SEC Files Complaint Against
WorldCom |
6/26. The Securities and
Exchange Commission (SEC) filed a civil complaint
in U.S. District Court (SDNY)
against WorldCom
alleging violation of Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder, and Section 13(a) of the Exchange Act
and Rules 13a-1, 13a-13, and 12b-20 thereunder, in connection
with WorldCom's disclosure that it engaged in improper
accounting practices.
The complaint states that WorldCom "disguised its true
operating performance by using undisclosed and improper
accounting that materially overstated its income before income
taxes and minority interests by approximately $3.055 billion
in 2001 and $797 million during the first quarter of
2002."
The complaint explains WorldCom's actions. "Starting at
least in 2001, WorldCom engaged in an improper accounting
scheme intended to manipulate its earnings to keep them in
line with Wall Street's expectations, and to support
WorldCom's stock price. One of WorldCom's major operating
expenses was its so-called ``line costs.´´ In general,
``line costs´´ represent fees WorldCom paid to third party
telecommunication network providers for the right to access
the third parties' networks. Under GAAP, these fees must be
expensed and may not be capitalized. Nevertheless, beginning
at least as early as the first quarter of 2001, WorldCom's
senior management improperly directed the transfer of line
costs to WorldCom's capital accounts in amounts sufficient to
keep WorldCom's earnings in line with the analysts' consensus
on WorldCom's earnings. Thus, in this manner, WorldCom
materially understated its expenses, and materially overstated
its earnings, thereby defrauding investors."
The SEC seeks civil penalties, an injunction against further
violations of federal securities law, an order prohibiting
WorldCom from destroying records, appointment of a corporate
monitor, and an order prohibiting WorldCom from making
severance payments, bonus payments, or indemnification
payments. |
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SEC Chairman Addresses
WorldCom |
6/26. Securities and Exchange
Commission (SEC) Chairman Harvey
Pitt gave a speech
in New York City in which he addressed the WorldCom lawsuit.
He stated that "WorldCom's announced $4 billion
restatement puts a sharper point on all the concerns we have
been expressing -- that our system has had serious
dysfunctional aspects for quite some time. It leads me to
offer you a simple message this evening, from the movie
``Network,´´ a message in which I encourage you all to join:
``I'm mad as hell, and I'm not going to take it any more.´´
What happened at WorldCom -- and we do not yet know all that
happened at WorldCom -- is an outrage. What we also know we're
looking at isn't a mistake, it's a fraud."
He also stated that the SEC plans to "require our 1000
largest companies to file a formal certification with us on
the accuracy and completeness of their last annual
reports" by August 15. |
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Congressional Committees to
Hold Hearings on WorldCom |
6/27. House
Financial Services Committee Chairman Michael Oxley (R-OH)
stated in a release
that "Problems with accounting in telecommunications are,
unfortunately, damaging a key growth sector of the economy
that is already facing other, steep challenges." Rep.
Oxley scheduled a hearing before his Committee for Monday,
July 8. He also issued subpoenas
[PDF] to John Sidgmore, Scott Sullivan, Bernard Ebbers, and
Jack Grubman. See, HFSC
release.
Rep. Billy Tauzin
(R-LA), the Chairman of the House Commerce Committee,
wrote a letter to John Sidgmore, CEO of WorldCom, stating that
his Committee "has undertaken a comprehensive review of
allegations of accounting improprieties within certain
telecommunication companies." He requested that WorldCom
provide his Committee certain enumerated records by July 11.
His letter includes requests for the recent internal audit the
precipitated WorldCom's June 25 disclosure, records relating
to communications with the SEC, minutes of the meeting of the
Audit Committee and Board of Directors, and records pertaining
to accounting policies for treatment of operating costs /
expenses and capital investment / expenses.
The letter is also signed by Rep. James Greenwood
(R-PA), Chairman Subcommittee on Oversight and Investigations. |
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Sen. Feingold Introduces
Radio Ownership Regulation Bill |
6/27. Sen. Russ
Feingold (D-WI) introduced the Competition in
Radio and Concert Industries Act [22 pages in PDF]. See
also, Feingold's
summary of the bill.
The bill is a response to the phasing out of the Federal Communications Commission's
(FCC) ownership rules affecting the broadcast radio industry.
The bill states in its findings that "This deregulation
of ownership rules has materially altered the radio broadcast
industry and resulted in a concentration of ownership of radio
stations and a corresponding reduction in localism."
The also recites that "Segments of the radio, concert,
and concert promotion industries have also become vertically
integrated. In some cases, radio station owners, and concert
promoters have common ownership, as well as exclusive
agreements to manage concert venues. As a result, these radio
station owners have the incentive and ability to favor the
musical artists and groups they promote."
The bill would amend 47 U.S.C.
§ 312(a), which currently lists seven reasons that FCC
may revoke a broadcaster's radio license. The bill would add
an eighth basis: "for willful and repeated engagement in
unfair methods of competition, unfair or deceptive acts or
practices, or tying the use of entities owned by the licensee
or permittee for the purpose of hindering significantly, or
preventing, the broadcast of programming or content, including
any sound recording by a musical artist, if such programming
or content is produced or promoted by a person independent of
the licensee or permittee or the creator thereof is
independent of the licensee or permittee".
The bill would also add a ninth basis: "for conviction or
final adjudication under an antitrust law or unfair trade
practice law of a violation of such law regarding concert
venues or concert promotion". Moreover, "unfair
trade practice law" is defined to include, not only the
FTC Act, but also any similar state law.
The bill would also require the FCC to promulgate new
regulations to implement these provisions the bill.
The bill would also require the FCC to conduct proceedings
scrutinizing any license transaction that would result in
further consolidation. Moreover, the bill would require the
FCC to promulgate rules "to prohibit the transfer or
assignment to operate, or the use of, a local marketing
agreement with respect to a commercial radio station if the
transfer or assignment, or such agreement, will permit the
applicant, or the brokers of such agreement, to own, operate,
or have an attributable interest in commercial radio stations
that have in aggregate ... (1) more than 35 percent of the
audience share of the local market of such radio stations; or
(2) more than 35 percent of the radio advertising revenue in
the local market of such radio stations."
The NAB opposes with bill, while the RIAA supports it. National Association of
Broadcasters (NAB) CEO Edward Fritts stated in a release
that "The 1996 Telecommunications Act has strengthened
the ability of radio to better serve listeners, and we
strongly dispute claims that radio has grown more homogenous
in recent years. Separate studies show that radio format
diversity is far greater now than six years ago, and Spanish
stations in the U.S. now number more than 600, up from fewer
than 400 in 1996. Moreover, through the collective efforts of
stations from Boston to Boise, local radio stations generated
$7 billion in public service last year. That alone should be
reason enough for Congress to let flourish a communications
medium that is free, local and reliable."
In contrast, Hillary Rosen, Ch/CEO of the Recording Industry Association of
America (RIAA), stated in a release
that "We applaud Senator Feingold for introducing this
important legislation. It takes the necessary first step
toward ensuring diversity of programming on radio stations by
preventing abuse of independent promotion through
unprecedented increased radio ownership consolidation. This
radio promotion system needs reforming and this bill provides
the road map to getting there." |
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Rep. Tauzin Writes FCC Re
Ownership Rules |
6/27. Rep. Billy
Tauzin (R-LA) wrote a letter
to Federal Communications
Commission (FCC) Chairman Michael Powell
in connection with the FCC's rulemaking proceeding regarding
on the newspaper broadcast cross ownership rules.
He wrote that the "explosion of media sources since 1975,
when the rule was first implemented, should eliminate
lingering concerns regarding a lack of diversity of views in
the marketplace and the need for greater media competition --
the principal justifications for the newspaper/ broadcast
cross ownership rule in the first place. Indeed, the vast
majority of commenters in this proceeding advocate repeal of
this antiquated and unnecessary rule, noting in large part the
dramatic changes in the media marketplace."
Rep. Tauzin continued that "I am disappointed with the
Commission's decision to defer what should be an immediate
repeal of this outdated rule. However, I am heartened that
final resolution of all of the outstanding broadcast ownership
issues -- in the form of an ``omnibus´´ proceeding -- is on
the horizon." |
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Cyber Security Provisions
of President's DHS Bill Criticized |
6/27. Legislators and technology industry representatives
criticized various cyber security related provisions of the
President's proposal to create a new Department of Homeland
Security (DHS). Rep.
Sherwood Boehlert (R-NY) stated that it does not give
research and development a high enough profile. Industry
representatives opposed plans to move the NIST's Computer
Security Division to the DHS.
House Majority Leader Richard
Armey (R-TX) introduced HR 5005,
the Homeland Security Act of 2002, on Monday, June 24. It
contains the President's proposal. See also, White House
section by section analysis,
and Bush's message
to Congress.
The House Science
Committee held a hearing on Thursday, June 27 on the
research and development aspects of the President's proposed
bill. Committee Chairman Boehlert said in his opening
statement that "The need for such a Department is as
plain as the front page of today's Washington Post, with its
talk of an Al Qaeda plot against our nation's computer
systems. And the need for that Department to have a strong
research and development (R&D) component is equally
plain."
However, Rep. Boehlert said that "the nation lacks the
tools it needs to foil a cyberattack". Moreover,
"the bill the Administration has sent us simply does not
give R&D a high enough profile to enable the Department of
Homeland Security to accomplish its goals. The bill does not
even explicitly mention R&D in some critical areas, such
as cybersecurity".
See also, prepared statements of John
Tritak, Director of the Critical
Infrastructure Assurance Office, and John
Marburger, Science Advisor to the President, and Director
of the White House Office of Science and Technology Policy.
The President's proposal has also come under criticism for its
planned relocation of the National
Institute of Standards and Technology's (NIST) Computer Security
Division to the new DHS.
The Computer &
Communications Industry Association (CCIA) held a two day
conference this week that addressed a wide range of technology
related issues. On June 15, Benjamin Wu spoke. He is Deputy
Under Secretary of Commerce for Technology at the Commerce
Department (which includes the NIST).
CCIA members used this occasion to express opposition to
moving the NIST's Computer Security Division. One participant
said that "the concern being raised is ... the
possibility exists that if it moves over to Homeland Security
that it would be more subjected to a law enforcement agency
mentality. And with the history that some of our folks have
gone through of Clipper
Chip, or that DES, there is a
certain suspicion."
Benjamin Wu offered some slight support for the President's
plan to move the Computer Security Division. He stated that
"the President has proposed that a number of functions
around the federal government be unified into the Department
of Homeland Security. The primary mission of those functions
is to protect our homeland security. A proposal that clearly
we need to do". He added that "At the last minute,
the NIST Computer Security Division was tossed into the mix.
And, because it is in the President's proposal, we support the
President's proposal."
However, he continued: "Now, having said that, clearly,
also -- give you a readout on the situation as I understood
it, because there has been, as you mentioned, a longstanding
tension between the computer, or the IT industry, in relation
to the -- really, two entities that perform computer security
work ... the NSA and NIST. And there has always been a
healthy, I think it would be fair to say, healthy disregard
for NSA, even though they are technically capable. NSA always
tilts towards their mission of national security."
He also stated that "the work that industry has done with
NIST has been very productive -- has developed, as you say,
the AES standard, and
moved away from the Clipper Chip, and has been one that is
well honed, and one that has proven to be effective in
championing some of the industry's concerns. And the proposal
that would move that Computer Security Division to the
Department of Homeland Security, in our preliminary
discussions with Congress, because, what the President
proposed was a proposed piece of legislation, that has to work
it way through the legislative process. So, both the House and
the Senate, and then eventually conference, will need to come
to agree to all of the final points of the legislation."
"What the Congress has indicated in preliminary
discussions is some concern they felt of some feedback from
industry that the Computer Security Division, if it is placed
into the Department of Homeland Security, its functions, and
its personnel, would then tilt towards homeland security, in
much the same way that industry has concerns with NSA. And as
a result, there won't be any real champion for the IT
industry. And that sentiment is out there within
Congress."
"And, if you truly believe that, then it would be
incumbent upon you to contact your Members of Congress as this
bill goes through the legislative process. So, I understand
those concerns. And, I think that Congress will probably be --
want to reach out to the industry. And if you have to share
those concerns, I am sure they would be interested in hearing
them. But, now also, I could say that that is a very small
function of the entire DHS proposal," said Wu.
The President's proposal would also transfer several other
existing cyber security related units to the DHS. These would
include all operations of the Federal
Bureau of Investigation's (FBI) National Infrastructure Protection
Center (NIPC), except for NIPC's Computer Investigations
and Operations Section, the Department
of Defense's (DOD) National Communications System, the Department of Commerce's (DOC) Critical Infrastructure Assurance
Office, the Department of
Energy's (DOE) National
Infrastructure Simulation and Analysis Center, and the General Service Administration's
(GSA) Federal Computer
Incident Response Center (CIRC). |
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President's DHS Bill
Creates Cyber Security FOIA Exemption |
6/27. Numerous House and Senate Committees held hearings
this week on the President's proposal to create a new
Department of Homeland Security (DHS). House Majority Leader Richard Armey (R-TX)
introduced legislation in the House that contains the
President's proposal. See, HR 5005,
the Homeland Security Act of 2002. See also, White House
section by section analysis
of the bill, and Bush's message
to Congress.
One provision that has not received much scrutiny at these
public hearings is Section 204. It creates a Freedom of
Information Act (FOIA) exemption for cyber security
information provided to the federal government. It provides
that "Information provided voluntarily by non-Federal
entities or individuals that relates to infrastructure
vulnerabilities or other vulnerabilities to terrorism and is
or has been in the possession of the Department shall not be
subject to section
552 of title 5, United States Code."
Sen. Patrick Leahy
(D-VT) raised the matter at a Senate Judiciary
Committee hearing on Wednesday morning, June 26. In his opening
statement he objected to "creating an ill considered
and overly broad new exemption to the Freedom of Information
Act. Encouraging government complicity with private firms to
indefinitely keep secrets about information on critical
infrastructure vulnerabilities may reduce the incentive to
find solutions and fix the problems. In the end, more secrecy
may undermine rather than foster security."
Rep. Bobby Scott
(D-VA) asked Tom
Ridge, Director of the Office of Homeland Security, about
this exemption at a House
Judiciary Committee hearing on Wednesday afternoon.
However, he merely asked Ridge to provide a written response
to a number of questions, including one regarding this
exemption.
The ACLU circulated a statement
opposing the exemption. The ACLU requests, in the alternative,
that the exemption be narrowed in several respects. For
example, the ACLU argues that it should be limited in time to
only "months". The ACLU also argues that parties
submitting documents to the federal government should be
required to elect only one FOIA exemption to apply to that
document, even though several might apply.
There are also several other pending bills that would provide
a cyber security FOIA exemption. For example, Sen. Robert Bennett
(R-UT) is the sponsor of S 1456,
the Critical Infrastructure Information Security Act of 2001.
It would provide a FOIA exemption for certain cyber security
information provided to certain federal agencies, including
the NIPC, FCC, Justice
Department, Defense Department, and Commerce Department. The
bill would also provide an antitrust exemption for certain
collaboration on cyber security issues. |
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Groups Raise Privacy
Implications of Driver's License Bill |
6/27. A collection of groups wrote a letter
to Rep. Don Young
(R-AK) and Rep. James
Oberstar (D-MN), the Chairman and ranking Democrat on the
House Transportation Committee, opposing HR 4633,
the Driver's License Modernization Act of 2002. The letter
states that the bill "establishes a nationwide
identification system (national ID) through the bureaucratic
back door of state drivers' licenses."
The bill would require all states within five years to have a
drivers license system that includes computer chips embedded
in licenses. The bill would require these chips to store
"all text data written on the license" and
"biometric data matching the holder of the license".
The bill would also require the following: "A State shall
participate in a program to link State motor vehicle databases
in order to provide electronic access by a State to
information contained in the motor vehicle databases of all
other States." The bill would also require that these
databases include all of the "data fields printed on
drivers' licenses and identification cards issued by the
State" and driving records.
The bill would also make the following acts a federal crime,
punishable by up to 20 years in prison: "falsely makes,
forges, counterfeits, mutilates, or alters any driver's
license ...", "tampers with, alters, or destroys a
computer chip embedded in a driver's license or identification
card or data contained on the computer chip", and
"except by lawful authority, accesses data contained on a
computer chip embedded in a driver's license or identification
card".
The letter opposing the bill further states that "An
identity card is only as good as the information that
establishes identity in the first place. Terrorists and
criminals will continue to be able to obtain -- by legal and
illegal means -- the documents needed to get a government ID,
such as birth certificates and social security numbers. H.R.
4633 builds a hi-tech card system on a faulty foundation of
potentially false ``breeder´´ documents." |
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Microsoft Meets with FCC
Commissioners |
6/26. Microsoft SVP
and Chief Technology Officer Craig
Mundie, and others, met with Federal
Communications Commission (FCC) Commissioners Kathleen
Abernathy and Kevin Martin,
and key staff, to discuss the FCC's proceeding regarding the
classification of cable modem service as an information
service. Microsoft's attorney stated in a disclosure letter
[PDF] that Microsoft argued that the FCC "should not
require cable operators to offer access to multiple ISPs but
should remain mindful of the importance of assuring consumers
continue to enjoy that ability in the broadband future." |
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Microsoft Signs MOU with
Chinese Government |
6/27. Microsoft
announced that it signed a Memorandum of Understanding (MOU)
with the State Development & Planning Commission (SDPC) of
the People's Republic of China. Microsoft stated in a vaguely
worded release
that the MOU pertains to "software industry
cooperation".
Microsoft stated that it "will invest RMB 6.2 billion
(USD 750 million) in China in the next three years in the
areas of education and training, academic and research
cooperation, hardware manufacturing outsourcing, continued
support in software outsourcing and strategic investments and
cooperative developments in local software companies."
Microsoft also said that the "SDPC will recommend the
companies Microsoft shall work with. In addition to that, SDPC
will also select entity to cooperate with MS on key national
informatization projects." |
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Friday, June 28 |
The House will meet at 9:00 AM for legislative business.
8:30 - 11:00 AM. The Alliance
for Public Technology (APT) and the High Tech Broadband
Coalition (HTBC) will host a breakfast briefing titled From
Debate to Deployment: Changing the Broadband Reality. The
participants include FCC Commissioner Kathleen
Abernathy, who is scheduled to speak at 9:05 AM. Other
participants include Debbie Goldman (Communications Workers of
America), Allen Hammond (University
of Santa Clara School of Law), Edie Herman (Communications Daily),
Edward Neaf (Cambridge
Strategic Management Group), Paul Schroeder (APT), and
Gary Shapiro (Consumer
Electronics Association and HTBC). See, agenda. Press contact:
Matt Bennett at 202 263-2972 or mbennett@apt.org. Location:
Lowe's L'Enfant Plaza Hotel, 480 L'Enfant Plaza.
9:30 AM. The Senate
Governmental Affairs Committee will hold a hearing to
examine how the proposed Department of Homeland Security
should address weapons of mass destruction, and relevant
science and technology, research and development, and public
health issues. Location: Room 342, Dirksen Building.
POSTPONED. 10:00
AM. The House
Judiciary Committee's Subcommittee on Commercial and
Administrative Law will hold an oversight hearing titled
Administrative Law, Adjudicatory Issues, and Privacy
Ramifications of Creating a Department of Homeland Security.
10:00 AM. The House
Judiciary Committee's Subcommittee on Commercial and
Administrative Law will meet to mark up HR 4561,
the "Federal Agency Protection of Privacy Act".
Audio webcast. Press contact: Jeff Lungren or Terry Shawn at
202 225-2492. Location: Room 2141, Rayburn Building.
Deadline to submit comments to the FTC
in response to its Notice of Proposed Rulemaking to amend its Telemarketing
Sales Rule. The new rule would impose user fees on
telemarketers, and their seller or telemarketer clients, for
their access to the national do not call registry, if one is
implemented. See, notice
in Federal Register. |
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Monday, July 1 |
Neither the House nor the Senate will meet Monday July 1
through Friday July 5, due to the Independence Day work
period.
9:30 AM - 12:00 NOON. The Department
of State's International Telecommunication Advisory
Committee (ITAC) will hold a meeting to address preparations
for the CITEL Assembly. For more information, and security
requirements, see notice
in the Federal Register.
Copyright Office fee
increases to into effect. Basic registration fees remain
unchanged. However, renewal registrations, group
registrations, supplementary registrations, and fees for
services, all go up.
Extended deadline to submit reply comments to the FCC in response
to its Notice of Proposed Rulemaking titled "In the
Matter of Appropriate Framework for Broadband Access to the
Internet over Wireline Facilities". This is CC Docket No.
02-33. See, May 29 notice
[PDF] extending deadline from June 3 to July 1. See also, Order
[PDF] extending deadline from May 14 to June 3, and original
notice in Federal Register.
Deadline to submit nominations to the NIST
for appointment to the Advanced
Technology Program Advisory Committee. See, notice
in Federal Register.
Deadline to submit nominations to the NIST
for appointment to the Visiting Committee
on Advanced Technology. See, notice
in Federal Register. |
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Tuesday, July 2 |
President's Homeland Security Advisory Council (PHSAC) will
meet. The meeting is closed to the public. However, written
comments may be submitted Fred Butterfield at fred.butterfield
@gsa.gov. See, notice in the Federal Register. See also, order
establishing the PHSAC. Location: undisclosed. |
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Wednesday, July 3 |
The TLJ Daily E-Mail Alert will not be published because of
the Independence Day holiday. |
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Thursday, July 4 |
Independence Day. The FCC and other government offices will
be closed. The National Press Club will be closed.
The TLJ Daily E-Mail Alert will not be published because of
the Independence Day holiday. |
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FTC Reports on Internet
Gambling and Children |
6/26. Federal Trade Commission
(FTC) issued a short document
[PDF] titled "Online Gambling and Kids: A Bad Bet".
It states that "The most common types of gambling for
kids are reported to be card games and sports betting. But
increasingly, parents of teens are concerned that their kids
may be gambling on the Internet, where many game operators are
operating from servers outside the U.S. -- beyond the
jurisdiction of state or federal regulations about the hours
of operation, the age of the participants, or the type of game
offered."
The FTC continues that "it's easy for kids to access
online gambling sites, especially if they have access to
credit or debit cards. Indeed, some of the most popular
nongambling websites carry ads for gambling sites, and many
online gameplaying sites link to gambling sites."
Rep. Bob Goodlatte
(R-VA) praised the FTC. He stated that "The spread of
gambling brings with it the onslaught of a host of social ills
including bankruptcy, addiction, family break down and even
suicide. Web users including children, who make up the largest
percentage of Internet users, are constantly confronted with
unsolicited banner ads, linking to Internet gambling sites.
These sites operate without all of the necessary safeguards
that are in place for the legalized gaming industry, which
ensure that children are protected from gambling."
Rep. Goodlatte is the sponsor of HR 3215,
the Combating Illegal Gambling Reform and Modernization Act, a
bill directed towards shutting down illegal off shore gambling
web sites. The bill passed the House Judiciary
Committee on June 18. |
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People and Appointments |
6/27. The Senate
Judiciary Committee approved the nomination of Lavenski
Smith to be a Judge on the U.S. Court of Appeals
(8thCir).
6/27. Retired General Wayne Downing resigned his
position as Deputy Assistant to the President, National
Director and Deputy National Security Advisor for Combating
Terrorism. He had held the position since October of 2001.
President Bush replaced him with retired General John
Gordon. Gordon is currently Under Secretary for Nuclear
Security and Administrator of the National Nuclear Security
Administration (NNSA). He was previously Deputy Director of
Central Intelligence at the Central Intelligence Agency (CIA).
Before that, he was Associate Director of Central Intelligence
for Military Support at the CIA. Before that, he worked on the
National Security Council. See White
House release.
6/27. Albert
Yu, Intel SVP and Strategic Programs Director,
retired. See, release.
6/27. Marilyn Nelson resigned as a director of Qwest Communications. See, release.
6/25. Wilson Lowery was named Executive Assistant
Director for Administration of the Federal Bureau of Investigation
(FBI). He has been a special assistant to the FBI Director,
tasked with overseeing the FBI's reorganization and
re-engineering implementation. He previously worked for IBM.
He replaces Robert Chiaradio. See, FBI
release. |
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More News |
6/27. The Office of the U.S.
Trade Representative (USTR) announced a reorganization.
See, USTR
release.
6/26. The Senate passed S 1754,
the Patent and Trademark Office Authorization Act of 2002, and
HR 2047,
the Patent and Trademark Office Authorization Act of 2002.
6/27. The House
Judiciary Committee postponed its hearing titled
"Revisions to the Attorney General's Investigative
Guidelines". Attorney General John Ashcroft
had been scheduled to testify.
6/26. The American Electronic
Association (AeA) announced that it is selling a report
titled "Cyberstates 2002: A State by State Overview of
the High Technology Industry". See, AeA
release. |
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