Exclusive: Arthur Laffer Is No Laughing Matter for Some - TheStreet

Exclusive: Arthur Laffer Is No Laughing Matter for Some

A number of companies have discovered that the famed economist is quick to sue.
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Arthur Laffer became one of the nation's most famous economists with his theory that wealth trickles down, but as a board member, several companies claim he demanded a steady stream of stock into his pockets, while offering far less in return than he had promised.

Laffer agreed to serve on the boards of several embryonic companies in exchange for equity stakes. He then sued the firms for payment after they claimed he failed to perform agreed-upon duties as a board member, according to court documents and interviews with a number of Laffer's former colleagues and their attorneys.

The economist has had considerable leverage in the disputes, because companies that eagerly announced his appointment to their boards are loath to lose the legitimacy his name brings and are ill-financed to fight his lawsuits, the court documents contend.

Arthur Laffer

"Laffer's conduct ... provides evidence of a pattern and practice of preying on small, cash-strapped companies by promising to sit on their boards of directors, reneging on his promise, and then suing the companies to extort the stock he was to receive for his services,"

ClickTheButton.com

, a New York City online price-comparison company argued in a California lawsuit it settled with Laffer earlier this year. "Suing companies in an inconvenient forum plays right into Laffer's scheme by lessening the odds that a victim company will fight the bogus claims asserted against it."

Laffer, in an interview with

TheStreet.com

, disputes that claim and stands by court filings in which he ardently denied extorting stock from companies on whose boards he has agreed to serve.

"I am far too busy a person to waste my and others' time to 'prey on small, cash-strapped companies,'" he said in a written court response to ClickTheButton's claims. "I am often asked to serve on the boards of directors of small companies. I have occasionally done so and my intent is to help those companies succeed and then to share in their success."

On the Supply Side

Laffer gained his fame in the 1980s as a proponent of a supply-side economics theory that contends, generally, that government tax revenues will increase at some point if taxes are reduced. That theory, known now as the "

Laffer curve" was embraced by

President Ronald Reagan

, in whose administration Laffer served as a member of the

Council of Economic Advisors

.

Laffer's economic prowess has continued to win him accolades. Last year

Time

included him on a list of 100 people it called "The Century's Greatest Minds."

"He is truly one of the brightest human beings I've ever met in my life, if not the smartest," says Alex Cappello, who for a year in the late 1990s was a partner with Laffer in the investment banking firm

Cappello & Laffer Capital.

"I know he's somewhat controversial, but I still have a high regard for him."

Given his fame, companies frequently ask Laffer to join their boards, Laffer says. "When they approach me, they think there's some value to that," he says. "I get requests all of the time to be on boards."

Laffer, who is 60 and owns the economic research and financial consulting firm

A.B. Laffer Associates

in San Diego, has been appointed as a director or advisor to the boards of at least 27 different companies over the past two decades, records show.

Laffer's activity on boards, however, has generated concern for more than the number of seats he holds. For example, he sued three of the companies that appointed him as a director in 1998 and 1999, court records show. Those include ClickTheButton,

Ambient Capital Group

, of California, and

Validigm

, of New York City.

The ClickTheButton Story

In the case of ClickTheButton, the company announced in an April 1999 press release that Laffer would become a board member, noting Laffer's credentials and pedigree as a celebrated economist.

In a March 1999 letter, company co-founder and former director Lance Vitanza welcomed Laffer, saying, "You have already made a huge contribution to the success of the company. I look at this as the first of many projects on which we will work together and if all goes well, by which we all make a lot of money and have a lot of fun in the process."

But five days after he agreed to sit on the board, Laffer demanded that ClickTheButton's chairman and CEO be replaced with someone of his choice, according to the company's court filing. He then refused to serve on the board until that happened.

So ClickTheButton was forced to issue a press release in May announcing that Laffer wouldn't serve on its board. The quick about-face hurt the company's financing efforts, it contended.

ClickTheButton officials declined to comment on the suit. Laffer says the matter was resolved with the company agreeing to pay him with a number of shares he found acceptable.

Laffer also says he reached acceptable settlements with Validigm and Ambient. Officials with those companies declined to comment.

A Helping Hand From the Courts

Other people who have dealt with him say Laffer often turns to the courts to resolve differences.

In the mid-1990s, for instance, Laffer launched a campaign to get a flat-tax proposal before California voters, so he hired prominent Republican political consultant Sal Russo to run the campaign. The two moved in the same political circles.

Russo had worked for Reagan when he was California governor and was friends with former U.S.

Congressman Jack Kemp

, another supply-side proponent.

Midway into the campaign, Laffer "pulled the plug" on the effort, Russo says, and filed a lawsuit against Russo. Laffer called for Russo to pay for millions of dollars in revenue he wasn't able to make in speaking fees while the tax campaign was under way, Russo says.

"I thought his conduct was bizarre," Russo says. "Everything was fine one day, and the next day he was suing me."

Laffer didn't win the payment he demanded, but Russo was ordered to pay "less than $20,000" to campaign contributors who supported the tax initiative, says Laffer's longtime attorney, Jeffrey Lewin, of the San Diego firm

Sullivan Hill Lewin Rez & Engel

. He adds that Laffer sued Russo because he believed Russo was spending the campaign money without authorization.

Yet Another Suit

Last year, Laffer also sued another company which his firm had been a consultant for -- the now-defunct California investment advisory firm

Pension Performance

. The lawsuit stemmed from a dispute over Laffer's compensation, says a former Pension Performance principal who asked not to be identified.

"Arthur does have this reputation of being very ruthless and of suing everybody," the person says.

Lewin says people try to take advantage of Laffer because of his fame. "A lot of people think they can make money riding on his reputation," Lewin says. So, Lewin adds, "He is not hesitant to enforce his rights in the courts."