Passage of bill to avoid "cliff" should bolster Wall Street

Speaker of the House John Boehner (R-OH) (front, in green tie) walks with Congressman Dave Camp (R-MI) (R) after a meeting with House Republicans about a ''fiscal cliff'' deal on Capitol Hill in Washington January 1, 2013.

Credit: Reuters/Joshua Roberts

By Ryan Vlastelica

NEW YORK | Wed Jan 2, 2013 12:16am EST

NEW YORK (Reuters) - U.S. stocks are poised for gains to begin the year after the late passage of a bill to avoid harsh tax hikes that would have hit most Americans and crimped economic growth.

However, harsh reality awaits any euphoria that comes from avoiding the "fiscal cliff". In two months, battles over further spending cuts and, in particular, the U.S. federal debt limit will come to a head.

The House of Representatives voted for a bill passed on Monday by the Senate that will raise taxes on wealthy individuals and families and preserve certain other benefits that will, together, soften some of the blow that would have been sustained without an agreement to avoid the fiscal cliff.

That puts Wall Street in prime position to begin 2013 with a rally, even if thorny issues remain to be addressed in the coming months in Washington.

Asian markets extended gains modestly, with the MSCI Asia Pacific ex-Japan index of stocks up 1.7 percent. U.S. markets will not have a chance to react until 6 a.m. ET, when futures trading begins after the New Year's Day holiday.

"When you separate the fundamentals of the economy from the headlines, the fundamentals really suggest we can support higher prices in the new year," said Bill Vaughn, equity portfolio manager at Evercore Wealth Management in San Francisco.

The Standard & Poor's 500 stock index ended the year up 13 percent, its best gain since 2009, mostly shrugging off the debt-related worries that dominated headlines during the year.

Equity markets held up in the last two months of the year as well, expecting a resolution to head off $600 billion in spending cuts and tax hikes that could push the economy into recession if they stay in effect for long. While the deadline to avert the cliff was December 31, legislation can be formulated to retroactively prevent going over.

The back-and-forth in recent weeks has primarily been of concern to businesses, where confidence has eroded. Some slowing in economic growth due to the impasse is expected, but that may play into the hands of value investors if the market corrects in coming months.

"It appears as though politics will dominate for some time," said Richard Bernstein, chief executive of Richard Bernstein Advisors in New York. "That being said, equity market valuations already reflect this ... the stock market is attractive from my perspective."

Stock markets around the world were closed Tuesday because of New Year's Day. Some Republicans in the House had expressed concern on Tuesday afternoon that a bill would not be finished before U.S. markets open.

Many traders will still be away from their desks because of the holiday, indicating trading volume will stay near its recent low levels. The anemic action, coupled with uncertainty over the cliff, resulted in a spike of volatility in December, with the CBOE Volatility index jumping 13.5 percent in the month.

DEBT CEILING BATTLE REMAINS

The bill that passed does not contain the kind of spending cuts that many conservative Republicans favor in order to bring down the high U.S. federal debt.

Even as this battle recedes, markets will look ahead to another fight in the next few months, this time over whether Congress will approve an increase in the U.S. debt ceiling.

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

"The spending side fight looms and it will be tougher," said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida. "The Republican caucus is tighter on that side."

Markets posted several days of sharp losses in the period surrounding the fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Economists at Goldman Sachs, in a note Tuesday, said the coming fight to raise the debt ceiling -- where Republicans are likely to demand spending cuts while President Obama pushes for more taxes -- "is likely to be at least as politically difficult as the last increase was in the summer of 2011."

During this fight, the markets have been less volatile, largely because the effects of the spending cuts and tax hikes will be gradual, and there was an ongoing expectation that a retroactive fix was in the offing.

(Additional reporting by David Gaffen, David Randall, Chuck Mikolajczak and Richard Leong; Editing by Neil Fullick and Paul Tait)

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Analysis: Whistleblower-law passage stalls in some states

By Andrew Longstreth

NEW YORK | Wed Nov 23, 2011 4:10pm EST

NEW YORK (Reuters) - For many states, a law intended to root out corruption also has been good for the bottom line.

Over the last decade, more than 20 states have passed a version of the federal anti-corruption law known as the False Claims Act (FCA). The local laws, like the federal one, allow governments to join lawsuits filed by whistle-blowers who spot fraud involving taxpayers dollars.

They have been a lucrative proposition, helping states collect millions of dollars in fines. In May, California announced a $241 million settlement of an FCA lawsuit against Quest Diagnostics Inc that alleged overcharges to the state's medical program for the poor. California's share of the settlement, $171 million, flowed to the state's general fund.

Yet at least nine states have tried and failed to pass local versions of the False Claims Act. In Ohio, there have been attempts to pass a bill since at least 2007. Republican state Attorney General Mike DeWine threw his support behind a bill in April, but so far nothing has come of it. Kentucky and Pennsylvania have also been unable to beat back opponents.

Some of the most vocal criticism of the False Claims Act has come from the pharmaceutical and medical industries, which claim that the law encourages meritless lawsuits and creates a hostile business environment.

They also question the cost-effectiveness of such statutes, which require significant government resources to investigate the claims and oblige the government to share recoveries with whistle-blowers.

Samuel Denisco of the Pennsylvania Chamber of Business and Industry, said that a state False Claims Act would be duplicative of the federal law, adding that policy makers have a responsibility to avoid "protractive litigation that is not beneficial to the state."

States that have been unable to counter those objections are starting to pay the price, according to proponents of the law.

In August, for example, Kentucky sought to join a sweeping lawsuit accusing Education Management Corp, a for-profit educational company, of fraud. The state said that EMC made false statements to the Kentucky Higher Education Assistance Authority and the U.S. Department of Education.

California, Florida and Illinois -- all of which have False Claims statutes -- had already joined the case, first filed by a whistleblower in 2007 alleging that EDMC wrongfully received more than $11 billion in federal and state funds.

But on October 24, Federal District Judge Terrence McVerry in Pittsburgh ruled that Kentucky could not intervene, citing its lack of a False Claims Act. A spokeswoman for the Kentucky attorney general's office said it "respectfully disagrees" with the judge's decision and is considering an appeal.

"It's a shame that Kentucky didn't have all the tools that other states have to go after fraud against taxpayers," said Harry Litman, an attorney for the whistle-blowers in the case.

False Claims legislation has run into similar obstacles in Pennsylvania. A coalition of Pennsylvania business groups, mainly in the medical professions, urged the legislature to oppose a version of a False Claims Act bill that was introduced last year. It argued that the bill would duplicate the federal statute and would hurt the state's efforts to recruit and retain physicians.

Opposition to the False Claims Act hardly is hardly ever about politics or ideology, said Patrick Burns of Taxpayers Against Fraud, who notes that states with the law are both blue and red.

"It's really about how state legislators will sell themselves out for a few thousand dollars apiece," said Burns. "Even in a state like Ohio or Pennsylvania where the economy is in shatters and unemployment is through the roof, a few thousand dollars will prevent the state legislature from passing a bill that will stop the hemorrhaging of fraud and recover hundreds of millions of dollars."

DATING TO LINCOLN'S ERA

The federal False Claims Act has a long history. It was first passed in 1863 in an effort championed by President Abraham Lincoln to combat unscrupulous defense contractors defrauding the Union Army.

But the act really got its teeth in 1987 when it was amended to allow whistle-blowers who discover fraud against the government to bring a lawsuit and to receive 15 percent to 30 percent of any recovery. The changes also increased potential recoveries available to plaintiffs to three times the amount of actual damages.

As states began passing their own version of the False Claims Act, they tended to use the statutes to target healthcare fraud. Recoveries were initially relatively modest, according to findings published in a 2005 Tulane Law Review article. In Hawaii, for example, recoveries obtained between 2000 and the fall of 2004 were $4 million.

But more recently, some states have reached eight and nine-figure settlements in whistleblower cases and begun to amend their False Claims Act laws to tackle other types of corruption.

New York, with one of the most powerful state FCAs in the country, put the statute to novel use in October when Attorney General Eric Schneiderman intervened in a whistleblower case brought against Bank of New York Mellon for bilking investors in foreign exchange transactions. He is seeking nearly $2 billion on behalf of public pension funds and other investors.

And False Claims Act boosters whose efforts have been unsuccessful are going back to the drawing board. Kentucky's House speaker, Greg Stumbo, has been trying to push a False Claims Act since he was attorney general of the state from 2003 to 2007. Though an effort to pass a version of the law failed earlier this year, Stumbo says he plans to reintroduce the legislation in January. "There's no reason for states not to have it," he said.

(Reporting by Andrew Longstreth; Editing by Eileen Daspin and Steve Orlofsky)

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