February 28, 2005
Rich Lederer over at the Baseball Analysts posts this first segment in a three part series of his recent interview with Bill James, who is the creator of Sabermetrics, the mathematical and statistical analysis of baseball records. Check out this fascinating interview, which includes such interesting observations as the following:
RL: In the 1979 Abstract, you noted that Rod Carew once swung at two pitches when he was being intentionally walked, trying to get the pitcher to throw him something he could reach. Do you think that is a strategy Barry Bonds could employ today?
BJ: I don't know. I would argue about it this way. If it is genuinely advantageous for the defense to intentionally walk Barry Bonds, then logically it has to be defensible for Bonds to swing at one or two pitches to try to negate that advantage and try to tempt them into throwing him a pitch. On the other hand, if hitters never react by swinging at pitches to try to stop the opposing team from intentionally walking them, the implication is that the offense always agrees to accept it even though the defense thinks the walk is helpful, which seems somewhat illogical.
A couple of previous interviews with Mr. James can be reviewed here and here. Mr. James was hired last year by the Red Sox as a consultant and, although he would attribute the Red Sox subsequent World Series Championship as pure coincidence, I'm not so sure. Bill James is one smart cookie on matters relating to baseball.
Update: Here is the second segment of the interview.
Greg's Opinion brings us this post in which he describes an evening chat with Vinson & Elkins partner and Democratic Party candidate for U.S. Senator, Barbara Radnofsky of Houston. Barbara is a formidable candidate who will be interesting to watch as her campaign develops. If she can overcome the name recognition hurdle, my sense is that she could give any Republican candidate for the Senate a real run for their money.
In a deal that may well be the equivalent of Custer's last stand for department-store retailing, Federated Department Stores Inc. -- the owner of Macy's and Bloomingdale's -- has agreed to buy its longtime and smaller rival May Department Stores Co. for about $11 billion. May is the owner of Houston's venerable chain, Foley's.
Federated will pay about $36 a share in cash and stock, and assume about $6 billion in debt, to buy May, which also owns the Marshall Field's and Lord & Taylor chains. Although the proposed merger will create a huge company of nearly 1,000 department stores, the deal underscores the critical condition of department-store retailing, which has to undergo a transformation to survive in the brutal American retailing market. Big-box retailers such as Wal-Mart Stores Inc. on the low end and upscale stores such as Neiman Marcus Group Inc. on the high end are squeezing the profits of big department chains, which have been losing market share steadily over the past 25 years.
Although Federated operates only one Macy's store in Foley's home base of Houston, divestitures are still expected to occur, particularly in the 94 malls across the nation in which Federated and May both maintain locations. The merger is subject to regulatory approval, which is expected given the deteriorating condition of the department store-retailing sector.
Update: Dylan has interesting inside observations about May in this post.
Robert "Mad Dog" Dawson, who taught criminal and juvenile law to a generation of law students at the University of Texas Law School, died Saturday at his farm in Fentress at the age of 65. Although illness forced him to into a motorized scooter in the last few months of his life, Professor Dawson continued to teach his criminal law class at UT until a week and a half ago.
Professor Dawson taught at UT for 30 years and founded the school's Criminal Defense Clinic in 1974. The clinic gives third-year law the opportunity to represent criminal defendants in court under the supervision of UT law professors. Dawson authored the state's juvenile justice laws in 1973 and advised lawmakers on the revision of the Texas Juvenile Justice Code in 1995.
According to his obituary, Professor Dawson's ashes will be mixed with old horse stall bedding and scattered by manure spreader on pastures at the farm. "They will make good fertilizer for the hay crop," he wrote before his death.
Arrangements were pending with Weed-Corley-Fish Funeral Home in Austin. A memorial service is scheduled for 2 p.m. April 2 at UT's LBJ Auditorium.
February 27, 2005
John and Jackie Knill of Vancouver, British Columbia were killed in Khao Lak, Thailand when the December 26, 2004 tsunami struck the resort at which they were vacationing. Afterward, their digital camera was found, and though the camera was destroyed, the photos of the oncoming tsunami on the camera's memory card were salvaged. Check out these spectacular photos.
Here is the amicus curie brief of the National Association of Criminal Defense Lawyers in Arthur Andersen's appeal of its witness tampering conviction to the United States Supreme Court. The NACDL's brief addresses the prejudicial impact that the Andersen conviction will have on the attorney-client relationship, and notes the following in its Summary of the Argument:
This case places lawyers at risk of investigation, prosecution, and imprisonment for doing their jobs. When a lawyer represents a client in connection with a potential government investigation, one of the lawyer?s goals may appropriately be to prevent the government from developing evidence against the client. Within the bounds of ethics and the law, that is what lawyers do. . .
In prosecuting the accounting firm Arthur Andersen LLP (?Andersen?), the government singled out the conduct of an in-house lawyer, Nancy Temple. Her crime, in the government?s view, was providing legal advice even before the SEC had issued a subpoena or launched a formal investigation. Specifically, she reminded Andersen employees to adhere to a lawful, established document retention policy and recommended changes to a draft memorandum ? actions that lawyers undertake every day. According to several of the jurors, her edits to the draft memorandum were the principal basis for Andersen?s conviction.
By criminalizing this conduct, the Fifth Circuit disregards the traditional role of lawyers, which includes a duty to protect their clients by deflecting potential government investigations. In the court?s view, this goal itself is ?improper? and reflects a ?corrupt? purpose. Any action by the lawyer ? such as vigorously asserting privileges, counseling potential witnesses about their rights, or, as here, advising employees about a company?s document retention policy and editing a draft memorandum ? can violate the witness tampering statute if it is motivated even in part by this goal. Lawyers in the post-Andersen era now will operate in fear of investigation and prosecution. Those fears inevitably will dampen the zealousness of their advocacy. And that will imperil the fair administration of justice.
If allowed to stand, the decision below also will damage the attorney-client relationship by engendering potential conflicts of interest between lawyers and clients. On every close call regarding tactical and legal issues ? and on many that are not so close ? lawyers will have to weigh in the balance their own potential exposure to criminal liability. Yet the fundamental tenet of the attorney-client relationship is that the lawyer?s commitment to the client must be undiluted by concerns for his or her own personal interests. Moreover, by expanding the government?s ability to investigate counsel, the Fifth Circuit?s decision undermines the communication between attorney and client. If the advice of the Andersen lawyer here amounts to witness tampering, then communications long assumed to be privileged are in jeopardy of disclosure under the crime-fraud exception. Clients who are uncertain of the loyalty of their counsel or the confidentiality of their communications will simply not disclose information their lawyers need to know. That, too, imperils the fair administration of justice.
As a technical aside, neither the Anderson brief nor the NACDL brief in this SCOTUS case are bookmarked or linked in Adobe Acrobat to faciliate ease of review. Get with it, appellate lawyers. As federal courts are increasingly relying on electronic versions of pleadings and briefs, using Adobe Acrobat's bookmarking and linking tools is an easy way to make such documents more reader-friendly. And, as any judge or law clerk will tell you, a brief or pleading that is easy to read is always easier to adopt.
Gosh, this is getting monotonous.
This Raw Story article reports that the National Journal is prepared to report that prominent lawyer and former lobbyist Jack Abramoff, who federal authorities are investigating for his lobbying efforts on behalf of an Indian tribe and his relationship with House Majority Leader and Houston area congressman Tom DeLay, paid thousands of dollars for DeLay and DeLay?s staff?s stay in an expensive London hotel in mid-2000. Earlier posts on the Abramoff-DeLay investigation can be reviewed here.
House rules stipulate that members or members? employees cannot accept payment from a registered lobbyist to cover travel costs.
February 26, 2005
The University of Nebraska football team has not been fairing well lately in its football rivalry with the University of Oklahoma. So, last year, a Nebraska lineman got confused and thought that NU was going to play the OU Spirit Squad instead. Oklahoma criminal authorities are not pleased (bugmenot login: "firstname.lastname@example.org"; password: "password").
The question being batted around the sports world the past couple of days is whether the suspension of Temple University basketball coach John Chaney is sufficient punishment for Chaney directing a goon on his team to hammer an opposing team's player, resulting in the player suffering a broken arm.
My question is different: How much will Chaney and Temple have to pay in money damages to the player? Looks to me that the liability phase of that civil case is a dead cinch winner for the injured player.
Update: Although I wouldn't want him sitting on the jury if I am representing the plaintiff, Greg Skidmore over at the Sports Law Blog has a nice analysis of the potential civil liability arising from Coach Chaney's actions. Also, Professor Palmer over at the Sports Economist is already thinking about potential damage calculations. Sounds like a budding expert witness on damages to me! ;^)
In the key strategic decision of the criminal trial of former WorldCom CEO Bernard Ebbers, Reid Weingarten advised U.S. District Judge Barbara Jones on Friday that he intends to call his client Mr. Ebbers to the stand on Monday.
The prosecution rested its case on Wednesday and the defense began its case on Thursday. The defense intends to conclude by the end of next week, which means the case should go to the jury early in the following week. Here are previous posts on the Ebbers case.
Inasmuch as juries in white collar criminal cases expect to hear from the defendant, the decision to have Mr. Ebbers testify is only surprising because of how well the trial appears to have gone to date for Mr. Ebbers.
In their case in chief, prosecutors relied almost entirely on former WorldCom CFO Scott Sullivan's testimony in attempting to prove that that Mr. Ebbers helped direct a massive accounting fraud that inflated WorldCom's publicly-reported earnings and revenue numbers. Mr. Ebbers' alleged motive was to forestall a decline in WorldCom's stock price in an effort to protect his personal net worth, which was almost entirely based on WorldCom stock.
The Ebbers defense team has countered with a theory of the case that it was Mr. Sullivan who masterminded the fraud and that he concealed it from Mr. Ebbers, who was an "honest idiot." This past week, the defense put on its first witnesses, including Bert Roberts, WorldCom's former chairman, who testified that Mr. Sullivan did not implicate Mr. Ebbers when he was initially confronted with the $11 billion fraud in June 2002. Moreover, Cynthia Cooper, the internal WorldCom auditor who first uncovered the fraud, testified for the defense that Mr. Ebbers directed her to disclose negative accounting information to the WorldCom audit committee that Mr. Sullivan had wanted withheld.
Thus, the Ebbers defense team probably feels reasonably good at this point about establishing reasonable doubt in the minds of the jurors. However, I agree with the decision to put Mr. Ebbers on the stand. Although a bad performance could give the jurors second thoughts about reasonable doubt, a good or even neutral performance could clinch an acquittal.
There is an old saying among investors and insolvency lawyers that a hotel is such a bad investment that no owner makes any money on it until at least three prior owners have gone bust.
Well, it appears that the City of Houston is about ready to experience the truth of that observation. Following on the news from last week that the downtown Hyatt Regency Hotel has been posted for a foreclosure sale, the Chronicle reports that two other hotels -- The Magnolia downtown and the Crowne Plaza Hotel in the Medical Center -- have defaulted on a total of $15 million in redevelopment loans that the City provided in connection with the recent rehabilitation of the hotels.
It occurs to me that if I were a downtown or Medical Center hotel owner, and the City of Houston had subsidized two competitors of mine with a tax on my business, I'd be rather angry right now.
To make matters worse, the City's loans are not even secured by a first lien on the properties, so the City is not entirely in control of its options resulting from the defaults. The Chronicle article contains all sorts of optimistic statements from City officials and the hotel owners that "they are working through" the problems, but the harsh reality of the situation is that, unless the City wants to get into the downtown hotel business in even a bigger way than it already is with the city government-financed 1,200-room Hilton Americas Hotel, the City's options are limited.
Frankly, the most creative option probably is to convert the City's debt to an equity stake in hotels, install a savvy hotel operator to run the hotels, and take the risk that hotels can at least generate enough money to service the first lien debt on the properties (which, in the case of The Magnolia, may be a shaky proposition). On the other hand, if the City continues to maintain its debt position or hands it off to the federal agency that guarantees a portion of such loans, then the hotels will gradually deteriorate as cash flow is diverted to service the unrealistic debt levels. In that case, the primary purpose of the City's loans in the first place -- to redevelop run down properties -- will be effectively nullified.
The bottom line is that these are two more examples of why the City of Houston should not be in the business of financing redevelopment projects. Indeed, financing redevelopment was one of the rationalizations for this even bigger boondoggle.
February 25, 2005
A couple of weeks ago it was the sale of the corporate jet. This week it's a federal criminal investigation as formerly high-flying retail doughnut franchisor Krispy Kreme Doughnuts, Inc. moved a step closer to what appears to be an inevitable chapter 11 reorganization.
Krispy Kreme announced yesterday that the U.S. attorney for the Southern District of New York had launched an investigation that appears to be focused on the company's franchise repurchases and a profit warning that the company issued in May, 2004. As is typical in such announcements, the the Winston-Salem, N.C.-based company said that the company is "cooperating fully" with the investigation. Here are the previous posts over the past year on Krispy Kreme's mounting troubles.
The investigation deepens the problems facing Krispy Kreme, which is facing a liquidity crisis by the end of March. The company has been struggling with slowing sales and an SEC probe of its accounting practices that began last year. The company is cutting about 25% of its nonstore work force as part of a turnaround plan under Stephen F. Cooper, the Enron restructuring expert who became chief executive at Krispy Kreme in January.
Krispy Kreme stock was trading at $5.36 at the close of New York Stock Exchange composite trading yesterday, leaving the stock at about one-tenth of its peak price in August 2003. The company has also been blasted by multiple shareholder lawsuits over the past several months, which are another reason that chapter 11 appears to be an inevitable part of the company's reorganization.
U.S. Bankruptcy Judge Letitia Z. Clark dismissed OAO Yukos' controversial chapter 11 case yesterday, concluding that there is inadequate precedent for a major foreign oil company to gain the substantial legal protections of a debtor-in-possession under U.S. bankruptcy law. Here is copy of Judge Clark's Memorandum Opinion and here are the prior posts over the past couple on months on this interesting international case.
Yukos had contended that the U.S. Bankruptcy Court had an adequate basis for jurisdiction over the company because of private American ownership of part of Yukos, two recently-created Texas bank accounts, and the fact that its chief financial officer had recently begun working out of his home in Houston.
Judge Clark's ruling sends Yukos back to the Russian and International civil justice system in an attempt to find a forum for its claims that the Russian government acted illegally in forcing the December auction of Yukos's valuable Yuganskneftegaz ("Yugansk") production unit. Yukos' former owner, Mikhail Khodorkovsky, remains in jail in Russia on fraud and tax evasion charges.
Yesterday's decision also concludes the lawsuits that Yukos filed in the Bankruptcy Court resulting from the auction, including its $20 billion "Hail Mary" against four Russian companies, including the Russian government-owned natural gas company OAO Gazprom and oil company OAO Rosneft. Rosneft purchased the Yukos unit from a shell company that that had won auction for Yugansk.
The dismissal of the Yukos case facilitates the Russian government's probable liquidation of the remainder of Yukos' assets to generate proceeds to pay the balance of Yukos alleged tax debt to the Russian government. Moreover, the Russian government will probably proceed with the merger of Gazprom and Rosneft, which had been put on hold after Yukos' chapter 11 case was filed. That planned merger will raise the Russian government's holding in Gazprom to above 50 percent, which will then allow foreigners to own shares in Gazprom.
February 24, 2005
Mary Flood of the Houston Chronicle is reporting that U.S. District Judge Sim Lake has scheduled the criminal trial of former Enron chairman Ken Lay, former CEO Jeff Skilling, and former head accountant Richard Causey to begin on January 17, 2006.
Here is Arthur Andersen's opening brief in its appeal to the U.S. Supreme Court of the firm's 2002 criminal conviction in connection with the Enron scandal. The following is an excerpt from the brief's Statement of the Case:
This case arises out of the conviction of Arthur Andersen, LLP ("Andersen") for witness tampering. . .
For more than a century, it had been settled law that destruction of documents prior to the initiation of judicial or agency proceedings is not obstruction of justice. The Government accordingly sought to circumvent the limits on the crime of obstruction by indicting Anderson for "witness tampering" under 18 U.S.C. 1512, which prohibits attempts to "kill," "threaten," or "corruptly persuade" potential witnesses. In the Government's view, it was perfectly lawful for Anderson's employees to comply with the document retention policy themselves, whatever their motive might be, prior to the start of a proceeding. But it was criminal "corrupt persua[sion]" to urge others to comply with the policy if the request was even partially motivated by an intent to "impede the fact-finding ability" of some possible future investigation. . .
That expansive and illogical interpretation of the statutory language criminalizes common conduct undertaken without any consciousness of wrongdoing. . .
This Jonathon V. Last-Daily Standard article reviews Edward Jay Epstein's new book, The Big Picture (Random House 2005), which examines the fascinating and ever-changing economics of moviemaking. To give you an idea of what's going on in Hollywood economics, consider this:
In 1947, Hollywood sold 4.7 billion movie tickets. The studios were hugely profitable movie factories.
Times have changed. . . Television came to compete with the movies, as did home video. And despite a population boom, movie-going fell out of favor. In 2003, only 1.57 billion tickets were sold, a third the number 56 years earlier, while the real cost of making movies increased some 1,600 percent.
It wasn't just production costs that exploded. Today the average movie costs $4.2 million to distribute and nearly $35 million just to advertise. (The comparable 1947 figures, adjusted for inflation, were $550,000 and $300,000.) Such peripheral costs, Epstein explains, have grown so large that "even if the studios had somehow managed to obtain all their movies for free, they would still have lost money on their American releases."
How did Hollywood respond? Epstein observes that Hollywood transformed itself from a factory for making movies into a clearinghouse for intellectual property, which is at least as profitable as making movies used to be. The result?
The truth is that, even with terrible movies, the studios have to try hard not to make money. In this way, today's Hollywood is very much like the studio system of old. The two business models are so favorable that the quality of the product is beside the point. The difference, of course, is that the movies from the studio era were often quite good.
Several big oil companies released a report yesterday that they had commissioned that challeges the way in which U.S. regulators require oil companies to measure how much oil and natural gas the companies have in the ground. Reserve numbers are a critical measure for evaluating the long term health of an oil and gas company. Here is the executive summary of the report.
Cambridge Energy Research Associates prepared the report, and it sharply criticizes the method that the Securities and Exchange Commission requires that oil and gas companies use to assess oil and gas reserves. The report contends that the SEC's method is obsolescent and that the results of using the method actually mislead investors because it underestimates the oil and gas industry's success in discovering or tapping new reserves of oil and gas. The results from using the different methods is startling -- it can amount to hundreds of millions of barrels of oil at one company alone. As a result, the report recommends that the SEC revise its reserves-accounting methodology to reflect changes in the oil and gas industry since the guideline was implemented 27 years ago.
This is a key issue for the oil and gas industry because because the long term prospects of companies in the industry is largely dependent on their ability each year to find enough new oil and gas reserves to replenish reserves that the company has generated. In short, reserves are akin to a sign of how much money an oil and gas company has in the bank.
Absent from the Big Oil sponsors of the report was Royal Dutch/Shell Group, which has been hammered over the past year by a scandal in which the company admitted that it had massively overstated its reserves. As a result, Shell has revised its reserves by about a third over the past year, and it still faces continued scrutiny from investigators in the U.S. and Europe.
February 23, 2005
The Chronicle's Mary Flood, who continues to do a fine job of covering the Enron scandal, posted this article today regarding U.S. District Judge David Hittner's denial of Lea Fastow's motion to reduce her one year sentence for misdemeanor tax fraud to the seven months that she has already served. Here are previous posts on the Lea Fastow case.
Along with the the sad case of Jamie Olis and the Martha Stewart case, Mrs. Fastow's case is another example of the egregious lack of prosecutorial discretion that exists in today's "Justice" Department.
This New York Times article entitled "Behind Those Medical Malpractice Rates" addresses the myth that Bush Administration and Republican Party-fueled propaganda campaigns continue to promote in their quest to limit for damage-limit legislation:
[F]or all the worry over higher medical expenses, legal costs do not seem to be at the root of the recent increase in malpractice insurance premiums. Government and industry data show only a modest rise in malpractice claims over the last decade. And last year, the trend in payments for malpractice claims against doctors and other medical professionals turned sharply downward, falling 8.9 percent, to a nationwide total of $4.6 billion, according to data.
Lawsuits against doctors are just one of several factors that have driven up the cost of malpractice insurance, specialists say. Lately, the more important factors appear to be the declining investment earnings of insurance companies and the changing nature of competition in the industry. The recent spike in premiums - which is now showing signs of steadying - says more about the insurance business than it does about the judicial system.
Even the connection limiting damages and reducing costs for doctors is not even well-established:
[S]ome researchers are skeptical that caps ultimately reduce costs for doctors. Mr. Weiss of Weiss Ratings and researchers at Dartmouth College, who separately studied data on premiums and payouts for medical mistakes in the 1990's and early 2000's, said they were unable to find a meaningful link between claims payments by insurers and the prices they charged doctors.
"We didn't see it," said Amitabh Chandra, an assistant professor of economics at Dartmouth. "Surprisingly, there appears to be a fairly weak relationship.
The Times article reiterates many of the same points that are made in the June 2003 GAO report entitled Medical Malpractice Insurance: Multiple Factors Have Contributed to Premium Rate Increases and this subsequent August 2004 Congressional testimony of GAO researchers on the same topic.
Make a note of the Times article and the these GAO resources the next time that you hear a demagouge declare that legislative caps on damages will reduce high medical malpractice premiums. Appealing to public bias against unpopular plaintiffs' lawyers by promoting such legislation as a cure for high malpractice premiums amounts to rearranging the deck chairs on the Titanic. High medical malpractice premiums are a result of America's broken health care finance system, and until we force our politicians to address the problems in that system, medical malpractice rates will continue to rise.
Hat tip to the HealthCareProf Blog for the links to the GAO resources.
Another high-ranking executive at Dallas-based restaurant company Brinker International, Inc. resigned earlier this week. The resignation was the third of a high-ranking Brinker executive in the past month.
The latest Brinker executive to go was Wilson Craft, a 20 year veteran with Brinker who was most recently president of Brinker's Chili's Grill & Bar, which is Brinker's flagship restaurant chain. Chili's chief operating officer and the president of Romano's Macaroni Grill, Brinker's second-largest restaurant chain, resigned last month.
Brinker has long been one of the most successful restaurant companies in Texas, but the competitive pressures in that industry are absolutely brutal at this time. Other Brinker's chains -- none of which are close to as popular as Chili's or Macaroni Grill -- are Maggiano's Little Italy, On The Border Mexican Grill & Cantina, Corner Bakery Cafe, Big Bowl Asian Kitchen and Rockfish Seafood Grill.
The U.S. Transportation Department announced yesterday that Houston-based Continental Airlines and Dallas-based AMR Corp.'s American Airlines have won a lively contest within the U.S. airline industry to offer additional non-stop flights to China.
Continental will offer a daily, 13-hour nonstop flight to Beijing from Newark Liberty International Airport later this year while American will offer daily nonstop flights from Chicago to Shanghai beginning in April, 2006. Northwest Airlines Corp. and UAL Corp.'s United Airlines are the other U.S. airlines that are authorized to fly routes to the country.
Cargo shipments carrying goods from China to the U.S. have been leading the increase in air service between the two countries over the past several years. However, according to the DOT, passenger traffic between the U.S. and China rose over 35% from 2003 through November 2004. So, the new flights are consistent with Continental's business strategy of emphasizing profitable international flights over less profitable domestic routes.
February 22, 2005
This NY Times article does a good job of summarizing the situation surrounding the increasingly likely retirement of U.S. Supreme Court Chief Justice William Rehnquist, who is suffering from thyroid cancer and the effects of the treatment for the condition. The Times article reports that a consensus is developing within the Bush Administration that Justice Rehnquist will step down at the end of the Supreme Court's term in June. According to the Times article, the five names on the Administration's short list are as follows:
1) Michael W. McConnell of the United States Court of Appeals for the 10th Circuit,
2) John G. Roberts of the United States Court of Appeals for the District of Columbia,
3) J. Harvie Wilkinson III of the United States Court of Appeals for the Fourth Circuit, and
4) J. Michael Luttig of the United States Court of Appeals for the Fourth Circuit, and
5) Samuel A. Alito of the United States Court of Appeals for the Third Circuit, who is mentioned as "another possible candidate."
This is a high caliber list of intellectual heavyweights who, I believe with the exception of Judge Alito, are all former Supreme Court clerks. My personal favorite for the appointment is Judge Roberts, who I have found to be an absolutely superb thinker and writer in the opinions that he has penned while on the D.C. Court of Appeals.
In a somewhat shocking development to a world conditioned to prolonged white collar criminal prosecutions, the prosecution in the criminal trial of former WorldCom CEO Bernard Ebbers announced yesterday that it will not be calling any further witnesses from the company and that it expects to conclude its case-in-chief either today or tomorrow. The government's statement came after U.S. District Judge Barbara Jones declined to grant the government's request to call a former WorldCom employee who lost her entire retirement savings when the company collapsed,
Thus, the importance of former WorldCom CFO Scott Sullivan's testimony to the government's case against Ebbers has come into clear focus. The government used Sullivan as the principal witness to connect Ebbers' involvement in the accounting fraud at WorldCom, and the cross-examination hammered on Sullivan's lies and misstatements, including a protracted discussion about whether what Sullivan said in a particular conference call constituted the universally understood concept of "B.S."
Nevertheless, after three weeks of testimony, the government has essentially conceded that there is no paper trail to link Ebbers directly to the fraud. Sullivan's testimony is that he falsified WorldCom's accounts on numerous occasions and repeatedly lied about the company's trading position because Ebbers urged in private conversations that "We have to hit our numbers."
On cross-examination of Sullivan, the Ebbers defense promoted the "honest idiot defense" theory that Ebbers was the visionary who delegated the details of the company's accounts to the more sophisticated and better educated Sullivan. Now, with the prosecution's case winding down, the Ebbers defense team faces the key strategic decision in the case -- whether to put Ebbers on the stand or even whether to put on any witnesses other than character witnesses to attest to Ebbers' good ol' boy nature. Inasmuch as juries in white collar cases expect to hear what the defendant has to say, they generally hold not testifying against the defendant even though they are not supposed to do so. However, with the WorldCom prosecution's case relying heavily on Sullivan's credibility, the Ebbers defense team may decide that Ebbers' testimony could only hurt their defense and, thus, it's worth the risk of not putting him on the stand.
Stay tuned on this one, folks. This case may go to the jury be early next week.
Swiss pharmaceuticals giant Novartis AG announced over the weekend an $8.4 billion expansion of its generic drug holdings in a move that is widely viewed in the drug and medical communities as the continuation of trend toward consolidation in the generic drug sector. As a result of the deal, Novartis will become the world's largest seller of generic drugs at a time when it is already the top seller of branded drugs. Novartis had total world-wide sales last year of just under $30 billion.
Novartis will pay $7.4 billion to buy Hexal AG of Germany and 68% of Eon Labs Inc., which are two generic-drug makers that are controlled by Germany's wealthy Strüngmann family. As a part of the deal, Novartis will also launch a tender offer to acquire the balance of Eon shares for about another billion.
The generic drug industry has exploded in growth since the 1980s when U.S. law was modified to make it easier for drug companies to copy successful branded drugs. As a result, the generic drug industry became increasingly aggressive at challenging the legality of branded drug patents in court, which has often resulted in patents being overturned years ahead of the normal term.
Nevertheless, the sector has always been highly fragmented and now its profits are being squeezed by brutal price competition. Thus, these difficult market conditions are prompting consolidations in the generics business, and the Novartis deal reflects that the branded drug companies are going to be involved in the consolidation in a big way.
In a case that is being followed closely by free speech advocates and lawyers who specialize in defamation cases, Massachusetts Superior Court Ernest B. Murphy hammered The Boston Herald and one of its reporters with a $2.1 million jury verdict for libeling him in a series of articles that portrayed him as being overly lenient toward criminal defendants.
The Herald reported in February 2002 that prosecutors were criticizing Judge Murphy privately for giving overly lenient sentences to criminal defendants, and used as an example a sentence of eight years' probation for a 17-year-old convicted of two rapes and an armed robbery. In a particularly inflammatory part of one article, the newspaper quoted Judge Murphy as telling prosecutors involved in the case to tell the teenage rape victim: "Tell her to get over it." The story was picked up by media outlets across the country and Judge Murphy became a target of right wing talk radio shows that tabbed him as "Easy Ernie" and "Evil Ernie." The Herald's lead reporter on the story then appeared on Fox's "The O'Reilly Factor" after his first story ran and confirmed that Judge Murphy had made the comment to three lawyers involved in the case.
In his suit against the newspaper, Judge Murphy's essentially accused the Herald of fabricating a sensational story to sell papers. Based on about a dozen articles, Judge Murphy asserted that the Herald had misquoted him in connection with the above particular quote, and that it took other of his remarks out of context. The lawsuit also alleged that the judge was bombarded with hate mail, death threats and calls for his removal from the bench as a result of the Herald's articles on the judge. The newspaper stood by its reporting of the particular quote and the series of articles in general.
The case is particularly noteworthy because Judge Murphy is a public figure, which means that Judge Murphy had to persuade the jury that either the Herald knew it was reporting false information or that it acted with a reckless disregard for the truth. That is a considerably higher standard than what a normal citizen must fulfill to win a defamation lawsuit.
Jacksonville, Fla.-based Winn-Dixie Stores Inc., the venerable Southern grocery retainler, announced early Tuesday that it had filed a chapter 11 case in New York City. The company operates 920 stores and employs about 80,000 workers in eight states and the Bahamas.
Winn-Dixie is one of the largest food retailers in the U.S., but the company reported earlier this month that it had posted a loss of almost $400 million for its most recent fiscal quarter on revenue of just above $3 billion. This result compared with an $80 million loss on almost $3.25 billion in revenue for the year earlier period. Lower revenues combined with considerably higher losses is usually a sign that that it's high time to reorganize.
As is typical in such big retail reorganizations, the main purpose of the chapter 11 is to reject the leases on about 150 stores that were the result of an ill-timed expansion effort. The company projects that those closings, along with the termination of leases on a couple of warehouses, will result in annual cash savings of at least $60 million. The company has also obtained an $800 million DIP (i.e., "debtor-in-possession") credit facility from Wachovia Bank N.A. to fund its operations during the chapter 11 case.
In early December, Winn-Dixie had the dubious distinction of being dropped from the Standard & Poor's 500 index after recording the worst performance in 2003 in the select stock index. Consequently, the company's management has its work cut out for it in this reorganization. Absent a white knight appearing to buy the company at a premium -- which is highly unlikely in the brutally competitive retail grocery business -- look for a debt-to-equity reorganization plan that will carve out a healthy piece of new equity to incentivize a new management team to turn Winn-Dixie around.
February 21, 2005
This Washington Monthly article profiles Tommy Goldstein, the Washington D.C. lawyer who, though still in his 20s, has elbowed his way into the select group of lawyers who regularly appear before the U.S. Supreme Court. What makes Mr. Goldstein's story most interesting is that he has accomplished this feat while starting and operating his three-lawyer firm out of his house:
He had never clerked for a justice or worked in the SG's office. He earned his law degree at plebian American University, not Harvard or Yale. Yet Goldstein is already renowned among his peers and has begun to make a lot of money, too. This year, his firm, Goldstein & Howe-- Howe is his wife and partner, Amy--will bill close to $1.5 million in fees. "His knowledge of the court is breathtaking," says Ronald Collins, a First Amendment scholar at the Freedom Forum and former court clerk. "One cannot speak about Supreme Court litigation without breathing Tom's name. And he has only just begun."
Hat tip to On Appeal for the link to this interesting story.
When Austin High School administrators removed candy from campus vending machines last year, the move was hailed as a step toward fighting obesity. What happened next shows how hard it can be for schools to control what students eat on campus.
The candy removal plan, according to students at Austin High, was thwarted by classmates who created an underground candy market, turning the hallways of the high school into Willy-Wonka-meets-Casablanca. . .
During the prohibition, one student, who asked not to be identified, said that he sold candy at the school and made as much as $50 in a day.
"It's all about supply and demand," said Austin junior Scott Roudebush. "We've got some entrepreneurs around here."
The Austin High administration, which won't elaborate on how much or little it knew about the candy black market, has since replenished the vending machines with some types of candy.
Hunter S. Thompson fatally shot himself Sunday night at his Aspen-area home. He was 67.
Mr. Thompson was a counterculture writer who popularized a new form of fictional journalism in books during the early 1970's such as Fear and Loathing in Las Vegas and and Fear and Loathing: On the Campaign Trail '72. Mr. Thompson also was the model for Gary Trudeau's balding "Uncle Duke" in the comic strip "Doonesbury."
Although Mr. Thompson was a writer for many years before joining Rolling Stone magazine in the late 1960's, that association led to a fairly large following during the 1970's. Nevertheless, Mr. Thompson's popularity as a writer peaked as a counterculture icon during the Watergate era and the Nixon Administration. He never moved beyond the vacuity of "gonzo journalism" and, thus, the popularity of his writing receded over the past three decades.
Here is an archive of Mr. Thompson's work.
Here is the ESPN.com archive of Mr. Thompson's work.
Update: Banjo Jones over at the Brazosport News has an insightful post on Mr. Thompson.
And Tom Wolfe remembers Mr. Thompson here.
February 20, 2005
Todd Ackerman is the Houston Chronicle reporter who has been doing an outstanding job covering the termination of the Methodist Hospital's 50 year primary teaching hospital relationship with Baylor College of Medicine that occurred last year. Here are the earlier posts on this historic split.
In this Sunday Chronicle article, Mr. Ackerman begins a series of articles that will explore the demise of the Baylor-Methodist relationship. Inasmuch as the Baylor-Methodist relationship was one of the many reasons that the Texas Medical Center grew over the past 30 years into one of the world's premier medical and primary research centers, the termination of the Baylor-Methodist relationship is an important part of Houston's history.
However, the divorce is also a reflection of the difficulties involved in sustaining even long-term business and professional relationships during this tumultuous period in the American health care industry. When those pressures overwhelm a productive relationship such as the one that Baylor and Methodist developed, the risk increases that a decline in the quality of medical care will be the ultimate result. That is an issue for which all of us should be concerned.
Update: Here is second article in the series.
And the third, which closes with this anecdote:
[A]s the squabbling between Baylor and Methodist shows no signs of abating, the best view might be the last line in a thank you note received by Dr. Richard Stasney, a Methodist ear, nose and throat specialist. It said,
"Let's pray for peace in the Middle East ? and the Texas Medical Center."
February 19, 2005
Ann Woolner of Bloomberg.com attended the Fifth Circuit oral argument on the appeal of Jamie Olis' sentence and files this report. She is optimistic, as I am, that the Fifth Circuit will reverse Olis' 24 year sentence and remand his case back to U.S. District Judge Sim Lake for resentencing. Earlier posts on the Olis case over the past year are here.
This Chronicle article reports that Houston's downtown Hyatt Regency Hotel has been posted for foreclosure by its lender, which is believed to be German American Capital Corp. The current owner of the hotel is Rushlake Hotels USA, which is closely-owned by a Pakistani investor group.
As with all non-judicial foreclosure sales of real property in Texas, a notice of the foreclosure sale was posted at the Harris County Courthouse at least 20 days before the first Tuesday of the following month. The first Tuesday of each month is the day on which non-judicial foreclosure sales of real property are conducted in Texas. That's the main reason why the first Monday of each month is often the day on which the highest number of bankruptcy filings takes place in Texas.
Although it has a good location, the downtown Hyatt is one of the older hotels in the downtown (it opened in 1972) and is a bit dowdy in comparison to many of the new hotels that have been built in the downtown area over the past several years. Industry experts believe that the Hyatt's occupancy rates have been below 50 percent for some time.
The Chronicle article downplays the foreclosure, but it is important to note that forced sale comes just a year after the opening of the city government-financed 1,200-room Hilton Americas Hotel a few blocks away next to the George R. Brown Convention Center. The Hilton Americas was a big part of the huge increase in the supply of downtown hotel rooms over the past several years in advance of Super Bowl XXXVIII in early 2004. During that period, downtown hotel capacity zoomed from 1,800 rooms to 5,500 rooms.
As a result, hotel occupancy rates averaged about 53 percent in downtown Houston last year, which is below the 60 percent that is generally considered an acceptable occupancy rate within the hotel industry. Nevertheless, that relatively low occupancy rate came on the heels of a 40 percent increase last year in the number of rooms in downtown Houston. So, downtown Houston actually had a strong overall increase in occupancy of hotels during 2004.
Having said that, there is no Super Bowl in Houston during 2005 and, thus, occupancy rates this year will be a better barometer of the overall health of the downtown hotel market. Thus, the foreclosure of the Hyatt is another sign of increasing troubles in the Central Houston, Inc.-coordinated redevelopment of downtown Houston over the past decade. Inasmuch as downtown restaurant and bar business has also slowed recently, it is beginning to look as if the supply of new amenities in downtown Houston needs to slow down and catch its collective breath to allow the demand for such amenities to catch up.
February 18, 2005
On Saturday morning (February 19), the Houston Bar Association's annual Law & the Media Seminar, co-sponsored by the Society of Professional Journalists and The Press Club, will take place on the sixth floor of the South Texas College of Law, 1303 San Jacinto in downtown Houston.
The topic for this year's program is "Maintaining the Independence of the Media," and the featured speaker is John Seigenthaler, who founded the First Amendment Center in 1991 with the mission of creating national dialogue about First Amendment rights and values. Mr. Seigenthaler served for 43 years as an award-winning journalist for The Tennessean, Nashville's morning newspaper and was the founding editorial director of USA TODAY in 1982. During the early 1960's, Mr. Seigenthaler served in the U.S. Justice Department as administrative assistant to Attorney General Robert F. Kennedy, which led to his service as chief negotiator with the governor of Alabama during the Freedom Rides.
There will also be a couple of panel discussions, which will include local journalists and attorneys. The first panel discussion will be on "Threats to the Independence of the Media" and will include four noted local journalists, Robert Arnold of KPRC, Tim Fleck of the Houston Chronicle, UH Journalism Professor Garth Jowett, and Mimi Schwartz of Texas Monthly magazine. I will be on the second panel along with local attorney Chip Babcock, Carlos Puig of Rumbo de Houston, and Olive Talley of Dateline NBC that will be discussing "Tools for Maintaining Independence of the Media."
Come on out on Saturday morning and enjoy the lively discussion of issues affecting the media and journalism. Members of the media, communications professionals and journalism and law students attend at no charge. Attorneys pay $40 for the program, which is approved for three hours of MCLE, including one hour of ethics.
Following this post from last week, the Senate Judiciary Committee approved bankruptcy "reform" legislation on Thursday that imprudently makes it harder and more expensive for people to discharge their personal liability for substantial debts in bankruptcy. Given Congress' Republican majorities, the long disputed measure appears to be on track to be signed into law.
This bankruptcy reform bill is similar to others that have been batted around Congress several times during the past seven years, but each time the bills have been stymied by a combination of Democratic opposition and Republican obstinance. A nearly identical bill to the one that the Judiciary Committee just passed has been introduced in the House.
The bill's main flaw is that it takes a "one shoe fits all" approach that would likely funnel most individuals into Chapter 13 cases under which the debtor proposes a plan to repay debts based on the debtor's income. In attempting to accomplish that dubious goal, the bill threatens to create a huge bottleneck in the U.S. Bankruptcy Courts by requiring that the Bankruptcy Judge make a threshold determination in each personal bankruptcy case of whether the debtor is, in effect, a "good" debtor, who is simply down on his or her luck, or a "bad" debtor, who is just trying to avoid paying his or her debts. If the debtor is not sufficiently "good" to justify a complete discharge of personal liability for his or her debts in a liquidation under chapter 7 of the Bankruptcy Code, then the Bankruptcy Judges are to funnel them into a chapter 13 case.
Just to give you an idea of the administrative nightmare that this ill-conceived requirement will likely cause, note that 1.6 million personal bankruptcies were filed in the 12-month period ending September 30, 2004, according to data from the Administrative Office of the U.S. Courts. Bankruptcy Courts already have extraordinarily busy dockets, and plopping such a time-consuming process at the outset of each personal bankruptcy case on top of those crowded dockets is simply contrary to any reasonable notion of judicial economy.
Moreover, this bill does not have the support of of a wide coalition of business leaders and the leading academic experts in insolvency law, such as the then new Bankruptcy Code enjoyed when it was passed in 1978. In comparison, this reform bill is supported primarily by narrow special interests -- financial institutions in the credit card business -- that want to make it harder for debtors to discharge their liability for substantial credit card indebtedness. As a result, the bill makes individual bankruptcy more expensive and difficult, which undermines one of key incentives of insolvency law -- that is, a fresh start for a person who desires a second chance and an opportunity to put their financial house in order.
Meanwhile, just to make certain that the bill has bipartisan contributions of bad ideas, the Committee accepted amendments from Senator Edward Kennedy that would limit companies on the brink of a chapter 11 reorganization from from paying key employees retention bonuses and would require a special trustee to be appointed in cases where corporate fraud is suspected. Not surprisingly, retention bonuses and fraud were hot button items in the politically-charged chapter 11 case of Enron Corp.
However, preventing a financially-troubled company from attempting to keep its key employees from deserting a sinking ship is a particularly bad idea because those employees are often the most important factor in planning a successful reorganization under chapter 11 that will pay creditors a dividend and preserve jobs in a community. Consequently, by taking away a financially-strapped company's flexibility to retain key employees, Congress is increasing the risk that the company will end up in a liquidation, which means that creditors recover nothing and the community in which the company is located loses jobs. Similarly, requiring a special trustee in cases involving corporate fraud is simply unnecessary and more political grandstanding -- the Bankruptcy Code already provides for the appointment of a trustee under such circumstances.
At least Judiciary Committee Democrats are promising a floor fight next month, in which they expect to propose at least 50 amendments to the bill. Moreover, Sen. Charles Schumer plans to propose the same amendment that has doomed a couple of the previous bills in the recent past -- a provision that would prohibit protesters from using bankruptcy to obtain a personal discharge of liability for paying court fines resulting from intentionally blocking abortion clinics. Perhaps those tactics will prevent this ill-advised and unnecessary legislation from being enacted.
Former University of Texas and current Harvard Law School professor of law Elizabeth Warren made these comments in her Congressional testimony on the bill, and closed with this recommendation to the Judiciary Committee:
Don't press "one-size-fits-all-and-they-are-all-bad" judgments on the very good and the very bad. Spend the time to make the hard decisions. Leave discretion with the bankruptcy judges to evaluate these families. Based on the Harvard medical study and other research, I think you will find that most debtors are filing for bankruptcy not because they had too many Rolex watches and Gameboys, but because they had no choice.
You have a choice. It's a choice that you're making for the American people. Adopt new bankruptcy legislation. Establish a means test that targets abuse. But do not enact a proposal written to address myth and mirage more than reality. Do not enact a proposal written for 1997 when the problems of the American corporate economy in 2007 deserve far more attention and the problems of the American middle class can no longer be ignored.
Overwhelmingly, American families file for bankruptcy because they have been driven there -- largely by medical and economic catastrophe -- not because they want to go there. Your legislation should respect that harsh reality and the families who face it.
This bankruptcy reform bill is not without its good aspects, such as the provision that would limit the "race to the bottom," in which bankruptcy courts in certain jurisdictions use the liberal venue provisions of the Bankruptcy Code to market themselves to debtors' lawyers who often choose the venue of big business reorganization cases. However, the bad provisions in this bill far outweigh the good, and Congress simply does not need to be wasting time on bad bankruptcy bills at a time when action on other key domestic issues is far more pressing.
February 17, 2005
Mr. Weingarten is also representing former Enron chief accountant Richard Causey in his criminal case that will probably go to trial this fall in Houston.
As creditors pick through the scraps of bankrupt Austin-based sandwich shop franchisor Schlotzsky's (previous posts here), attorneys for those creditors teed off on former company owners and chief executives -- brothers John and Jeff Wooley -- in a San Antonio federal court in a lawsuit that alleges that the brothers ruined the company through a series of reckless transactions that drained cash at critical junctures.
As is typical in most reorganizations of retail businesses, the sale of the assets typically does not generate enough cash to pay any dividend on unsecured creditors' claims. Thus, those creditors are often left with no prospect for any recovery on their claims unless they can extract some funds through a lawsuit against the company's former owners or third parties that took advantage of the company's financial difficulties. Normally, the success or failure of such a strategy is more directly related to the net worth of the targets of such a lawsuit than the validity of the claims asserted in the lawsuit.
The hearing on whether Russian oil company and American debtor-in-possession OAO Yukos' chapter 11 case should be dismissed began on Wednesday in U.S. Bankruptcy Judge Letitia Clark's Houston courtroom as Hugh Ray, Deutsche Bank AG's lawyer, urged Judge Clark to dismiss the case because U.S. courts lack a jurisdictional basis to reorganize the crippled Russian oil giant. Here are the previous posts on the Yukos saga over the past year.
Mr. Ray contended that Yukos changed the dates of documents related to a $2 million bank account in an effort to create a bogus basis for jurisdiction in U.S. courts. Yukos filed its chapter 11 case in December in an effort to seek relief from the Russian government's decision to auction Yukos' main asset -- the huge production unit Yuganskneftegaz ("Yugansk") -- to collect on $28 billion in alleged back-tax claims. Deutsche Bank had led a financing group that intended to fund a bid for Yugansk that Russian natural gas giant OAO Gazprom was going to make, but Judge Clark's temporary restraining order at the outset of the Yukos case chilled Western Banks from financing an auction bid. Russian authorities eventually sold the Yugansk unit to a shell Russian company named Baikal Finance Group, which Russian state oil company OAO Rosneft then quickly acquired. As a result, the effect of the Yugansk auction is that Yukos' main production unit has been nationalized by the Russian government.
Meanwhile, Stephen Theede, Yukos' CEO, testified that seeking reorganization relief for Yukos under Russian law would have been a futile effort because the Russian government would not allow Yukos to commence a reorganization case in Russia. Inasmuch as the Russian government has frozen Yukos' assets and frozen its bank accounts, Mr. Theede testified that only protections of U.S. bankruptcy law provide the potential legal relief necessary for Yukos to fight the Russian government's efforts to liquidate the company. Mr. Theede has been operating Yukos out of London while Bruce Misamore, Yukos' chief financial officer, is operating out of Houston. Mikhail Khodorkovsky, the former Yukos chief executive and at one point the largest owner of the company, continues to be imprisoned in Russia.
Inasmuch as the result of the Yugansk auction effectively nationalized one of Russia's main oil assets, the Russian government's blunt methods have created increased uncertainty in Western capital markets regarding the security of investment in Russian companies. So, the result of the Yukos chapter 11 case in Houston is being watched carefully by Western investing markets. Stay tuned.
February 16, 2005
David Bermingham, Gary Mulgrew and Giles Darby -- the three former NatWest investment bankers facing possible extradition to the United States in connection with Enron-related fraud charges -- are floating an unusual and creative legal strategy in England that amounts to a motion to change the venue of their criminal case to England. Here are prior posts on this interesting part of the Enron case.
The case is a test of a relatively new English extradition law that allows British citizens to be extradited to the United States without U.S. prosecutors being required to present prima facie evidence against them first in an English court. Last October, an English magistrate court ruled there was a good and proper basis for prosecuting the men in Houston in connection with the ongoing prosecutions of various former Enron executives.
Enron Task Force prosecutors claim that the three men conspired with former Enron CFO Andrew Fastow and his confidant Michael Kopper to defraud NatWest by secretly investing in one of Enron's infamous off-balance sheet partnerships. The Task Force alleges that the three men conspired with with Mr. Kopper to persuade NatWest to sell its stake in the off-balance sheet partnership for $1 million when it was worth far more. A month or so later, the Task Force alleges that the partnership was sold for a cool $20 million, which allowed the three British men to share $7.3 million in profits. Most of the work on the transaction was carried out in England and the Cayman Islands.
In the trio's latest motion in their continuing fight against extradition to the U.S., the trio challenges the English authorities' failure to investigate the Enron-related allegations. The three men contend that a foreign government has charged them without evidence of committing a crime in England against an English bank. Inasmuch as the three men voluntarily brought the transaction to the attention of English authorities well before Enron prosecutors commenced extradiction proceedings, the trio reasons that English criminal authorities have an obligation to evaluate the case and decide on a threshold basis whether the charges should be tried in England, particularly in view of the fact that the case concerns alleged damage to an English financial institution.
This Washington Post article does a good job of analyzing the strategy of impeaching the credibility of an adverse witness with the witness' prior bad acts, which is not always as effective a trial strategy as it would seem on the surface. The strategy is coming into full focus this week as Bernard Ebbers' attorneys prepare to cross-examine chief prosecution witness Scott Sullivan, and Richard Scrushy's counsel takes on former Scrushy confidant, William T. Owens.
February 15, 2005
Colorful Dallas-based software entrepreneur Sam Wyly, who headed Sterling Software Inc. when it was sold to Computer Associates International Inc. in March 2000 in a $4 billion transaction, has filed an $80 million lawsuit in state district court in Dallas against Ernst & Young LLP, which had audit relationships with both companies. The lawsuit is the latest in a deluge of lawsuits that have been filed over the past year against the Big Four auditing firms, and is only the latest in a string of lawsuits that Mr. Wyly has filed over his disatisfaction with the Computer Associates management and board.
In his latest lawsuit, Mr. Wyly contends that he relied on Ernst & Young's audit of Computer Associates' books for fiscal 1999 in making his decision to sell his company in return for Computer Associates stock. Unfortunately, CA's shares fell 12% in one day about a month later when the company announced that it was delaying its reporting of year-end earnings. Subsequently, the CA stock declined even further when CA failed to fulfill its earnings forecast.
Or course, CA is no stranger to accounting scandals. A $2.2 billion accounting scandal led to criminal indictment of its former chief executive, Sanjay Kumar, late last year along with the resignations and indictments of several other top officials. Although Mr. Kumar has pleaded not guilty to the charges, CA has admitted to backdating contracts and keeping its books open days after they were supposed to be closed on the last day of several quarters in order to book extra revenue.
New York AG (meaning either "attorney general" or "aspiring governor") Eliot Spitzer and the Securities and Exchange Commission issued subpoenas yesterday to American International Group Inc. in connection with investigations into AIG's earnings management techniques relating to certain types of insurance arrangements.
Inamuch as many non-traditional insurance products blend insurance with financing, Mr. Spitzer and other government regulators use Enron Corp.'s use of such products to hide billions in debt in off-balance sheet partnerships as justification for these investigations. Thus, regulators rationalize that such investigations are necessary to protect investors from being misled.
More specifically, the "alternative risk" transactions that regulators such as Mr. Spitzer are typically investigating these days in the insurance industry allow insurers to improve their balance sheets in the short run by shifting claims reserves, which cannot pass muster with accounting rules unless risk is also shifted. Thus, speculation is that Mr. Spitzer is investigating whether AIG entered into transactions that essentially allowed AIG to borrow another company's reserves in order to make its reserves look more robust to investors than they really were.
Mr. Spitzer's new probe into nontraditional insurance comes on the heels of the announcement last month of the issuance of subpoenas to Berkshire Hathaway Inc., Warren Buffett's holding company. Those subpoenas sought documentation and information relating to loss-mitigation insurance products from Berkshire's General Re insurance unit. Speculation is that Mr. Spitzer's investigation into AIG may be connected to transactions it had with General Re.
In a remarkable development, this Chronicle article reports that the value of Ms. Wiess Law's overall bequest to the MFA may end up generating more than $450 million, which would make the bequest one of the largest in the history of American philanthropy.
Mrs. Wiess Law, who died in 2003 at the age of 85, was one of Houston's most generous donors to the arts and sciences. She was a longtime supporter of the MFA, the Houston Ballet, Houston Grand Opera, and the Houston Symphony, and also bequeathed $25 million to Baylor College of Medicine and the University of Texas M.D. Anderson Cancer Center.
Mrs. Wiess Law was one of the three daughters of the marriage of Olga Keith and Harry C. Wiess, who was one of the founders of Humble Oil Co., the predecessor to Exxon Mobil. Mr. and Mrs. Wiess were founding members of the MFA, which has grown into the centerpiece of Houston's Museum District just north of the Texas Medical Center.
Mr. Onstead and his late father sold 117 Randall's supermarkets to Safeway in 1999 for $1.5 billion. Since that time, Safeway has mismanaged the Randall's stores to the point where the chain -- which was once the cream of the crop of Houston supermarkets -- is now an afterthought to Kroger, H.E.B. and even WalMart in the Houston market for supermarkets. Having the Onstead Family reacquire the Randall's chain would be a welcome relief to Safeway's mismanagement of the stores.
February 14, 2005
McCombs is selling the Vikes for $625 million. He bought the club for about $245 million in 1998.
Phil Miller over at the Sports Economist has been following the negotiations over the sale of the Vikings and has some interesting observations.
Russian oil company and American debtor-in-possession OAO Yukos filed a lawsuit seeking damages of $20 billion late Friday in Houston against Russian natural gas giant OAO Gazprom, its unit Gazpromneft, Baikal Finance and OAO Rosneft for playing a role in the Russian government's auction of Yukos' valuable Yugansk unit. Here are the prior posts on the Yukos saga.
In addition to the lawsuit, Yukos filed an outline of its chapter 11 plan of reorganization just days before U.S. Bankruptcy Judge Letitia Clark will conduct a hearing on Gazprom's motion to dismiss Yukos' chapter 11 case for lack of jurisdiction.
Yukos filed its chapter 11 case in Houston in an effort to block the Russian government from auctioning off its main asset -- the valuable Siberian oil production unit Yugansk -- to collect on $28 billion in alleged unpaid taxes. Despite the automatic stay under the Bankruptcy Code and a temporary restraining order that Judge Clark issued before the auction, the Russian government proceeded to auction the Yugansk unit, with an unknown Russian company, Baikal Finance Group, being the winning bidder. Baikal was subsquently acquired by Russian state oil company OAO Rosneft, which effectively effectively nationalized the valuable Yugansk unit.
In the meantime, Yukos's main shareholder, Group Menatep Ltd., has commenced similar litigation last week seeking $28.3 billion against the Russian government under the international arbitration provisions of the the European Energy Charter Treaty, which protects investors from unfair treatment.
Several developments over the past month or so have prompted me to think about the National Collegiate Athletic Association's regulation of minor league football and basketball. Although it is an unincorporated association that includes many of the best universities in America, the NCAA has developed into a hulking and bloated bureaucracy that is the poster child for ineffective and misguided regulation.
One of the developments that triggered my thinking was the disclosure this past week that one of the best players on each of the University of Texas' basketball, football and baseball teams had been declared academically ineligible for the spring semester. That's not much of a return on the astounding $1.6 million a year that UT is currently spending on academic assistance for its athletes.
This UT academic problems come on the heels of the announcement last month that the NCAA -- whose rules and regulations manual already resembles the Internal Revenue Code in terms of size and complexity -- approved the first phase of a "landmark" academic reform package under which about 30 percent of Division I football teams (including UT's) would lose scholarships if the reforms were to be implemented immediately. The demand for professors with expertise in developing basket-weaving curricula is going to increase at more than a few NCAA member institutions in response to this latest NCAA initiative.
Meanwhile, partly as a result of the NCAA's strict regulation of compensation that can be paid to athletes in intercollegiate football and basketball (i.e., essentially scholarships), salaries for college coaches skyrocket at the same time as a black market for compensating college football and basketball players continues to run rampant, despite the NCAA and now the government's efforts to curtail it.
Finally, a college baseball game in Houston over the weekend between Rice and Texas A&M during the Minute Maid Classic Baseball Classic drew almost 20,000 fans. That's right -- a college baseball game, in February, drew almost 20,000 fans.
What are we to make of all of this?
Well, a bit of historical perspective helps. For all of its faults, Major League Baseball is the only one of the three major professional sports (football, basketball and baseball) that has capitalized and subsidized a thorough minor league development system. Oh, the NBA has its development league and the NFL has NFL Europe, but both of these ventures pale in comparison to the depth and success of baseball's minor league system. As a result, it's relatively rare for a baseball player to play in the Major Leagues without spending at least some time playing minor league baseball. In comparison, relatively few of the players in the NFL or the NBA ever play in NFL-Europe or the NBADL.
The reason for this is not that professional football and basketball players do not need to develop their skills in a minor league. Rather, the reason is that professional football and basketball simply rely on a ready-made minor league systems to develop most of their players -- that is, intercollegiate football and basketball.
This odd arrangement arose partly as a result of how professional sports developed in America over the past century. On one hand, professional baseball was already well-established in the late 19th century when intercollegiate football and basketball started taking root. Thus, MLB developed its minor league system as a necessary means to develop its players decades before intercollegiate baseball became popular on college campuses. Intercollegiate baseball has only become a source of player development for professional baseball over the past couple of decades or so, and it is still rare for a college baseball player to go straight from playing college baseball to playing in the Major Leagues.
On the other hand, despite the popularity of the NFL and the NBA today, the success of of those professional sports is still relatively recent in comparison with MLB's business success over the past century. Until the 1960's in regard to football, and the 1980's in regard to basketball, neither professional sport was particularly vibrant financially or as popular with the public as their intercollegiate counterparts. Thus, until relatively recently, neither the NFL nor the NBA has been in a financial position to capitalize a minor league system of player development similar to MLB's minor league system.
However, now that the NFL and the NBA owners have the financial wherewithal to subsidize viable minor league systems, they have little economic incentive to do so. Inasmuch as the NCAA and its member institutions have transformed intercollegiate football and basketball into a free minor league system for the NFL and the NBA, the owners of professional football and basketball teams have gladly accepted the NCAA member institutions' generosity.
The arrangement has been extraordinary successful for professional football and basketball owners, who have seen the value of their clubs skyrocket over the past two decades. A substantial part of that increase in value is attributable to avoiding the cost of developing a minor league system, as well as taking advantage of liberal public financing arrangements for the construction of new stadiums and areanas. That latter point is a subject for another day.
In comparison, the NCAA member institutions' acceptance of minor league professional status has not been nearly as successful. Yes, the top tier of intercollegiate football and basketball programs have had been successful financially, but the athletic programs of most NCAA member institutions struggle financially.
Moreover, almost every NCAA member institution compromises academic integrity at least to some extent in order to attract the best players possible to play on the institution's football and basketball teams. As a result, respected academics such as UT Chancellor Mark Yudof regularly have to endure troubling scandals (in Yudof's case, as president of the University of Minnesota) that underscore the tension between the business of minor league professional sports and the academic integrity of NCAA member institutions. The NCAA member institutions' reaction to these conflicts has generally been to increase regulation with usually unsatisfactory results.
So, what is the solution to this mess? Well, it's doubtful that more regulation of college football and basketball is the answer. Rather, my sense is that the model for reform is right in the front of the noses of the NCAA member institutions -- i.e., college baseball.
Due to MLB's well-structured minor league system of player development, a baseball player emerging from high school has a choice: Do I accept a moderate compensation level to play professional ball in the minor leagues in the hope of developing to the point of being a highly-paid MLB player? Or do I hedge the risk of not developing sufficiently to play at the MLB level by accepting a subsidized college education while developing my skills playing intercollegiate baseball?
This simple choice is the key difference between intercollegiate football and basketball, on one hand, and intercollegiate baseball on the other. Except for the relatively few high school basketball players who are sufficiently developed to be able to play professional basketball in the NBA or Europe immediately after high school, high school football and basketball players' only realistic choice for developing the skills to play at the highest professional level is college football or basketball.
Consequently, each year, the NCAA member institutions fall over themselves trying to accomodate a large pool of talented football and basketball players who have little or no interest in collegiate academics. Rather than placing the cost and risk of these players' development on the professional football and basketball clubs, the NCAA member institutions continue to incur the huge cost of subsidizing development of these players while engaging in the charade that these professional players are really "student-athletes."
In comparison, most top college baseball teams are generally comprised of two types of players -- a few professional-caliber players combined with a greater number of well-motivated student-athletes. That is an attractive blend of players, and the tremendous increase in popularity of college baseball over the past decade reflects the entertaining competition that results from such a player mix. Heck, the college baseball system is structured so well that even a small academic institution can win the National Championship in college baseball.
Nevertheless, transforming the current minor league system in college football and basketball into the college baseball model is going to take fundamental reforms within the NCAA. Primarily, it's going to require the courage and resilience of the presidents of the NCAA member institutions, who need to stand up and quit being played as patsies by the NFL and NBA owners who prefer to foist the risk of funding and administering minor league systems on to the NCAA member institutions.
Moreover, such a transformation of college football and basketball from entrenched minor league systems will be risky. The quality of play in college football and basketball will suffer a bit, even though the competition likely would not. In time, such a transformation would force both the NFL and the NBA to expand their minor league systems to develop the skills of the pool of physically-gifted athletes who prefer to develop their skills as minor league professionals rather than as college students. Competition from such true minor league football and basketball teams might result in a decrease in popularity of college football and basketball.
However, such a transformation would remove most of the galling incentives to compromise academic integrity and to engage in the black market for compensating players that are rife under the current system. Likewise, once viable professional minor leagues in football and basketball exist, football and basketball players will have the same choice coming out of high school that has generated the well-motivated mix of players that has made college baseball such an entertaining intercollegiate sport over the past decade.
Now that type of choice -- rather than the choice of which basket-weaving course to take in order to remain eligible -- is the kind of choice that NCAA member institutions should be encouraging.
February 12, 2005
A 144-page Senate Permanent Subcommittee on Investigations report issued this past Thursday provided more embarrassing public disclosures of how the Big Four accounting firm KPMG mass-marketed dubious tax shelters from the late 1990's through late 2003. Here are previous posts over the past year on KPMG's tax shelter problems. Here is the Senate subcommittee's report.
The report is the second on questionable tax shelters that the Senate subcommittee has released that concludes that KPMG has been deeply involved in designing and selling abusive tax shelters since the mid-1990's. Although the new report focuses to KPMG, it also deals with the the tax shelter activities of Ernst & Young and PricewaterhouseCoopers, several banks, including Deutsche Bank, and the law firm of Sidley Austin Brown & Wood.
Q: What's the only thing worse than being pursued by a greedy plaintiff's law firm?
You've to to hand it to the New York Times. Not many publications have the imagination (or is it bias?) to portray Big Oil's current passing along of profits to its investors as a problem for the industry.
Please don't misunderstand: Alex Gibney has no great beef with capitalism. Indeed, many of his best friends back in Summit, New Jersey, are investment bankers. But when Gibney looks at the prodigious rise and precipitous fall of Enron in Enron: The Smartest Guys in the Room, the remarkable documentary that premiered January 22 at the Sundance Film Festival, the award-winning filmmaker sees the collateral damage of an economic system dangerously out of whack. And when he looks at Ken Lay and Jeff Skilling, the former Enron executives now charged with perpetrating egregious fraud and deception during their stewardship of the now-bankrupt company, Gibney sees the lead players in a worst-case scenario that eventually could undermine capitalism itself.
My goodness. I haven't seen the Enron documentary yet, so I will reserve comment on it until I do. However, it is staggering that presumably bright people such as Mr. Leydon write such drivel in a film review without even seeking so much as a comment from an objective business or legal commentator regarding the film's portrayal of Enron. I mean, how many "Sherron Watkins good/Enron bad" stories are we going to have to endure before the mainstream media ("MSM") or moviemakers move on to some of the really important issues raised by the Enron saga? At this point, does anyone even recall that Ms. Watkins' famous memo to Ken Lay essentially depicted Enron's now infamous accounting problems related to Andrew Fastow's off-balance sheet partnerships as a manageable public relations problem?
To understand this phenomena, it is helpful to take some time and review Professor Ribstein's recent post and his interesting law review article -- Wall Street and Vine: Hollywood's View of Business -- on how business is portrayed in film. Here is the abstract and the conclusion of Professor Ribstein's article:
American films have long presented a negative view of business. This article is the first comprehensive and in-depth analysis of filmmakers' attitude toward business. It shows that it is not business that filmmakers dislike, but rather the control of firms by profit-maximizing capitalists. The article argues that this dislike stems from filmmakers' resentment of capitalists' constraints on their artistic vision. Filmmakers' portrayal of business is significant because films have persuasive power that tips the political balance toward business regulation.
Generations of filmgoers have sat in darkened theatres regaled by larger-than-life images of the evils of capital. This consistent message is not mere happenstance. Films are made by people who work for and have particular attitudes about business firms. Moreover, the fantasy about business that audiences see presented in films has real world political effects in government regulation of business. The trial lawyer as hero becomes the trial lawyer as vice-presidential candidate. Filmmakers? attitude toward business may change as the medium evolves. In the meantime, the best way to counteract films? misleading message about business is to let business speak for itself.
So, while moviemakers and the MSM continue to trot out stories on the Enron morality play, they ignore the harder but more compelling stories -- the sad case of Jamie Olis, the federal government blithely depriving thousands of innocent people jobs by pursuing a questionable prosecution of Arthur Andersen, the "Justice" Department sledgehammering businesspeople into pleading guilty to dubious criminal charges out of fear of receiving of what amounts to a life sentence if they risk asserting their Constitutional right to a trial, how Enron's corporate governance system contributed to the company's collapse. The list of fascinating issues goes on and on.
As Professor Ribstein notes, depth does not sell well in Hollywood, at least in regard to portrayal of business in films. But maybe, just maybe, a Pulitizer Prize is waiting for an enterprising reporter who is willing to go beyond the simple story of Enron and examine the complex issues that are really at the core of the fascinating Enron tale.
February 11, 2005
A tip of the hat today goes to Stros owner Drayton McLane and GM Tim Purpura for signing ace pitcher Roy Oswalt to a two year $16.9 million contract. The contract will take Oswalt up to his final arbitration year of 2007, so the Stros will have to deal with the risk that he will become a free agent after that year unless they agree on a long term deal.
Although the Rocket is the highest paid Stros player, Oswalt is currently their best starting pitcher. After 3.01 ERA/33 Runs Saved Against Average ("RSAA," explained here) and 2.97 ERA/21 RSAA seasons in 2002 and 2003, Oswalt had a 3.49 ERA/22 RSAA in 35 starts (36 games) last season, most of which was pitched with a painful abdominal injury. His career ERA is 3.11 compared to his league average of 4.26, and he has a career 105 RSAA in 120 games.
Just to give you an idea of the level of talent that the Stros have in Oswalt, consider the following, courtesy of Lee Sinins. Over the past 50 years in Major League Baseball, Oswalt ranks 7th in the NL in RSAA through the age of 26:
1 Tom Seaver 174
2 Don Drysdale 173
3 Ferguson Jenkins 134
4 Pedro Martinez 129
5 Dwight Gooden 118
6 Jim Maloney 106
7 Roy Oswalt 105
8 Gary Nolan 97
9 Jose Rijo 91
10 Greg Maddux 84
Not bad company, Roy.
This may seem a bit odd coming on the heels of the previous post, but UCLA law professor Lynn LoPucki's long-awaited new book -- Courting Failure : How Competition for Big Cases Is Corrupting the Bankruptcy Courts (UM Press 2005) -- is finally available.
As noted in this earlier post, Professor LoPucki has been studying for many years the issue that he characterizes as the "race to the bottom" -- i.e., bankruptcy courts in certain jurisdictions bending federal bankruptcy law to market themselves to debtors' lawyers who often are instrumental in choosing the venue of big business reorganization cases.
The cost attributable to this "race to the bottom" is considerable because the two main bankruptcy venues -- Delaware and the New York City -- commonly approve professional fees in big reorganization cases that are at the highest level of the profession. In comparison, the high hourly rates being charged and routinely approved in the Enron reorganization case in New York would likely not have been approved if the case had been filed in Houston where Enron is based and which is a far more convenient venue for the vast majority of Enron creditors. In addition, Professor LoPucki argues in his new book that the "race to the bottom" has also caused a decline in the quality of bankruptcy reorganizations and a parallel rise in chapter 22's (i.e., repeat reorganizations).
By the way, the bankruptcy reform legislation referred to in the previous post fails to address this "race to the bottom" issue. So it goes.
The long legislative fight over bankruptcy reform legislation appears to be coming to a close, as this Washington Post article reports.
If you want to understand why this is poorly-conceived legislation that is a perfect example of Republican legislators indulging the narrow self-interest of certain business interests, then read this.
Although not perfect, America's Bankruptcy Code and system is the best in the world, which is one of the reasons that it is often emulated. Making that system more expensive and difficult for individuals is contrary to the public policy of the fresh start and the promotion of risk taking that are the foundation of our insolvency laws.
The best summary I have seen to date of why Carly Fiorina failed at Hewlett Packard is contained in this Rich Karlgaard op-ed today in the Wall Street Journal ($). Karlgaard, who is publisher of Forbes and author of Life 2.0 (Crown Business, 2004), notes Ms. Fiorina's seven basic failures in managing HP:
1. Acting like a rock star. . . In the U.S., only entrepreneurs get to act as rock stars. Hired guns do not. . . We love our entrepreneur rock stars so much we let their sins slide. Carly was excoriated for a boneheaded move -- giving Compaq shareholders 37% of HP's profitable printer division in a swap for Compaq's flagging PC business. Founder-CEOs are allowed to get away with far worse. . . Jobs's first bold act after reassuming Apple's reins in 1996 was to buy NeXT Software at an inflated $400 million and kill the company. Because he owned NeXT, Apple's purchase made him rich. Yet Apple shareholders forgave Jobs because, well, he's a rock star. And he has made good on that faith.
2. Failing to see the cheap revolution. . . . Dell is on the right side of the cheap revolution divide. It sells powerful servers for under $5,000 and keeps overhead low in Round Rock, Texas, where the average three-bedroom house sells for $200,000. HP sells servers for tens of thousands and keeps high overhead in Palo Alto, Calif., where the average three-bedroom sells for $1,500,000.
3. Failing to see the consumer revolution. A huge shift has occurred in the last five years. The coolest tech products now go straight into the consumer market. . . Carly has ineffectively maneuvered HP into this consumer field.
4. Obsession with size over flexibility. . . we need to go deeper and challenge the very premise of these mergers: that large scale is a requirement of success in the global economy. By merging with Compaq, Carly clearly believed this. But maybe the opposite is true -- that speed and flexibility now trump scale.
5. Letting talent go. . . Aside from chasing away shareholder capital, she chased away talent, from Michael Capellas on down. For high-IQ tech companies, talent loss may be the greater sin. The most dynamic -- Microsoft and Oracle during the '80s and '90s, and Google now -- have always been obsessed with recruiting and keeping talent.
6. Not tolerating strength in others. . . the good [CEO's] tolerate strength in others; the bad ones don't. Gates has Steve Ballmer. Michael Dell has Kevin Rollins. Larry Ellison has Jeff Henley. Carly had no one like that.
7. Lack of focus. We conclude with Peter Drucker's other great insight: Effective CEOs pick two tasks and devote their energies there. When those tasks are done, they don't go to #3. They make a new list. One overlooked trick to maintaining focus, Drucker told me, is to cut travel. "Make your reports come to see you. Use technology, it's cheaper than traveling. I don't know anybody who can work while traveling. Do you?" Carly, globe-hopping in her Gulfstream, worked 100-hour weeks. But she was focused on too many tasks. Which is no focus at all.
Read the entire op-ed, and then think about how HP's corporate governance promotes inflexible and ill-conceived management decisions such as those made by Ms. Fiorina. Professor Bainbridge also has some interesting observations on the big picture meaning of the HP Board's action in terminating Ms. Fiorina's employment.
On an anecdotal note, I am friends with several former Compaq executives who now work for HP in Houston. In discussing HP's problems several months ago with one of my friends who is an HP sales exective, I asked him to sum up why he thought that HP was having so many problems integrating its various units into a cohesive whole. My friend's reply was quick and authoritative:
"Because we are such a pain in the ass to deal with."
By the way, my friend noted that he had passed that exact thought along personally to Ms. Fiorina on several occasions.
In a trend that has been developing over the past year in connection with the Russian government's handling of Russian oil giant OAO Yukos, the Russian government announced Thursday that foreign-owned oil and gas companies will not allowed to bid at auctions this year for permits to develop several big Russian oilfields unless the companies have at least a 51% Russian-owned affiliate participate in the auctions. The new restrictions will further undermine Western investor confidence toward investing capital in the Russian oil and gas industry, which is already undergoing a sharp decline in growth.
Double-digit increases in prodution over the past several years has made Russian production one of the primary sources of additional supply that has offset rising demand from China and developing countries. However, production has now fallen for four straight months and it is widely expected that there will be an abrupt slowing in growth later this year.
The Kremlin's additional restrictions on foreign investors also rebuffs the Bush Administration's efforts to increase cooperation between Western oil and gas companies and the Russia government in the energy sector. The Administration held a summit conference earlier this month in which such business matters were discussed, but it appears that the Administration's lobbying has gone over like a lead balloon with the Putin regime.
Meanwhile, in updating the Yukos case, U.S. Bankruptcy Judge Letitia Clark will hear arguments next Wednesday in Houston on a motion to dismiss the Yukos chapter 11 case that is currently pending in Houston.
Brian Lavielle, one of three former Duke Energy Corp. natural gas traders who were indicted last April for booking phony trades to increase bonus compensation, pleaded guilty in Houston Thursday to falsifying books and agreed to cooperate in the federal prosecution of his other two co-defendants.
Lavielle, who is 34, faces a maximum sentence of twenty years and a fine of $5 million, although the cooperation deal and the recent Supreme Court rejection of mandatory federal sentencing guidelines probably mean that his sentence will be far less than the maximum. Sentencing is scheduled for December 9.
As noted in the previous post on the indictment, Lavielle and fellow Duke traders Timothy Kramer and Todd Reid were indicted for racketeering, conspiracy, wire and mail fraud, money laundering and falsifying corporate books in connection with booking phony electricity and natural-gas trades to boost trading volumes and inflate profits in a trading book that was the basis of their annual bonuses. The indictment alleges that the three rigged 400 phony trades that produced a $50 million profit in the trade book used for bonus calculations between March 2001 and May 2002. The schemes are alleged to have inflated bonuses for the three by a total of at least $7 million.
This is one of the first criminal cases of which I am aware in which senior-level executives have been accused of devising schemes to generate profits in a trading book by using "mark-to-market" accounting in calculating bonuses, on one hand, and to enter losses in an "accrual book" that had no bearing on bonuses, on the other. Duke and many other energy trades commonly used mark-to-market accounting to record profit and loss for energy contracts that might not settle for many years. However, mark to market accounting method has come under intense scrutiny since the demise of Enron Corp. in late 2001 because of the latitude that the method allows in recording profitable results in trading operations.
February 10, 2005
Don't miss the latest segment (no subscription required for this series) in the Wall Street Journal's Econoblog series, in which economist John Irons and George Mason University economics professor Russ Roberts discuss America's broken health care finance system.
Several months ago, this post addressed Seventh Circuit Judge Richard Posner's criticism of the recommendations contained in the final report of the 9/11 Commission. In doing research on the 9/11 Commission report, Judge Posner decided to write a new book on intelligence reform, on which he is currently working.
In this NY Times op-ed, Judge Posner points out that the reason the Bush Administration is having trouble finding someone to fill the "Intelligence Czar" position that the Commission recommended is that the proposed position is ill-conceived and makes impossible demands:
The beguiling premise of the commission's report was that the 9/11 attacks occurred because there wasn't enough sharing of intelligence data among America's 15 or so federal intelligence agencies. The report's reassuring conclusion is that we can solve the problem by centralizing the control of the intelligence system. The premise is doubtful; only in hindsight do the scattered clues gathered in the summer of 2001 point to the attacks that took place.
And slotting in a new bureaucracy (the director is authorized a staff of 500) above the existing agencies will not increase information sharing. Instead, by adding a layer to the intelligence hierarchy, it will delay and diminish the flow of information to the president.
Read the entire op-ed. Key thought here -- more centralization of information analysis does not equate with better analysis.
His fame made him the "signature architect" for corporate headquarters and commercial developers. The AT&T Building's much-publicized "Chippendale" top put him on the cover of Time magazine, cradling the model in his arms. But his nimble intelligence and excellent eye failed to produce more than a pictorial pastiche that was flat and one-dimensional or a shallow sendup of the past. What was meant to be monumental was merely big and flaccid.
Whatever Philip Johnson's legacy turns out to be, it will not rest on his buildings. His dedication to the art that was central to his existence, his proselytizing zeal for new work that pushes concept and practice beyond existing limits, his driving belief in architecture as the defining art of the present and the past, did much to re-establish a sense of the importance of the way we build in an age that worships the beauty of the bottom line. In his own way, perhaps he did change the world.
New class lawsuit legislation that will facilitate removal of most class actions from state to federal courts moved closer to Congressional approval yesterday as the Senate prepared to approve it. The House of Representatives has already committed to ratifying the bill so long as the Senate does not materially amend the legislation, and President Bush has already publicly stated that he will sign the legislation into law.
Under the legislation, most large class actions with aggregate claims of more than $5 million would be subject to removal to federal court, where most defense attorneys prefer defending class action cases.
A few exemptions remain that would allow primarily local controversies to remain in state court, such as cases in which at least two-thirds of the class members are from the state of the state court in which the class action is filed. A similar exemption exists for cases involving injuries that occurred primarily in one state.
The theory behind the legislation is to prevent class action plaintiffs' lawyers from forum shopping class actions in the state courts to find the most "damages friendly" venue for such cases. However, class action plaintiffs' lawyers have forum shopped class actions in federal courts for years, so the main impact of the legislation is simply to reduce the supply of available courts in which plaintiffs' lawyers can initiate a such a lawsuit.
The rest of the political debate regarding the bill is largely partisan drivel.
February 9, 2005
Group Menatep Ltd. is the offshore entity under which jailed Russian billionaire Mikhail Khodorkovsky and several of his associates hold the controlling stake in Russian oil company and American debtor-in-possession OAO Yukos. Here are the previous posts on the fascinating Yukos case.
Yesterday, Group Menatep asserted a tidy $28.3 billion damage claim against the Russian government for its handling of Yukos under the European Energy Charter Treaty, a 1994 treaty that, among other things, protects investors against unfair treatment and expropriation of assets without fair compensation.
This new litigation front arises just a week before U.S. Bankruptcy Judge Letitia Clark in Houston is scheduled to hear arguments on a motion to dismiss Yukos' chapter 11 case in Houston. The availability of another legal forum in which Yukos' owners can assert their claim for compensation from the Russian government may actually work to undermine Yukos' opposition to dismissal of its chapter 11 case in the American civil justice system.
Here are previous posts on HP's saga over the past year.
By the way, HP shares are surging in early trading.
What do you think it would be? International trade barriers? GM's bonds being rated at junk levels? Declining GM profits?
None of the above.
Instead, [Mr. Wagoner will] focus on fixing the U.S. health-care system.
[Mr. Wagoner] runs not only the world's largest auto maker (a position threatened by Toyota Motor), but also the nation's largest private health-care purchaser (a position threatened by no one.) He's responsible for the health of some 1.1 million people, most of them retirees and their families, and paid $5.2 billion last year for the privilege. The cost of health care now adds more than $1,500 to every vehicle sold, and is rising at double-digit rates. . . To cure what ails General Motors, he has to cure what ails America: a very sick health-care system.
Mr. Murray then frames the issue nicely:
The U.S. spends a fortune on health care -- 15% of its total output, compared with 10% in Germany and 8% in Japan. But it gets a lousy return on that money. Forty-five million Americans lack health insurance. . .
Curing the problem won't be easy -- which may be why the White House has put it on a back burner. . . fixing health care ultimately is more important to the nation's future than overhauling Social Security, rewriting the tax code or cutting discretionary spending. But Mr. Bush wrestled with health care in his first term, and has decided to give these other issues top billing in his second. That means there's little chance he'll have the time or energy to give serious attention to health care again before leaving office.
If costs continue to rise at their current pace, however, you can expect Mr. Wagoner and his business buddies to join forces with beleaguered state governors and insist that health care become the issue of the 2008 presidential campaign.
Meanwhile, Harvard Law and former University of Texas law professor Elizabeth Warren pens this Washington Post op-ed today in which she addresses the recent Harvard study that found that half of the nearly 1,800 study participants interviewed admitted that medical costs had been the primary cause of their bankruptcy filing. As Professor Warren notes:
The problem is not in the bankruptcy laws. The problem is in the health care finance system and in chronic debates about reforming it. The Harvard study shows:
? Health insurance isn't an on-off switch, giving full protection to everyone who has it. There is real coverage and there is faux coverage. Policies that can be canceled when you need them most are often useless. So is bare-bones coverage like the Utah Medicaid program pioneered by new Health and Human Services Secretary Mike Leavitt; it pays for primary care visits but not specialists or hospital care. We need to talk about quality, durable coverage, not just about how to get more names listed on nearly-useless insurance policies.
? The link between jobs and health insurance is strained beyond the breaking point. A harsh fact of life in America is that illness leads to job loss, and that can mean a double kick when people lose their insurance. Promising them high-priced coverage through COBRA is meaningless if they can't afford to pay. Comprehensive health insurance is the only real solution, not just for the poor but for middle-class Americans as well.
Without better coverage, millions more Americans will be hit by medical bankruptcy over the next decade. It will not be limited to the poorly educated, the barely employed or the uninsured. The people financially devastated by a serious illness are at the heart of the middle class.
As noted in this post on the funding crisis in Medicaid, the failure to address the true crisis in this country -- i.e., the broken down system of financing health care -- is not only a daunting failure of the Bush Administration and the Republican Party, but a huge political opportunity for the Democratic Party.
If the Dems can resist their normal temptation to address the problem through nationalizing the entire health care finance system, then the Democrats could establish a political foothold that could cut across normal party lines and provide the party with the basis for a comeback in the 2006 and 2008 elections.
Other Houston blogs such as blogHouston.net and Lone Star Times have been done a good job of covering the local political controversy that has arisen over Mayor White's rather clumsy implementation of the SAFEClear program for towing cars from Houston area freeways.
Welcome to the big leagues, Mayor White.
David Gockley -- without question the most successful executive in Houston's arts community over the past generation -- has resigned as general director of Houston Grand Opera to accept the same position with the San Francisco Opera.
After the HGO Board hired the youthful Mr. Gockley 33 years ago to replace HGO's founder Walter Herbert, Mr. Gockley oversaw the transition of HGO from a sleepy regional company to one of the leading Opera companies in the United States. Under Mr. Gockley's diretion, HGO has become particularly well-known for its productions of new works for the American stage, and Mr. Gockley brought in 33 world premieres. Examples of noteworthy works that were first performed by HGO are "Nixon in China" by John Adams and "A Quiet Place" by Leonard Bernstein.
Under Mr. Gockley?s leadership, HGO won a Tony, two Grammy and two Emmy awards, conducts frequent international tours, and is heard around the world each year through international radio broadcasts on three continents. Mr. Gockley was also a superb innovator as he introduced such concepts as supertitles, outdoor simulcasts, and OperaVision, which are screens that bring close-ups of the stage and orchestra to people in the upper reaches of the theater.
The main attraction to the director's post with the San Francisco Opera is that the company is bigger and much older than HGO. SFO was chartered in 1923, while HGO began in 1955. Moreover, SFO's budget is about $55 million, which is twice the size of HGO's budget. SFO's season includes 9 productions and 80 performances compared with HGO's 7 productions and 55 main-stage performances.
Nevertheless, Mr. Gockley will not be facing a bowl of cherries in taking on the SFO job. SFO is undercapitalized, and its current endowment is only about a third of what it should be given SFO's budget. Moreover, in San Francisco, Mr. Gockley will face huge transportation problems in attracting Bay Area opera fans into downtown San Francisco; those problems simply do not exist in the much less densely populated Houston metro area. Finally, SFO is heavily unionized, which makes operations much more expensive and complicated. Mr. Gockley did not face any meaningful union problems during his entire 33 year stint with HGO.
No word yet on who will replace Mr. Gockley, who will be the quintessential tough act to follow. Nevertheless, given HGO's stature in the opera world, the HGO should have an impressive list of candidates. Stay tuned.
Ronald G. Bliss, a highly-regarded Intellectual Property lawyer in Houston over the past two decades and a true legend in Houston legal circles, died Tuesday in Houston after a six year battle with cancer. Ron was 61 at the time of his death.
Ron headed Fulbright & Jaworski's IP section during a time of explosive growth in that area from the mid-1980's until he became ill with cancer in the late 1990's. Ron specialized in patent, trademark, copyright, and trade secret lawsuits, but he also was an expert in litigation matters over franchises and franchise assets. Most recently, Ron had become a first rate mediator of intellectual property disputes.
Although well known for his legal talent, Ron was legendary in Houston legal and business circles for being a decorated Vietnam War fighter pilot who spent over six years in the "Heartbreak Hotel," a particularly nasty part of the "Hanoi Hilton" POW camp in North Vietnam. Ron was tortured many times during that experience, which gave him a particularly interesting perspective on difficult legal matters. Listening to his stories about the torture sessions was a riveting experience in and of itself, which is one of the reasons that Ron was a big part of the 2000 documentary Return with Honor.
Ron was in captivity for 2,374 days -- as he would specify in talking about the experience -- and he was shackled in leg chains for almost the entire time. According to Ron, the worst torture method was one called the "Vietnamese Rope Trick," in which the North Vietnamese guards would place him face down with his wrists behind him on his back. The guards would then tie Ron's arms with rope, run a bamboo pole through the ropes, and then apply increasing amounts of pressure on the pole. That force, in turn, would place tremendous pressure on his wrists, arms, elbows and shoulders. As Ron noted to me and a group of lawyers on one occasion, the physical abuse "did not help my golf game, but it is a good excuse for getting more strokes on the first tee."
Ron got on with life upon his return to the United States in 1973 and never dwelled on the horrifying experience, although he would admit in conversation that he would have enjoyed a few rounds with the North Vietnamese guards who tortured him. As one would expect, Ron was a highly decorated veteran. Among his medals were two Silver Stars, a Distinguished Flying Cross, two Purple Hearts and the POW Medal. He was also inducted into the Texas Aviation Hall of Fame in 2000.
A memorial service for this remarkable Houstonian will be held at 1 p.m. Friday at St. Luke's United Methodist Church, 3471 Westheimer.
February 8, 2005
Knox Nunnally is a well-known and highly regarded trial lawyer at Vinson & Elkins in Houston. Knox has been writing a series for the Texas Lawyer on tips for trial lawyers, and the latest segment in the series provides a number of common sense tips. Knox makes two particularly insightful points:
[Get] to know all of the people associated with the court at the courthouse. This means you need to know, on a personal level, the clerk of the court, This means you need to know, on a personal level, the clerk of the court, the bailiff, the court reporter and whoever else assists with the trial. . . . during a trial any one of those court personnel could have some contact with the jury. It is always to your advantage if court personnel feel positively about you, because you never know when some gratuitous comment could be made that either advances or sinks your case. These folks also usually prove to be the best shadow jury I have ever known concerning who?s winning and who?s losing during the course of a trial.
Perhaps even more important is the following point, which unfortunately is contrary to the adversarial approach to litigation that has become increasingly common in recent years:
One of the most important tips concerns getting along with opposing counsel. Years of trial combat taught me it is far better to try to get along with the other side rather than allowing everything to become a heated battle. It seems today that so many of our relationships with opposing counsel deteriorate more quickly; cases become almost exclusively a motion practice, with personal recriminations creeping into the pleadings and arguments. I remember a case I tried to a jury verdict (and lost) with Ronald Krist, a truly splendid lawyer. It was a case we fully lost) with Ronald Krist, a truly splendid lawyer. It was a case we fully prepared, took to trial and ultimately settled after the verdict without needing one hearing before the court on any kind of dispute. That is a rare occurrence today. The trial business is tough enough without making it tougher with scorched-earth tactics. It is also true that what goes around, comes around.
This Washington Post article examines the political implications of the Trans-Texas Corridor, which is the biggest highway project since the Interstate Highway project of the 1950s. The $184 billion, 50-year plan provides for building 4,000 miles of six high speed toll lanes for cars and trucks, six rail lines, and easements that would provide space for petroleum, natural gas and water pipelines, and electric, broadband and other telecommunications lines.
Wounded Russian oil company but American debtor-in-possession OAO Yukos has dismissed five banks from its tortious interference lawsuit that it has brought in federal court in Houston in connection with its pending chapter 11 case. Here are the previous posts on the Yukos case.
The lawsuit involves several Western banks alleged involvement in the financing of an auction bid on Yukos' former production unit called Yuganskneftegaz ("Yugansk"), the Siberian oil giant that represents about 1% of world oil production. In December, the Russian government scheduled an auction of Yugansk to generate proceeds to pay Yukos' alleged $28 billion tax debt to the government, which prompted Yukos' to file a chapter 11 case in Houston in an effort to delay the auction. The Russian government went ahead with the auction despite the automatic stay under 11 U.S.C. § 362 and a Bankruptcy Court TRO enjoining the auction, and Yukos then initiated the lawsuit against a number of Western financial institutions for alleged involvement in financing the winning $9.3 billion auction bid in violatio of the automatic stay and the TRO.
Yukos dropped affiliates of ABN Amro Holding NV, BNP Paribas SA, Calyon, JP Morgan Chase & Co. and Dresdner Kleinwort Wassertein from the lawsuit. Those banks had originally been members of a consortium of Western financial institutions that was prepared to finance an auction bid for Yugansk, but Yukos is now satisfied that these banks had nothing to do with the winning auction bid.
On the other hand, one of the banks that Yukos did not dismiss is Deutsche Bank, which is challenging the jurisdiction of the U.S. Bankruptcy Court over Yukos. The hearing on Deutsche Bank's motion to dismiss the Yukos case is presently scheduled for February 16th in U.S. Bankruptcy Judge Letitia Clark's Houston courtroom.
February 7, 2005
Former MLB slugger Jose Canseco is writing a book, and early reviews indicate that he is implicating former home run champ Mark McGwire in the use of steroids and President Bush in the knowledge of their use during the time that he was CEO and part owner of the Texas Rangers.
This Wall Street Journal ($) article is an excellent overview of how subsidizing Medicaid is overwhelming state budgets across the country. The article uses the state of Mississippi as an example, where federal and state funding of the program has doubled from $1.8 billion to $3.5 billion over the past five years:
In the current fiscal year, which ends June 30, Medicaid is projected to cost $268 million more than the state budgeted. Officials are now warning that the program will run out of money by the end of this month unless the legislature passes an emergency appropriation. To open up funds for Medicaid, the state has slashed road construction and may delay plans to raise the salaries of public-school teachers who earn an average of about $35,000 a year.
Forty years ago, Congress, as an afterthought to the Medicare program for the elderly, created Medicaid to help pay for the medical needs of about four million low-income people. Today, the program covers 53 million people -- nearly one in every six Americans -- and costs $300 billion a year in federal and state funds, recently surpassing spending on the federal Medicare program. In some states, Medicaid accounts for one-third of the budget.
The article is quite good in describing the many facets of the dilemma, including the issue of how to ration care, the under-representation of poor people who truly need some type of subsidy for medical costs, and the knotty problem of trying to make a flawed government program more efficient:
As states try to slash costs under current rules, they run into many roadblocks. Federal law mandates that states must cover many types of care, such as pregnancy care for certain low-income women. Reducing the number of beneficiaries is hard because they often have nowhere else to turn. What's more, because Medicaid is a "fee for service" program that pays doctors and hospitals every time they treat a fever or patch up a cut, it's difficult to encourage efficiency.
Patients, too, have little incentive to ration their own care because they pay at most a small sum to see the doctor. "When something is free, people don't care what it costs," says [Governor Haley] Barbour in Mississippi.
Which reminds me of an observation that Milton Friedman made in an interview awhile back about the inefficiency of federal programs that interfere in the market's allocation of services and products:
There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.
Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.
Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!
Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government. And that's close to 40% of our national income.
Read the entire article. As with the entire employer insurance-based, third party payor system of American health care finance, the Medicaid program has grown into a hulking mess largely because of the skewed economic incentives involved. Absent addressing the fundamental problem -- i.e., the subversion of market forces in the allocation of health care -- reforming the Medicaid program will be akin to rearranging the deck chairs on the Titanic.
Social Security reform is necessary over the long term, but the more pressing need in his country is the reform of the health care finance system. The introduction of Health Savings Accounts is a good start, but the Bush Administration and Republican Party's reluntance to address the fundamental problems in our society's third party payor system of financing health care may doom our children and grandchildren to the worst of all results -- that is, socialized health care finance by default.
February 6, 2005
Despite the overpriced contracts that the Stros' gave Bags and Richard Hidalgo, and the lesser mistakes that the club continues to make by unnecessarily signing such awful players as Brad Ausmus and merely mediocre ones such as Jose Vizcaino, the Stros by and large have done a reasonably good job over the past decade of allocating their limited payroll resources. The result has been a very good run over that span in which the club has won the National League Central Division four times (1997-1999; 2001), made the League Championship Series once (2004), and finished below second place in its division only once (2000).
To make you appreciate the Stros even more, consider the case of the Detroit Tigers. The Tigers have been to the playoffs exactly once (1987) since winning the World Series 20 years ago in 1984. Over the past 12 seasons, the club's best finish has been third in their division, and the club has only accomplished that feat three times. During that span, the Tigers have finished dead last in their division exactly half (6) of the time. To give you an idea of how bad it has gotten in Detroit, the club improved its record last season by 29 games from the previous season and the Tigers still finished with a 72-90 record! Consequently, just as the Stros have been one of the most successful clubs in Major League Baseball over the past decade, it is fair to say that the Tigers have been among the most dreadful.
The Detroit Tigers snared the last remaining premier free agent of the offseason, agreeing to a $75 million, five-year contract with outfielder Magglio Ordonez, . . . Ordonez's deal could be worth up to $105 million over seven seasons, . . .
Probably to avoid a malpractice lawsuit from their fans over this contract negotiation, the Tigers at least hedged their risk on this absurd deal somewhat by negotiating an effective $12 million option to terminate the deal after one season if Ordonez is unable to play in a specified number of games during the upcoming season. The reason for that hedge is that Ordonez is coming off of knee surgery last season that led to the rare complication of bone marrow edema. A second surgery that was performed in Austria has reportedly cleared up that problem, but no one has even seen whether Ordonez can run at full speed at this point. Nevertheless, if Ordonez can limp through one season with the Tigers as a full-time player, the Tigers are on the hook to him for at least $75 million over the next five seasons.
Now, I like Ordonez as a player. I even thought it would be worth it for the Stros to take a flyer on him if they could have locked him up with a one year contract for say, $5-6 million with an option for $7 million. But what the Tigers have just committed to is, in a word, ludicrous.
Look, Ordonez had a very good five year run with the the White Sox (1999-2003) in which he developed power and the ability to draw a walk. His eight year career numbers (.307BA/.364OBA/.525SLG) are quite a bit better than Beltran's seven year career numbers over the same period (.284/.353/.490).
However, the big difference between Ordonez and Beltran is that Ordonez did not become a starter until he was 26, so there is a high probability that his five year with the Sox was his peak performance period. Ordonez is now 31 and coming off of knee surgery, and even if he is able to return to playing everyday, the risk is huge that this contract will turn into a Bagwell-type albatross for the Tigers.
What on earth are the Tigers going to do if Ordonez fulfills his first year playing requirements and then becomes a .266/.377/.465 hitter like Bags was last season? In short, the Tigers would simply be using Ordonez's contract to replace the absurdly overpriced contract that they gave to the then 30 year old Bobby Higginson in 2000, who proceeded to go downhill to the point where he provided the Tigers a pitiful .246/.353/.388 performance this past season. The Tigers are currently attempting to unload the $8.85 million that they currently owe Higginson under that contract.
Thus, as we ponder what could have been had the Stros been able to sign Beltran and elected to exercise their $9 million option on Jeff Kent, remember the Tigers. Sometimes the expensive deals that a club doesn't make turn out to the ones that give young players such as Jason Lane and Chris Burke an opportunity to shine. As the past decade has shown us, it is far more likely that the Stros will be a better ballclub over the long haul by relying on development of such good talent within the organization than the Tigers will be throwing money at high risk contracts as those they gave Higginson and Ordonez.
February 5, 2005
In this post, James Wolcott endorses Kinky Friedman's candidacy for Texas governor because of Kinky's stated reason for running -- he wants "to move into the governor's mansion because he needs more closet space."
It has been rumored that Senator Kay Bailey Thurston Howell the Third is planning to step down from the Senate to run for the governor's seat, presently occupied by Rick Perry, whom even other Republicans consider a ceramic idiot. She would be a formidable candidate, unlike the current dolt.
Meanwhile, don't miss Banjo Jones' hilarious analysis of the lengths that Houston U.S. Representative and notorious camera hog Sheila Jackson Lee went to in order to obtain maximum camera time during President Bush's State of the Union speech earlier this week.
Austin-based Temple-Inland Inc. -- the big lumber and financial services company -- announced yesterday that one of Carl Icahn's investor vehicles -- Icahn Partners Masters Fund LP -- had requested government approval to buy as much as $1 billion of the company's stock. The company's stock price was up a cool 16% on the news. Here are several posts on what Mr. Icahn has been up to over the past year. Here is the Bloomberg News article on the development.
As predicted in this prior post, Houston-based Landry's Restaurants Inc. announced yesterday that it is buying the Golden Nugget hotel-casino in downtown Las Vegas. The acquisition comes on the heels of a Landry's junk bond offering last year amid speculation that the company was finalizing a strategy to attempt to add the potentially lucrative -- but highly competitive -- gambling business into its casual restaurant business.
Built almost 60 years ago, the Golden Nugget is the largest and probably the best of the 14 casinos in the troubled downtown area of Las Vegas, which has faded in recent years as numerous mega-casinos have been built in the Strip area of Vegas. The Nugget has just over 1,900 hotel rooms and employs over 2,500 employees.
Landry's will pay Poster Financial Group Inc., the owners of the Golden Nugget, almost $300 million for the casino, including $140 million in cash and the assumption of approximately $155 million in debt.
Nevertheless, Landry's may be picking up a bargain. Timothy Poster and Thomas Breitling -- who were the founders of travel Web site Travelscape.com (later sold to Expedia) -- are the owners of Poster Financial Group, which bought the Golden Nugget properties in downtown Vegas and Laughlin, Nevada from MGM Mirage Inc. in mid-2003 for $215 million. Poster Financial later later sold the Laughlin property for $31 million, but their operation of the Golden Nugget Las Vegas has not gone smoothly, as their dubious strategy of catering to high rollers resulted in a substantial drop in the casino's "cash flow," as the Vegas types say. Messrs. Poster and Breitling also decided to take part in the Fox reality television show, "The Casino," which turned out to be a real turkey and was not good public relations for the casino. In short, it appears that Messrs. Poster and Breitling have had their fill of the gaming business for the time being.
The market responded favorably to the announcement, as Landry's shares were up 12% to $31.95 on volume of 2.5 million shares yesterday afternoon on the New York Stock Exchange. Average daily volume in Landry's shares is normally a tad over 300,000 shares.
Landry 's is a national restaurant company that owns and operates 300 restaurants, including Joe's Crab Shack, Rainforest Cafe and Landry's Seafood House. Landry's CEO Tilman Fertitta, who founded the company and controls about a quarter of the company's outstanding stock, is the cousin of the Fertitta family that runs Station Casinos Inc. Landry's had about $1.1 billion in revenue during its most recently audited fiscal year and currently employs more than 30,000 people.
February 4, 2005
As with most young folks who grow up in Iowa City, I became immersed in the rather remarkable culture of the University of Iowa Hawkeye sports programs, particularly the football and basketball programs. From 1960 through 1971, I attended virtually every Iowa home football and basketball game. Although I have not found much of a market for my services in this area, I remain one of the relatively few experts on those Iowa programs from that era.
What brings all this up is an interesting situation that has been playing out with regard to the Hawkeye basketball team over the past week. Pierre Pierce, who has started something like 82 or 84 games during his three season career at Iowa, was dismissed from the team because of a squabble with a girlfriend that has resulted in a police investigation. Pierce has not been charged with a crime, but the probable reason that Pierce was dismissed from the team rather than suspended pending the outcome of the investigation is that he had been effectively suspended for a season (i.e., red-shirted for a season) a couple of years ago after copping a plea bargain in connection with aggravated sexual assault charges that had been leveled against him.
In this post, Professor Ribstein -- from Hawkeye arch-rival, the University of Illinois -- makes the point that markets were already making the UI athletic administration's job somewhat easier in dismissing Pierce:
It must be tough to drop such a player. A team's success has huge financial implications for a big-time sports school. But it is, still, a school, and discipline of misconduct is an important part of the educational mission. So there's a conflict of interest at all management levels (not just the coach), because of conflicting criteria for judging their performance. This sounds to me a lot like the corporate social responsibility debate -- profits vs. society.
But I've argued that markets sort out these conflicts in the corporate area, and markets seem to be working here, as many at Iowa were expressing displeasure with the school's failure to act against Pierce.
Professor Ribstein is correct in his analysis, although it is just part of the story. Attendance at Hawkeye basketball games -- which has been a tough ticket in Iowa for over 50 years -- has diminished to the lowest levels in decades this season, despite the fact that the Hawkeye team is a Top 25 team and, as Professor Ribstein mentions in his post, took number one ranked and undefeated Illinois into overtime last week before losing a close game. As with most markets, a variety of factors is contributing to the declining attendance at Hawkeye basketball games, but no one who knows anything about the Hawkeye culture doubts for a second that the primary reason for the decline is many Hawkeye fans' disdain for Pierce and his primary supporter, Hawkeye basketball coach Steve Alford. The fascinating element to this is that the Hawkeye fans' disdain may be as much based on Coach Alford's limitations in evaluating Pierce's playing ability as it is on Pierce's apparent character flaws.
Coach Alford was hired at Iowa six years ago with the promise that he was going to take the traditionally very good Iowa basketball program to the "elite" level of college basketball programs. Unfortunately for Coach Alford, the program has actually gone in the other direction during his tenure, and the latest chapter in the Pierce saga is probably going to be the straw that breaks the camel's back in pushing the UI administration to buyout his contract and bring in a new coach.
Regardless of whether Coach Alford's decision to support Pierce was based on alturistic "everyone is entitled to a second chance" principles or more grizzled "the team really needs him" principles, the market for Iowa basketball has firmly rejected Coach Alford's decision. And interestingly, the market is at least partly rejecting Coach Alford's competence as an evaluator of basketball talent because, as this excellent analysis points out, the reality is that Coach Alford overrated Pierce as a basketball player and Iowa's team is likely not going to miss him much:
Pierre Pierce was clearly the focal point of Iowa's offense through its first seven conference games. Since he scored in such an inefficient fashion, his absence in the offense probably won't be the crisis some are making it out to be. The team going forward will be more balanced and made up of more efficient scorers, so they should be able to pick up the slack from the fallen star.
Stated simply, Pierce is like the .300 hitter in baseball whose on-base average is only .310 and whose slugging percentage is only .320. Because the non-experts in player evaluation believe that a .300 batting average equates with good hitting, the general public is deceived into thinking that the player is a good hitter despite the fact that the less well known but more important on base average and slugging percentage statistics reflect that the player is far below average. Pierce has a relatively high scoring average because he shoots frequently, but his poor shooting percentage and high turnover rate hurt the team more than his high scoring average contributes to it.
So, not only does the Pierce story intersect, as Professor Ribstein points out, the business of college sports and university corporate governance, it also points to the rather remarkable power of markets in effecting change in the entertainment business. The market for Hawkeye basketball recognizes that Coach Alford's decision to make the overrated Pierce the focal point of the Hawkeye team reflects his limitations as a coach who will be able to fulfill the market's expectation that the Iowa program remain at least the traditionally very good program that it has been over the past 50 years. That market is demanding a new (and hopefully better) coach, and it will likely get it.
Meanwhile, the market for Hawkeye football is quite strong as Hawkeye Coach Kirk Ferentz has just hauled in a top recruiting class on the heels of three straight major bowl appearances and Top Ten finishes. Interestingly, Coach Ferentz's turnaround of the Hawkeye football program has been performed essentially by following the football model of the Super Bowl champion New England Patriots, which emphasizes teamwork and making no player the focal point of the team. Call it the "low risk with high upside" model of building a football program.
Yes, markets truly are in everything.
Look who has jumped into the debtor-in-possession lending business in connection with making a $36 million loan in the Trump Hotels & Casino Resorts chapter 11 case -- Dallas-based Beal Bank and its poker-playin' owner, Andrew Beal.
I guess that's one way to increase one's tab at the Trump Casinos.
Royal Dutch/Shell Group announced another sharp cut in its energy reserve estimate yesterday even as high energy prices allowed the company to generate a fourth-quarter profit of $4.48 billion. Here is a series of posts over the past year on the reserve estimate mess and related problems that Shell has been confronting.
Shell's announcement highlighted a problem that is facing most of the major exploration and production companies -- i.e., the struggle to find new reserves to replace the oil and gas that the companies are currently producing.
Shell's problems in that area are are worst than most. Yesterday, the company reduced reserves by an additional 1.4 billion barrels of oil equivalent, the fifth such cut over the past year.
This brings the cumulative reserves reduction to about one-third of total company reserves since Shell first disclosed early last year that it had drastically overstated its reserves numbers. Moreover, Shell has not filed its required 2004 year-end reserves numbers with the U.S. Securities and Exchange Commission, so even further reductions are possible. Shell expects the five-year earnings impact of these cuts to total about $700 million, which is about 1% of the company's profit over that period.
Despite that relatively small impact on profits, it is Shell's dismal performance over the past year in replacing energy reserves that is placing the company in a precarious position within the industry. Reserves are the estimated bank of energy reserves that an oil and gas company has in the ground and energy companies typically attempt to replace at least 100% of the reserves they pump annually in order to provide markets with the confidence of future growth potential.
Shell is not even close to that standard. The company announced that it expected its 2004 reserve replacement ratio to be somewhere between 45% to 55%. Moreover, if one includes the effect of divestments and technical adjustments related to year-end oil pricing, the replacement rate plunges to a horrifying 15% to 25%.
Although not as drastic a problem as Shell's, the entire oil and gas industry is having a difficult time replacing its energy reserves. Last week, Houston-based ConocoPhillips announced that it replaced just 60% to 65% of its reserves in 2004 and ChevronTexaco Corp. announced that its replacement rate will also be disappointing.
Thad Grundy, who was one of the statesmen in Houston's business bankruptcy bar for many years, died on Wednesday in Houston at the age of 84.
Thad was a member of the same extraordinary generation of men as my late father. He was born and raised in Galveston, and then -- like many men in that generation -- graduated from college and law schoool (The University of Texas) just in time to enter the Navy in World War II. From 1942 until 1945, Thad served in the United States Naval Reserve as a commanding officer of PT boats in the Mediterranean Sea and in the Philippines. He went on to serve with distinction and was awarded several medals, including the Silver Star. Despite his disintinguished service for his country, Thad was a humble man and never mentioned his military record to me in the 25 years that we knew each other.
When Thad returned to Houston after the war and he joined Fulbright & Jaworski (then known as Fulbright, Crooker, Freeman and Bates). Then, in 1957, he became a founding partner in the medium-sized downtown Houston firm Hutcheson and Grundy, where he practiced for over 30 years until that firm dissolved in early 1998. For several years after that, Thad continued practicing in an of counsel role at Locke Liddell & Sapp in Houston.
Thad was a fine lawyer in many areas, but his real forte' was business bankruptcy. Along with Mickey Sheinfeld, the late Bankruptcy Judge Arthur Moeller, and several others, Thad was one of the leaders of the early Houston business bankruptcy bar, which over the years has grown into a formidable force on the national scene. Thad was always a gentleman and a mentor to any young attorney who sought his insight into the myriad of complex issues that arise in business reorganization litigation.
I met Thad in the first big corporate reorganization case that I worked on after law school. He represented the largest group of bondholders and I represented the largest unsecured creditor in the case. The case did not go well for Thad and his clients, but my lasting memory of Thad from that case is the classy and professional way that he handled the adversity of that case. In many ways, that has been a more valuable lesson for me than any creative legal strategy that I have learned over the years.
A memorial service for Thad will be held at St. Martin's Episcopal Church (sometimes referred to by Houstonians as former "President Bush's Church"), 717 Sage Road, at 11 a.m. today. If you are not able to make it, say a prayer for this good and honorable man who will be sorely missed by the Houston legal community.
February 3, 2005
The MSM is atwitter today with news about the release of a previously confidential report that details former New York Stock Exchange CEO Richard Grasso's compensation and perks as head of the NYSE and paints the Big Board's directors as clueless as to how much compensation they were approving for Mr. Grasso during his eight years as Big Board CEO. New York attorney general and Governor-in-waiting Eliot Spitzer -- who has sued Mr. Grasso and Wall Street financier and former NYSE compensation committee chairman Kenneth Langone over Mr. Grasso's compensation issues -- is quite pleased with the publicity, thank you.
Of course, the MSM is self-righteously indignant with the corpulent details of Mr. Grasso's perks, including $193 million in annual pay, early pension payouts and estimated interest earned on those payouts from 1995 through 2003, as well as the $240,000-a-year secretary, two $130,000-a-year drivers, access to a private plane, and club memberships. Relying on compensation experts, the report -- which was commissioned by the Big Board directors only after they had approved all this compensation for Mr. Grasso and Mr. Spitzer started snooping around -- opines that the compensation represented about $100 million in "excessive" pay for Mr. Grasso.
Interestingly, the report notes that former NYSE director Carl McCall, the former New York state comptroller who headed the NYSE board's compensation committee in 2003 when it approved Mr. Grasso's most lucrative contract, signed the document without reading the damn thing. Despite this rather amazing disclosure and the fact that Mr. Spitzer has sued Mr. Langone (who was Mr. McCall's predecessor as NYSE compensation chairman), Mr. Spitzer did not name Mr. McCall as a defendant in his lawsuit against Messrs. Grasso and Langone. I'm sure the fact that Mr. McCall, like Mr. Spitzer, is a prominent New York Democrat, while Mr. Langone is a prominent Republican, had nothing to do with that decision.
As expected in such misguided squabbles, both Mr. Spitzer and Messrs. Grasso and Lagone stated publicly yesterday that the report supports their respective positions in the lawsuit.
Alas, what is completely lost in the MSM treatment of Mr. Grasso's pay and Mr. Spitzer's Robin Hood lawsuit is the real issue, which is the failed corporate governance model of the NYSE. For insightful analysis of that issue, check out Professor Bainbridge here and Professor Ribstein here. Although arguably not be as entertaining as gossiping about how Mr. Grasso's country club buddies lined his pockets or how Mr. Spitzer is going to be the next "Peoples' Lawyer," their recommendations have a much better chance of remedying the problem of oblivious directors and overpaid executives than a hundred Spitzer-type lawsuits would ever have.
Less than a month after it was announced, the tentative settlement by 10 of 12 WorldCom Inc. directors to pay $54 million (including $18 million out of their own pockets) to settle the class-action claims against them has collapsed after U.S. District Judge Denise Cote rejected a key provision of the deal.
The agreement unraveled as the plaintiffs withdrew from the settlement after Judge Cote rejected the provision in the deal that would have prevented the remaining defendants in the lawsuit to reduce their liability on a judgment by assessing a portion of the responsibility for that judgment to the settling defendants. As noted in this earlier post, a similar tentative settlement early in the Enron case that would have resolved civil and criminal charges against Arthur Andersen was also scuttled by a dispute over a similar provision.
Consequently, unless the plaintiffs and the directors revise the deal to delete the above-described provision, the 10 directors will have to stand trial starting Feb. 28 along with the other defendants in the case.
My sense is that cooler heads on the plaintiffs side will prevail and the settlement will eventually get done. However, stranger things have happened in such a high profile case than leaving $54 million on the table. The plaintiffs may figure that its worth it to go for the gusto against the financial institutions because they can always settle with the directors on similar economic grounds after obtaining a big judgment against, or settlement with, the remaining banks.
February 2, 2005
This previous post expressed skepticism that the city of Jacksonville would be able to handle the logistical nightmare of Super Bowl XXXIX. In this article, ESPN's Bill Simmons -- who believes that the Super Bowl should be played only in Las Vegas (in a to be-built stadium), Miami, New Orleans, and San Diego -- says that the disaster developing in Jacksonville is making Houston's performance hosting Super Bowl XXXVIII last year look good in comparison:
If anything, the past two days made me appreciate Houston's performance last year, a city that faced the same logistical problems and conquered many of them. I don't think Houston should have hosted a Super Bowl either, and those last two days were a certifiable train wreck. But at least they had enough hotels. At least there were a decent number of cabs. At least there was a recognizable downtown area. At least they had the Light Rail, with the bonus that you might get to see some drunken pedestrian bouncing off it. Houston was 10 times more prepared than Jacksonville is right now.
Thanks for the compliment, Bill. I think. ;^)
Hall of Famer Yogi Berra has filed a $10 million lawsuit against TBS, claiming the cable television network sullied his name by using it in a racy advertisement for its Sex and the City reruns.
Berra's papers . . . say the Turner Broadcasting System Inc. ad, which has appeared on buses and in subways, caused "severe damage to his reputation" with its reference to Kim Cattrall's sexually promiscuous character, Samantha.
The offending ad . . . queried readers about the definition of "yogasm." Possible definitions: (a) a type of yo-yo trick, (b) sex with Yogi Berra and (c) what Samantha has with a guy from yoga class. The answer is (c).
This Times Online article opines that there are clear signs of increasing instability within the government of North Korea. Earlier posts on the sad saga of North Korea may be reviewed here, here, and here.
As Russian oil giant OAO Yukos continues its attempt to maintain jurisdiction of its pending chapter 11 bankruptcy case in Houston, this report today confirms what had been suspected earlier -- i.e., that energy-driven China loaned Russia $6 billion secured by future oil shipments to help finance the effective nationalization of Yuganskneftegaz ("Yugansk"), which was Yukos' main production unit and produces about 1% of the world's crude oil output.
Russian state oil company OAO Rosneft had taken over management of Yugansk in December after a Russian shell company had purchased the unit at a Russian government auction. There had been discussions of a sale of a 15% stake in Yugansk with state oil companies from China, but apparently those talks are now on hold.
The loan is effectively a forward payment for a total of about 352 million barrels of oil that Rosneft has already agreed to ship to China through 2010. The contract replaces an earlier deal between China and Yukos. China is being quite aggressive in oil markets these days as it attempts to satisfy the country's growing demand for oil, which is currently estimated to be over 6 million barrels a day.
The Russian state takeover of Yugansk has raised concerns in Western markets over the Russian government's commitment to the rule of law, which is a key component of a market economy. Although Western oil and gas interests remain interested in investing in Russia's vast oil and gas reserves, Yukos' chapter 11 case and the the threat of legal action has chilled Western companies from getting involved in the bidding for Yugansk. The Russian government has jailed several current and former Yukos executives -- the most prominent being former Yukos CEO and main shareholder, Mikhail Khodorkovsky -- in a campaign that Yukos claims is merely a government campaign to nationalize Russia's oil and gas industry.
The Wall Street Journal's ($) Holman Jenkins, Jr. notes in his Business World column today on the big mergers announced over the past week (P&G-Gillette, SBC-AT&T, and MetLife-Travelers) that management is coming up with ever more creative pitches to use a company's retained earnings for anything other than paying it to shareholders:
Procter & Gamble and Gillette spent as much effort on getting the incentives of key players right as they did on touting "synergies" and the like.
Take Gillette's biggest shareholder and presumably the biggest beneficiary of P&G's willingness to buy the company for an 18% premium: Berkshire Hathaway chief Warren Buffett committed a novel act when he made a video to be distributed on P&G's Web site not merely praising the merger as a "dream deal" but vowing to increase Berkshire Hathaway's stake in the combined companies.
Mr. Jenkins goes on to note that Gillette CEO James Kilts -- who is making a cool $185 million on the merger -- provided further enticement for P&G shareholders by promising not to sell any shares of the merged company for two years after the deal closes. And, if Messrs. Buffett and Kilts assurances are not enough, P&G management also promised that it would spend $18 to $22 billion over the next year and a half in buying back P&G shares.
So, what on earth is going on here? Mr. Jenkins thinks he knows:
[H]aving large amounts of cash around is also deemed a temptation to management to engage in undisciplined spending. The message here: If shareholders would kindly approve the deal, management will keep itself on a short leash in the future.
Alas, none of these gestures managed to stop Procter & Gamble's stock price from falling off the table in the manner typical of companies announcing costly acquisitions.
Mr. Jenkins goes on to note that the market requiring incentives rather than empty promises to approve a deal is a step in the right direction in the business of selling mergers to the investing public. However, as with Hewlett-Packard's acquisition of Compaq and Comcast's failed bid for Disney, is the acquisition price for Gillete so high that, as Professor Ribstein might observe, it takes a near-delusional synergy theory -- plus Mr. Buffett's promotion of the deal -- for P&G management to justify it?
By the way, Mr. Jenkins takes note of the unusual nature of Mr. Buffett's involvement in selling the Gillete deal to P&G shareholders, and observes:
Mr. Buffett is famous for keeping his stock-buying intentions under wraps, knowing that his legion of fans might otherwise move the stock against him, so this was a first.
That said, we wonder what Pandora's Box Mr. Buffett has opened. The role of big shareholders is to ride herd on management, not to peddle the goods to shareholders of acquiring companies as ally and agent of the acquiring company's management. Having put himself in the position of selling the deal to P&G's investors, is Mr. Buffett now obliged to warn them in the future if he intends to dump the stock?
Indeed, in addition to P&G shareholders, perhaps Mr. Buffett should also call Eliot Spitzer if he plans on dumping any his stock involved in this deal anytime soon.
Update: In commenting on Mr. Jenkins article, Professor Ribstein's notes that the deals may be a positive sign that the takeover market is combining with the trend toward more productive distribution policies to produce real corporate governance reform, and then adds:
It's worth noting that none of this has anything to do with Sarbox.
February 1, 2005
Yesterday brought perhaps the first sign that a more measured approach to sentencing in white collar criminal cases may be in the offing since the current trend of criminalizing questionable business transactions began with the meltdown of Enron in late 2001.
In this order, U.S. District Judge Ewing Werlein declared moot the jury findings from the makeshift sentencing hearing that the court held in the Enron-related criminal case known as the Nigerian Barge case last year pending the U.S. Supreme Court's decision in U.S. v. Booker. As noted in that latter post, the Supreme Court in Booker in late 2004 set aside the mandatory provisions of the federal sentencing guidelines after the Nigerian Barge jury sentencing hearing had been conducted.
In his order, Judge Werlein concluded that, in light of the Supreme Court's decision in Booker, the sentencing jury finding that the Nigerian Barge transaction cost Enron investors $13.7 million is not binding on the court. Judge Werlein is scheduled to sentence the five defendants that were convicted in the Nigerian Barge case in March.
Judge Werlein is one of the fairest and most gracious men on the federal bench. Accordingly, I am hopeful that Judge Werlein will take the bold step of reversing an ugly trend in the U.S. criminal justice system that has resulted in injustices such as this.