Sprint Wrestles Unions, Old Folk
On Tuesday, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), the union umbrella group fighting to oust Ernst & Young as Sprint’s independent auditor, won support from Institutional Shareholder Services Inc., the nation’s leading independent proxy advisory firm, for its “Vote No” campaign (see AFL-CIO Takes On Sprint ). And last week, a class-action lawsuit was filed against Sprint alleging the carrier did not adequately shield participants in its retirement plan from risky investments in its own stock.
The AFL-CIO, whose unions represent more than 8,000 of Sprint's 72,000 employees, has launched a campaign encouraging Sprint shareholders to vote against ratifying the ongoing use of Ernst & Young as the company's independent auditor. The ratification is set for the company’s annual stockholder meeting on May 13.
The labor group asked Sprint to nominate another auditor after it became public that Ernst & Young accountants had provided former chairman and chief executive Bill Esrey and former chief operating officer Ronald LeMay with investment advice that got them into hot water with the U.S. Internal Revenue Service (see Sprint's Fun With the IRS). The company booted the executives and instituted a broad range of reforms last month. As part of that effort, the company barred Ernst & Young from providing personal tax advice to executives.
But the AFL-CIO says that isn’t enough. The labor group claims that a conflict of interest still exists within Ernst & Young, because Sprint has paid the accounting firm more nonaudit fees -- that is, fees for financial advice and other items -- than audit fees over the past three years.
Some analysts are not convinced that a conflict of interest really exists.
“It’s not Ernst & Young’s fault that the IRS changed its ruling on this type of tax shelter,” says Patrick Comack, an equities analyst with Guzman & Company. “They didn’t do anything wrong, and there is no impropriety in Sprint’s accounting practices. So I don’t see how this reflects poorly on Ernst & Young’s reputation. Besides, who else are they going to get? Every other accounting firm has been tainted in one way or another lately.”
Still, with support from the ISS, the union’s position among investors could be strengthened when the matter comes to a vote on May 13.
“I’m sure [Gary] Forsee [Sprint’s new CEO] will listen to employees and shareholders," says Comack. "Who knows? Maybe he will just want to start with a clean slate.”
Meanwhile, Sprint is battling yet another shareholder class-action lawsuit filed by current and former employees (see Sprint Sued by Shareholders and Shareholders Sue Sprint). The lawsuit seeks compensation for a drop in value of some 401(k) plans at the company, which it claims were overly invested in Sprint shares.
According to the suit, filed in U.S. District Court in Kansas last week, Sprint gave employees the option to select funds that held Sprint FON stock and Sprint PCS (NYSE: PCS) stock. The suit says the company invested more than $3.5 billion (including over 60 percent of the company's total retirement assets) in these funds, which it calls “speculative, high-risk investments."
Sprint disagrees with these allegations and says employees were under no obligation to purchase Sprint stocks. Because employees had the choice of which funds to invest in, the class-action group may have a difficult time winning their case.
In any event, Comack for one says the recent wranglings don't concern him right now. And they appear to have had little impact on the company’s stock, which this afternoon was trading up $0.22 (1.88%) to $11.90 a share.
— Marguerite Reardon, Senior Editor, Light Reading