Shares didn’t bar US antitrust chief’s telecom role

The Justice Department’s antitrust chief helped shape U.S. telecommunications policy after obtaining waivers from a conflict-of-interest law that otherwise would have barred his participation because of family-owned telephone stock, government records show.

The clearances obtained by antitrust division head Joel Klein in 1996 are a matter of public record, though they were disclosed for the first time after Bloomberg News requested them. At the time of the waivers, his daughter owned more than $32,000 in Sprint Corp. and Cincinnati Bell Inc. stock.

After getting the waivers, Klein reviewed two major telecommunications combinations, defended a new sweeping telecommunications law in court and recommended keeping three local phone companies from competing for long-distance customers with businesses like Sprint.

Klein, who ethics officials say followed the letter of the law in obtaining the waivers, decided a year later to sell all his family’s stock holdings to avoid future questions about financial conflicts of interest, Justice Department officials said.

A request for comment by Klein was referred to Janis Sposato, the agency’s No. 2 ethics official, who said he “played it by the book.”

The belated public knowledge about the waivers shows that the process of how they are granted “needs to be a little more transparent,” said Charles Lewis, director of the Center for Public Integrity, a private group that studies government ethics and political donations. “It would’ve been nice to know there was this type of potential conflict at the time,” Lewis said, even if it didn’t affect the outcome of any decisions.

$50,000 Threshold
The waivers were granted on grounds the Klein family holdings in Sprint and Cincinnati Bell weren’t substantial enough to compromise his integrity and because Klein’s disqualification would create a hardship for the department.

Under the latest government interpretation of the ethics law, Klein’s holdings could have been as high as $50,000 and he still would have received such a waiver — as long as the companies in which he owned shares were not party to any matter under review.

Ethics experts say Klein’s case points up a recurring tension when the government enlists people from the private sector to oversee sensitive business issues: There may be an unavoidable appearance of a conflict of interest.

“We know that people going into government are not financial eunuchs,” said Lewis. Still, he said, “Conflict-of-interest waivers should be granted on a very, very limited basis.”

Waivers are commonplace among high-level officials in the antitrust division because officials often oversee investigations of an industry in which they may have investments, said Justice’s Sposato. “If you couldn’t get waivers, it would be a requirement that all public officials divest of all assets except cash,” she said.

The decisions Klein made helped some investments and hurt others because Sprint and Cincinnati Bell were on opposite sides of most telecommunications issues, said Gene Kimmelman, Washington director of Consumers Union.

Exxon Valdez Case
In another example, then-Attorney General Dick Thornburgh received a 1991 waiver that enabled him to participate in the government’s investigation of the Exxon Valdez oil tanker spill in Alaska even though he owned $32,296 in oil company stocks.

Outside experts said the waiver policy is sound. “We structure public service in this country so people can go in and out of public service and the private sector,” said Kathleen Clark, who teaches ethics at Washington University law school. “We prefer that to having public service as a priesthood.”

Waivers are also granted when a holding is a relatively small part of an official’s investment portfolio. And officials who own less than $5,000 in a stock needn’t seek a waiver even if the company is a party to a particular matter.

Stephen Gillers, a legal ethics specialist at New York University law school, defended Klein, saying the likelihood he acted “to increase his net worth is remote in the extreme.”

Klein’s waivers were granted when he was acting head of the antitrust division. He sold the shares of Sprint and Cincinnati Bell, held in his daughter’s name, and other stock holdings and reinvested the proceeds in mutual funds soon after the Senate confirmed him to the post last year.

In requesting the first waiver in the telecommunications cases, Klein said in an Aug. 29, 1996 letter that his continued “disqualification would effect a substantial hardship on the department.” He said his phone company holdings amounted to just 4 percent of his financial investments.

Legal Challenges
At the time, the government went to court to defend Federal Communications Commission regulations promoting competition for local telephone service under the Telecommunications Act of 1996. The regulations have spawned complicated and protracted legal challenges by telephone companies, including Cincinnati Bell.

The waivers let Klein guide the government’s legal defense of the FCC’s regulations — a case that is scheduled to be argued before the Supreme Court on Tuesday — and play a prominent role in making telecommunication policy. He also was able to participate in the Justice Department’s review of Bell Atlantic Corp.’s $23 billion acquisition of Nynex Corp. and SBC Communications Corp.’s $16 billion purchase of Pacific Telesis Group.

He also took a visible role in urging the FCC to deny applications by Bellsouth Corp., Ameritech Corp. and SBC to enter the long-distance market and compete with companies like Sprint.

The FCC followed the Justice Department’s recommendations that the regional operating companies be kept out of long distance until they had opened their local markets to competition. Sprint joined other long-distance companies in opposing these petitions.

Bingaman
Federal ethics laws require that government officials remove themselves from participating in decisions or court cases involving companies in which they have a financial interest. The law permits waivers when the financial interest is small enough so as not to “affect the integrity of the services which the government may expect” from the official.

At the time of Klein’s waivers, his predecessor, Anne Bingaman, was disqualified from dealing with telecommunications issues because she was negotiating to leave the Justice Department to become an executive with LCI International Inc., a long-distance telephone provider that later was acquired by Qwest Communications International Inc.

On Sept. 20, 1996, Klein filed a brief in the 8th U.S. Circuit Court of Appeals that opposed motions by Bellsouth, U.S. West, Bell Atlantic and others to block the FCC’s local competition regulations.

Nearly a month later, on Oct. 17, 1996, Klein was informed that Cincinnati Bell was a party to the case and requested a clarification of his previous waiver. By that time, Sprint also had filed a brief supporting the FCC regulations.

“I now realize that challenges to FCC regulations … technically involve the industry members as parties,” he wrote in his second waiver request. Bloomberg