Kelete should get another job or give up the house, the borrower says. Kelete responded that he’d already lost his second job cleaning offices and couldn’t find another in a faltering California economy. “Why don’t you work with me?” he asked First Franklin. The lender declined. The Hope Now counselor said there was nothing more to do. “Foreclosure is the only future I see,” Kelete says. A spokesman for BofA, which acquired Merrill in December, declined to comment, citing the borrower’s privacy. After BusinessWeek’s inquiries, however, First Franklin contacted Kelete about lowering his monthly payments.

Hope Now’s Schwartz acknowledges she is fighting an uphill battle. By her calculation, 45% of the borrowers her organization advises still end up in foreclosure. “If I seem frustrated,” she says, “it’s because we are dealing with nothing but an exploding problem.” She has a full-time staff of four in Washington; 500 counselors participate in the industry-funded hotline. “You shouldn’t take it lightly, what we have achieved,” Schwartz says. She bristles at suggestions that the statistics she disseminates are misleading. “I print what I know,” she says, noting that some of her bank members aren’t forthcoming about loan modifications. “It’s like herding and juggling cats.”

By early 2008 it was obvious that Hope Now wasn’t halting a significant percentage of foreclosures. Democrats in Congress began gathering ideas for a government-sponsored remedy. Many of those ideas came from the industry. Lobbyists and congressional aides referred to one concept as “the Credit Suisse plan.” Another, “the Bank of America plan,” would allow borrowers to refinance mortgages with loans guaranteed by the Federal Housing Administration. Representative Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, had solicited BofA’s advice via an old Boston acquaintance, Anne Finucane, the bank’s chief marketing executive and a politically active Democrat. He assigned several aides, including Michael M. Paese and Rick Delfin, to work out the details.

Francis Creighton, a Democratic former staff member on the Financial Services panel who had gone to work as a lobbyist for the Mortgage Bankers Assn., negotiated with Paese and Delfin. Creighton’s Republican colleague Gustafson huddled with aides to such GOP lawmakers as Representative Spencer Bachus and Senator Richard Shelby, both of Alabama.

Before long, the anti-foreclosure provisions were being altered in ways the industry favored. Shelby, the ranking Republican on the Senate Banking Committee, along with other Republicans insisted on the pro-industry language in exchange for their support, aides say.

In the end, the program included stiff up-front and annual fees and a requirement that homeowners pay the government 50% of any future appreciation in the property’s value—all of which made it much less attractive to borrowers. Moreover, the banks’ participation was made entirely voluntary; there was no way to pressure them to cooperate.

Congress approved Hope for Homeowners on July 26, 2008, as part of a larger measure imposing restrictions on the mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE). At the Mortgage Bankers Assn., lobbyists gathered in Gustafson’s corner office to lift plastic cups of wine in celebration.

Those familiar with Hope for Homeowners anticipated that its fine print would discourage all but a few borrowers. “We knew it was likely to have limited appeal,” says Preston, the former secretary of HUD, which oversees the FHA. George Miller, executive director of the American Securitization Forum, a Wall Street trade group, calls the program and its 25 refinanced loans “useless” because of the onerous details.

BROKEN BILL

Shelby, for his part, never expected Hope for Homeowners to accomplish much, according to Republican Senate aides. He agreed to it to gain Dodd’s support for greater regulation of Fannie and Freddie—and only when assured the program wouldn’t drain tax dollars. “My consistent aim throughout this crisis has been to protect the American taxpayer,” Shelby told BusinessWeek in a statement. He accepted $565,000 in contributions from the financial-services industry in 2007-2008.

Frank, whose industry contributions totaled $948,000 over the same period, says he became skeptical Hope for Homeowners could achieve its initial goal of helping 1 million people. But he expected much more progress than the mere 25 refinancings that have occurred so far, according to HUD. He blames Republicans and the industry for undercutting his legislation. “I didn’t have the votes to do more,” he says.

The Massachusetts liberal hasn’t given up hope of repairing Hope for Homeowners. He is working on changes that would cut borrowers’ up-front fees and provide bonus money for mortgage servicers that agree to participate in the voluntary program. Frank aides Paese and Delfin aren’t assisting with the fixes: They have left their congressional staff positions for lobbying jobs with the Securities Industry & Financial Markets Assn. in Washington. They say they are observing the one-year federal ban on speaking with their former boss about business they did on the Hill.

In the first days of 2009 it appeared that progress might be possible on a different front. A slumping Citigroup came back to the Treasury Dept. for a second round of bailout money. Bowing to pressure from regulators, Citi broke ranks with its rivals and dropped its opposition to bankruptcy cramdown.

Senator Dick Durbin (D-Ill.), who since 2007 had led unsuccessful efforts in Congress to give bankruptcy judges authority to modify home loans, dispatched his senior economic policy adviser, Brad J. McConnell, to talk with lobbyists for JPMorgan Chase and Bank of America. “Each agreed to take [the idea] back to their folks to see what they could do,” says a person familiar with the talks. Citi’s concession, the imminent Obama inauguration, and intensifying public hostility toward big banks contributed to an atmosphere Democrats assumed would be conducive to compromise.

TALKING POINTS

By the time McConnell talked to the JPMorgan and BofA representatives the next day, however, “they had gone on full defense mode and started to complain about how lousy a deal Citi had struck,” says the person familiar with the exchanges. Bank opposition, Durbin says, “was very shortsighted in light of the mess they have created in our economy.”

In the following weeks, banking lobbyists launched a renewed attack on the cramdown legislation, enlisting as an ally Republican Representative Lamar Smith of Texas, among others. Apart from Citi, “the industry remains united in that bankruptcy cramdown would destabilize the market” by creating widespread uncertainty about the value of numerous troubled mortgages, says Steve O’Connor, senior vice-president for government relations at the Mortgage Bankers Assn. His group is distributing talking points to key congressional aides laying out reasons why “Congress should defeat bankruptcy reform legislation.” These include the argument that if lenders can’t be confident that loan terms will survive, they will raise rates and reject riskier borrowers. Industry lobbyists are organizing home state bankers to pressure moderate Democrats they hope will be receptive to limiting the kinds of loans eligible for cramdown. One target: Senator Evan Bayh of Indiana.

Stefanie and James Smith of Santa Clarita, Calif., fear they may need the help of a bankruptcy court if they are to keep the subdivision home they bought for $579,000 in November 2005. Stefanie, 37, a university human resources coordinator, and James, 40, a federal law enforcement agent, borrowed the entire amount in two subprime loans that required a total monthly payment of $3,000. A representative of their lender, Countrywide, told them not to worry, says Stefanie: They would be able to refinance in a year.

By mid-2007 they were running late on payments, and refinancing options had dried up. With their monthly bill scheduled to jump to more than $4,000 this January due to a rising mortgage rate, Stefanie contacted Countrywide last summer. She asked for a loan modification so they could avoid default. In December the lender said it would be willing to increase their payment by $600. That was better than the scheduled rise of $1,100, so the Smiths agreed.

But now they are struggling to pay the higher amount. Countrywide’s parent, BofA, declined to comment, citing the Smiths’ privacy. After BusinessWeek’s questions, though, Countrywide called them to discuss cutting their payments.

“We knew when we bought that the payments would be a stretch,” says Stefanie. She regrets assuming they would be able to refinance at a lower rate. “We are not deadbeats,” she adds. “All we want is a mortgage we can afford.”

(Text to come)

THE PLAIN DEALER
March 1, 1993

an excerpt from DEADLY DELAYS
Part Two of a five-part series

March 10, 1989. Dryden, Ont. 12:11 p.m. : Air Ontario flight 1363, carrying 65 passengers prepares for takeoff.

In seat 7C, Nancy Ayer, a bubbly woman with a loud laugh, is excited about joining her husband in Winnipeg to celebrate his job transfer to a new sales territory.

The plane lifts slightly, the engines grinding with more power, but it fails to gain height and crashes into a dense forest.

Struggling to escape, survivors clamber over one another, Nancy Ayer runs from the plane in flames, her arms flailing. “Help me,” she cries.

Dazed, she stumbles back into the wreckage. A fellow passenger grabs and rolls her in the snow to douse the flames.

She hangs on long enough to get to a hospital where her husband, John, awaits her.

“I’m not in good shape, am I?” she asks.

“No,” he tells her. “You’re going to die.”

“You’re kidding,” she says.

“I love you,” he says.

“I love you,” she says.

Six hours later, Nancy Ayer is dead. Total fatalities: 24

Cause: “Ice and snow adhering to the upper surfaces of the wings.”

By KEITH C. EPSTEIN

WASHINGTON
It’s 1985. Ice on the wings had already caused three airline crashes.

“A hazard exists,” federal safety officials write in a confidential memo. Certain types of planes are “more sensitive” to accumulations of ice too small for pilots to spot.

But the government does nothing and, in succeeding years, other ice-sensitive planes fall from the sky, killing 81 people.

Seven years after the memo, USAir’s Flight 405 became the 10th such plane  to crash, plunging into icy waters just beyond the runway at New York’s  LaGuardia Airport and adding 27 people to the deadly toll of bureaucratic  delay. Once again, the government’s failure to react to recurring accidents  involving wing ice on Dutch-made Fokker F-28’s and two older models of  McDonnell Douglas’s DC-9 led to tragedy.

Top officials in many federal agencies know such delays are common. Barry  L. Harris, the Federal Aviation Administration’s acting administrator,  acknowledges the government’s “lumbering lack of responsiveness.”

Charles O. Miller, a former top U.S. accident investigator, was helping the Canadians investigate the crash of the F-28 carrying Nancy Ayer and 64 other  passengers, when Flight 405 went down at LaGuardia. “I felt,” he said,   sighing, “like I’d come to in a time warp.”

By the time National Transportation Safety Board investigators drafted   their 1985 memo, they already knew wing icing had caused crashes of an Ozark  Airlines DC-9 series 15 in Sioux City, Iowa, in 1968; an F-28 near Izmir,   Turkey, in 1974; a Trans World Airlines DC-9 series 10 in Newark, N.J., in  1978; and an Airborne Express DC-9 series 15 in Philadelphia in 1985.

Before each accident, pilots had looked through their windows, checking for ice. Later, the pilot of Flight 405 also would check, but there was no way he  could have seen ice crystals possibly no thicker than 2 millimeters that   downed his F-28.

In 1985, Airborne Express pleaded with the safety board to investigate the  DC-9 accidents for a common thread.

The result was the 1985 memo, which urged  that flight manuals for the earlier versions of the DC-9 emphasize the unique  hazards of tiny amounts of ice on wings.

The internal memo also referred to a 1979 study by McDonnell Douglas’ chief engineer, Ralph E. Brumby, which found that the planes could become unstable   and stall from even “extremely small amounts of frost.”

Government officials, manufacturers and aviation experts long have   recognized that planes without slats – retractable mini-wings along the wing’s front edge – are vulnerable to small amounts of frost, snow or ice.

Pilots of most commercial jets, which have slats, can adjust them to   compensate for icy conditions and give planes extra lift and stability.

While planes with slats outnumber the others 10 to 1, during the last 24   years, only three of them crashed with ice on wings. But 10 F-28s and DC-9s   without slats crashed during the same period.

As early as December 1969, Fokker itself warned owners of its F-28 that ice on the wings was “particularly dangerous,” and could prevent the aircraft from lifting, sending it into an uncontrollable roll.

The safety board’s 1985 internal memo echoed these findings.

“A hazard exists,” the memo said.  “Aircraft without leading edge devices   are more sensitive to even light amounts of airfoil ice, which may not always  be visibly detectable and which may accumulate during pre-takeoff taxi   operations.”

Senior officials at the safety board refused to make the memo public and   failed to seek the changes suggested by their investigators. The safety board  can only suggest remedies, only the FAA can require them. Yet the safety board failed to give the FAA the suggestions in the internal memo.

“We didn’t feel we were on real solid ground,” said William G. Laynor,   deputy director of the safety board’s office of aviation safety. “More   research was needed. We were busy with other things. Plus, industry was   already taking action.”

He was right about industry. Independently, McDonnell Douglas had published new training material about wing ice hazards that might have helped if only   the government had required airlines and pilots to read it.

“Clearly, pilots weren’t getting the message,” said Brumby, the McDonnell   Douglas chief engineer. “It’s not like McDonnell Douglas and pilots talk   directly to each other. But it was so frustrating to see this happening to   Learjets and F-28s and DC-9s,” he said. “And then the Continental crash   happened.”

In November 1987, after de-icing, a Boise-bound Continental Airlines flight at Denver waited 27 minutes for takeoff. When the DC-9 series 10 crashed,   killing 28 people, the board no longer doubted the evidence.

Yet today the FAA still hasn’t acted on the board’s urgent pleas after the  Continental crash to force airlines to use a longer-lasting antifreeze and   end-of-runway de-icing pads common in Europe. Crashes due to wing ice have all but disappeared in Europe in the past two decades.

The jelly-like, glycol-based antifreeze lasts for 45 minutes, three times   as long as the weaker North American version. Many U.S. airlines object to the added cost. Spraying a Boeing 727 with the stronger substance adds about $200  to the cost, but the need to redo the job is less likely.

Nor did the FAA include information in flight manuals to help pilots of   planes without slats check for ice before takeoff.

More than a year after the Denver crash, the FAA said it “does not believe  there is anything unique” about planes without slats.

NTSB did nothing to counter that claim. The safety board’s Laynor   acknowledged the issue “fell through the cracks.”
Board member Susan M. Coughlin agreed. The board “should have communicated  its strong disagreement … swiftly and clearly,” she said.

Even so, if the FAA had at least complied with a 1981 request from the   safety board, the risk would have been less. The safety board had asked the   aviation agency to include specific warnings about ice and limitations of   de-icing fluids for each kind of aircraft.

The FAA refused, arguing it needed to improve weather forecasts first. The  FAA still had not distributed wing icing warnings when a Ryan International   Airlines DC-9 series 15 crashed in Cleveland in February 1991, another victim  of ice on the wings.

Such a warning, which would have included specific information for the   F-28, could have warned Flight 405 pilots John Rachuba and Wallace Majure that the de-icing fluid applied to their wings was good for only 12 to 15 minutes.  The jet sat on the runway for 35 minutes.

The Air Line Pilots Association, meanwhile, continued to hound the safety   board. “The system has failed,” the pilots union complained in a formal filing following the Continental crash in Denver. “Information documented in the   three previous DC-9-10 accidents foretold of the unique hazard.”

The similarities of “almost identical” crashes cannot be ignored, the union said. “The DC-9 series 10 aircraft … is more adversely affected … than   other DC-9s.”

The pilots association demanded that the airlines modify the planes, making them safer.

Neither the safety board nor the FAA was willing to go that far. NTSB   thought its other recommendations would be sufficient.

But the 1989 crash of Canadian F-28 with Nancy Ayer aboard should have   erased any doubt about the susceptibility of F-28s to wing icing. By the end   of the year, three other F-28’s had crashed in icy conditions, in Argentina,   Turkey and Korea. Fokker itself warned U.S. owners to take off within 15   minutes of being de-iced.

In Washington, nothing happened.

Then on Feb. 17, 1991, just after midnight, a light snow was falling at   Cleveland Hopkins International Airport. The two-man crew of Ryan   International Air Flight 590, a DC-9 series 10 cargo jet on a mail run to   Indianapolis, failed to have the plane de-iced, though it had been on the   ground 26 minutes. On takeoff, the plane lifted and stalled.

Both crewmen   died.

Cause: “Ice contamination on the airplane’s wings,” the safety board   concludes.

“We now find ourselves making the case once more for a safety issue that we were confident existed as early as 1985,” complained the safety board’s   Coughlin.

“The facts are disturbingly similar to previous accidents,” McDonnell   Douglas said in a private March 21 letter to some airlines, referring to all   DC-9 accidents to that point. The DC-9 series 10 and 15 wings are “sensitive   to small amounts of ice, snow, freezing precipitation and frost.” Crews should “taxi back for a second de-icing if a delayed takeoff … raises any question  of wing condition.”

McDonnell Douglas quietly decided it was time for a fix. Company insiders   described the remedy as an unimpressive set of five or six electrical relays,  two pressure switches, a couple of brackets, some tubes and wires – no more   than a few thousand dollars in parts.

Hot air would be conveyed from the engines to the wings using technology   available a quarter-century ago, when the company made the planes.   Retrofitting those older models would be easy.

Today, nearly two years later, it still isn’t required.

The evidence continued to pile up on the desks of aviation experts in   government and industry; the FAA, still unwilling to acknowledge the problem,  refused to act.

In June, a story in New York’s Newsday raised questions about the DC-9   series 10’s susceptibility to icing. The story was widely distributed at the   aviation agency and the safety board – but the FAA again took no action.

Concluding its investigation of the Cleveland crash, the safety board   blamed the FAA for “a lack of appropriate response … to the known critical   effect” of ice on DC-9s.

Early last year, the FAA finally agreed with one of the safety board’s   suggestions: to include a warning in flight manuals that “wings without   leading edge devices are particularly susceptible to loss of lift due to wing  icing,” and to recommend a hands-on check of the wing.

Still, nothing required crews to do what the manual suggested, or to use   the longer lasting antifreeze, and there was no mention of other,   ice-sensitive DC-8s and F-28s.

The FAA decided in February 1992 to conduct a survey to identify the other  planes – a task agency spokesman Fred Farrar said “probably” could have been   accomplished in a single afternoon.

The FAA was still working on its “survey” when USAir’s Flight 405 crashed.  The ice on its wings, too small for the pilot to see, “resulted in an   aerodynamic stall and loss of control,” the safety board officially determined Feb. 17.

But the safety board also faulted the airline industry and the FAA for   their `failure’ to establish de-icing safeguards for the crew.
This time, the FAA was convinced. Within a month of the crash, it admitted  the “difference between hard wings and slatted wings.”

Even so, Anthony J. Broderick, an FAA associate administrator, insisted:   “Until the tragedy of Flight 405, I know of no one who clearly recognized this factor.”

“I can’t understand what made him say that,” counters NTSB’s Laynor.”It’s been hard to miss.”
Within a month, the FAA even agreed to consider the easy remedy   contemplated by McDonnell Douglas. Price tag: $26,500 per airplane. The   airline industry opposed it, saying the $800,000 fix was too costly and the   matter died.

“That’s ridiculous,” counters Charles Eastlake, a professor of aerospace   engineering at Embry-Riddle Aeronautical University in Daytona Beach, Fla. The fix, he said, is both easy and inexpensive.

Other stories from this series:

Deadly Delays: Bureaucracy is Killing Us – Long after wreckage is examined for clues, causes determined, and solutions urged – thousands of Americans still risk death or injury in similar accidents. (The Plain Dealer)

Ice on Jets – Recurring Risk, Tolerated for Years – Despite pinpointing causes of multiple commercial airliner crashes, Washington does nothing to require simple, proven remedies advocated for years

Flight 405: The Story of Four Passengers- Strangers on a plane, going about the routine business of flying, trusted that commercial aviation had become as safe as airlines and the government could make it.  They were wrong.

Killer Trucks – Why the Slaughter Won’t Stop – Trucks with self-adjusting brakes would have fewer accidents, causing less damage and saving hundreds of lives.  Yet the government dawdled in requiring them.

While Grownups Squabbled, Children Died – Battles between automakers and regulators for more than a decade stalled development of safer child seats.

Feds Shrug Off a Life-Saver for Commuter Planes – Commuter airline flights crashed repeatedly into the ground for lack of a simple device  urged for years by federal safety officials. The  FAA declined. Planes kept crashing.

Cessnas Crash, but Agencies Do Nothing -  For decades, Cessnas chocked from a carburetor flaw known to the manufacturer and the government. Yet pilots had never heard of the problem, and the government required no fix.

Yellow Coffins – Modern school buses are among the safest means of transport. Yet when accidents occur, children are often trapped. Still, the government for years allowed preventable tragedies to recur.

Safety Board Has No Teeth – The National Transportation Safety Board is widely known for investigating accidents. What many people don’t realize is that it’s powerless – a toothless tiger.

THE PLAIN DEALER
Sunday, November 8, 1998

FIRST OF TWO ARTICLES

By KEITH EPSTEIN and BILL SLOAT
PLAIN DEALER REPORTERS

A legacy of medical exploitation, from secret Cold War radiation experiments to notorious syphilis studies on unwary blacks, has led the United States to adopt some of the world’s toughest protections for people on whom scientists test new drugs, devices and vaccines.
So firm is the underlying presumption that patients in experiments must be treated fairly and honestly that the protections of federal law apply not just to Americans but to any person, anywhere in the world, used in U.S.-financed research.

But federal and foreign records disclose that the nation with some of the world’s strictest research safeguards has flouted its own rules in dozens of countries, and has a history of “systemic deficiencies.”

On nearly every inhabited continent, the U.S. government has fashioned scientific partnerships with foreign officials and undertaken scores of medical research projects without obtaining basic agreements to avoid human rights abuses, as the law requires.

The contracts, known as “assurances,” serve as formal government-to-government accords that overseas scientists spending federal dollars are treating their patients as Americans would be treated. The contracts were missing in all 96 research projects conducted by the Centers for Disease Control and Prevention over the last decade.

The research alliances, most formed within recent years, have been sponsored by the Atlanta-based CDC, an agency with a storied reputation for protecting public health.

In these international collaborations, the United States provides money, manpower and the best available medical technology. The foreign partner provides whatever scientists it can muster and access to a vast living laboratory of human test subjects, often undereducated and desperate for medical care.
In a number of instances, drugs were given, samples taken and research completed without a written assurance of compliance with rules that patients be fully informed, monitored for safety, told of known treatments and free to refuse experimental drugs:

• On the Ivory Coast, pregnant women with HIV got dummy pills but were not told the drugs wouldn’t work.
• In Zambia and Malawi, children in a malaria project got medical treatment but their guardians weren’t told whether it was “standard” or “experimental.”
• In Niger, consent forms for parents of babies vaccinated for diphtheria and meningitis conveyed vital details but not in the local language. Consent forms for a rabies vaccine trial in Ethiopia also had not been translated.

Altogether, the CDC “was engaged in 96 active research studies in 32 countries” where it “did not have approved assurances” from foreign collaborators they would abide by U.S. ethics laws, Marjorie A. Speers, the CDC’s deputy associate director for science, wrote in a July 1997 memorandum.

At the time, that involved every foreign research project sponsored by her agency. Some of those projects had been going on for 10 years or more, Speers said in an interview last week. Most involved tuberculosis, HIV, malaria and syphilis.

“The volume of what was out of compliance is startling,” said Gary Ellis, director of the National Institute of Health’s Office for Protection from Research Risks, to which the CDC quietly confessed last year. He said the scale of failures was unprecedented in two decades of enforcing the regulations.

J. Thomas Puglisi, director of human subjects protections at OPRR, said the amount of research that had failed to abide by the regulations “bothered me greatly,” because it demonstrated that a handful of controversial CDC experiments on foreign mothers with HIV were not isolated incidents.

“The identification of numerous international studies where all the required protections for human subjects were not in place was an indication of a need for systemic improvement at the CDC,” Puglisi said.
Speers, while acknowledging the rules were violated, said the CDC was confident no foreign research subjects had been harmed.

“What was missing was the procedural requirement to have this written assurance,” she said, “a document where an institution is saying we will follow ethical principles and abide by the rules.” Speers also said that the CDC had had to correct some overseas consent forms to make them clearly disclose to patients that they were taking part in health research.

It wasn’t the first time OPRR, the government’s main internal investigative agency on human experimentation, uncovered “systemic deficiencies” at the CDC.

Documents obtained by The Plain Dealer reveal recurrent failures, bureaucratic upheaval and broken promises of reform at the Atlanta-based public health agency.

Among the reasons: The government’s inability to police itself. A recent report to a presidential advisory commission described OPRR, the enforcer of the rules, as virtually powerless, especially when it comes to the CDC.
The human protections bureau is too “small and weak” to compel the CDC to correct problems, concluded the report by John C. Fletcher, former chief of bioethics at the National Institutes of Health.

The U.S. regulations are plain: Researchers cannot camouflage the truth. They cannot omit vital information about risks. They must offer any appropriate alternative medication. Doctors must disclose what they know and don’t know – whether in Cleveland or Cairo.

“We’re ethically bound to observe our regulations in the U.S. and overseas – because they’re based on principles we all agree on. And there’s no ethical principle I’m aware of that says we can treat other people in another country differently than ourselves,” said Dr. William Freeman, president of the Applied Research Ethics National Association, the leading U.S. membership organization of scientists and others overseeing the ethics of research.

Freeman, also director of medical research at the U.S. Indian Health Service, which oversees experiments on America’s Indian reservations, noted the grossest examples occurred when researchers treated other people differently than they would treat themselves.

Most notable, he said, was a federal study beginning in 1932 at Tuskegee, Ala., where 412 poor, black men were allowed to sicken with syphilis without being told and without being offered a known and effective treatment. The argument in Alabama, as overseas today, was that the patients probably would have received no better treatment anyway – a rationale Freeman doesn’t buy.

“The rules aren’t just rules but an expression of our morality and sense of community that you should do unto others as you would have them do unto you. If you want to be respected when you’re dependent on others, you’d better show respect to people dependent on you. If you want to be told the truth when you don’t have any way of knowing whether it’s true, then you’d better tell the truth yourself. If you want to be given a chance to say no to something, you’d better offer that chance to others.”

Said OPRR’s Puglisi: “It’s not that researchers are bad people. But sometimes they get so caught up in their immediate goals and the sense of the goodness of what they’re doing that they fail to see the larger ethical implications of their actions.”

Speers said that overseas studies supported by the CDC often operate with lower standards than in the United States.
Among the projects lacking a legally binding promise from the foreign country to follow the rules was a tuberculosis prevention study in Uganda, in which 464 Africans in a control group were given a placebo, or fake pill, instead of an established and inexpensive U.S. medication for which the CDC had long found “strong evidence and substantial clinical benefit.”

In September 1997, the CDC’s Speers confirmed that “at the time the study was done” her agency lacked an agreement with Uganda to abide by U.S. rules.
“However,” she added, “we’ve been working on getting one for the past few months.”
By then, the study was finished and results had been published by the New England Journal of Medicine.

Ethical rules challenged

CDC officials in recent months have been arguing that U.S. ethical rules ought not to apply in many of the very nations where the agency failed to adhere to the regulations.

For instance, Speers said, language differences can make it extremely difficult to follow U.S. rules for getting a patient’s informed consent.

The CDC also argues that in countries where no better care is available, scientists need not live up to U.S. standards of care.

The CDC’s sister agency, the National Institutes of Health, has more than 700 assurances in place for research in more than 110 countries.

Those assurances are generally negotiated by universities receiving NIH grants.

But Speers said the CDC had had trouble obtaining assurances because other countries strongly object to having ethics rules imposed on them by the U.S. government.

“We shouldn’t be dictating a code of ethics for other countries. Telling them how things should be done is often viewed as imperialistic,” said Speers.

The CDC has been anything but imperialistic, federal and foreign records show. Sometimes, the health agency has chosen to play by the local rules in places where there are no clear rules, according to internal e-mail traffic, memoranda, directives, compliance audits and other government documents obtained by The Plain Dealer through the Freedom of Information Act.

In Kazakhstan in 1997, nobody could be found to approve or monitor the “Central Asian Infectious Disease Project.”
Referring to a requirement for the use of ethical review committees to monitor patients’ safety, a CDC epidemiologist noted that in Kazakhstan the committees “or anything resembling them simply do not exist.”

In the Slovak Republic, a study of children with allergic diseases, launched in 1996, had to be halted.
During the study, laboratory samples were being collected for unspecified “future research” – but the children and their parents were not told what it was about, or asked for their permission.

In Egypt in 1997, a study assessing blood lead levels in children included consent forms that neglected to mention the project was “research.”

In Sierra Leone, the problem wasn’t getting a foreign government to form an alliance with the CDC, it was finding the government.

“We cannot acquire a government signature at this time due to the fighting and disturbances in Freetown,” a CDC official wrote from Africa in June 1997. “The U.S. Embassy is evacuated and we have no way to communicate at this time or know who to address.”

In Washington last fall, the National Institutes of Health was dispatching directives to CDC-affiliated researchers around the world to comply with the rules or close down.

“If your review does uncover any questionable situations we request that all further collections of biological materials be suspended until such time as the necessary [ethical] assurances are obtained,” one directive stated.

An internal chronology compiled by human protections agency and obtained by The Plain Dealer reveals ethical lapses from February 1993 through May 1997 that recurred despite attempts at reform.

CDC promised it could do better. The lapses ought not to happen again.

“CDC officials pledge their commitment to ensuring full protections for human subjects in all research conducted or supported by CDC,” the agency promised in August 1993. “They further pledge … concrete actions.”

By October 1996, ethics managers were reshuffled and CDC took the step of assigning a top official – a deputy associate director, Speers – to oversee protection of human subjects on a daily basis.

Then, in 1997, Dr. Sidney Wolfe, the Cleveland native who works for Ralph Nader, went public with his discovery that in nine government studies, including two sponsored by the CDC in Thailand and the Ivory Coast, pregnant women in control groups were not offered an expensive form of AIDS treatment available in the United States.

That aroused the curiosity of OPRR’s director, Gary Ellis, who wondered whether the CDC had obtained the necessary written contracts to abide by the rules. At the suburban Maryland office building where he works, Ellis ensconsed himself in a room of file cabinets containing copies of more than 10,000 such contracts, mostly from universities and government agencies.
He could find none for the CDC studies, so he called the agency.

Three days passed without an answer.

He called Atlanta again – and guessed. He was right. The CDC hadn’t gotten any “assurances” the AIDS studies would follow the rules. The studies were halted immediately.

A few hours later, there was another call and another confession. The problem, the CDC reported, had somewhat larger dimensions. The agency was having trouble figuring out how many international alliances it had formed. Records were in disarray.

“It takes a long time to change a culture, but there are people at the CDC now who are getting it,” said Puglisi. “They’re learning. But we’ve also learned when it comes to human subject protections, one has to be ever-vigilant.”

————-

Related stories:

In the Name of Healing Doctors infused a solvent also used as a gasoline additive into Laura Michalski’s abdomen. Within hours, she died. Eight years later, her family learned it had been an experiment.

“They Used Our Kids as Guinea Pigs.” Medical research records show the U.S. government is still in the business of conducting and paying for clinical trials on unsuspecting Americans.

Foreign Tests Don’t Meet U.S. Criteria The cycle of hype, hope and heartbreak surrounding clinical trials has become a chronic condition in the global pharmaceutical industry, which now initially tests two-thirds of all products for Americans overseas. The experiments often involve fraud, concealed side effects, improvised experiments and human rights abuses.

Living Proof: U.S.-Run Study Gave Ugandans Dummy Pills Instead of Treatment American researchers let tuberculosis worsen, unchecked by an effective drug, in a control group of 500 Ugandans with HIV, as they charted its deadly progression. Some thought “placebo” was a medication that would help them. In the U.S, the practice would have been unethical.

One morning,  hospital workers began infusing a solvent also used as a gasoline additive into Laura Michalski’s abdomen.

She died within hours.

Eight years later, her family learned the truth: It had been an experiment.

(The Cleveland Plain Dealer)

December 15, 1996 (Day 1 of 4)

By KEITH C. EPSTEIN and BILL SLOAT

She was given a code name, “TE3.”To this day, the federal government won’t say who she was or what it knows about how she died.

It hasn’t even told her family.

Laura Michalski’s husband, naturally, knew her as the center of his life.

They met one night in 1938 at a 15-cent jitterbug dance. He recalls “we floated on that floor as if it was ours. I thought right then: This girl I have to marry.”

Laura and Alexander taught their five children to be proud Polish Catholics and oversaw their chores in the family’s grocery a floor below their Philadelphia apartment.

Come Christmas and Easter, she would stuff kielbasa for the store, and still manage to assemble a lavish holiday spread for her own large family.

“You could have invited the president,” Alexander would say.

At suppertime, everyone was expected at the table. No excuses allowed.

She was strict, but spiritual, too. She knitted angels, crocheted angels, collected figurines of angels.

By the time Laura Michalski checked into Philadelphia’s Hahnemann University Hospital, she was 64, the beloved grandmother of 19. Her kidney system was failing. There were gallstones, the pain intense.

“I can’t find a comfortable place in this bed,” she would say. “Sometimes, I wish to God the angel would come for me.”

One morning, “they told me she was going to have this new treatment,” said Alexander.

It was June 7, 1988. Around 10:40 a.m., the medical records show, hospital workers began infusing a solvent also used as a gasoline additive into Laura Michalski’s abdomen.

A pioneering radiologist, Dr. Steven K. Teplick, believed the solvent, methyl tertiary butyl ether, held promise as a method of dissolving gallstones. Physicians at the Mayo Clinic, and in Germany, had conducted similar experiments.

The idea was that MTBE would help patients avoid surgery. Researchers had to convince the federal Food and Drug Administration that it worked and was safe.

By midafternoon, records show that from 142 to 360 cubic centimeters of the solvent, nearly enough to fill a small coffee cup, had been infused.

Michalski’s heart speeded to between 140 and 150 beats per minute. Her blood pressure fell. Her fingernails began turning blue. After she was rushed to intensive care, her heart weakened, then gave out.

At 6:50 p.m., a few hours after the infusion ended, Laura Michalski was pronounced dead.

“When all my kids got there, I was still crying,” Alexander said. “This was my love, my friend. We’re together 47 years. I’d hoped to God for 50. . . . Then, suddenly – after it seemed like there was going to be no problem – she’s not there.”

Listed on her death certificate as contributing causes: heart arrest, aspiration of body fluids and a disease of the gallbladder known as cholangitis.

The Plain Dealer identified Laura Michalski as TE3 by matching information from an FDA file to her death certificate. The documents matched on time, place and cause of death.

“We were never told it was ^after] an experiment. We had no idea what was going on,” or what the federal government eventually learned about the clinical trial, said Michalski’s daughter, Bernadette McCloskey.

A year later, inspectors from the FDA happened to be conducting a routine audit when they found out about TE3 – as well as TE4, TE7, TE8, TE10, TE11, TE15, TE19, TE21 and TE25.

Both before and after Michalski’s death, nine of 29 patients suffered “adverse effects . . . in close proximity” to infusions.

The forms had stated “the drug will probably be effective.” Consent forms “failed to adequately address the foreseeable risks and discomforts,” the FDA found.

Teplick said he had obtained consent from every patient and did not believe that any harmful side effects were caused by MTBE.

The FDA halted further research “due to unreasonable and significant risk to human subjects.”

It was hardly the first time the government had made such a discovery.

And after the fact.

On the frontiers of medical science, for the greater good of society, well-meaning doctors sometimes employ an ounce of salesmanship for a pound of cure.

Since 1977, the FDA has conducted 4,154 inspections of researchers testing new drugs on people. More than half the researchers, 53 percent, were cited by FDA inspectors for failing to clearly disclose the experimental nature of their work, a Plain Dealer analysis shows.

The risks, alternatives or uncertainties were obscured or incompletely explained.

In 46 clinical trials, drugs were tested on people without written evidence they had consented. The records are key safeguards required by law, signed receipts showing patients agreed to roll the dice with their health.

Altogether, at least 1,000 men, women and children were participants in the 46 pharmaceutical studies questioned by the FDA. The experiments, in 23 states, were sponsored by federal agencies and drug companies.

The analysis of the FDA files is strikingly similar to what a White House advisory committee discovered in 1995 when it examined patient-consent documents from more than 100 ongoing government research projects. The experiments, or clinical trials as they are more commonly known in scientific circles, are research studies designed to evaluate the safety and effectiveness of new treatments.

“Some consent forms currently in use are flawed in morally significant respects, not merely because they are difficult to read but because they are uninformative or even misleading,” the Advisory Committee on Human Radiation Experiments concluded.

Asked about the FDA’s inspection reports, Mary Pendergast, the agency’s associate commissioner, said she considered them “representative of biomedical clinical research as a whole.”

Many experiments do occur with appropriate safeguards. The fact that nearly half of all inspected research is conducted without deficiencies in informed consent suggests that following proper procedures is hardly impossible.

Ruth Macklin, bioethics professor at Albert Einstein College of Medicine in New York, said even complex human research could be conducted in an ethically responsible manner. The challenge is to determine needed changes to ensure that clinical trials are “in accord with the highest standards,” she added.

Each year, government and industry spend at least $20 billion financing research on hundreds of thousands of human beings, yet the government discloses surprisingly little about those people, the risks they face, the injuries they endure or the benefits to them.

“Most people don’t understand they’re in clinical research. They think it’s therapy,” said Case Western Reserve University bioethicist Thomas Murray, appointed this year to a new National Bioethics Advisory Commission.

How many experiments are there? How many people take part? At best, the experts can hazard little more than wild guesses.

Asked how many clinical trials take place, senior FDA official Paul Goebel Jr. replied with an ancient riddle. It has no answer. “How many angels can dance on the head of a pin?”

What the government lacks in hard data about humans, it more than makes up for with volumes of statistics about laboratory animals. Wonder how many guinea pigs were used in U.S. research? The Agriculture Department knows: 333,379. How many hamsters in Ohio? 2,782.

“There are more inspections for laboratory animals carried out by the Department of Agriculture than there are for human subjects carried out by the entire Department of Health and Human Services,” observed Charles McCarthy, a consultant on the use of laboratory animals and until 1992 director of a federal office meant to safeguard people in government research.

His successor, Gary B. Ellis, a University Heights native, is the first to acknowledge the government is more aggressive about protecting laboratory animals than humans. “Research subjects are real people, our fellow Americans. But in 1996, we do not have the tools necessary to ensure that they – and all human subjects – are protected.”

Only this month, the FDA for the first time required consent forms to be dated “in response to problems . . . verifying that informed consent was obtained” before clinical trials started.

Just one of the clinical trials in the FDA files, obtained under the Freedom of Information Act, involved at least 500 adults and children at a Miami Beach hospital who were injected with a radioactive dye without their permission.

Researchers acknowledged to the FDA they didn’t think consent was necessary.

The FDA’s Pendergast said it was a “company-to-researcher miscommunication. We got strong assurances and “mea culpas’ from the researchers that they recognized the problem and that they wouldn’t do it again.”

The experiment took place at Mt. Sinai Medical Center between 1980 and 1982.

The investigational drug, known as pipida, was mixed with a radioactive tracer and injected.

Dr. William M. Smoak, who worked on the team studying pipida, said he knows of no one harmed by the drug.

Earlier tests “convinced us it was a safe material, and then we were just doing tests adding volume [numbers of patients], looking for more unusual side effects. What are you supposed to tell people about hazards if you don’t know any for sure?” Smoak said.

“Juveniles as young as 15 years of age received injections and there was no informed consent,” an FDA supervisor, Melvin Zymash, noted in an internal report.

As for the men, women and children who received the injections – the FDA abandoned efforts to identify them when it closed the case in 1983.

By then, the era that allowed the use of unwitting patients for the sake of science and the greater good was supposed to be history.

What happened in Tuskegee, Ala., is still the most widely talked about medical experiment of our time. The U.S. Public Health Service wanted to find out what happened to men with syphilis. So, starting in 1932, the government diagnosed more than 400 black men with the disease but didn’t tell them.

It just observed them.

While distinguished scientists collected data, at least 28 men died.

When the world learned about Tuskegee in 1972, the outrage triggered new rules. Explicit informed consent was required. Ethics committees had to weigh predictable risks against anticipated benefits.

Today, every human subject is supposed to understand hazards, uncertainties and – even if chances of physical harm are remote – be able to say no.

As Yale University Professor Jay Katz, who served on the advisory committee that examined the Tuskegee experiment 22 years ago, puts it: “Research is a voyage into the unknown.”

Last month, for the first time, the FDA relaxed the nation’s informed consent rules. In an emergency, medical researchers can administer experimental drugs without a patient’s permission. The patient must be insensible, relatives unavailable and the condition life-threatening.

It was a sea-change in policy and eroded the first principle of an ethics code enacted by The American Medical Association on Dec. 11, 1946: “The voluntary consent of the person on whom the experiment is to be performed must be obtained.” The code of ethics was developed for prosecutors at the Nuremberg medical trial in Germany at the end of World War II. It evolved into a system of rules, laws and international standards governing informed consent.

Before a drug can be tested on people, it must be tested on animals. If the animal studies go well, the sponsor, usually a drug company or government agency, asks the FDA for permission to begin a clinical trial of the “investigational new drug.”

The experiment, normally in three phases, each involving a larger number of people, is intended to answer: What happens to the body? What is the best dose? What side effects surface? How does the drug compare to those already approved?

Only one in five investigational drugs makes it to market.

Thus, test subjects are critical to medical advances.

That pressure to recruit, says CWRU’s Murray, may tempt some researchers to camouflage risks and uncertainties.

Mary Poppins would have called it a spoonful of sugar.

In 1992, nearly 16,000 women across the United States and Canada were being asked to take part in a test of a synthetic hormone called tamoxifen. The National Cancer Institute wanted to learn if the drug could prevent breast cancer in healthy women.

A variety of consent forms were prepared. Some stated the pill had been approved by the FDA; it was, but only as a follow-up therapy for women already diagnosed with breast cancer.

Some consent forms said nothing about lab mice on tamoxifen developing liver cancer.

The FDA’s Goebel found another problem: It wasn’t clear in every consent form that the drug was being tested for safety.

“The toxicities are minimized and the positive benefits emphasized, resulting in undue influence being placed on women to enter the trial,” an internal memo said. “Use of the word “therapy’ to describe this study is inappropriate, as it implies treatment of a disease rather than the conduct of well-controlled research.”

Contemporary experiments on people for the pharmaceutical industry are more shrouded in secrecy than the radiation studies of the Cold War.

The existence of a clinical trial involving an investigational drug, and the identity of the sponsor, “is confidential, commercial information,” said Pendergast.

The names of errant researchers, too, are closely held. They rarely face severe consequences.

Neglecting to fully inform test subjects. Failing to disclose deaths or injuries. Failing to get permission from ethics committees of their peers. Faking data. In each instance, written criticism and a letter usually satisfies the FDA.

Those who face the harshest penalty, having their names added to a list of 82 researchers barred from obtaining investigational new drugs, need have little fear of being found out by peers or patients.

Names of “Disqualified Investigators” – the FDA’s “blacklist” – are distributed only among an inner circle of agency bureaucrats.

As Bernadette McCloskey studied the 47-page FDA file on the Philadelphia experiment, provided to her by The Plain Dealer for the first time last summer, she turned the pages slowly.

Whatever emotions she felt, she tried to keep to herself. Only for the briefest moment did her forehead wrinkle, chin quiver, eyes water.

She fought for composure, laboring to absorb this new picture of her mother’s last hours.

“We had no idea,” McCloskey said. “No one has ever told us anything. It’s certainly upsetting to find out there’s something we weren’t told.”

Six years after her mother was buried in Philadelphia’s Holy Redeemer Cemetery, the agency “disqualified” Teplick from conducting clinical trials with investigational new drugs.

FDA Commissioner David A. Kessler signed the formal notice. “You have repeatedly and deliberately failed to comply with the regulatory requirements regarding investigational new drugs,” Kessler wrote. Besides “failing to document informed consent,” he noted, Teplick had not reported adverse effects “probably caused by” the investigational drug.

Teplick, now on the faculty of the University of South Alabama in Mobile, said he never saw Kessler’s order, nor had the opportunity to challenge it. Every patient consented, he said, and MTBE caused no harmful effects.

McCloskey, the administratrix of her mother’s estate, has hired a lawyer, whoin September filed a malpractice lawsuit in the Court of Common Pleas in Philadelphia County against the hospital and the doctor. In a preliminary ruling Dec. 6, a judge dismissed the portion of the lawsuit dealing with informed consent, on grounds that under Pennsylvania law “a claim for lack of informed consent only applies to surgical procedures. The administration of a therapeutic drug is not a surgical procedure.”

Alabama granted him a medical license in 1994 as a “distinguished professor,” after peers from around the country wrote letters of praise. “Conscientious, honest and thoughtful physician,” one Wisconsin professor wrote. “Well-respected.”

“It’s amazing that the FDA, with all the expertise at its fingertips, can’t tell the state what it finds out about a researcher,” said John M. Goldberg, a lawyer with the Illinois Department of Professional Regulation. He learned of FDA action against a doctor while Illinois prepared its license revocation case against her.

The Illinois doctor, Chavonee Aroonsakul, had been reprimanded by Kessler for “repeatedly and deliberately” failing to comply with the regulations. “You failed to obtain informed consent,” Kessler stated when he placed her on the “blacklist” in 1991.

She said the charges were “false and unfounded” and that she always got consent from her patients. She says her only goal was to help people – administer her patented treatment for Alzheimer’s disease – and that the government had conspired to stop her.

“The FDA didn’t want to tell us anything,” said Goldberg. “Who are they trying to protect? The doctor? Some drug company? The system is nuts.”

——

Other stories in this series:

“They Used Our Kids as Guinea Pigs.” An investigation of medical research records shows the U.S. government is still in the business of conducting and paying for clinical trials on unsuspecting Americans.

Foreign Tests Don’t Meet U.S. Criteria The cycle of hype, hope and heartbreak surrounding clinical trials has become a chronic condition in the global pharmaceutical industry, which now initially tests two-thirds of all products for Americans overseas. The experiments often involve fraud, concealed side effects, improvised experiments and human rights abuses.

Living Proof: U.S.-Run Study Gave Ugandans Dummy Pills Instead of Treatment American researchers let tuberculosis worsen, unchecked by an effective drug, in a control group of 500 Ugandans with HIV, as they charted its deadly progression. Some thought “placebo” was a medication that would help them. In the U.S, the practice would have been unethical.

U.S. Medical Researchers Flout Rules Around World On nearly every continent, the U.S. government and its clinical trials partners have hidden risks and undertaken medical experiments without legally required  agreements to avoid human rights abuses.

An investigation of medical research records shows the U.S. government is still in the business of conducting and paying for tests on unsuspecting Americans

DRUG TRIALS:
Do People Know the Truth About Experiments?

December 16, 1996

Day 2 of 4

By KEITH EPSTEIN and BILL SLOAT

Not long after school started in the fall of 1991, Sacheen White Tail came home with a note from her teacher.

It was addressed to her parents, and no, the sixth-grader wasn’t in any kind of trouble.

Her classwork was fine. She was still winning ribbons at swimming meets.

The note was an invitation almost too good to pass up: If her mother approved, Sacheen was eligible for a free hepatitis vaccination.

Two shots, a month apart, would “provide lifelong immunity.”

Something called the “Hepatitis A Vaccine Prevention Program” was behind the offer, sent to hundreds of parents on the Standing Rock Sioux Reservation that spreads across the grasslands of the Dakotas.

Without hesitating, Ella-Mae White Tail returned the accompanying form. Her 11-year-old would get the shots at school.

“I was interested in protecting my daughter,” she said.

Sacheen also wanted the gift researchers were offering. “It was an expensive mousse gel for my hair, good stuff,” she said.

What Sacheen’s mother didn’t realize then was that the “Hepatitis A Vaccine Prevention Program” wasn’t just a prevention program. It was a research project sponsored by the Centers for Disease Control and the Indian Health Service. The vaccine was being tested for a British pharmaceutical company.

“They were using our kids as guinea pigs,” White Tail said. “In the beginning, I thought it was approved by the ^Food and Drug Administration]. And then, I found out it wasn’t.”

Among other things, the government wanted to evaluate the vaccine’s “safety,” before allowing its use on all American children – a purpose that never appeared on the consent form distributed to the Sioux parents.

Neither did the word “experimental.” Or “research.”

“When you say “experimental,’ it scares off a lot of people,” said Tim Yellow, the tribe’s health director in Fort Yates, N.D., where a boulder marks the burial site of Sitting Bull.

Yellow had welcomed the researchers. His own daughter, Lisa, got the shot. Hepatitis A was endemic on the reservation. The contagious disease could be thwarted by better sewage and plumbing systems and more careful handwashing – and now, it seemed, also with the vaccine.

That the parents felt misled would be putting it mildly, said Yellow. His friendships grew strained. Traditional drummers at the Bear Soldier Hall appealed to the spirits to heal hard feelings and protect the children.

While the vaccine was eventually determined to be safe, Yellow said, the uproar has barely subsided on the reservation, where many raise buffalo and cattle a few miles south of Gen. George Custer’s old 7th Cavalry headquarters.

What happened at Standing Rock is not an isolated incident.

Decades after notorious syphilis experiments on blacks at Tuskegee, Ala., and radiation studies on civilians during the Cold War, the government is still in the business of conducting and paying for medical tests on unwary Americans.

In fact, a computer analysis shows that in medical research, the pharmaceutical industry is not the most likely abuser of basic human rights.

It is the U.S. government.

Researchers working for the government have camouflaged the truth. They have omitted vital information about risks. They have failed to properly obtain permission before testing unapproved drugs with uncertain effects.

Even with prescription drugs, whose effects are largely known, doctors are expected to disclose the pros and cons and allow patients a free choice. For experimental drugs and vaccines, federal law and professional medical ethics compel doctors to disclose what they know – and don’t know.

“Because the patient may not benefit. Because you may be doing harm; you don’t know what the risks might be. Because this is not veterinary medicine, this is another human being,” said Dr. Bernadine Healy, dean of the Ohio State University medical school and former director of the National Institutes of Health.

“In an experimental trial, you don’t have the answers; that’s why you’re doing an experiment. So you have the heightened obligation to tell the patient – someone who trusts you with their most precious possession, their life and well-being – you don’t know the answers.”

Yet American test subjects have been kept in the dark or only partially informed in 63 percent of all medical research that The Plain Dealer could identify as government-sponsored from 1977 through 1995. The newspaper’s analysis was based on internal FDA inspection records obtained under the federal Freedom of Information Act.

Consent forms were unclear; sometimes they were missing altogether. Such forms are like signed receipts, crucial evidence that patients were given all the information to which they were entitled.

Some forms described experimental drugs as “new therapies” or “treatments.”

FDA records show that consent forms were adequate in 37 percent of clinical trials at federal research sites, such as veterans hospitals and the National Institutes of Health. Others, such as private research contractors who test drugs for the pharmaceutical industry, gave full disclosure in 50 percent of their experiments. University and hospital researchers were only slightly better than the government: They disclosed complete information to their subjects 42 percent of the time.

“If there’s one principle firmly established,” said Case Western Reserve University bioethicist Thomas Murray, “it’s that you do not trim the truth or deceive people just because a research project is important. Some ethics questions are tough. That one’s a slam-dunk. It’s a short step from withholding information from subjects to what happened at Tuskegee.”

The Plain Dealer’s analysis parallels barely noted discoveries by a 1994 presidential advisory committee. That committee’s central focus was the Cold War era, a 30-year period from the mid-1940s when federal agencies sponsored 4,000 radiation experiments involving tens of thousands of subjects, many of whom had no knowledge they were test cases.

Yet President Clinton’s Advisory Committee on Human Radiation Experiments also uncovered more contemporary examples of research on unwitting Americans. “The most serious concerns focus on informed consent,” the committee reported 700 pages deep within an imposing volume, thick as a Sears, Roebuck & Co. catalog.

On page 717, the committee said, “Human subject protections may be more effective in radiation research than elsewhere” – in other words, patients could be more at risk nowadays in nonradiation experiments than in the kind that triggered the committee’s inquiry.

It was the radiation experiments that Clinton apologized for, agreeing to compensate some of the patients who had been exposed.

“Informed consent means your doctor tells you the risk of the treatment you are about to undergo. In too many cases, informed consent was withheld,” the president declared. “The deception extended beyond the test subjects themselves to encompass their families and the American people as a whole.”

Just last month, the government paid $4.8 million to 12 victims injected with uranium and plutonium without their consent. “When the government does wrong,” Clinton said, “we have a moral responsibility to admit it.”

Although the committee said its other discoveries involving nonradiation research were “findings that cannot be ignored,” the written evidence – disclosing locations of experiments, researchers’ names and the agencies involved – was boxed and shipped to a warehouse in Maryland, filed and forgotten. Some records were opened by National Archives lawyers at The Plain Dealer’s request.

“Human subjects,” as scientists refer to them, include the poor, the vulnerable, the medically dependent. They include former soldiers at hospitals of the Department of Veterans Affairs.

They include women with breast cancer at the National Cancer Institute. Alcoholics with hepatitis at the National Institutes of Health.

They include the Lakota people in the Dakotas, where parents like Ella-Mae White Tail effectively shut down the Centers for Disease Control’s hepatitis A experiment in 1992.

Although the vaccine, Havrix, was approved by the FDA in 1995 (based on tests involving 40,000 people elsewhere) the Pine Ridge Sioux sued the government.

A federal court in January 1993 tossed out the lawsuit by the parents as moot – the clinical trial had already been halted – but not before expressing “grave doubts” about the government’s conduct.

The court said the government failed to give parents “an adequate basis for informed consent.”

And the court added that it expected the government to be “less cavalier . . . on Indian reservations or anywhere else.”

Around then, far from the prairies, J. Thomas Puglisi had heard of a different Centers for Disease Control vaccine experiment on children, although in the barrios of inner-city Los Angeles, the CDC’s preferred word was “project.” As chief of the NIH’s compliance oversight branch of the division of human subject protection, Puglisi monitors government-sponsored clinical trials. In this instance, the CDC was the sole sponsor.

To the mothers in Los Angeles, it all seemed routine, just another trip to the neighborhood health clinic. Their babies, 24 to 45 weeks old, were weighed and measured. Nurses collected blood samples, administered free shots, filled out charts.

Where was the infant born? the nurses would ask the mothers, many of them immigrants. Date of birth? Race? Esta de Mexico? Esta de El Salvador? De donde esta?

There were at least 302 Hispanic babies, 245 black babies, 58 white babies.

Mothers signed forms that mentioned something about a “project” in which “public health policy-makers” wanted to “determine the best measles vaccine strain” and “the best schedule for age of measles vaccination.”

With the “E-Z vaccine,” the form assured the mothers, “your child may be protected earlier against measles.”

The mothers didn’t see the Centers for Disease Control documents that spelled out a reason the agency started inoculating infants with E-Z during May 1990: to test the vaccine’s “immunogenicity and safety.”

An FDA document the mothers never saw stressed that the mothers should be warned that the outcome was uncertain.

Paul D. Parkman, an FDA official, had cautioned the CDC well before the experiment began, in October 1989, that because unpublished data suggested effects on babies’ immune systems and “since the use of the E-Z measles vaccine is unlicensed in the United States and therefore experimental. . . it seems imperative that there be a strong warning on the consent form to the mothers . . . that their infants may not be protected.”

Specific neighborhoods were targeted: East Los Angeles, West Los Angeles and Inglewood – communities that had experienced measles outbreaks.

To combat this resurgence, government scientists confidently turned to E-Z in a dose up to 100 times more potent and administered much earlier than Moraten, the only measles vaccine approved for American children.

“It certainly was a good potential weapon,” said Stephen Hadler, director of the epidemiology and surveillance division of the national immunization program at the centers’ Atlanta headquarters.

But in their enthusiasm, government scientists seized upon a vaccine that backfired.

In Africa, children were dying.

Months before the first California baby got a shot, immunologists were making frightful discoveries in the former French, British and Portuguese colonies near Cape Verde: Some inoculated children were dying within three years.

A French researcher saw it in Dakar, Senegal, in 1989. A Danish immunologist in January 1990 pleaded with the World Health Organization to look at his numbers from Guinea-Bissau and Senegal. It did, and so did the Centers for Disease Control.

Scientists suspected the vaccine somehow weakened the immune system, making children more susceptible to a variety of ailments. Diarrhea and pneumonia were leading causes of death in Africa.

Researchers doubted children in relatively healthy U.S. environments would be harmed, although with weaker immunity they might still become sick.

By April 1990, the news out of Africa was even grimmer. As part of a data-monitoring safety team, the Centers for Disease Control knew that the “excess mortality” had become statistically significant.

But one month later, in May 1990, its Los Angeles test went forward.

In early November, the government quietly participated in a decision, with the European researchers, to stop giving high-dose E-Z to African infants.

Among those present: the CDC’s leading scientist overseeing the U.S. trial.

That same CDC scientist informed the FDA of the African deaths on March 6, 1991.

An FDA official’s notes said the CDC scientist reported “a large number of children who got hi-dose EZ died” in Africa. The notes indicate that about 52 out of 300 children died, compared with 32 out of 300 who got a placebo or another vaccine.

In Los Angeles, the experiment continued.

The evidence out of Africa, explains Hadler, was just “not compelling.”

Wasn’t compelling until Neal Halsey came along.

A Johns Hopkins University researcher under contract to the State Department’s Agency for International Development, Halsey had during the 1980s inoculated babies with E-Z in a Haitian shantytown. Doubting the findings in Africa, he went back to the shantytown, expecting to show the Haitian babies were better off.

“We actually set out to demonstrate there wasn’t an effect,” he said. “We found there was.” High doses of E-Z were associated with increased mortality.

Halsey dialed the CDC. The Los Angeles test was stopped.

By then, it was October 1991, and the mothers of 1,192 children had allowed their children to randomly receive two vaccines, one of which was E-Z. Four hundred and eighty-five babies had received the highest dose. Another 217 had been inoculated with a less-intense form of E-Z.

“So far, there’s no evidence of any untoward effects,” says Hadler. “In the U.S., there’s no evidence this vaccine causes a problem in healthy children.”

CDC internal data obtained by The Plain Dealer do show some changes in the immune systems of some vaccinated children, but the significance remains under study.

Then there was Ricardo Munoz, the son of a 21-year-old Mexican immigrant, Rafaela Lopez Barajas.

Ricardo, nearly 23 months old, died on July 14, 1992, of “clostridium dificile enteritis” and “probable viral gastroenteritis,” according to the coronor’s report.

The CDC has not publicly identified the boy it acknowledges died 15 months after receiving a standard dose of E-Z. CDC documents show the death occurred when the child was 23 months old in July 1992. A document states “causes of death per death certificate” were: “clostridum dificile enteritis” and “probable viral gastroenteritis.”

A search of California records showed no other death of a boy that age from those causes in July 1992.

“It came all of a sudden,” said Maria Socorro, Ricardo’s comadre, or godmother. She lived with the boy and his mother in a cramped, yellow stucco walkup in the largely Hispanic enclave of Bell Gardens, Calif.

“The little boy was nice and healthy, sweet fat cheeks. He was a happy child. And then all of a sudden . . . two days of vomiting, diarrhea and coughing, and this illness took him.”

On the evening of the second day, he was found unconscious, vomit like coffee grounds around his head. “Natural causes,” concluded the coroner.

The CDC, in public descriptions of the death, acknowledged only that a child vaccinated with a less intense dose of E-Z died of acute dehydration and shock following several days of diarrhea; bacteria were found in his stool. It also said the death was unrelated to the vaccine.

A month after The Plain Dealer interviewed CDC officials about the vaccine research, the agency issued a press release that for the first time publicly disclosed the measles study.

Once more, the agency stated categorically that “no problem is expected” among the children in Los Angeles.

“Disingenuous,” was how Brian Ward reacted to the government’s statements, after The Plain Dealer provided him with a copy of Ricardo’s autopsy report and the immunologic data on the Los Angeles children from the CDC’s internal files. Ward, in Montreal at McGill University’s Center for Tropical Diseases, is a leading expert in infectious diseases.

He theorizes that E-Z might rev up the immune system against certain ailments, while weakening it against others.

Ricardo’s death seems “compatible with the deaths that occurred” in Africa and Haiti, Ward said.

Yet neither is there proof the vaccine was to blame for Ricardo’s death; E-Z may have had nothing to do with it.

“Based on what I’ve seen, you can’t prove it either way. It’s an open, legitimate question,” said Ward.

And while the CDC points to research in other developed countries as evidence of safety, Ward cautions that too few children were involved to draw a firm conclusion.

Despite its pronouncements of certainty, the government is still collecting blood samples to learn whether the vaccine harmed or only insignificantly altered the children’s immune systems. Results are due in July.

“We fully acknowledge that it was a mistake” not to tell the families the vaccine was experimental, said Dixie E. Snider Jr., associate director of the Centers for Disease Control. “The major problem is that the consent form did not specifically identify the E-Z vaccine as being an unlicensed vaccine. Some people would call that experimental.”

Last summer, the government finally notified the parents in Los Angeles that the E-Z shots were experimental, thanking them for helping “benefit medical science by increasing our knowledge.”

In Atlanta, the CDC research staff was ordered to undergo training in “human subject protection.”

BusinessWeek – June 11, 2007

How Iran and other nations routinely obtain restricted military technology from the U.S. Department of Defense

TO FRIENDS AND FAMILY, Reza Tabib had seemed an inspiration, proof an immigrant could launch life anew. The son of an Iranian judge, Tabib was a flight instructor at John Wayne Airport in Orange County, Calif. He spoke four languages and could be counted on for level-headed advice, and a laugh.

Agents with the Pentagon’s Defense Criminal Investigative Service discovered Tabib had another talent: procuring restricted aircraft and missile parts for the Iranian military. On May 7, a federal judge in Santa Ana, Calif., sentenced Tabib, 52, to two years in prison for trying to help Iran acquire components for the F-14 Tomcat fighter jet, the swept-wing plane once used by the U.S. and flown by Tom Cruise’s character in Top Gun. The pro-Western Shah of Iran, before his fall in 1979, had acquired 80 of the jets. Today Iran is the only country flying the aging planes, and the U.S. forbids anyone from shipping F-14 hardware to the Middle Eastern nation.

Law enforcement officials say Tabib and an associate easily obtained thousands of Tomcat components that originated from a surprising source: the online company that works with the U.S. government to auction off surplus military equipment to the public.

Defense and homeland Security Dept. investigators say they are pursuing dozens of similar cases in which restricted equipment has slipped through the military’s system of selling surplus equipment. Investigations of F-14 parts bound for Iran led law enforcement agents in March to four entire Tomcats housed at two California airfields. A nearby Navy installation had improperly sold three planes to a scrap dealer. Small museums eventually bought them. The fourth plane was sold for $4,000 to Paramount Pictures for use on the TV drama JAG. In case after case, investigators have found sensitive military equipment and parts in warehouses of front companies or the homes and briefcases of middlemen striving to make deliveries to potential adversaries. Despite precautions contained in policy and law, carelessness, antiquated record-keeping, and failures to confirm the identities and intentions of buyers have contributed to a glut of made-in-the-USA military goods on the global black market. Authorities say many parts have made it to Iran, as well as China and Syria.

One current investigation, triggered by a search in 2005 of a suspect building in California, casts an even more disturbing light on the Pentagon’s permeability. When Defense investigators moved in on their target, they found the expected cache of F-14 parts, apparently bound for Iran. But they were astounded to discover the components were the very ones intercepted during another investigation two years earlier. The parts even had evidence tags still attached to them from the previous case, in which three people were convicted of shipping aircraft and missile parts to Iran. Returned to the Pentagon, the F-14 hardware had been resold and once again was headed for Iran, says Rick Gwin, the Pentagon special agent heading the continuing investigation. “My reaction,” he says, “was extreme, to say the least.”

Each year, the U.S. military disposes of millions of excess items: boots, boats, computers, and plane parts among them. Those that aren’t destroyed because they’re too sensitive, or given away to other government agencies, are typically sold in eBay-like online auctions run by private contractor Government Liquidation. The Pentagon assigns each surplus item a unique 13-digit number and a code indicating whether it should be destroyed or sold. Some sensitive items can still be auctioned, but only to buyers willing to sign paperwork restricting how the purchase can be used and by whom.

The sorting, scrapping, and selling is handled by Government Liquidation and another unit of publicly traded Liquidity Services Inc., based in Washington, D.C. Since 2001, Government Liquidation has had the exclusive contract to sell military equipment the Defense Dept. no longer wants. Last year, the company auctioned off about 19 million items. Some 613,000 registered users, mostly small businesses, can bid on them at the Web site govliquidation.com. The company keeps up to 30.5% of the proceeds, which often amount to only pennies to the dollar of the military’s original cost. In the second quarter of 2007, sales and disposal of military surplus accounted for 58% of the parent company Liquidity Services’ revenue of $49.3 million. (Sales of surplus equipment from 350 corporate clients account for the remainder.)

Government Liquidation says that it scrupulously follows Pentagon regulations. But undercover investigators from a special unit of the Government Accountability Office, the investigative arm of Congress, have recently demonstrated just how easily a person can obtain sensitive parts from the Defense Dept.

In a report published last July, the GAO said its investigators made multiple purchases on Government Liquidation’s site that shouldn’t have been possible. They acquired body armor enhancements currently used by American troops, test equipment for guided missiles, and electronic components for the F-14. All told, the investigators identified thousands of instances in which restricted items that should have been retained by the military or destroyed had instead been sold to the public online. In other cases, GAO investigators posing as military contractors made purchases in person, walking out of the Defense Dept.’s surplus-property warehouses with metal mounts for shoulder-fired guided missiles and other sensitive equipment.

2,669 ‘SENSITIVE MILITARY ITEMS’

The GAO blamed both the Pentagon and its contractor. “Sensitive military equipment items are still being improperly released by the Defense Dept. and sold to the public, thus posing a national security risk,” the GAO report concluded. Government Liquidation, the GAO said, fails to verify the classifications of sensitive equipment and has sold items that should have been returned to the military or destroyed. The combined effect is that the government sometimes doesn’t know to whom it’s selling or what buyers intend to do with military technology.

Liquidity Services hinted at the extent of its potential liability in a 10-K filing with the Securities & Exchange Commission on Dec. 22, 2006. The company noted law enforcement investigations that could involve 79 buyers who purchased 2,669 items between November, 2005, and June, 2006. “These buyers may have acquired these sensitive military items from us,” the company stated. “If an investigation alleges that we engaged in improper or illegal activities, we could be subject to civil and criminal penalties.” The company nevertheless has denied any wrongdoing.

Responding to revelations about black market F-14 parts sales, the House of Representatives on May 17 passed legislation that would bar the Pentagon from selling any F-14 components. The Senate is expected to take up the measure in June. In an Apr. 9 letter to Senator Ron Wyden (D-Ore.), a co-sponsor of the legislation, Government Liquidation says it has decided to stop selling F-14 parts to “ensure that Iran does not receive such parts through any avenues, including the Defense Dept. surplus sales.” The letter adds that the company “always has sought to put national security ahead of commercial profit.”

The Pentagon, for its part, has asked Government Liquidation to develop better ways of tracking inventory. “They came to us and said, can you help us fix this?” says Government Liquidation spokeswoman Julie Davis. Bar code guns have replaced hand transcription of long classification numbers and paper records. New computer databases and centralized warehouses will help ensure more consistency, Davis says. “The systems in place are far superior to anything that’s been in place before,” she adds. Spokeswoman Dawn Dearden of the Pentagon’s Defense Logistics Agency agrees, saying safeguards are now adequate. The Pentagon has “significantly reduced the availability” of sensitive items and has tightened restrictions on who can walk away with parts, she says.

Representative Christopher Shays (R-Conn.), another supporter of the F-14 parts legislation, isn’t convinced. “They’ve got a long way to go,” he says. John P. Ryan, a former U.S. Secret Service agent who has overseen the GAO’s investigation of the Pentagon and Government Liquidation for four years, notices some improvement in surplus military sales. But sensitive goods can still fall too easily into the wrong hands, he says. “The system is vulnerable.”