Fact Sheet: Why BellSouth Stockholders Should Be Cautious

Document Date: July 21, 2006

Considerations for BellSouth shareholders with regard to the AT&T merger and the NSA spying controversy

BellSouth shareholders should ask some hard questions about the proposed merger with AT&T because of that company’s entanglement in the NSA spying controversy.

AT&T appears to be heavily involved. There are several sources of information that point to AT&T’s participation in the newly revealed NSA spying programs:

  • In December the New York Times reported and the Bush Administration confirmed that the NSA was tapping into telephone calls of Americans without warrants. Under the NSA program, the Times reported, “senior government officials arranged with officials of some of the nation’s largest telecommunications companies to gain access” to communications.
  • Former AT&T workers have described secret, secured government rooms through which telecommunications traffic was routed at AT&T communications centers in San Francisco and St. Louis. The descriptions came in documents filed as part of a class-action lawsuit filed by the Electronic Frontier Foundation, and in a story reported by Salon.
  • USA Today reported in February that several companies including AT&T were sharing their customers’ calling records en masse with the NSA. BellSouth and other companies said that USA Today was mistaken. AT&T was conspicuous, however, in not denying the report.
  • Executives of another telecom, Qwest, have reported being approached by the NSA and pressured to provide customer data without a warrant. Unlike AT&T, however, Qwest apparently refused.

Such a sharing of communications is against federal law. Telephone companies are required by law to protect the privacy of consumers’ communications. Section 222 of the Stored Communications Act and Section 2707 of the Electronic Communications Privacy Act ban phone companies from sharing information about their customers’ phone records without a warrant or other legal process.

AT&T’s participation exposes it to enormous liability. The Stored Communications Act carries a1,000 per customer penalty for turning over records. Given that the newly merged company would have 70 million customers, that could add up to staggering70 billion in potential liability. Even a fraction of that amount would be a major blow to shareholder interests. AT&T may also be vulnerable to fair-trade actions for violating the promises it made to its customers in its privacy policy. In an apparent attempt to reduce its exposure in this area, AT&T in June issued a revised privacy policy giving itself more latitude to share its customers’ calling information, raising new questions about its commitment to customer privacy and the legal risks it is apparently willing to take.

Failure to disclose pending lawsuits in the proxy statement raises serious concerns under the securities law. Just yesterday a Federal Judge in Northern California ruled that a suit against AT&T for disclosing customer communications to the NSA is not barred by the “state secrets” doctrine, as the company has claimed throughout the nation, and may go forward. This decision highlights AT&T’s legal jeopardy. The existence of multiple suits against the company with potential damages in the tens of billions of dollars should have been fully disclosed in the joint proxy statement.

The failure to disclose this extraordinary potential liability raises serious questions about whether the companies have complied with the securities laws.

Just because the chickens haven’t come home to roost yet, doesn’t mean they won’t. The Bush Administration’s domestic spying activities — and AT&T’s role in them — have so far been insulated against oversight and accountability by three factors: 1) A shield of secrecy; 2) Congressional allies; and 3) an overall political climate where the issue of terrorism is still predominant. However, no smart investor would bet upon the stability of any of these factors. No one should be surprised if the wall of secrecy surrounding these programs continues to crumble, Congress changes hands, or the overall political winds shift direction.

AT&T’s involvement raises disturbing questions that aren’t going away. A significant segment of the American people feel deeply disturbed and betrayed by AT&T’s behavior, and are going to continue pressing for an inquiry into it, an end to it, and punishment for anyone who has violated the law.

The ACLU has taken the following actions in this case:

  • Sued the NSA directly over this program.
  • Filed federal lawsuits against AT&T in Illinois and California.
  • Called for Congress to launch a thorough investigation of just what has taken place between the NSA, AT&T, and any other companies.
  • Filed requests with public utility commissions in 22 states asking them to investigate potential violations by AT&T and other companies of state privacy laws, which in many states clearly bar the reported activities.
  • Filed comments with the FCC pointing out that under the law the FCC must investigate allegations of wrongdoing by AT&T before it can approve a merger.
  • Worked with allies to keep officials and publics in Europe informed of what is taking place.
  • Written to telecom executives demanding public pledges not to engage in the reported data sharing activities.

As Americans, AT&T’s behavior should disturb us. We are investors, but we are Americans first, and every American should be disturbed by AT&T’s actions, which undercut precious things this country holds dear: the rule of law, the separation of powers, and our most basic understandings and expectations about how our private communications are treated in the United States.

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