March 31, 2005
Jerry Flint writes in his Forbes Backstreet Driver column that GM's problems are worse than they appear, and they appear to be pretty darn bad. Mr. Flint focuses on GM's tactical decisions, including a suggestion that the Pontiac and Buick brands might be phased out if sales do not improve. Mr. Flint sums up the news coming out of GM's offices these days in the following manner:
Every day there seems to be more bad news from General Motors. It's like a parody of BBC news in the early days of World War II.
"And now, news of fresh disaster."
Meanwhile, the Washington Post's Steve Pearlstein chimes in with this article in which he observes that all of the Big Three are in big trouble:
[T]the Big Three today are in roughly the same pickle as the integrated steel mills back in the early 1980s, or the full-service airlines around 1990: Their choice . . . is either to make radical changes in their business model and cost structures or suffer a long, slow death.
Hat tip to Craig Newmark for the links to these articles.
This Chronicle article reports that the owners of the chic Hotel ZaZa in Dallas have acquired one of Houston's oldest hotels, the venerable Warwick in the Museum District in between downtown and the Texas Medical Center.
For many years, the Warwick and the old Shamrock Hilton on the other side of the Medical Center from the Warwick were Houston's premier hotels. However, in the 1970's, both properties suffered in comparison to newer hotels that were built in the area near the Galleria, and the Shamrock was finally shuttered and destroyed in 1987. The Warwick has held on through a series of owners and at least one recent renovation, but it has not been able to recapture the magic of its earlier days.
Nevertheless, the Warwick is in a prime location, near the Medical Center and Rice University to the south, and downtown to the north. Moreover, the property sits in the middle of Houston's beautiful Museum District and is on the new Metro Light Rail line. Finally, the views from the hotel down Main Street lined with majestic Live Oak trees remains a sight to behold. Here's hoping that the Hotel ZaZa owners recognize the jewel that the Warwick can be and invest the funds necessary to restore its preeminence among Houston's finer hotels.
In the most stunning in a series of revelations that has rocked the U.S. business community, American International Group Inc. admitted yesterday to numerous and substantial accounting irregularities that could reduce its net worth by over $1.75 billion. Moreover, the company's accountants -- PriceWaterhouseCoopers -- received a subpoena for documents relating to the probe.
AIG, the largest insurance company in the U.S., admitted transactions that "appear to have been structured for the sole or primary purpose of accomplishing a desired accounting result." The company's statement listed eight areas in which an ongoing internal review has identified accounting mistakes. The statement specifically declared as improper the treatment of a deal with General Re Insurance Corp., a unit of Warren Buffett's Berkshire Hathaway Inc., that has been at the center of the probe since it began. Here are the previous posts on the investigation into AIG and Berkshire.
To make matters worse, state and federal investigators believe that the full extent of AIG's accounting improprieties over the past decade are even larger. According to unnamed sources within the government's investigation units, the investigations have already uncovered a pattern of alleged misconduct in regard to the business transactions that will likely prompt criminal prosecutions against the individuals responsible for the transactions.
The Lord of Regulation was pleased with AIG's public admissions. "The board's decision to provide this information represents a welcome step toward transparency and accountability as our investigation proceeds," said the Lord's spokesman.
The market is clearly worried by AIG's mounting problems. Yesterday, during a broad stock-market rally, AIG's shares fell almost 2% to $57.16, continuing a slide that began in mid-February after disclosure of the governmental probes. Since that time, AIG shares are down 22% since closing at $73.12 on Friday, Feb. 11. Perhaps even more importantly, Standard & Poor's yesterday downgraded AIG's long-term bonds and certain other debt by a notch from its top AAA rating.
Given these latest developments. the question of the moment is whether AIG is headed for an Enronesque meltdown. Financially, it would appear that such a meltdown is unlikely. In 2004, AIG reported net income of over $11 billion on revenue of about $98.5 billion. Consequently, the accounting problems identified to date probably will not deplete shareholders' equity by more than about 2%, which would leave the company's net worth above $80 billion. That's not chump change.
However, the reason that Enron collapsed is that Enron's business-model -- as does AIG's -- requires its customers to rely on the company's financial integrity and not necessarily the company's net worth. Accordingly, when customer confidence in a company such as Enron or AIG is undermined, participants in those companies' markets become less willing to engage in the purchase or sale of long-term contracts that might not be fulfilled. Thus, as the "bid-ask" spreads on Enron's trading contracts diverged in late 2001, Enron's markets unraveled and Enron's formerly profitable trading business collapsed.
Enron and AIG's business models are quite similar to that of a bank. Banks take in money from depositors on a short-term basis and then loan it out on a long-term basis. The bank only keeps a small fraction of its assets available as working capital. Consequently, as sometimes happens, if too many depositors try to withdraw funds from a bank (i.e., a "run on the bank"), then the bank will not have adequate cash on hand to pay them their withdrawals and the customers will be have to be turned away.
So what prevents a run on the bank? Beyond federal deposit insurance, the only thing that really prevents the run on the bank is that the bank's depositors trust that the bank will be able to fulfill their demands for withdrawals. Stated another way, the bank will fail when its depositors stop trusting the bank. That's one of the reasons why banks traditionally have built huge and impressive bank lobbies and offices to advertise the strength of the bank's assets and its concurrent financial integrity. Enron followed that example in building the Enron office tower in downtown Houston, and AIG's New York building is equally impressive. However, regardless of the financial soundness of any bank, when its depositors stop believing in the financial integrity of the bank, the bank will fail.
Life insurance companies such as AIG operate in much the same way. Insureds deposit money with a life insurance company for years and build up equity. However, if the insurance company fails (as they sometimes do), then the investment is lost. Thus, customers rationally hesitate to use a life insurance company that is not financially solid, and insurance companies attempt to fulfill that customer expectation regarding their financial stability through public accounting, by building enormous offices, and by advertising themselves as bastions of stability. In that regard, governmental regulation of companies in the life insurance and banking industries help those industries by reducing the public's fear of hidden financial problems.
Enron was similar to a bank or life insurance company because Enron's largest business was in natural gas contracts. Inasmuch as Enron created the long-term natural gas market, Enron became the market maker for such contracts and, thus, offered to buy or sell long-term natural gas contracts in that market.
That raises an important attribute of Enron's business that led to its downfall -- Enron was a party to every transaction in its trading business. That is, buyers and sellers did not contract with each other, but with Enron. Thus, every company that conducted trading business with Enron had credit exposure to Enron and, as a result, a big part of the value placed on a contract depended on Enron's creditworthiness. This exposure is greater in long-term contracts, particularly for buyers who prepaid some or all of the contract.
Therefore, as the revelations of Enron's accounting problems began to emerge in late 2001, buyers of such contracts from Enron began to bid lower -- the value of a contract fell with the increased risk. On the other hand, sellers of contracts began to demand a higher price from Enron because of the increased risk that the contract might not be fully consummated. Moreover, the foregoing process was not limited to Enron's natural gas trading market. It also occurred in regard to electricity, plastics, chemicals, metals, oil, fertilizers, coal, freight, tradable emissions (pollution) permits, lumber, steel, and other markets that Enron had created. Almost overnight, Enron's profit margins in its trading business diminished dramatically or disappeared completely, and that process ultimately led to the implosion of Enron's trading markets.
Consequently, accounting improprieties are unlikely, in and of themselves, to lead to AIG's collapse. By way of comparison, bad accounting alone would not have brought down Enron. However, bad accounting can undermine the business customers' trust in AIG's financial integrity, and the disappearance of that trust in the marketplace can cause AIG's business to decline dramatically or, in the worst of all scenarios, collapse completely. That lack of trust is what truly brought Enron down, and AIG needs to be concerned with that same dynamic.
March 30, 2005
Kevin Whited over at blogHouston.net continues to question why the Chronicle is taking such a hand's off approach to the controversy over KTRK-TV's scuttling of investigative reporter Wayne Dolcefino's piece on the Houston Livestock Show & Rodeo's record regarding charitable contributions. This stewing controversy was the subject of this earlier post.
As Kevin notes in his post, the Chronicle's coverage of this story is so deficient that the Dallas Morning News is covering this local story better than the local paper. Stay tuned on this one.
Only a week after agreeing to an embarrassing $2 billion settlement arising from its role as an underwriter of WorldCom bonds, JPMorgan Chase got some good news yesterday in a securities fraud case arising from its somewhat different dealings with Enron.
U.S. District Judge Sidney Stein granted JPMorgan's motion to dismiss a securities class action that the bank's shareholders brought on the theory that the bank had misled investors on its financial exposure arising from allegedly fraudulent transactions that the bank had entered into with Enron. The plaintiffs alleged that specific trading transactions between JPMorgan and Enron were really just disguised loans to Enron and that JP Morgan's assistance to Enron in arranging off-balance sheet entities allowed Enron to hide debt. When news of JPMorgan's alleged involvement in Enron became public in late 2001, the bank's stock price fell, triggering the class action by the investors.
In the 61 page decision, Judge Stein carefully considered plaintiffs' allegations, but concluded that plaintiffs failed to meet the standard of proof required in a securities class action and dismissed the claims. Inasmuch as the securities fraud claims must meet the heightened pleading standards set out in the 1995 Private Securities Litigation Reform Act, Judge Stein ruled that the plaintiffs were required to show that JPMorgan had made materially false statements with scienter. Establishing scienter is not an easy, as the plaintiffs must either show that JPMorgan had the motive and opportunity to commit fraud or show facts that constitute strong circumstantial evidence of conscious behavior or recklessness,
In his decision, Judge Stein found that plaintiffs offered generalizations rather than specific instances needed for scienter. Inasmuch as JPMorgan continued to fund Enron with new capital virtually up to the time of the company's collapse, Judge Stein concluded that JPMorgan was unlikely to have known that Enron was on the brink of financial collapse. Consequently, Judge Stein reasoned that the bank could not have been expected to reveal its exposure in its financial statements before the Enron collapse actually took place.
Judge Stein did find that plaintiffs had pleaded scienter with the requisite particularity in connection with their allegation that JPMorgan's prepay transactions with Enron were characterized as trading assets rather than as loan assets (an allegation that JPMorgan strongly disputes). However, Judge Stein ruled that, even assuming that the investors' allegation on this technical accounting point is true, that distinction by itself was not material to investors.
Two research giants of Houston's Texas Medical Center are teaming up on a massive new research project focusing on the genetic abnormalities that cause cancer.
This Todd Ackerman Houston Chronicle article reports on the planned collaboration of Baylor College of Medicine and the University of Texas M.D. Anderson Cancer Center on the proposed Human Cancer Genome Project, which is an extension study to the Human Genome Project, a recently completed 10-year Baylor-led study. The goal of the cancer project is to determine the DNA sequence of tumor samples in hopes of identifying the mutations that are key to the development of cancers.
Inasmuch as Baylor has already developed the genome-sequencing research infrastructure and M.D. Anderson can contribute the tumor samples, the collaboration on the research project is a natural for both institutions. The estimated cost of the complete project is roughly $1.35 billion, which is yet another example of the huge impact that such Medical Center research projects have on the local Houston economy.
A couple of interesting news items popped up yesterday in regard to the Houston legal community.
First, venerable Houston-based law firm Bracewell & Patterson announced that Rudolph W. Giuliani, the former mayor of New York and former U.S. Attorney for the Southern District of New York, is becoming a partner in the firm and that the firm will be re-named Bracewell & Giuliani. Mr Giuliani will head up the firm's new office in the Midtown section of Manhattan office, which the firm will open in May.
Bracewell is one of Houston's largest law firms, but has always been a step below in size to the city's big three, Vinson & Elkins, Fulbright & Jaworski, and Baker & Botts. Bracewell currently employs about 400 lawyers worldwide and has estimated gross revenues of $200 million. Its client list includes Royal Dutch Shell, Bank of America, the Bechtel Corporation and Kinder Morgan.
Meanwhile, on the east side of downtown, Fulbright & Jaworski became the first downtown Houston law firm to have a high-rise building named for the firm as its longtime headquarters -- 1301 McKinney -- was re-named Fulbright Tower.
Fulbright became the largest tenant in the building after former owner ChevronTexaco moved out and sold the property last year to Crescent Real Estate Equities Co. ChevronTexaco put the building up for sale after it bought the 40-story 1500 Louisiana Building for its new headquarters. Enron had built that building to be its headquarters, but Enron's bankruptcy scuttled those plans and ChevronTexaco picked up the building on the cheap.
March 29, 2005
After working his way through the then new University of Houston Law Center during the mid-1950's, Professor Hippard went on to receive his Masters in Law from New York University, and then returned to UH where he taught Evidence, Criminal Law and Procedure, and Civil Procedure for many years. An accomplished trial lawyer, Professor Hippard peppered his classes with the practical aspects of handling cases and his emphasis on trial techniques eventually led the school to name its annual Moot Court competition in his honor. While in law school, I took Texas Civil Procedure from Professor Hippard, and my lasting memory of him is his quick wit and uncommon grace.
A memorial service for Professor Hippard will take place this afternoon at 3 p.m. in the chapel of the Geo. H. Lewis & Sons Funeral Home, 1010 Bering in Houston.
This Mary Flood Houston Chronicle article reports that a second grand jury has been empaneled to replace the original federal grand jury that has been investigating the Enron scandal for the past three years. According to Ms. Flood, Enron Task Force prosecutors informed the new grand jurors that they should expect to remain working on the Enron case until at least November, 2006.
The first Enron grand jury indicted 23 people in connection with the Enron scandal. Six of those 23 pled guilty, five were convicted in the Nigerian Barge case -- which is remarkably the only criminal case that has gone to trial to date in connection with the Enron affair -- and one of the two former Enron employee-defendants in that trial was acquitted. The other 11 indicted persons still await trial.
Quare: If it takes over three years to figure out how to indict someone, then doesn't that length of time, in and of itself, indicate that reasonable doubt exists that a crime occurred in regard to matters under investigation?
Meanwhile, in regard to the Nigerian Barge case, the U.S. Chamber of Commerce took the unusual step of filing an amicus curie brief in the case this past week on the issue of sentencing. The Chamber of Commerce brief focuses on the market loss issue, which could have a big impact on U.S. District Judge Ewing Werlein's decision on sentencing the convicted defendants in the case.
Almost on cue, this Wall Street Journal article($) is reporting that Warren Buffett, the famed investor who is chairman and CEO of Berkshire Hathaway Inc., will be questioned by regulators next month over his involvement in the transaction between Berkshire's General Re insurance unit and American International Group Inc. that has led to the resignation of Maurice "Hank" Greenberg as AIG's chairman and CEO.
Here are the previous posts on the probe into AIG and Berkshire, and a NY Post article from last week that reported on a leak from New York Attorney General Eliot Spitzer's office that Mr. Buffett was not a target of the investigation.
H'mm. I guess Mr. Spitzer has changed his mind.
Mr. Buffett's interview is scheduled for April 11, a day before Mr. Greenberg's interview unless he has decided to assert his Fifth Amendment privilege in light to his resignation from AIG. At this point, Mr. Spitzer's office and the Securities and Exchange Commission are handling the probe, although Justice Department lawyers will also be present at both interviews.
Mr. Buffett will be questioned specifically about his involvement in a 2000 reinsurance transaction between AIG and General Re that regulators contend allowed AIG to boost its financial position improperly. The transaction shifted half a billion of expected claims to AIG from General Re along with a commensurate amount of premiums. AIG booked the premiums as revenue and then added $500 million to its reserves to account for its obligation to pay the claims at a time when market analysts were questioning whether AIG had adequate liability reserves. Regulators contend that the premium was designed to ensure that AIG was not at risk and, therefore, that the half billion was improperly booked as premium revenue. For its trouble, General Re received a $5 million commission on the deal and now even more investigative scrutiny into similar transactions with other companies.
March 28, 2005
The Stros traded (finally) disgruntled pitcher Tim Redding today to the San Diego Padres for 25 year old catching prospect Humberto Quintero, who may be the best catcher on the Stros' squad when he hits town. Inasmuch as Quintero has a total of 95 lifetime at bats, that gives you an idea of the sorry state of the catching position on the Stros' squad.
Baseball Prospectus projects Quintero as a .236 BA/.273 OBA/.335 SLG. hitter for this season, which compares favorably with either Brad Ausmus (.239/.303/.324) or Raul Chavez (.228/.270/.320). The following is a Baseball Prospectus blurb on Quintero:
At least the young backstop finally hit better [at AAA Portland last season] in addition to terrorizing baserunners. He profiles as a low-strikeout, low-walk hitter with modest pop, but the Pads are wishcasting for some .290 seasons with doubles power. With Ramon Hernandez's contract up at year's end, they may give Quintero his shot sooner than expected.
Translated: the Stros continue their attraction to "catch and throw" prospects at catcher, but at least this one is only 25 and may develop into something more than either Ausmus or Chavez. It's Springtime -- we can dream, can't we?
More on the Stros later in the week as the final roster is finalized and the club returns from Spring Training for Opening Day next Tuesday.
This Corporate Counsel article reports on the cottage industry in placement services that New York AG ("Aspiring Governor") Eliot Spitzer has developed in regard to his multiple investigations of big insurance companies. Seems as though a number of those companies (listening AIG and Berkshire?) are hiring former prosecutors as executives in connection with the companies' efforts to soften the blow of such investigations.
Although not mentioned much in the MSM, the most notorious example to date was Marsh & McLennan's decision to promote a Spitzer friend and former supervisor in Spitzer's AG office -- Michael Cherkasky -- to CEO after Spitzer indicted there would not be a settlement so long as Jeffrey Greenberg (son of current Spitzer target, Maurice "Hank" Greenberg) remained in control. Then, in January, Marsh hired E. Scott Gilbert -- a former Assistant U.S. Attorney in Manhattan -- to serve as chief compliance officer. Finally, this past December, former prosecutors also took on compliance roles at two other insurers that are under investigation -- The Hartford hired Ronald Apter as its new deputy associate counsel for compliance and AIG named associate general counsel Mari Maloney as its chief compliance officer.
Business executives cannot view this trend of hiring former prosecutors as compliance officers with warm and fuzzy feelings. As companies adopt a strategy of appeasing regulators regardless of the nature of their probes, the companies are increasingly cooperating with the investigators, requiring executives to waive their self-incrimination privilege as a condition of maintaining their employment, and cutting a settlement check as quickly as possible to satiate the regulators. Accordingly, prosecutors with ties to Mr. Spitzer should keep their resumes current -- you just never know when the next business subject of the Lord of Regulation is going to need some
March 27, 2005
The NY Times Gretchen Morgenson provides this lucid analysis of the deal that prompted American International Group's board to call upon Maurice "Hank" Greenberg to step down as AIG's CEO after a generation of phenomenal wealth building for AIG shareholders. Here are the prior posts on AIG and Mr. Greenberg's mounting troubles.
Ms. Morgenson asserts that the purpose of the questionable transaction that led to Mr. Greenberg's ouster was to mask AIG's declining financial performance from the market. Unless AIG's stock price was maintained, AIG risked overpaying for American General Insurance Co. in 2001, which was a key acquisition in Mr. Greenspan's strategy of diversifying AIG's insurance business.
Nevertheless, Ms. Morgenson's analysis fails to address the nuance that the transaction in question was not performed in Mr. Greenberg's basement where no one could see it. Rather, it was a material transaction that was fully disclosed after careful review and approval by AIG and General Re's executives, auditors and attorneys. Presumably, Mr. Greenberg would not have approved the transaction without such disclosure and approvals. In fact, Ms. Morgenson's article simply assumes that the transaction was at least wrong without even entertaining the notion that numerous experts in such transactions had approved the transaction and are prepared to defend AIG's booking of it.
Despite all this, Mr. Greenberg faces a possible indictment on criminal charges that could result in a substantial prison sentence in the autumn of his long and successful business career. In a couple of weeks, Mr. Greenberg will be removed from the the board of directors of the company he built into a financial powerhouse unless he waives his privilege against self-incrimination in connection with the regulatory investigation into the transaction.
Maybe AIG took risks with certain transactions that should result in restatement of its earnings and reserves. Although the value of AIG's shares are fallen 24% for over $46 billion in market value since the beginning of the above-described probe, perhaps the value of such shares should be hammered in the market as a result of such a restatement. But do we really want the government criminalizing talented people such as Mr. Greenberg simply because he approved a questionable transaction that multiple experts in such deals had previously blessed?
That a reporter of Ms. Morgenson's stature does not even mention that troubling issue reflects just how socially acceptable it has become for the government to abuse its awesome police power to criminalize merely questionable business transactions.
March 25, 2005
My old friends Chris Tomlin, one of the stars of the contemporary Christian music world, and John David Walt, Vice President of Community Life and Dean of the Chapel at Asbury Theological Seminary in Wilmore, Kentucky, came into town this week to lead The Woodlands United Methodist Church's Good Friday service this evening at the fabulous Cynthia Woods Mitchell Pavilion in The Woodlands.
Whenever Chris ("C.T.") and J.D. hit town, it's a good excuse for a Big Golf Game, and our usual course of choice is Houston's Lochinvar Golf Club. Please enjoy a few pictures below of Lochinvar that I took as C.T., J.D. and I enjoyed a wonderful round of golf and fellowship on a picture perfect day with J.D.'s father, David Walt, and friends Bruce Clinton and Pat Murphy.
Springtime is wonderful in Houston!
The American Bankruptcy Institute has put together this first rate site tracking the upcoming changes in the U.S. Bankruptcy Code that will go into effect later this year. This is an essential resource for anyone involved or interested in insolvency or reorganization law.
In what is becoming a typical development in such sagas, this NY Times article reports that the board of financial services giant American International Group Inc. is considering a move to restate its financial statments as a result of suspected accounting mistakes on its financial statements that may total as much as $3 billion from as many as 30 different insurance transactions. Here are the earlier posts on the the government's assault on AIG.
As the governmental probes into AIG's accounting is now far broader than what was believed just a week ago, the AIG board is assessing whether to restate its financial statements in regard to an additional 60 transactions that internal AIG investigators have identified as being potential problems. The potential errors under scrutiny occurred over five year period and include the possible booking of revenue and income prematurely and improperly transferring liabilities off the company's books. Many of the deals in question could have been designed either to boost AIG's reserves or to "smooth the earnings" of the company to meet Wall Street expectations.
Gosh, isn't this starting to sound downright Enronesque?.
Nevertheless, even a multibillion-dollar writedown of earnings should not damage AIG's long-term financial stability much. The company had net income of over $11 billion last year on revenue of almost $100 billion.
Former AIG chairman Maurice "Hank" Greenberg, who remains as AIG's nonexecutive chairman, is tentatively scheduled to give a sworn statement to investigators from New York AG Eliot Spitzer's office and the SEC on April 12. At the rate this scandal is developing, Mr. Greenberg better think seriously about stepping down and taking the Fifth. It is becoming increasingly clear that the Lord of Regulation is going to want more from AIG than simply financial sacrifices.
March 24, 2005
A number of friends have asked me why I have not blogged on the Terri Schiavo case, to which I have stolen Eugene Volokh's reply that "I know nothing about the Schiavo matter, and -- despite that -- have no opinion."
As we have seen with the Enron case, when a case becomes as sensationalized in the MSM as the Schiavo case has over the past several weeks, battle lines get drawn politically, increasingly shrill views compete for the public's limited attention, and wise perspectives tend to get lost in the shuffle. Bloggers can find thoughtful views -- such as those of Professors Bainbridge and Ribstein -- but, let's face it, the vast majority of the public do not read blogs.
At any rate, I wanted to pass along a couple of informative articles on the Schiavo case that will appear in next month's New England Journal of Medicine. Timothy Quill, M.D. is a nationally-recognized expert in palliative care and end-of-life issues who is a professor of medicine, psychiatry, and medical humanities at the University of Rochester, School of Medicine and Dentistry. In this article, Dr. Quill dispassionately reviews what has occurred in the Schiavo case, and then makes the following observation:
In considering this profound decision, the central issue is not what family members would want for themselves or what they want for their incapacitated loved one, but rather what the patient would want for himself or herself. The New Jersey Supreme Court that decided the case of Karen Ann Quinlan got the question of substituted judgment right:If the patient could wake up for 15 minutes and understand his or her condition fully, and then had to return to it, what would he or she tell you to do?If the data about the patient?s wishes are not clear, then in the absence of public policy or family consensus, we should err on the side of continued treatment even in cases of a persistent vegetative state in which there is no hope of recovery. But if the evidence is clear, as the courts have found in the case of Terri Schiavo, then enforcing life-prolonging treatment against what is agreed to be the patient?s will is both unethical and illegal.
In the same issue, George P. Annas, J.D., the Edward R. Utley Professor and Chair Department of Health Law, Bioethics & Human Rights at Boston University School of Public Health, pens this article in which he reviews the legal precedent relating to the Schiavo case and criticizes Congress for ignoring it. In so doing, Professor Annas observes the following:
There is (and should be) no special law regarding the refusal of treatment that is tailored to specific diseases or prognoses, and the persistent vegetative state is no exception. "Erring on the side of life" in this context often results in violating a person?s body and human dignity in a way few would want for themselves. In such situations, erring on the side of liberty ? specifically, the patient?s right to decide on treatment ? is more consistent with American values and our constitutional traditions.
Hat tip to the HealthLawProf blog for the links to these articles.
A Florida state district judge in the high-profile lawsuit that financier Ron Perelman is pursuing against Morgan Stanley in connection with Mr. Perelman's failed investment in Sunbeam Corp. ruled yesterday reports Law.com($) that the discovery abuses that Morgan Stanley and its counsel -- Kirkland & Ellis -- have engaged in during the litigation have been "offensive."
As a result, the judge ruled that she would instruct the jury during the upcoming trial that Morgan Stanley had a role in helping Sunbeam conceal accounting fraud that reduced the value of Mr. Perelman's investment in Sunbeam. The ruling increases the already high risk that a jury will find against Morgan Stanley and force the firm to pay Mr. Perelman some or all of the $680 million he contends that he lost on the investment. In addition, Mr. Perelman is seeking a cool $2 billion in punitive damages. Here is the Wall Street Journal article ($) on the case.
The ruling came a day after Morgan Stanley moved to fire Kirkland & Ellis, its longtime law firm, during jury selection in the case, which is being heard in a West Palm Beach state district court. The trial is currently scheduled to begin April 4.
The case involves a transaction in which Mr. Perelman sold an 82% stake in Coleman Inc., the camping gear company, to Sunbeam in 1998 for $1.5 billion, including $680 million in Sunbeam stock. Sunbeam was Morgan Stanley's investment banking client in the transaction. The value of Mr. Perelman's holding in Sunbeam dropped dramatically in the wake of accounting fraud at Sunbeam, which ended up filing a chapter 11 case in early 2001.
For the past several months, Morgan Stanley and Kirkland have been the subject of a number of adverse rulings and scathing in-court comments from the Florida state court judge, who has characterized Morgan Stanley's behavior in the transaction as grossly negligent and has suggested the firm has purposely withheld information from the court and Mr. Perelman.
In an extraordinary development, Morgan Stanley on Tuesday placed Kirkland on notice of a potential malpractice claim arising out of its representation of Morgan Stanley in this case. The judge ruled yesterday that Morgan Stanley could replace Kirkland, but gave the firm only a week -- not their requested six months -- to do so and prepare for trial. Thus, Kirkland will probably end up having to try the case for Morgan Stanley while operating under a potential malpractice claim from its client.
If Morgan elects to keep Kirkland on the case in light of the judge's refusal to grant a lengthier postponement, this will not exactly be the environment in which allies enjoy preparing for litigation combat.
This Wall Street Journal article ($) reports on one of the biggest litigation miscalculations of the past several years -- Skadden Arps' partner Jay Kasner's recommendation to JP Morgan Chase and other WorldCom underwriters that they reject an earlier settlement in the WorldCom class action lawsuit that was proposed last year. By waiting until the trial loomed this month, J.P. Morgan and the other underwriters paid over $675 million more in the settlement than they would have paid had they accepted the earlier offer. Here are the posts over the past year on the WorldCom class action and related matters.
Not exactly the type of result that you would want splattered on the front page of the Wall Street Journal.
A huge explosion tore through a British Petroleum oil refinery in Texas City Wednesday morning, killing at least 15 people and injuring over 100. Here is the exhaustive Chronicle coverage on the blast.
Texas City is a city of 40,000 located on Galveston Bay about 30 miles south of Houston just north of Galveston Island. My 15 year old daughter was on the beach on Galveston with friends when the blast occurred yesterday morning, and she and her friends said that the blast sounded like a thunderclap directly overhead when it occurred. They spent the rest of the morning watching the billowing smoke from the blast cover the sky north of Galveston.
The British Petroleum refinery that blew is one of many in Texas City, which is one of several cities south and east of Houston that contain some of the largest refineries and petrochemical plants in the nation. This particular plant is the third largest in the U.S., sprawling across 1,200 acres. It processes almost 450,000 barrels of crude oil daily and employs almost 2,000 people.
Within minutes of the explosion, Texas City officials issued the "shelter-in-place" warning to Texas City residents, which requires residents to stay inside until authorities could be certain the air was safe. These procedures are commonplace in Texas City, which has endured some of the most remarkable explosions in American history.
Although the 1900 Galveston Hurricane is the worst disaster that the Houston-Galveston area has endured in modern history, the disaster resulting from the Texas City industrial explosions over a two day period in April 1947 is not far behind. During those perilous two days, a fire aboard a ship at the Texas City docks triggered a series of massive explosions in several Texas City plants that killed 576 people and left fires burning in the city for days. In fact, huge explosions are really just a part of life in Texas City. As one former Texas City resident observed to me several years ago after a relatively small blast killed a couple of workers at another plant:
"That one won't even make the Top Ten list of Texas City explosions."
Unfortunately, the BP plant explosion of yesterday will.
March 23, 2005
Baseball fans are opening their newspapars this morning to this article reporting that star San Francisco Giants slugger Barry Bonds, the best baseball player of his generation, might not play this upcoming season because of a minor knee injury and the effect that media scrutiny of Bonds' steroid use has had on his family. However, as Paul Harvey would say, "here's the rest of the story."
Turns out that Bonds' former mistress -- Kimberly Bell -- is apparently singing like a canary to the same federal grand jury in San Francisco that has been investigating the alleged illegal distribution of steroids that resulted in the indictment of certain individuals affiliated with BALCO (previous posts here and here). This San Francisco Chronicle article reports that Ms. Bell has not only testified that Bonds admitted to her that he used steroids, but that he gave her $80,000 from autographing baseballs in increments of just under $10,000 to avoid currency transaction reporting requirements. Federal prosecutors do not look kindly upon such activities.
As noted in this earlier post, Bonds allegedly claimed in his grand jury testimony several months ago that that he did not understand that some of the supplements that his BALCO trainer was giving him were steroids. Inasmuch as Ms. Bell's alleged testimony reflects that prosecutors may be preparing to charge Bonds with perjury, currency reporting violations, and possible tax evasion, Bonds' lack of desire to play this season may have more to do with preparing a criminal defense than anything else.
Professor Ribstein over at Ideoblog is presenting a workshop on blogging at the University of Illinois (perhaps to take their minds off of Bruce Pearl, see this previous post). In organizing the event, the Professor has developed this insightful "blog article" that outlines the various legal, economic, and political issues that have arisen in the field of blogging. The Professor is encouraging readers to comment on the issues raised in his blog article, which he will then include in the final draft of his paper. Check out this innovative approach to developing ideas, which is the key goal of Professor's Ribstein's first-rate blog.
One of the alluring characteristics of the NCAA Basketball Tournament each season are the undercurrents that bubble to the surface when certain teams end up playing each other. One of the more delicious background stories of this year's tournament pertains to this Thursday's game between the number one seeded University of Illinois Illini and the University of Wisconsin at Milwaukee, which is making its first appearance in the Sweet Sixteen of the NCAA Tournament.
What makes this game so interesting is that Bruce Pearl, the UWM coach, was the central figure over 15 years ago in a recruiting scandal that haunts the Illinois program and its fans to this day. Pearl, then an assistant coach at Illinois recruiting rival Iowa, taped a conversation with Deon Thomas -- a hot high school basketball prospect -- and then turned the tape over to the NCAA Enforcement Division. The resulting investigation landed the Illini program on probation and the NCAA banned the program from the NCAA Tournament for a year. A couple of Illini assistant coaches lost their jobs over the affair, and Illinois and Iowa basketball fans re-confirmed their mutual and everlasting distaste for each other.
Although Illini fans allege that Pearl turned on the Illinois program simply because Illinois had won the battle for Thomas and that Pearl himself was guilty of recruiting violations, the NCAA did not cite either Pearl or Iowa for any violations in connection with its investigation of the affair. Nevertheless, many in the cozy basketball coaching "fraternity" deemed Pearl a "snitch" and blacklisted him. Moreover, inasmuch as the state of Illinois was Pearl's main recruiting territory while he was on the Iowa coaching staff, his tarnished reputation in Illinois at the time prompted him to leave the Iowa staff and start over at a Division II school. Even though he had been a rising star in the coaching profession at Iowa, Pearl toiled for 12 more years in the backwaters of college basketball before finally getting a chance to coach at a Division I school, and then only at the obscure Milwaukee campus of the University of Wisconsin. Four years later, his team is the Cinderella story of the tournament.
So, you might want to take a few minutes tomorrow night and watch a bit of the Illinois-UWM tournament game. Even though the players on both squads were just pups at the time of the Pearl-Thomas affair, you can rest assured that the Illini fans -- as well as Coach Pearl -- will bring a special intensity to this particular game.
And if Coach Pearl's Cinderella team were to prevail over the mighty Illini? Moments such as those are the reason why the NCAA Basketball Tournament remains a colorful thread in the fabric of America life each March. Don't miss the opportunity to see it.
Russian oil giant and former U.S. debtor-in-possession under chapter 11 OAO Yukos waved "good-bye" to the Houston federal courthouse yesterday by announcing that it would no longer pursue an appeal of U.S. Bankruptcy Judge Letitia Clark's decision last month that dismissed the company's chapter 11 case for lack of jurisdiction. Here are the earlier posts on the Yukos saga.
Yukos had requested both Judge Clark and U.S. District Judge Nancy Atlas to stay the order dismissing Yukos' chapter 11 case pending the company's appeal of that order, but both judges denied the stay request on the grounds that Yukos had failed to show a reasonable probability of success on the merits of its appeal. Yukos apparently concluded that its chances for a stay pending appeal at the Fifth Circuit Court of Appeals -- not to mention its slim chance for success on the merits of the appeal generally -- did not justify further machinations in the U.S. federal courts.
Yukos' decision closes the chapter on an interesting "go for broke" chapter 11 strategy in its running battle with the Russian government. Although establishing bankruptcy jurisdiction in the United States federal courts for a Russian company was always a longshot, Yukos management does not have many alternatives left for attempting to salvage any value for shareholders. Despite the attraction of potentially lucrative business opportunities in Russia, the lesson of the Yukos case is that the Russian government remains a very powerful opponent of maintaining strong and valuable business interests there.
March 22, 2005
Dr. Foss has been the Dean of the College of Arts and Sciences at Florida State University for the past 10 years and, for 12 years before that, he was Dhairman of the Department of Psychology at The University of Texas at Austin. He replaces former UH Optometry Dean Jerald Strickland, who has filled the Provost position on an interim basis since September 2003.
By all accounts, Dean Strickland has done a marvelous job of patching up the relationship between the UH Faculty and Administration that had deteriorated badly during the tenure of former UH Provost Edward Sheridan. That bitter relationship is the subject of this April 2002 Tim Fleck Houston Press article.
Dr. Foss' appointment is subject to approval by the UH Board of Regents at its April 6 meeting, and he is expected to assume the Provost position in July.
The Chron's Mary Flood reports today that the documentary Enron, The Smartests Guys in the Room (earlier post here) will open in Houston on April 20 at the River Oaks Theatre, just down the street from where Ken Lay, Jeff Skilling and Andy Fastow all live.
No word on whether the three are on the invitation-only list for the Houston premiere.
By the way, I am patiently waiting for a movie reviewer to read this paper before penning a review on the Enron documentary. Don't worry, though. I am not holding my breath while waiting.
Homer Hickam, the former NASA engineer and author whose brilliant October Sky was made into one of the best family films of the past decade, urges President Bush to discontinue the obsolescent Space Shuttle program in this devastating Wall Street Journal op-ed ($), in which he observes:
I left NASA in 1998 to pursue a writing career. I'm glad I did, because I could no longer stand to work on the Space Shuttle: 24 years after it first flew, what was once a magnificent example of engineering has become an old and dangerous contraption. It has killed 14 people and will probably kill more if it continues to be launched. It has also wasted a generation of engineers trying to keep it flying on schedule and safe. Frankly, that's just not possible and most NASA engineers in the trenches know it. Einstein reputedly defined insanity as repeating the same behavior and expecting different results. The Shuttle program is a prime example of this.
Mr. Hickam describes a phenomena of big governmental agencies that Robert Coram examined in regard to the Defense Department in Boyd: The Fighter Pilot Who Changed the Art of War -- i.e., the tendency of power elites in governmental agencies to perpetuate their pet projects at the expense of progress and innovation. Secretary Rumsfeld is confronting much the same inertia in the Defense Department as he attempts to transform America's military, a topic that is addressed in these earlier posts. This is not a story that the MSM covers to any meaningful degree, but it remains one of the most important to America's survival as a superpower.
Former WorldCom chairman Bert C. Roberts, Jr. -- the final settlement holdout among WorldCom Inc.'s former outside directors -- agreed to settle the WorldCom investors' class-action lawsuit claims against him for $5.5 million, including $4.5 million out of his own pocket. Earlier posts on the WorldCom directors' settlement may be reviewed through this post.
Roberts' settlement leaves WorldCom's former auditor Arthur Andersen as the only remaining defendant in the trial of the class action, which is scheduled to begin on Wednesday. With huge litigation exposure remaining in connection with both the WorldCom and Enron class actions cases, Arthur Andersen has apparently decided to use its remaining cash reserves (estimated to be several hundred million dollars) to defend the cases rather than dilute the reserves through settlement. Andersen really does not have much to lose in pursuing such a high risk litigation strategy. It's not like the firm can be put out of business. The Justice Department has already taken care of that.
Following on these earlier posts regarding the increasing threat of criminal indictment that is being place on American International Group executives, AIG canned two of its top executives -- CFO Howard I. Smith and VP Christian M. Milton -- after the two invoked their Fifth Amendment right against possible self-incrimination in the ongoing investigation into whether whether AIG manipulated its books in connection with a transaction involving General Re Corp., a unit of Warren Buffett's Berkshire Hathaway Inc.
Both men were terminated pursuant to an AIG company policy that requires employees to cooperate with government authorities investigating matters pertaining to the company. However, the two employees were clearly placed in an untenable position given recent developments in similar criminal investigations. In connection with this investigation involving Computer Associates, three former executives of that company pleaded guilty to obstruction of justice charges that were not tied to alleged misstatements told to federal investigators, but to alleged misstatements made to the company's own law firm during the company's internal investigation. Similarly, in this case involving accounting giant KPMG, the government required threatened criminal action against KPMG in connection with a tax avoidance scheme unless the firm forced one of its partners to cooperate with the government, which of course can use the partner's statements against him in prosecuting a crime.
Accordingly, rather than attempt to facedown the government over its increasingly common use of its odious power to criminalize merely questionable business transactions, the AIG Board has decided to offer several sacificial lambs to the Lord of Regulation in an effort to avoid a meltdown of the company. One can only ponder how many such lambs this Lord will require?
March 21, 2005
Speaking of golf, Vijay Singh's past two weekends have been interesting, to say the least.
Last week at the Honda Classic, Vijay jacked a 2 foot putt in a playoff that cost him about half a million in prize money.
Then, while tied for the lead yesterday at Bay Hill, Vijay dunked his approach shot at the 18th hole. That one cost him a cool $460,000.
Thus, those two shots over the past two weekends cost Vijay a cool $960,000. Meanwhile, his second place finishes in those two tournaments allowed Singh to regain the No. 1 World Golf Ranking from Tiger Woods.
Golf is a very cruel game.
With Spring Break in the air, golfers' thoughts turn to fairways, greens and, while sitting at the computer, golf blogs.
In that regard, golfers should take note of a new golf blog that I recently added to my blog role -- A Walk in the Park. Jay Flemma is an entertainment, copyright and trademark lawyer in Manhattan who has developed an interesting side career in golf writing, particularly about golf architecture. But Jay also loves to play golf while traveling, and his passion is writing about the hidden golf course gems that do not receive the publicity of the famous tracts, but have just as many (if not more) attributes and, most importantly, are generally far cheaper to play.
In his most recent post, Jay previews the TPC at Sawgrass in anticipation of the upcoming Players Championship. Jay has recently moved his blog to the TravelGolf.com network of blogs, and there appear to be a few technical glitches to work out in the transition (for example, Jay's post of today renders in FeedDemon, but not in my Firefox browser). Nevertheless, if you are a golfer, then check out Jay's blog often -- his goal is to steer you to the right course wherever you want to play.
March 20, 2005
John DeLorean died yesterday at the age of 80 from the effects of a recent stroke.
John Zachary DeLorean was one of the more interesting business characters of the past two decades. His famous stainless-steel sports car project collapsed in the 1980's, although the use of the futuristic auto as the time travel machine in the Back to the Future movies ensures that the car will never be forgotten.
Moreover, DeLorean's criminal trial in California in the 1980's on cocaine trafficking charges introduced America to the entrapment defense as DeLorean's lawyers persuaded the jury that DeLorean had been the unwitting victim of a government sting operation. Or, as one wag put it at the time, "the government successfully managed to frame a guilty man."
DeLorean was the son of a Ford factory worker and grew up on Detroit's east side during the Great Depression of the 1930's. After earning an undergraduate engineering degree and an MBA graduate degree, DeLorean went to work in the automotive industry, first for Chrysler and then Packard.
But when he moved to General Motors in the 1960's, DeLorean's star really began to rise and, as head of GM's Pontiac division, he pulled off a marketing coup by turning the innocuous Tempest LeMans compact coupe into a hot rod called the GTO. The combination of an intermediate body with the most powerful engines available soon became a legend within the automotive industry.
Had he remained with General Motors, DeLorean may have accomplished even greater feats, but he was too flashy for the notoriously buttoned-down GM culture. Handsome and stylish, DeLorean became a celebrity himself, dating such beauties as Ursula Andress and Raquel Welch, and eventually marrying supermodel, Christina Ferrare.
Alas, DeLorean's life was a struggle over the last two decades. Although he managed to beat the cocaine trafficking charges, he was married and divorced several times, and filed bankruptcy twice. In the most recent bankruptcy, DeLorean sadly was forced to sell his luxurious New Jersey estate to generate proceeds for his creditors. His most recent business venture was a company that marketed watches under his name. In the end, DeLorean's legacy is that of a talented innovator who did not have the depth of business or management skills to be a successful entrepreneur.
Update: As is typical of British obituaries, the Guardian's on DeLorean is delicious.
Though some grades of crude have recently set record price highs on New York and London futures markets, the Forbes graph shows that, when adjusted for inflation, the price of oil is still only 60% as expensive as it was in 1980.
I am about halfway through Conspiracy of Fools and it is excellent. With more information and the benefit of more hindsight, Mr. Eichenwald's book will likely replace the earlier Smartest Guys in the Room as the best book on the Enron scandal.
On the heels of this fine earlier series on the breakdown of the primary teaching hospital relationship between Baylor College of Medicine and The Methodist Hospital in Houston's famed Texas Medical Center, the Chronicle's Todd Ackerman teams with fellow Chronicle reporter Eric Berger to provide this story on the initial impact that the split is having on research planning at both institutions and the threat that the richer Methodist will pluck the prime Baylor researchers for its own research facility.
Mr. Ackerman's reporting on the Baylor-Methodist split has been outstanding over the past year, and well-known Texas Monthly journalist Mimi Schwartz chimed in with this article ($) in the March edition of the magazine on the background and personalities involved in the negotiations leading up to the split. The Chronicle series and Ms. Schwartz's article are both providing much grist for the gossip mill in the Medical Center community regarding this historic readjustment of professional relationships in the Medical Center.
March 19, 2005
Berkman is one of the best hitters in Major League Baseball, and the contract avoids the possibility of the Stros losing their best homegrown player since Bidg as Berkman could have become a free agent after the 2005 season. To understand just how good a player Berkman is, consider how many many more runs that Berkman has created compared to the number of runs an average Major League player generates.
That statistic -- called "runs created against average" or "RCAA" -- is particularly valuable to evaluate hitting because it focuses on the two most important things in winning baseball games ? that is, creating runs and avoiding making outs. RCAA basically computes the number of outs that a particular player uses in creating runs for his team and then compares that number to the amount of runs that an average player in the league would create while using an equivalent number of outs. A player can have either a positive RCAA -- which indicates he is an above average hitter (i.e., Barry Bonds) -- or a negative RCAA, which means he is performing below average (i.e., Brad Ausmus).
Over the past 4 years, Berkman ranks 6th in all of Major League Baseball in runs created against average:
1 Barry Bonds 597
2 Todd Helton 284
3 Albert Pujols 281
4 Jim Thome 250
5 Manny Ramirez 240
6 Lance Berkman 236
7 Jason Giambi 225
8 Alex Rodriguez 218
9 Jim Edmonds 216
10 Gary Sheffield 210
Kudos to Drayton McLane and Tim Purpura in locking Berkman up. It's a happy day in Stros land.
Legal issues involving public figures often have a public-relations dimension as well as a political angle, and this past week's Congressional testimony of Mark McGuire regarding Major League Baseball's steroids scandal is a case in point.
The key legal issue in regard to McGuire's testimony was whether he should assert the privilege against self-incrimination under the Fifth Amendment of the United States Constitution. Congressional investigators had already declined to grant immunity from use of the Congressional testimony in any criminal prosecution of Mr. McGuire, so McGuire and his attorneys had to address the knotty public relations issue of having McGuire assert the Fifth in front of glare of national television, just like, say, one of those disgraced Enron executives.
So, what did McGuire do? Best I can tell, he took the Fifth without actually saying that he was taking the Fifth, which is pretty darn clever if he gets away with it. Fortunately for McGuire, none of the Committee members pressed the issue and required McGwire to answer directly or take the Fifth to the question of whether he had ever taken steroids. However, when he was asked the question, McGwire answered by presenting himself as the kind of "stand-up" guy who does implicate his former teammates. The following is a passage from his prepared statement to the Committee:
"I have been advised that my testimony here could be used to harm friends and respected teammates, or that some ambitious prosecutor can use convicted criminals who would do and say anything to solve their own problems, and create jeopardy for my friends . . . My lawyers have advised me that I cannot answer these questions without jeopardizing my friends, my family, or myself."
Thus, McGuire's lawyers and P.R. advisors appear to have accomplished the nice trick of having McGuire take the Fifth without actually coming out directly and saying so. It will be interesting to watch whether the grand jury that is currently investigating baseball's steroids scandal will press the issue with McGuire that the Congressional investigators decided not to push.
William J. Carney is the Charles Howard Chandler Professor of Law at Emory Law School, where he specializes in business associations, securities regulation and corporate law. In this new SSRN paper, The Costs of Being Public After Sarbanes-Oxley: The Irony of 'Going Private', Professor Carney observes that the SOX legislation may be the final nail in the coffin for public equity financing being a cheaper alternative for many smaller private firms:
The enactment of the Sarbanes-Oxley Act ("SOX") in 2002 may represent the final act in regulation of corporate disclosure. By that I mean that regulation may have reached the point where the costs of regulation clearly exceed its benefits for many corporations. When the securities acts were originally enacted in the 1930s, one justification was that they would restore investor confidence and allow honest businesses to raise capital once again. The relevant question today is whether regulation has gone so far that honest businesses, at least those of modest size, are being forced to consider abandoning public markets for less regulated private markets. . .
Professor Carney also reminds us of the intrinsic limitations of governmental regulation of securities markets:
In an economically rational world we don't want to prevent all fraud, because that would be too expensive. Instead, the goal should be to keep on spending on fraud prevention until the returns on a dollar invested in prevention are no more than a dollar. There is an "Optimal Amount of Fraud." . . These new [SOX] procedures won't prevent all fraud. Section 404 of SOX, the principal factor in increased costs, deals strictly with financial statement issues, and leaves the rest of corporate disclosure untouched. Financial fraud was already illegal and subject to both civil liability and criminal penalties. The other initiatives thus far mostly involve acceleration of filings. Estimating the benefits of new regulations is much more difficult, and can only be approached indirectly. I do so here by looking at the possibility of exit from U.S. public markets (presumably attractive to most companies) because of increased (and cumulative) regulatory costs.
Ultimately we must ask why an increasing number of companies are finding these alternatives attractive. . . The main impact of SOX, then, may be to mandate controls that are not those that would be selected absent the mandate.
Consequently, one of the unintended consequences of Sarbones-Oxley is that an increasing number of public firms are delisting because of the high cost of compliance with the legislation. Thus, as Professor Ribstein notes here, "we can add a decline in disclosure as firms delist and withdraw from mandatory disclosure requirements" as one of the consequences of Sarbox. I don't think that consequence is what the Sarbox legislative sponsors had in mind.
Hat tip to Professor Bainbridge for the link to Professor Carney's article.
Russian oil company and former United States debtor-in-possession OAO Yukos lost another round in its legal battle with its creditors Friday as U.S. District Judge Nancy Atlas declined to grant the company a stay under Fed. R. Bankr. P. 8005 for a stay of Bankruptcy Judge Letitia Clark's earlier order dismissing the Yukos chapter 11 case pending Yukos' appeal of that order. Here are the previous posts over the past several months on the fascinating Yukos case.
As with its chapter 11 strategy generally, Yukos' motion for a stay of Judge Clark's dismissal order is a longshot because it is unlikely that the company can establish a reasonable likelihood of success on the merits of its appeal, which is a requirement for the granting of such a stay order. Despite the failure to obtain a stay, Yukos can and probably will continue its appeal of Judge Clark's dismissal order to the District Court and, assuming a loss there, ultimately to the Fifth Circuit Court of Appeals. Inasmuch as two Fifth Circuit judges are noted experts on bankruptcy and reorganization law -- Judge Carolyn Randall King and Judge Edith H. Jones -- the Fifth Circuit decision on the Yukos appeal could be quite interesting.
Yukos essentially has nothing to lose by pursuing its longshot chapter 11 strategy in the United States courts. The company lost 60% of its oil production capacity when the Russian government conducted the December 2004 auction of Yukos key Yugansk subsidiary. Absent relief from a U.S. court, it is doubtful that any other legal move will place the Russian government or Yukos' bank creditors sufficiently at risk that they feel compelled to enter into settlement negotiations with Yukos.
Houston-based Continental Airlines reiterated this earlier warning by announcing in this Form 8K filing that it is forecasting continued "significant" losses for 2005, but projecting cash flows and reserves are sufficient to carry it through the year so long as employee unions approve management's proposed spending reductions. The company said in this latest filing that it expects ratification of the new labor contracts by the end of March.
Continental's update followed similarly downbeat forecasts issued in recent days by other legacy airlines. Continental expects cash expenditures during the quarter of $200 million, which would allow it to come out of the first quarter with decent unrestricted cash and short-term investments balance of $1.3 billion to $1.4 billion.
Continental also said in the filing that it does not currently have any fuel hedges in place, which is a move that has protected Southwest Airlines from escalating oil prices.
Eleven of WorldCom Inc.'s former directors who served on the WorldCom board between 1999 and 2002 yesterday agreed to revive a settlement that the District Court had earlier rejected (see earlier posts here and here) under which the directors agreed to pay $55.25 million in the WorldCom class action, including $20.25 million of their own money. The balance of the settlement will be paid with insurance proceeds.
That leaves just two defendants remaining in the WorldCom class action, former director Bert Roberts and former WorldCom auditor Arthur Andersen. Jury selection is scheduled to begin in the case on Tuesday.
With the directors' settlement, the WorldCom settlement pot stands at about $6.06 billion, which is the largest recovery to date in a class action securities case, at least until the banks start settling in the Enron class action case. Sixteen investment banks sold a total of $15.4 billion of WorldCom bonds in 2000 and 2001 and those bondholders suffered about $9 billion of losses.
March 18, 2005
Bernard S. Black, a University of Texas Law School professor, contributed to this timely article that summarizes the landscape of outside directors' liability to investor lawsuits in the wake of the recent Enron and WorldCom directors' settlements. The article nicely sets forth the current state of the law on outside directors' liability, and includes the following money passage on whether Enron and WorldCom-type settlements really induce outside directors to do a better job of overseeing management:
Outside directors fearing financial ruin will no doubt be more careful than directors feeling immune to out-of-pocket liability will be. But by how much? We simply don?t know. And there can be too much of a good thing. With jittery directors at the helm, prudent caution can readily transform into counterproductively defensive decision making and even paralysis in the boardroom.
Hat tip to Professor Bainbridge for the link to this article.
Mr. Kennan was one of America's foremost foreign policy experts of the post-World War II and Cold War eras. He was one of the primary architects of the highly successful Marshall Plan that underwrote the reconstruction of Western Europe after World War II, and he had an equal amount of influence on the development of the containment postwar foreign policy that the United States government adopted to combat the Soviet Union's promotion of totalitarism during the Cold War.
When he was chief of the State Department's policy planning staff, Mr. Kennan was the author identified only as "X" in a famous 1947 article in the Foreign Affairs journal that outlined the containment policy and predicted the demise of Soviet communism that eventually occurred over 40 years later. When the Communist Party was finally driven from power in the Soviet Union after the 1991 coup attempt, Mr. Kennan publicly called the development "a turning point of the most momentous historical significance."
Despite the "X" article and his work in formulating the Marshall Plan, Mr. Kennan left government service in 1950 after he and Truman administration Secretary of State Dean Acheson disagreed over the reunification of Germany (Kennan supported it). He briefly served as ambassador to Moscow in May 1952, but he soon left foreign service again until the Kennedy Administration after butting heads with the Eisenhower Administration's first Secretary of State, John Foster Dulles.
During the Kennedy Administration, Mr. Kennan returned to foreign service in as ambassador to Yugoslavia from 1961-63, but his highest profile engagement during the 60's came in 1967 when he persuaded Svetlana Alliluyeva, the daughter of Soviet dictator Josef Stalin, to come to the United States. During the late 1960s, Mr. Kennan opposed American involvement in Vietnam because he argued that the United States had only five areas of vital interest -- the Soviet Union, Britain, Germany, Japan and the United States.
Mr. Kennan won the Pulitzer Prize for history and a National Book Award for Russia Leaves the War (1956) and a second Pulitzer Prize in 1967 for Memoirs 1925-1950. As a young college student, I read my late father's copy of the latter book and it stimulated an interest in foreign affairs that continues to this day. Mr. Kennan's honors also included the Presidential Medal of Freedom in 1989, Albert Einstein Peace Prize in 1981, the German Book Trade Peace Prize in 1982, and the Gold Medal in History from the American Academy and Institute of Arts and Letters in 1984.
Professor Drezner, who is one of the blogosphere's most insightful foreign policy analysts, has more on Mr. Kennan here.
Earlier this year, the Yukos chapter 11 case in Houston highlighted the fact that governmental persecution is a risk of doing business in the still emerging capitalist markets of Russia. An incident yesterday underscored another risk of doing business in Russia that is difficult to hedge effectively -- i.e., that extra-judicial means are still the approach favored by many in resolving business disputes in Russia.
Anatoly Chubais, the CEO of Russia's state electric company and one of Russia's most prominent pro-Western politicians, survived a brazen assassination attempt in Moscow yesterday as the attackers detonated a roadside bomb and then sprayed Mr. Chubais's armored car with machine-gun fire. A retired Russian army colonel and explosives specialist was arrested a few hours after the attack, which was at least the third on Mr. Chubais' life over the years.
Inasmuch as he was the architect of the rigged privatizations during the 1990s that transferred the country's business wealth from the state into the hands of a few Kremlin-connected cronies, Mr. Chubais certainly has his share of enemies. More recently, he has been pushing a plan to overhaul Russia's deteriorating power grid and to restructure the state electric company. Mr. Chubais also has a somewhat testy relationship with Russian president Vladimir Putin after Chubais sided with a liberal party against Mr. Putin in the most recent parliamentary elections in Russia.
Although the number of business contract murders in Russia reportedly have declined in recent years from the "cowboy era" of the period after Communism failed, the killings still occur and the Russian government's response tends to differ based on the state view of the moment toward the victim. That does not evoke warm and fuzzy feelings for foreign investors who are considering committing capital in any of Russia's numerous undercapitalized industries or markets.
March 17, 2005
This HealthProfBlog post provides an insightful analysis of the legal issues raised by the decision of Texas Children's Hospital earlier in the week to take Sun Hudson, the nearly 6-month-old who had been diagnosed and slowly dying from a rare form of dwarfism (thanatophoric dysplasia), off the ventilator that was keeping him alive. A Houston state district court had authorized the hospital's action, and Sun died shortly after being removed from life support.
Kevin Whited over at blogHouston.net has this interesting post regarding rumors that KTRK undercover reporter Wayne Dolcefino is pursuing a sensitive story regarding the Houston Livestock Show and Rodeo and its finances.
It sounds as if Dolcefino's story revolves around speculation regarding the Rodeo that I have heard in Houston's business community for years. The gist of the speculation is that the Rodeo's enormous revenues are out of whack with the amount of charitable contributions that the Rodeo actually makes. If this is in fact the subject of Dolcefino's story, stay tuned. It could be interesting.
Update: The Chron is now running with the story.
Former Houston Oilers head coach Jerry Glanville is one of the lead candidates for the head coaching position at Northern State University in South Dakato, an NCAA Division II program.
Glanville remains a central figure in one of the most famous Oiler foibles for his infamous "Stagger Lee" trick play call in a playoff game against the Broncos in 1987. The main problem was that he called the play while the Oilers were on their own one yard line. The Broncos defense promptly blew the play up and recovered the ensuing fumble for a touchdown on their way to a 34-10 shellacking of the Oilers. Glanville has never lived down that call, which remains seared on the psyche of those who have followed Houston professional football over the years.
J.P. Morgan Chase & Co. became the final major holdout in WorldCom investor class-action lawsuit to settle as it agreed to pay a cool $2 billion in the WorldCom settlement pot. The settlement came a day before jury selection was expected to start in the class action case against the remaining defendants in the case, but now the jury selection date has been put off until next week.
It doesn't look as if J.P. Morgan improved its settlement posture by waiting until the last minute to settle. Under the formula used in Citigroup's earlier $2.58 billion settlement, J.P. Morgan would have paid $1.37 billion. But with all other major investment bank defendants already having settled, it appears that J.P. Morgan had to almost two thirds of a billion more for waiting to settle until the case was on the courthouse steps. Incredibly, the $2 billion settlement wipes out about five years worth of underwriting fees that J.P. Morgan has generated through the the sale of investment grade bonds.
The settlement raises the amount recovered in the WorldCom class action to over $6 billion, which is a record for a securities class action case that will stand at least until the Enron class action defendants begin settling or take that case to trial. Here are the earlier posts on the WorldCom class action.
WorldCom was valued at $180 billion at its peak in 1999, but collapsed into a Chapter 11 case in 2002 amidst an accounting scandal and $30 billion in debt. As is common in such huge business failures, investors sued virtually all of WorldCom's investment bankers, accusing the banks of failing to evaluate WorldCom's financial health properly when the banks sold $17 billion of WorldCom's bonds in 2000 and 2001. When WorldCom tanked, the holders of those bonds lost most of their value.
The banks collected about $85 million in fees for underwriting the WorldCom bonds, and about $5 billion of the $6 billion in settlement proceeds is earmarked for those bonds investors. Those proceeds will generate a dividend to those bond investors of about 50 cents on the dollar.
With J.P. Morgan out of the way and as predicted earlier here, the former directors of WorldCom will now enter into multimillion dollar settlement that collapsed in February. That would leave the only remaining defendants in the case as Arthur Andersen (WorldCom's auditor) and Bert Roberts, a former director.
March 16, 2005
Speaking of O'Neill, that reminds me of this incredibly bad idea that cropped up during last year's Presidential campaign. Thankfully, the trial balloon that was referred to in that post blew away and that was the end of the speculation.
Dear Miss Manners:
At an apartment-warming I attended, a couple arrived about 30 minutes into the party. Within seconds, the family dog began making love to the female guest's leg. Her date grabbed her because she was struggling to stand.
The hostess said, "Down! Down!" The host said, "No, 'Big Boy!' No!" and tried to pull Big Boy off, without success. A nearby guest then leaned forward and gave the dog's tail a single tug. The dog let out a yelp, dropped to his feet and began inspecting his rear.
The yelp brought the party to a halt. In the silence that followed, the hostess said, "Did you jerk my dog's tail?" The tail-tugger turned red and looked ashamed, but said nothing. The moment passed and the party resumed.
Big Boy walked away. The tail-tugger did, too, in the opposite direction. The female guest later became pregnant, but not because of Big Boy. I don't think anyone handled this well.
What do you think?
Miss Manners' answer: That you had far too good a time at this party.
And while the business and legal worlds focus on the implications of the Ebbers conviction, this NY Times article reports on the uneasiness at Berkshire Hathaway as New York Attorney General Eliot Spitzer carves another notch in his anti-business holster with the resignation of longtime American International Group chairman, Maurice "Hank" Greenberg, who is every bit as prominent in financial circles as Berkshire chairman Warren Buffett is in the investment field.
In striking contrast to Mr. Ebbers' fate, this week's "retirement" of AIG CEO Greenberg was the result of AIG's board trying to soften the wrath of AG (i.e., "Aspiring Governor") Spitzer. AIG remains one of the world's largest and most lucrative financial services businesses. Mr. Spitzer was about to take Mr. Greenberg's deposition in his ongoing investigation of transactions between AIG and Berkshire's General Re Corp., so the AIG board unceremoniously elected to dump the man who had built the company into a giant in the hope of avoiding further legal scrutiny by the Aspiring Governor.
What is unfortunate about all of this is that, in the current anti-business culture that is fostered by films, the MSM, and prosecutors such as Mr. Spitzer, the AIG Board's throwing of Mr. Greenberg to the wolves just might have been the most reasonable business decision under the circumstances. In light of recent civil settlements by directors in the Enron and WorldCom cases, the main risk for directors now is failing to get rid of a CEO at the first sign of Mr. Spitzer or some other irregularity. Even if that that means showing the door to a CEO with Mr. Greenberg's long record of great returns for shareholders, that's just life in the big city.
Based on what is publicly known about Mr. Spitzer's investigation into the AIG-General Re transaction, it would not be unreasonable for any CEO to run for cover out of fear that she is the next target of this voracious appetite to criminalize even normal business practices. If you believe Mr. Spitzer, Mr. Greenberg arranged a transaction in 2000 with General Re that made AIG's reserves look slightly better than they really were. However, the deal did not affect AIG's net income and was the type of transaction that AIG -- and many other companies in the insurance industry -- have done for years without any adverse market reaction, much less a criminal investigation.
Nevertheless, as Mr. Spitzer continues pressing his campaign to criminalize business, it does not matter whether a transaction was considered proper in the past. Mr. Spitzer knows that he can get what he wants without the details of due process and a trial by undermining a company's stock price in the media. Such an approach is contrary to the rule of law, but Mr. Spitzer proceeds with the warm understanding that no one in the MSM will ever call him out on the injustice of his ways.
Perhaps the Aspiring Governor will yet turn up something more damaging at AIG and Berkshire than what has been reported to date. But the AIG morality play is turning out about the same as other Spitzer investigations -- a CEO gets canned, the company pays a big fine, and the Aspiring Governor gets good P.R. with perhaps a few crimes sprinkled in to titillate public interest in the matter. Although the dubious policy of criminalizing business generally is bad enough, Spitzer's manipulation of huge companies by publicly attacking common business practices -- without any measure of prosecutorial discretion or due process -- is taking governmental regulation of business to an entirely new and more dangerous level.
Update: Don't miss Professor Ribstein's observations on the foregoing process, which he insightfully characterizes as the "Imperial Regulator and the Divine CEO."
The conviction is further bad news for former Enron chairman Ken Lay and former CEO Jeff Skilling who are claiming -- as did Mr. Ebbers -- that former Enron CFO Andrew Fastow kept them in the dark regarding the dire implications that Mr. Fastow's creation and management of several off-balance sheet partnerships had on Enron's true financial condition.
In fact, in many respects, Messrs. Lay and Skilling's defense is harder than Mr. Ebbers' because both Lay and Skilling supported Fastow's involvement in the off-balance sheet partnerships and their co-defendant -- former Enron chief accountant Richard Causey -- approved the dubious accounting relating to the partnerships. It is going to be risky for Messrs. Lay and Skilling to criticize Mr. Causey's accounting for Fastow's machinations with off-balance sheet entities during a trial in which all three are defendants. The bet here is that Mr. Causey cops a plea prior to trial and Messrs. Lay and Skilling end up defending the case between themselves. In that regard, Mr. Ebbers' defense counsel -- Reid Weingarten -- is one of the lawyers on Mr. Causey's defense team.
However, a key difference between the Ebbers theory of the case and that of Messrs. Lay and Skilling is that the latter two are not arguing that they were left in dark because of ignorance, but because of Mr. Fastow's desire to hide the enormous income that he was making from managing the partnerships. Thus, where Mr. Ebbers was forced to argue that he simply did not understand WorldCom's complicated accounting, Messrs. Lay and Skilling are contending that Mr. Fastow's greed to generate huge income from Enron's off-balance sheet partnerships incentivized him to lie to Lay and Skilling regarding the true nature of Enron's off-balance sheet partnerships. Of course, a complicating fact in Messrs. Lay and Skilling's defense is that they engineered the Enron board's dubious approval of Fastow's management of the partnerships, but that's another issue.
Moreover, another difference between the Ebbers case and the case against Mr. Lay is that the government's indictment against the three former Enron executives attributes a much larger role in the alleged crimes to Messrs. Skilling and Causey than to Mr. Lay. Messrs. Skilling and Causey are charged charged with crimes all the way back to 1999, and are identified as the men who "spearheaded" the purported conspiracy to hide Enron's true financial condition from the marketplace. On the other hand, the charges against Mr. Lay are focused on his actions during the months following following Mr. Skilling's resignation as CEO in August, 2001, when the government alleges that Lay "took over leadership of the conspiracy."
This past weekend, Mr. Lay continued an unusual public relations campaign that he has mounted since his indictment in which he has claimed that he was ignorant of wrongdoing at Enron. During an interview on CBS' 60 Minutes, Lay contended that Enron was a huge company in which senior management was delegated enormous trust to do the right thing. Mr. Lay contended that Mr. Fastow had "betrayed that trust" and "ultimately caused Enron's collapse. To the extent that I did not know what he was doing, and he obviously didn't share with me what he was doing, then indeed I cannot take responsibility for what he did."
Similarly, although Mr. Skilling has not been spoken publicly since his indictment, he did raise eyebrows in legal circles by testifying before Congress in February 2002 in which he asserted that "while I was at Enron, I was not aware of any financing arrangements designed to conceal liabilities or inflate profitability."
March 15, 2005
Traditionally, the NY Times views high energy prices as a failure of the government to regulate the oil barons properly. Thus, when the Times starts talking about a possible bubble in energy prices, take note.
This Daily Telegraph op-ed addresses the long overdue disdain that is being heaped upon Gerry Adams, who is the leader of Sinn Fein, which is the Irish Republican Army's "political" wing, as the MSM tepidly refers to the group.
One of the more incongruous developments in the post-September 11 world has been the way in which Mr. Adams has been able to avoid scrutiny for his and his followers' support of terroristic activities over the past 30 years. Despite this dubious background, this week is the first time since the mid-'90s that American political leaders will not welcome Mr. Adams with open arms in connection with traditional St. Patrick's Day celebrations. Rather, President Bush will host the family members of the late Robert McCartney, the 33-year-old Northern Irish Catholic who was brutally killed outside a Belfast bar in January. Given the IRA's mob-like control of certain local communities in Northern Ireland, none of the numerous witnesses to the McCartney murder -- which include two Sinn Fein political candidates -- have been willing to step up and identify the murderers.
Meanwhile, the IRA remains the prime suspect in the $50 million bank robbery that occurred in Belfast this past December just as British Prime Minister Tony Blair made a last ditch offer to restart the deadlocked Northern Ireland Assembly. That deadlock grows out of the 1998 Good Friday Agreement under which Mr. Blair agreed that the Assembly rules would require that operations be approved by parties such as Sinn Fein that represent only a small minority of the vote. After September 11, the Assembly increasingly appears to be a symbol of the failed policy of appeasement toward terroristic tactics.
As a result, the U.S., British and Irish governments are all finally on the verge of blowing off this failed policy toward dealing with the IRA and Sinn Fein. Inasmuch as Northern Ireland citizens -- unlike the oppressed citizens of most Islamic countries -- have always been fully represented in a democratic British government, one can only wonder why it has taken the governments this long to recognize the folly of appeasing the IRA and Sinn Fein.
The bottom line is that IRA is not a freedom movement of oppressed Catholics. Rather, it has evolved into a criminal enterprise that embraces a radical political agenda and cooperates with virtually every radical terrorist group, including radical Palestinian and Libyan factions. Over the past 35 years, the IRA has killed about 3,000 people, and has undertaken several assassination attempts on various British prime ministers.
Meanwhile, the IRA and Sinn Fein have for years secretly raised millions of dollars in contributions in the United States, and the groups have been allowed to raise contributions openly in the U.S. since President Clinton lifted the ban on the group in the mid-90's. Politicians such as Massachusetts Senator Ted Kennedy (Democrat) and New York Congressman Peter King (Republican) have been among the IRA and Sinn Fein's biggest American fundraisers.
In one of the more refreshing moves of the year, the Bush Administration has finally revoked the IRA and Sinn Fein's license to raise funds openly in the U.S. this year, and even Messrs. Kennedy and King are shunning Mr. Adams during his visit to the States this year. However, keep watching this process carefully. Appeasement is almost always a more comfortable policy than confrontation for politicians to embrace, and organizations such as the IRA and Sinn Fein are masters at pushing the edge of the violence envelope under an appeasement policy. It does not make much sense for America to be fighting terroism that seeks to sustain radical Islamic fascism in the Middle East if it is unwilling to confront terrorism that seeks to undermine democratic government in our closest ally.
March 14, 2005
The following is a lively exchange at the end of a recent deposition in a Texas civil case:
Lawyer 1: "Mr. Lawyer 2, if you ever imply that I manufactured testimony again, I'll fucking kick your ass. I'll do it right here in front of all these attorneys, okay? Because we're off the record. Did you hear what I said?"
Lawyer 2: [To the Court reporter] "Did you get that on the record?"
Lawyer 1: "No, it's not on the record. I said 'we're off the record, end of deposition.'"
The Reporter: "You have to agree, per the Rules. I mean, that's just my -- I'm sorry."
Lawyer 1: "That's fine. Whatever."
Here is the motion for sanctions resulting from this exchange.
Key litigation tip for Texas lawyers -- don't threaten to kick your opposing counsel's ass during a deposition. However, if you do, it's generally better to do so off the record. ;^)
Hat tip to Evan Schaeffer for the link to this instructive deposition exchange.
Turns out that Mr. Shelley had set up a scam operation to line his pockets in connection with obtaining nutritional supplements for the Texas Tech football team and eventually for other Texas Tech athletes. The press release states as follows:
Shelley conspired to and carried out two schemes to defraud Texas Tech University by over-billing the athletic department for nutritional supplements provided to athletes. The first scheme involved Shelley receiving kickback payments from Muscle Tech of Lubbock, a nutritional supplement store located in Lubbock, Texas. The later scheme involved Shelley over-billing through a "shell" corporation, Performance Edge, Inc. The fraudulent, over-billed amounts from both schemes totaled $497,145.19.
"Overbilled" by half a million bucks on "nutritional supplements?" No wonder those Tech receivers have looked so fast over the past several seasons. ;^)
Mr. Shelley received a sentence of 33 months in the slammer for the scheme. Hat tip to the White Collar Crime Prof for the link to the press release.
David Cutler is a Harvard economist who was involved in the failed Clinton Administration initiative in the early 1990's to reform America's health care finance system. This NY Times Sunday Magazine article examines Professor Cutler's evolving views on health care finance reform, and a number of them are quite interesting:
Cutler's approach is radically different. He says that most health-care spending is actually good. Spending has been rising, he says, because it delivers positive, and measurable, economic value, and because it can do more things that Americans want. Therefore, Cutler says, we should focus on improving the quality of care rather than on reducing our consumption of it. Rather than pay less, he wants to pay more wisely -- to encourage health-care providers to do more of what they should and less of what is wasteful.
A tweedy, self-effacing 39-year-old, Cutler is a seriously modified lefty. He envisions a system in which everyone could get insurance while free-market incentives would motivate health-care providers to be more effective as well as more efficient. Instead of suppressing the market by rationing care, restraining prices or regulating doctors, he wants to liberate it. It is neither Clinton nor Bush -- but closer to Bill Bradley, whose 2000 campaign Cutler advised.
To make coverage universal, Cutler advocates a $6,000 credit for poor families (and less, on a sliding scale, for others, tapering off to a small credit for people earning $50,000 and up). The credits would be redeemable as a sort of health-insurance voucher. Significantly, Cutler would extend credits to everyone -- even to people who are covered now. Many employers, for competitive reasons, would still offer coverage, but access to care would no longer depend on either employment status or age.
The problem is that most health care finance policy wonks believe that health care spending is "out of control" and, thus, Professor Cutler's approach would make that spiral worse. However, the wonk solution -- a single payor government system -- simply creates even worse problems. Professor Cutler's focus on the qualitative side of the problems is refreshing and merits serious consideration.
Finally, note that Professor Cutler's ideas are similar in several ways to the ideas addressed in this previous post on business theorist Michael Porter's views on reforming the health care finance system.
After a couple of years of shareholder unrest over the direction of the Walt Disney Co., the company's board yesterday named veteran Disney insider Robert Iger to replace Michael Eisner as the company's CEO. Mr. Iger was Mr. Eisner's choice to to succeed him. Here are the previous posts over the past year on the turmoil at Disney.
The theory behind the appointment of Mr. Iger is that he is best suited of all the candidates to continue Disney's recent financial success because of his experience with the inner workings of the unique Disney culture. On the other hand, some Disney board members are still smarting over the choice of Mr. Iger over over outsider Meg Whitman, the eBay Inc. CEO who interviewed for the job a week ago but almost immediately withdrew her name from consideration because she felt the Disney board favored Mr. Iger.
Consequently, Mr. Iger's selection is unlikely to bring immediate peace to the fractured Disney boardroom, in which dissident board members Roy E. Disney and Stanley Gold have already criticized Mr. Iger's selection as being a sham orchestrated by by Disney Chairman George Mitchell.
Meanwhile, Eliot Spitzer is about to carve another notch in his belt as this NY Times article reports that Maurice R. "Hank" Greenberg, who turned American International Group Inc. into a financial services industry giant over the past generation, is planning to step down as chief executive amidst concern on the company's board over investigations into certain of the company's structured finance transactions with a Berkshire Hathaway insurance unit. Here is an earlier post on Mr. Spitzer's investigation into AIG's practices.
Mr. Greenberg's imminent departure from AIG is a stunning reversal for the New York-based financial-services titan. Mr. Greenberg is one of America's most successful CEO's, and has personally transformed AIG over the past 40 years from an obscure property-casualty insurer into one of the world's largest financial-services companies. Its market capitalization of almost $170 billion makes it one of the world's most valuable companies, and Mr. Greenberg is one of the company's largest individual shareholders.
Finally, President Bush on Friday picked John Hopkins University physicist Michael Griffin to lead the National Aeronautics and Space Administration to replace Sean O'Keefe, who left NASA earlier this year after three years in the top job to become chancellor of Louisiana State University. Dr. Griffin will become the space agency's 11th administrator.
For the past year, Dr. Griffin has headed the space department at Johns Hopkins University's Applied Physics Laboratory in Laurel, Md. It is the lab's second-largest department and specializes in projects for both NASA and the military. Dr. Griffin has a fairly incredible academic background, which includes a Ph.D. in aerospace engineering and five master's degrees -- aerospace science, electrical engineering, applied physics, civil engineering and business administration. Before taking over the space department at Johns Hopkins, Dr. Griffin was president and chief operating officer of In-Q-Tel, a CIA-bankrolled venture-capital organization and, earlier in his career, Dr. Griffin worked at NASA as chief engineer and as deputy for technology at the Strategic Defense Initiative Organization.
Last year, Dr. Griffin was a part of a team of experts who recommended that NASA retire the space shuttle by 2010, send astronauts back to the moon by 2020, and then mounting human expeditions to Mars and beyond. The report recommended retiring the space shuttle in order to accelerate work on a spaceship that could carry astronauts to the international space station and ultimately to the moon.
March 13, 2005
The entire excerpt is well worth reading, but the following part of the excerpt is particularly interesting. It involves an Enron management crisis meeting in late October 2001 as public revelations of Enron's off-balance sheet partnerships began making Enron's bank creditors extremely nervous. At the outset of the meeting, Greg Whalley, Enron's chief operating officer, fired Andrew Fastow as Enron's chief financial officer and replaced him with Jeff McMahon, who Fastow had canned as Enron's treasurer a year and a half earlier after McMahon had objected to then Enron CEO Jeff Skilling about Fastow's conflict of interest in managing the partnerships:
The men made their way to a tiny conference room upstairs, crowding around an oblong table. Fifteen minutes later, Whalley blew into the room."O.K., let's get going," he said. "Let's start with the organization first."
Whalley shot a look at Fastow, pointing at him.
"Andy," he said rapidly. "As we discussed, you're no longer C.F.O., effective right now."
Fastow's face fell. "Wait ..."
Ignoring Fastow, Whalley swept his arm across the table, pointing at [former Enron treasuerer Jeff] McMahon.
"Jeff, you're now C.F.O."
What was that? McMahon wasn't sure he heard Whalley correctly."Excuse me?" McMahon said. "I'm C.F.O.?"
"Yes, you're C.F.O."
McMahon glanced across the table. Fastow was shaking his head, looking shocked. The moment was surreal."Wait a minute!" Fastow sputtered. "That was not my understanding of the deal!"
Whalley held up a hand. "Andy," he said, "I don't know the legal stuff. You get with Ken and work it out."
That was it. Whalley turned away from Fastow.
The mercurial F. Lee Bailey, the former high-profile criminal defense attorney who was disbarred in 2002 for allegedly misapplying $6 million in proceeds from the sale of a client's stock, has applied to regain his law license in Massachusetts..
Now even Rosie O'Donnell has a blog?
March 12, 2005
Bob is one of Houston's most well-regarded lawyers in the corporate securities area and is also involved in many civic causes. He is currently chairman of the advisory boards of directors of the Houston Technology Center and BioHouston, and is a member of the University of Houston C.T. Bauer College of Business Dean's Advisory Board.
This earlier post told the story of the Snohomish County Public Utility District, which is riding an unparalleled wave of popularity among its customers despite hiking electricity rates 50 percent in the past four years and disconnecting a record number of customers for failure to pay bills.
The reason for this rather incongruous situation? The utility has been leading the public charge against the popular business whipping boy of the moment, Enron Corp.
Well, the utility's anti-Enron public relations campaign appears to be working. Yesterday, the Federal Energy Regulatory Commission issued an order that determined that Enron was engaging in illegal activity at the time it entered into contracts with West Coast utilities during the West Coast power crisis of 2000-2001. Accordingly, FERC has ordered a hearing to determine whether Enron should be allowed to collect profits it would have received had those contracts been fulfilled. The hearing is expected to occur in May, and that hearing will be followed by FERC's final decision later this year.
The decision is a landmark for West Coast utilities that continue to fight their Enron contracts because it is the first time that FERC has acknowledged that the contracts were signed under fraudulent pretenses. The utilities and cities involved terminated their contracts with Enron or watched as Enron terminate its contracts with them when the company slid into bankruptcy in late 2001.
When Enron went bankrupt, the Enron bankruptcy estate sued the utilities and cities for the money it would have made had the contracts been fulfilled. Enron is seeking a cool $300 million from a couple of Nevada utilities, and $122 million from the Snohomish County PUD, which signed a nine-year contract with Enron in January 2001 for power that was four times as expensive as it had been just months earlier. To come up with the $122 million, Snohomish contended that it would have to collect about $400 per customer.
As noted in the previous post, Snohomish searched through thousands of pages of Enron documents and paid for hundreds of hours of taped conversation transcripts involving Enron traders. The material turned out to be Watergatesque -- the Enron traders joked about stealing money from California grandmothers and about the possibility of going to jail for their actions. With this explosive evidence, Snohomish sought a finding from FERC that it did not have to pay any damages to Enron under the terminated Enron contract. The FERC ruling on Friday means that Snohomish is inching closer to that goal.
Despite the FERC ruling and the tape recordings, the Enron Task Force has not taken much of an interest in pursuing former Enron traders on criminal charges. In October 2002, former Enron trader Tim Belden pleaded guilty to wire fraud for participating in trading schemes to game the California market, and two other former Enron traders -- Jeffrey Richter and John Forney -- later pleaded guilty to similar charges. However, those are the only former Enron traders who have been charged with crimes to date and, during a deposition in an Enron-related civil case last month, former Enron Online trading desk executive Louise Kitchen disclosed that the Justice Department had never even interviewed her.
Meanwhile, despite all of these legal machinations, the customers of the Snohomish PUD continue to pay much higher utility bills than utility customers in most other parts of the country. Perhaps the excess amount should be called the "flog Enron premium?"
March 11, 2005
This Chronicle article reports on the imminent closing of the Palace Boot Shop, which is a downtown Houston institution. The nearby Christ Church Cathedral has acquired the downtown city block where the shop is located, and brother-owners Lakis and Steve Xydis have decided to take a break for a year or two before deciding whether to reopen the shop in another location. Any suggestions on where I should buy my boots in the meantime?
Meanwhile, a couple of blocks down the street from the boot shop, this Chronicle article reports that Reece Rondon was sworn in this week as replace Bruce Oakley as judge of the 234th Harris County State District Court. Mr. Oakley stepped down earlier this year to return to private practice.
Judge Rondon was first appointed to the 334th District Court in October 2003, but he lost a close race in the 2004 Republican primary to Sharon McCally by 307 votes. Judge McCally went on to win the seat in the November election. Between stints on the bench, Judge Rondon returned to private practice at Andrews Kurth, where he had practiced before taking the bench. His new term in office will run until 2006, when he intends to run for a full term.
A French magistrate opened a formal investigation on Thursday of Houston-based Continental Airlines for manslaughter in the alleged role that one of its jets played in the July 2000 crash of the supersonic Concorde. The step of placing Continental under investigation is the process that the French criminal justice system follows prior to formally charging a defendant with a crime, such as the anticipated manslaughter and involuntary injury charges in this case.
Investigators have previously concluded that a titanium strip that fell from a Continental DC-10 onto the runway caused one of the Concorde's tires to burst, which in turn propelled rubber debris that perforated the Concorde's fuel tanks. Continental contends that it is not responsible for causing the crash because of defects in the Concorde's fuel tanks.
Deutsche Bank AG, German bank WestLB AG and Italian bank Caboto Holding Sim joined most of the other financial institution-defendants in the WorldCom class action yesterday in agreeing to settle fraud allegations for their participation in the sale of WorldCom Inc. bonds in 2000 and 2001. The settlements come on the eve of a scheduled trial of the case next week, and leaves JP Morgan Chase and a couple of smaller financial institutions as the only remaining defendants in the case. This link will take you to the previous posts on the WorldCom class action settlements.
Deutsche Bank's settlement amount is $325 million, while WestLB agreed to pay $75 million and Caboto $37.5 million. Those amounts increase the WorldCom class action settlement pot to about $3.7 billion, which is for the time being the largest recovery ever in in a securities class-action lawsuit. Nevertheless, sharpies on such matters are already betting that the settlement pot and/or damages awarded against the financial institution-defendants in the Enron class action will lap the WorldCom settlement pot by several billion.
The Oregon Public Utility Commission announced Thursday that it had decided not to approve Texas Pacific Group's proposed $2.35 billion purchase of Enron subsidiary Portland General Electric because "the potential harms or risks to PGE customers from the deal outweigh the potential benefits." Here are the earlier posts on this situation.
PGE is Oregon's largest utility with about 755,000 customers. Texas Pacific is the closely-owned Fort Worth investment firm that has been trying to buy PGE out of Enron's bankruptcy estate for more than a year despite widespread public resistance in Oregon. Even such major industrial customers of the utility such as Intel Corp. came out against the deal.
State law required the state regulators to decide whether ratepayers would benefit from the takeover and that no public harm would result. Inasmuch as the commission could have approved the deal outright or conditioned approval of a sale on certain additional requirements, the outright denial of the proposed purchase is a crushing defeat for Texas Pacific and Enron creditors.
If Texas Pacific does not win an appeal of the utility commission's ruling, then Enron's creditor's committee will essentially decide what to do with PGE. The two most likely results are just to distribute new stock of the utility among Enron creditors or reopen the bidding for the utiity. Representatives of the City of Portland has publicly stated that it would make a bid for the utility.
March 10, 2005
Texas Senator John Cornyn's staff should think twice next time before sending out a canned response to one of his constituent's email communications.
Robin Phelan of Haynes and Boone's office in Dallas has long been one of Texas' leading experts in the area of business bankruptcy and reorganization law. As noted most recently here, Congress is getting ready to enact dubious bankruptcy "reform" legislation that has remarkably little public support except for the well-heeled consumer credit card industry.
Robin's practice is primarily in big corporate reorganization cases, so he does not have any personal or professional stake in the consumer bankruptcy area that is the primary focus of this bad bankruptcy "reform" legislation. Nevertheless, Robin knows bad bankruptcy legislation when he sees it, and so he took the time to write Senator Cornyn a well-reasoned and dispassionate letter offering his expert view of the numerous defects in this legislation. In response, Robin received this canned email from Senator Cornyn's office:
Dear Mr. Phelan:
Thank you for contacting me about the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256). I appreciate having the benefit of your comments on this issue.
On February 1, 2005, Senator Grassley introduced S. 256, legislation which I am proud to co-sponsor. This legislation would amend the federal bankruptcy code and reform many areas of bankruptcy practice such as consumer bankruptcy filings, small business bankruptcy, and family farmer reorganization. Additionally, it would address abuse of creditor practices and bankruptcy filings. On February 24, 2005, S. 256 was approved by the Senate Judiciary Committee and now awaits a vote on the Senate floor.
I support bankruptcy reform because America needs to restore a greater sense of personal responsibility to its financial system and must act to prevent the abuses of bankruptcy law that we have witnessed in recent years. Bankruptcy relief should be available to those who are unable to pay, not to those who are simply unwilling to pay.
I appreciate the opportunity to represent the interests of Texans in the United States Senate. You maybe certain that, as a member of the Senate Judiciary Committee, I will keep your views in mind as the Senate considers S. 256. Thank you for taking the time to contact me.
United States Senator
Most folks receiving such a response would simply sigh and say, "Oh well, that's politics" and move on to the next task of the day. Not Robin. Here is his reply to Senator Cornyn's canned email:
Dear Senator Cornyn:
Nice unresponsive canned statement that parrots the line given to you by the consumer lenders.
You have ignored the comments of substantially all of the professionals and academics that are familiar with the issues. It is beyond me why you would believe the consumer lenders who have a distinct economic interest in squeezing as much as they can out of consumers and disregard the opinions of almost everybody else.
I don't have an economic interest in consumer bankruptcies, but I'm close enough to the system, and have reviewed the bill in connection with professional activities, to have a working knowledge of the issues. Campaign contributions by the consumer lenders aside, you have a responsibility to consider that almost everyone else thinks that this is a really bad bill.
Sending an unsolicited credit card to many people is like sending a case of Jack Daniels to an alcoholic and then sending him a bill for the booze a month later. Throwing bankrupts into indentured servitude to the credit card companies isn't the solution to the non-existent problem manufactured by the lenders.
By the way, "maybe" in the next to the last sentence should be "may be".
H'mm, I wonder if Senator Cornyn's staff has a canned response to that one?
Following on this post from a couple of weeks ago, this NY Times op-ed by University of Texas law professors Bernard Black and Charles Silver, University of Illinois law professor David Hyman, and Columbia law professor William Sage contends that there recent study of malpractice awards in Texas indicates that there is scant evidence that a crisis in states' tort systems is the driving force behind the increases in medical malpractice insurance premiums. Here is how they summarize the results of their review of all closed claims in Texas between 1988 and 2002, which was the year before the Texas Legislature enacted sweeping tort reform measures:
Large claims (with payouts of at least $25,000 in 1988 dollars) were roughly constant in frequency.
The percentage of claims with payments of more than $1 million remained steady at about 6 percent of all large claims.
The number of total paid claims per 100 practicing physicians per year fell to fewer than five in 2002 from greater than six in 1990-92.
Mean and median payouts per large paid claim were roughly constant.
Jury verdicts in favor of plaintiffs showed no trend over time.
The total cost of large malpractice claims was both stable and a small fraction (less than 1 percent) of total health care expenditures in Texas.
In short, as far as medical malpractice cases are concerned, for 15 years the Texas tort system has been remarkably stable.
The authors conclude as follows:
Malpractice premiums have risen sharply in Texas and many other states. But, at least in Texas, the sharp spikes in insurance prices reflect forces operating outside the tort system.
The medical malpractice system has many problems, but a crisis in claims, payouts and jury verdicts is not among them. Thus, the federal "solution" that Mr. Bush proposes is both overbroad and directed at the wrong problem.
Unfortunately, this is not an unusual approach for the Bush Administration to follow in enacting legislation, as reflected by this legislation.
The airline industry just continues to reel. Yesterday, Houston-based Continental Airlines announced that competition from Delta Air Lines's recent broad-based fare cuts is the primary factor behind a revenue decrease that will be at least $50 million more than it originally expected. Last year, Continental reported a net loss of $363 million on revenue of $9.74 billion.
Continental now expects annual revenue to sink by about $200 million instead of its previous estimate of $150 million, according to this SEC filing made yesterday. Although the fare cuts have brought more customers to Continental, the fare cuts are producing less total revenue.
Continental is one of Houston's largest employers and is generally regarded as one of the healthier legacy U.S. airlines. Nevertheless, it continues to struggle to compete more effectively with lower-cost carriers such as Southwest Airlines.
In a development that you just don't see very often, the primary investor under one of the two competing chapter 11 reorganization plans in the Hawaiian Airlines chapter 11 case was arrested yesterday in St. Louis for allegedly trying to bribe an undercover FBI agent in a fraudulent scheme to fund the plan.
I guess that means that the other plan is the odd's on favorite to be confirmed as the winning plan.
At any rate, Paul Boghosian was arrested after he allegedly agreed to pay a half million dollaar bribe to an FBI agent who was posing as a hedge-fund manager in exchange for a $2.5 million loan. Mr. Boghosian was the lead representative of Hawaiian Investment Partners Group LLC, which is the take out financier behind one of the competing plans in the Hawaiian Airlines chapter 11 case.
In addition to the bribe allegation, the government is also alleging that Mr Boghosian made a number of misrepresentations regarding his group's ability to provide plan funding in his group's Disclosure Statement filed with the bankruptcy court in connection with its competing plan in November, 2004. Mr. Boghosian was charged in U.S. District Court in Manhattan with conspiracy to commit bankruptcy fraud and two counts of commercial bribery. Each count carries a maximum punishment of five years in prison.
Hawaiian Airlines has been wallowing in chapter 11 since 2003. The other competing plan -- one proposed by the airline's trustee Joshua Gotbaum, Ranch Capital LLC, and the company's unsecured creditors' committee -- will take place today and tomorrow.
I think it's safe to say that Mr. Boghosian will not be attending that confirmation hearing.
I often advise clients and lawyers not experienced in reorganization cases that chapter 11 is strong medicine with serious side effects. Although bankruptcy crimes are not often prosecuted, it's easy to commit such a crime in connection with a reorganization case without even knowing it. Thus, it is a wise move to have reorganization counsel standing by at every step of the process.
Following on this earlier report of the increasingly dangerous situation that exists along the Texas-Mexico border, the federal government has issued a warning to students going to the Spring Break hotspots of South Texas regarding the dangers lurking in the border towns.
Parents of college students going to South Texas over Spring Break need to emphasize to their children that this is a real danger and not one to take lightly. Although security on the Texas side of the border is fine, security is simply not adequate these days in the Mexican border towns, and the smart move for young people is simply to stay out of those towns. There is plenty to do on the Texas side of the border, anyway.
The "courthouse steps" settlements continued Tuesday in the class action lawsuit over the WorldCom accounting scandal as four more financial institution-defendants reached deals with the plaintiffs in which the defendants agreed to pay a total of $428.5 million. Earlier posts on the WorldCom settlements may be reviewed here and here.
Under yesterday's deals, ABN Amro Holding NV agreed to pay $278.4 million; Mitsubishi Securities International PLC, $75 million; and BNP Paribas Securities Corp. and Mizuho International, $37.5 million apiece, which increases the WorldCom settlement pot to $3.5 billion. Those settlements add to the list of financial institutions that have decided to hedge their ligitation risk in the case through settlement. As noted in the previous posts, Bank of America Corp. and four investment banks agreed to settle earlier this month, while Citigroup settled for a cool $2.58 billion last year.
These additional settlements increases the price of poker on the remaining financial institution defendants in the case, which include J.P. Morgan Chase & Co. and Deutsche Bank AG. As the number of deep pocket defendants is reduced, the risk of having to pay a greater percentage of a jury award increases for each of the remaining defendants. Settlement negotiations apparently are ongoing with the remaining defendants.
The Chronicle's Mary Flood, who continues to do a bang up job of keeping up with the unfolding events relating to the various aspects of the Enron scandal, has a couple of Enron-related news items today.
First, she reports that the next Enron-related criminal trial -- the one known as "the Enron Broadband case" -- has been pushed back to at least April 18 as a result of U.S. District Judge Vanessa Gilmore's involvement in this case. Here are the previous posts on the Broadband case.
Although the intensity of the media attention given to Enron makes it seem as if there have been a plethora of criminal trials related to the case, the Broadband case is only the second criminal case involving former Enron executives that will go to trial. Interestingly, the first case -- the trial of the Nigerian Barge case -- resulted in convictions of four Merrill Lynch executives and one Enron mid-level executive. However, of the two Enron defendants in that case, the Enron accountant who was closest to the alleged sham transaction in that case -- Sheila Kahanek -- was the only defendant who the jury acquitted in the case.
The Broadband case is interesting in that it involves a division of Enron that was one of the company's more auspicious business failures, but one that undeniably had great potential. The five remaining former Enron executives in the case will argue that Enron's other financial problems undermined the broadband division's business potential, and that none of their public statements regarding the division's business opportunity were false or intentionally misleading. Although the Enron Task Force's public stance on the case has been typically bullish, the two former Enron executives who have copped pleas in the case to date -- Ken Rice and Kevin Hannon -- pleaded guilty to only one count of securities fraud in their plea bargains. The nature of those pleas does not exactly reflect that the government thinks it has a lock cinch winner in this prosecution.
Meanwhile, Ms. Flood reports in this article that the Chronicle has requested that U.S. District Judge Ewing Werlein unseal a couple of pleadings that three of the convicted Nigerian Barge defendants filed in connection with their upcoming sentencing hearings. There appears to be no basis for the pleadings to be sealed permanently, so Judge Werlein will likely grant the Chronicle's request. Probably the only reason that the pleadings have not been unsealed to date is that the Judge probably just has not gotten around yet to ruling on the defendants' motion to seal the pleadings.
Finally, in what could be one of the more entertaining interviews of the year, former Enron chairman and CEO Ken Lay will be interviewed on this Sunday's 60 Minutes show in connection with the release of the new Enron book, Conspiracy of Fools by New York Times reporter Kurt Eichenwald. According to Mr. Lay's publicist, Mr. Lay rather enjoyed the book.
March 9, 2005
Randy is one of the best family law practitioners in Texas, and he provides his students with a broad and useful curriculum of the myriad issues that they will confront in family law cases. The subject of this particular class was the impact that bankruptcy law and the risk of insolvency have on divorce cases, which is always a lively topic. Most of the students in the class had not yet taken bankruptcy law, but they caught on quickly and asked quite insightful questions regarding the interplay of insolvency and divorce law. You can download my PowerPoint presentation for the class here, which provides a basic introduction of bankruptcy law principles for Texas divorce cases.
Teaching the class yesterday reminded me to pass along a bang up new continuing education resource called Ten Minute Mentor, a free series of Web lectures that the Texas Young Lawyers Association and the Texas Bar CLE launched on March 1st with the well-thought out sales pitch of "Concise. Practical. Free." Moreover, the program is not limited in any way and is available to lawyers and interested laypersons everywhere.
The Ten Minute Mentor is a library of short video presentations by some of the state's best-known experts in various areas of law, firm management, and professional development. For example, longtime Houston trial lawyer Harry Reasoner describes how to structure a legal argument, while plaintiff's lawyer extraordinaire Joe Jamail articulates his view of a lawyer's role in society. The TYLA is actively adding to the video library, which already includes over 100 videos on various topics and can be searched by either speaker or category.
The Ten Minute Menton is another outstanding addition to the Texas Bar CLE's continuing education program, which is becoming a model for such programs. Check it out.
The Senate on Tuesday rejected further opposition to approval of the horrific bankruptcy "reform" legislation, which clears the way for a final Senate vote on the bill over in the next couple of days. House Republican "leaders" have already publicly announced that they would approve the Senate bill next month and send the bill to the White House later this spring.
Harvard Law professor Elizabeth Warren wrote the following about this special interest-backed abomimation on a temporary "subweblog" on the bankruptcy bill that she has been contributing to over on Josh Marshall's blog:
So the bankruptcy bill moves forward, speeding toward inevitable passage in the Senate and the House. That's good news for credit card companies, particularly those that are loading their cards up with surprise interest rate jumps and a dozen other tricks and traps. Good news for payday lenders, for banks raking in profits on overdraft accounts, and for car lenders that focus on no-credit-check lending. Good news for all of those who squeeze the American family when someone loses a job, gets sick, or otherwise falls behind in a tough economy.
Banks, credit-card companies and retailers have poured money into Republican campaign war chests for the past decade while pushing for this ill-conceived legislation. The demagouges supporting the bill contend that it is "too easy" for consumers to run up debt and then use bankruptcy protections to bail themselves out.
The Senate bill would limit the ability of individuals to use a liquidation under chapter 7 of the U.S. Bankruptcy Code to eliminate credit-card debt or certain loans. It would require those with the means to pay some of their debts to file under chapter 13 of the Bankruptcy Code, which requires that the debtor propose a plan for repayment of a portion of his debts from future income.
On the other hand, wealthy individuals will not be affected all that much by the legislation because the bill retains many of the same exemptions that can be used to shelter valuable assets from the bankruptcy estate that is established upon the filing of a bankruptcy case. The new legislation even retains a loophole that permits people to set up so-called "asset protection trusts," which are exempt from being used to pay off debts in a bankruptcy case.
The most important change in the legislation makes it more difficult and expensive for families under heavy debt loaks from filing a chapter 7 liquidation case, which provides the "fresh start" discharge of personal liability for debts that is central to American insolvency law. The new legislation will force more debtors to file Chapter 13 cases, in which the Bankruptcy Court oversees a three to five year repayment plan. About 70% of individuals currently filing for bankruptcy do so under chapter 7.
The legislation does retain the liberal real estate homestead exemption of Texas and several other states, which allows wealthy debtors to come out of a bankruptcy case retaining the value of their high-priced homestead. However, the legislation does limit the exemption by requiring that debtors own their homes for 40 months to qualify for the exemption.
During yesterday's Senate debate on the bill, the Senate also rejected efforts to drop the loophole in the legislation that permits wealthy people to protect assets by opening special trust accounts in several states, including Alaska, Delaware, Rhode Island, Nevada and Utah. Doctors in those states have been setting up these asset-protection trusts for years to protect themselves from potential malpractice liability, and many business executives are now doing the same out of concern for potential liability for corporate accounting scandals. Experts estimate that approximately 1,500 domestic asset-protection trusts holding more than $2 billion in assets were created between 1997 and 2003.
Finally, the reform legislation also provides a potential procedural nightmare for bankruptcy courts in that it imposes a strict "means test" to assess whether a prospective debtor would be allowed to liquidate under chapter 7, and adds new paperwork and legal burdens on debtors' lawyers that will undoubtedly increase the cost of filing bankruptcy.
Make no mistake about it, I am against this bankruptcy "reform" legislation because it is an ill-conceived modification of a well-thought out but underappreciated bankruptcy system that contributes much to the strength of the American economic system. The "fresh start" of a bankruptcy discharge encourages entrepreneurs to take risk and create businesses and jobs, and gives individuals hope that they can rebound from a financial disaster to rebuild wealth for their families. I, for one, am not interested in giving that system away for the parochial benefit of the credit card industry.
Meanwhile, as Republican legislators harp about this "business-friendly" bankruptcy legislation, the Bush Administration's criminalization of business continues unchecked. When are business leaders going to wake up and realize that the marginal benefit to business interests of "reforming" bankruptcy legislation pales in comparison to the damage done by the federal government's increasing regulation of business through criminalization of merely questionable business transactions?
March 8, 2005
Dr. Michael DeBakey is Houston's most famous physician and one of the most reknowned of the post-World War II generation of doctors who changed the way medicine was practiced in the world. But in this Wall Street Journal ($) article, Dr. DeBakey is something entirely different -- a model for longevity and good health:
[L]ong a role model for physicians, [Dr. DeBakey] now can serve as a role model for another group: anyone turning the corner on what used to be called old age. In 1965, Dr. DeBakey appeared on the cover of Time magazine. He was 56. Almost 40 years to the month later, the 96-year-old remains a player in the field of medicine, his most recent article ("Kismet or assiduity?") having appeared only last month in the journal Surgery.
Entering the room, Dr. DeBakey looked only slightly older than he did in photographs taken decades ago. Sitting down, he poured himself a cup of coffee with a steady hand. For anyone who wrestles with the health implications of caffeine, this gesture might have borne significance, except that during the two hours we spoke Dr. DeBakey barely took a sip of it. "This will be my only cup of the day," he says, touting moderation.
His hearing was sharp; I never repeated a question. . .
His personal habits largely parallel what doctors order. He always has been a light eater, and on most days takes only one meal, dinner, often consisting of a salad. "My wife is a great salad maker," he says. Though he doesn't take vitamins or engage in what he calls "formal exercise," he walks from place to place, putters around the garden and chooses stairs over elevators. He is on no medications, doesn't drink and never smoked. His military uniform still fits him perfectly.
Interestingly, Dr. DeBakey views the key to his longevity and health to be something that the medical profession often characterizes as damaging to health -- hard work and stress:
But here is what Dr. DeBakey sees as the real secret to his longevity: work. He rises at five each morning to write in his study for two hours before driving to the hospital at 7:30 a.m., where he stays until 6 p.m. He returns to his library after dinner for an additional two to three hours of reading or writing before going to bed after midnight. He sleeps only four to five hours a night, as he always has.
But isn't stress harmful? In the Time magazine article of 40 years ago, Dr. DeBakey expressed scorn for the alleged ill effects of stress: "Man was made to work, and work hard. I don't think it ever hurt anyone," he said then. Now, that quote elicits a sheepish smile from him. "I was being provocative," he says.
Although he concedes now that stress can be damaging, he also believes that work is underrated as a health tonic. "What we call stress is sometimes stimulating and can bring out the best features in our makeup," he says, adding that no vacation spot could ever prove as relaxing for him as did the operating room. "Work can block out the unpleasant things we have to deal with every day. When you concentrate, you are not distracted by the things that are bothering you."
My anecdotal experience with my late father -- Dr. Walter Kirkendall -- certainly supports Dr. DeBakey's views. Walter worked as a professor of medicine at the University of Texas Medical School in Houston literally up to the day he died suddenly of a heart attack in 1991. Although stress arguably played a role in his sudden death, Walter's work during his final years was a large part of what sustained him, giving him the focus and purpose of a much younger man. Walter would not have wanted to live his life in any other way.
The examples of Walter and Dr. DeBakey remind us that the motivation to excel in what we do is inextricably tied to our will to live.
On the heels of Warren Buffett's annual letter to Berkshire Hathaway shareholders that was silent on such matters, federal and state investigators are focusing on whether a four year old transaction between Berkshire Hathaway's General Reinsurance Corp. and American International Group Inc. transferred sufficient risk to AIG to allow the company to account for it as an insurance policy. Here is an earlier post on this investigation.
AIG booked the transaction as insurance, which increased its premium revenue by $500 million and added another $500 million to its property-casualty claims reserves. Generally accepted accounting principles require insurance and reinsurance transactions to transfer significant risk from one party to another if either party accounts for the transaction as insurance. Absent risk transfer, such transactions must be booked as financing, which defeats the purpose of the transaction. In the General Re-AIG deal, $600 million of potential losses were transferred from General Re to AIG in return for the $500 million premium paid by General Re. Investigators are evaluating whether the risk transfer was illusory based on the structure of the transaction. AIG confirmed last month that the Securities and Exchange Commission, the Justice Department, and New York Attorney General Eliot Spitzer's office are examining its accounting for certain reinsurance contracts.
You know, doesn't all of this sound eerily similar to this case?
March 7, 2005
In this earlier post on why some Major League Baseball teams are chronically bad, I noted that the Stros have consistently been one of the better Major League Baseball teams during the Bidg-Bags era. On the other hand, during the latter part of that era, the Tampa Bay Devil Rays have been one of the worst MLB teams. This St. Petersburg Times article reviews the futility that permeates the Devil Ray franchise:
Wednesday is the 10-year anniversary of the awarding of the Major League franchise to Tampa Bay, but there is little to celebrate. After seven seasons, the Devil Rays have been losers on the field, failures at the gate, and criticized by business publications, baseball experts and their own fans as prime examples of how an organization should not be run.
What went wrong? Well, interestingly, the same things that doom many startup businesses. The club (business) was undercapitalized from the beginning. Management was inexperienced, which resulted in multiple bad personnel decisions. To make matters worse, a poor business entity structure made it virtually impossible to replace the incompetent management. Finally, the fan (customer) base turned out to be a mirage and no one enjoys going to the Tampa ballpark (store). Beyond that, the club (business) is doing just fine:
Forbes magazine labeled the Rays the "most horrific" franchise of the modern era and the "worst-managed organization" in baseball. Sports Illustrated called them the "worst run franchise in the game." The Sporting News pronounced them in need of "a new owner, a new general manager and a new ballpark in a new city."
They have been the subject of contraction speculation, rumors of financial ruin and punchlines by late-night TV hosts.
Their best hitter, Aubrey Huff, has referred to them as "basically a joke." One of their former general partners, Bill Griffin, says ownership is like "managing a war with too little resources." And one of their current investors, Gary Markel, says he isn't excited about the upcoming season because "we're going to get killed."
How's that for spring training optimism?
Hat tip to Professor Sauer over at the Sports Economist for the link to the article and for making all Stros fans feel a bit better after a tough off-season.
Just thought I would pass along this picture of Phil Mickelson's pitch shot on the 18th hole that lipped out yesterday and prevented a sudden death playoff between Mickelson and Tiger Woods, who regained the No. 1 World Golf ranking with his victory over Mickelson.
I watched the Woods-Mickelson match yesterday afternoon while working, and the match was so entertaining that it made it seem as if I was not working.
The Texas Public Policy Foundation provides this timely review of the development of asbestos litigation, which is a current hot reform issue in both Washington and Austin.
This Washington Post article reports on drug-coated stents, which are allowing an increasing number of people to avoid having heart bypass surgery. The new generation of tiny, drug-coated metal scaffolds prop open arteries and slowly release medication that prevents the arteries from from reclogging. Check it out.
Uber-investor Warren Buffett's 2004 performance letter to Berkshire Hathaway, Inc's shareholders was published over the weekend. While citing such diverse characters as W.C. Fields and Jesus Christ, Mr. Buffett accepted blame for a drop in Berkshire's 2004 earnings. Here is a prior post about Mr. Buffet's letter from last year.
Mr. Buffett candidly admitted the following:
My hope was to make several multibillion dollar acquisitions that would add new and significant streams of earnings to the many we already have, But I struck out.
As a result, Berkshire's change in book value increased only 10.5% in 2004, lagging behind that of the S&P 500-stock index's 10.9% return, a performance that Mr. Buffett characterized as "lackluster." However, it's important to remember that Berkshire generated that return while remaining quite liquid -- the company has $40 billion in cash reserves earning a small return, but putting the company in an enviable position to make acquisitions. Unfortunately, Mr. Buffett commented that there are currently "very few attractive securities to buy," continuing a theme that was also used in last year's letter.
Mr. Buffett's currency investments allowed him to include the quote from W.C. Fields in his report. Inasmuch as Berkhire's bets nearly doubled in 2004 to $21.4 billion, Mr. Buffet quoted Mr. Fields' famous comment to a a beggar's approach: "Sorry, son, all my money's tied up in currency."
Mr. Buffett also criticized U.S. policy makers for the growing current-account deficit and warned that net ownership of U.S. assets by foreign countries over the next decade will amount to about $11 trillion if account deficits continue at current levels. He did not explain why he thought that it was a bad idea for foreigners to overpay for U.S. assets.
Somewhat surprisingly, Mr. Buffett's letter did not mention investigations by state and federal regulators into transactions between insurance clients and Berkshire's General Re and other company reinsurance subsidiaries. Those investigations are examining whether some companies have used finite-risk insurance to hide financial obligations and make their results appear stronger than they actually are. You know, sort of like the criminalization of structured finance transactions of Enron fame.
Mr. Buffett also quoted Scripture in defending the independence of Berkshire's board, which includes several Buffett family members and their friends, including Microsoft Corp.'s Bill Gates. Mr. Buffett contends that the board members' substantial holdings in their own companies' stock aligned them with the interests of other shareholders, and then cited Matthew 6:21, in which Jesus is quoted as saying "For where your treasure is, there will your heart be also." Mr. Buffett concluded that "measured by the biblical standard, the Berkshire board is a model."
The venerable Louisiana bank, Hibernia Corp., has agreed to be acquired by McLean, Va.-based Capital One Finance Corp. in a $5.35 billion deal that allows one of the nation's leading credit card issuers finally to enter the retail banking industry. With a market value of approximately $20 billion, Cap One is nearly five times Hibernia's size.
Hibernia is a Louisiana institution that established in the post-Civil War years. It became best known during the Great Depression, when the late Louisiana Governor and demagogue Huey Long leaned on Hibernia and other banks to finance huge public works projects for the construction of bridges, roads and other infrastructure in Louisiana during the 1930s. Hibernia has more about $22 billion in assets, about 300 branches and operations in Texas, Louisiana and Mississippi.
Cap One's acquisition is a clear response to a shrinking market share in the credit card business, where competitors such as Bank of America Corp. have invested billions in new products over the past several years. That's why your and my teenage children continue to receive so many solicitations for credit cards in the mail. Acquiring a retail bank will give Cap One low-cost retail deposits, which it can then use to generate loans at more profitable interest rates to its borrowers.
Hibernia's banking operation will will fit nicely into Cap One's business, which also provides financial services such as health insurance and personal loans. Cap One was also attracted to Hibernia's presence in the Texas banking market, which is growing much faster than Louisiana's market. The deal is is expected to close by the third quarter of this year. Hibernia shareholders will receive $33 for each of their shares, split into roughly half cash and half Cap One stock, which means that Hibernia stockholders will receive about a 24% premium on their shares' $26.57 price on the New York Stock Exchange as of this past Friday.
March 6, 2005
In its first decision since the U.S. Supreme Court's decision in U.S. v. Booker that overruled the mandatory nature of the federal sentencing guidelines, the Fifth Circuit Court of Appeals on this past Friday explained how Booker issues are to be handled within the Fifth Circuit in its opinion in United States v. Mares. Interestingly, the opinion notes that it was circulated among the judges of the circuit and changed to reflect their comments. Here are the prior posts over the past year on the Booker decision and the developing case law regarding the federal sentencing guidelines.
The Booker analysis in the opinion has two basic parts. First, the Fifth Circuit explains how the sentencing guidelines are to be applied post-Booker. Second, the Court establishes the plain error analysis that it will use in analyzing future Booker issues.
The following is how the Fifth Circuit described the Booker issue in Mares:
Mares? sentence was enhanced based on findings made by the judge that went beyond the facts admitted by the defendant or found by the jury. The jury found that Mares, a felon, possessed ammunition. The judge enhanced the sentence based on his finding that Mares was involved in a felony when he committed the offense.
In regard to the sentencing guidelines under Booker, the Fifth Circuit states as follows:
Even in the discretionary sentencing system established by Booker/Fanfan, a sentencing court must still carefully consider the detailed statutory scheme created by the SRA and the Guidelines, which are designed to guide the judge toward a fair sentence while avoiding serious sentence disparity. Although Booker excised the mandatory duty to apply the Guidelines, the sentencing court remains under a duty pursuant to § 3553(a) to ?consider? numerous factors. . .
If the sentencing judge exercises her discretion to impose a sentence within a properly calculated Guideline range, in our reasonableness review we will infer that the judge has considered all the factors for a fair sentence set forth in the Guidelines. Given the deference due the sentencing judge?s discretion under the Booker/Fanfan regime, it will be rare for a reviewing court to say such a sentence is ?unreasonable.?
When the judge exercises her discretion to impose a sentence within the Guideline range and states for the record that she is doing so, little explanation is required. However, when the judge elects to give a non-Guideline sentence, she should carefully articulate the reasons she concludes that the sentence she has selected is appropriate for that defendant. These reasons should be fact specific and include, for example, aggravating or mitigating circumstances. . .
Then, in regard to the particular facts of the Mares case, the Fifth Circuit employed its plain error analysis for Booker issues in rejecting Mares? claim of plain error:
An appellate court may not correct an error the defendant failed to raise in the district court unless there is ?(1) error, (2)that is plain, and (3) that affects substantial rights.? Cotton, 535 U.S. at 631. ?If all three conditions are met an appellate court may then exercise its discretion to notice a forfeited error but only if (4) the error seriously affects the fairness, integrity, or public reputation of judicial proceedings.? Id.
The third factor is the most important in that it requires the defendant to show that the trial court's error affected the outcome and that it undermined confidence in the outcome. On this particular point, the Fifth Circuit enunciated a difficult burden for the defendant to fulfill:
Since the error was using extra verdict enhancements to reach a sentence under Guidelines that bind the judge, the pertinent question is whether Mares demonstrated that the sentencing judge - sentencing under an advisory scheme rather than a mandatory one - would have reached a significantly different result.
Based on the record before us, we reach the same conclusion ... We do not know what the trial judge would have done had the Guidelines been advisory. Except for the fact that the sentencing judge imposed the statutory maximum sentence of 120 months(when bottom of the Guideline range was 110 months), there is no indication in the record from the sentencing judge?s remarks or otherwise that gives us any clue as to whether she would have reached a different conclusion. Under these circumstances the defendant cannot carry his burden . . .
Finally, the Court noted the split that is developing among the circuit courts in handling post-Booker decisions, with the Fourth and Ninth Circuits taking a different approach in remanding post-Booker cases than the First, Fifth and Eleventh Circuits are taking.
Although certainly not a slam dunk, my sense is that the Mares decision is a reasonably favorable one for both Jamie Olis -- who is serving an unjust 24 year sentence -- and the Nigerian Barge defendants, who would be facing mandatory sentences of similar length but for the Booker decision. U.S. District Judge Sim Lake made comments during Mr. Olis' sentencing that clearly indicated that he was troubled by the length of the sentence that the then mandatory sentencing guidelines required him to impose. Similarly, U.S. District Judge Ewing Werlein is a man of fairness and depth who will not hesitate -- if he concludes that the circustances of the Nigerian Barge case so warrants -- to make the findings necessary to impose lesser sentences on the Nigerian Barge defendants than those recommended under the sentencing guidelines.
You know, some things are just different in Manhattan.
It's never easy to defend a personal injury case in certain parts of Texas, and Crystal City in Zavala County is one of them.
This San Antonio Express-News article reports on a case in Crystal City (between San Antonio and Eagle Pass) in which a jury last week awarded $28 million to a plaintiff against Ford Motor Co. in a rollover case. In an almost unbelievable development except that this is Zavala County, the trial was interrupted earlier when Ford lawyers discovered that one of the jurors was the girlfriend of one of the plaintiffs' lawyers. Moreover, in a hearing over a defense motion for a mistrial, Ford presented evidence that the girlfriend -- who happens to be the Crystal City city manager (it's a very small world in Zavala County) -- had also solicited two of the plaintiffs for her boyfriend to represent in the case!
Incredibly, the trial judge denied Ford's motion for a mistrial. So it goes in small town South Texas.
Will the plaintiff's lawyer's failure to disclose that the juror was his girlfriend receive a more appropriate response from the State Bar of Texas? Stay tuned.
That's the name of a segment on "60 Minutes" this evening, according to this Washington Post article, which examines the ongoing criminal investigation in Austin over House Majority Leader Tom DeLay's involvement in various campaign finance violations. Here are the previous posts on the investigation of Mr. DeLay.
Update: Here is the transcript of the 60 Minutes segment.
March 5, 2005
On the heels of BofA's settlement earlier in the week, more "courthouse steps" settlements in the WorldCom shareholder class action lawsuit took place on on Friday as four investment banks settled claims arising from their involvement in underwriting bond sales that were based in part on WorldCom's false financial statements.
Under the latest settlements, Lehman Brothers Inc. settled for $62.7 million and Credit Suisse First Boston, Goldman, Sachs & Co. and UBS Warburg LLC each settled for $12.54 million. All four participated as underwriters in WorldCom's May 2000 bond offering. Among the 10 institutions that remain in the litigation are JPMorgan Chase & Co. and divisions of Deutsche Bank AG and ABN AMRO Bank.
I knew that Sammy Sosa had a bad season last year, at least by his standards. However, you know that it was a really bad season when it costs the owners of the club three cents a share.
This NY Times article reports on the concern in Houston business circles about Houston-based Citgo Petroleum Corp.'s status as the political football of choice for Hugo Chávez's Venezuelan government, which has controlled Citgo since government-owned Petróleos de Venezuela acquired a controlling interest in the company in 1990.
Basically, Mr. Chávez and his government have promoted popular sentiment in Venezuela against Citgo's links to the United States while, at the same time, taking actions that indicate that the government is going to exercise greater control over the company. Citgo brands its name to over 14,000 independently owned gas stations in the U.S. and generates about 15 percent of the U.S. oil refining output.
About a month ago, Chávez fired Citgo's chief executive Luis Marín and replaced him with Felix Rodríguez, who is a senior executive at Petróleos de Venezuela and a political hack for Mr. Chávez. Then, last week, Petróleos de Venezuela purged the entire Citgo board of directors and replaced them with another group of Mr. Chávez's political supporters.
Although the Times article tends to view the Venezuelan government's control of Citgo as perilous to the U.S. energy market, I'm not buying it. Frankly, it is far more likely that Mr. Chávez and his government will make bad decisions regarding Citgo, which will present opportunities for its competitors.
March 4, 2005
As an aside, it is always remarkable to me the amount of time that both the prosecution and the defense take in presenting closing arguments in these high profile criminal cases. Although the article on the closing arguments does not disclose the exact amounts of time expended, my sense is that both sides spent hours in front of the jury on closing argument. That is a dubious strategy, and one which tired jurors will often hold against a lawyer and his client. If a lawyer has not persuaded the jurors of the validity of the lawyer's theory of the case by the time of closing argument, then spending hours on end attempting to drum it into them will more likely alienate the jury than anything else.
In two weeks, the trial cranks up of claims by investors and creditors who lost billions in the WorldCom accounting scandal against WorldCom's former underwriters, outside directors, and Arthur Andersen. Consequently, over the next several weeks, there will probably be a series of "courthouse steps" settlements announced as the defendants in that litigation hedge their risk of a huge judgment for damages if they elect to go to trial. Yesterday, the first of such settlements was announced as Bank of America Corp. agreed to pay $460.5 million to settle the claims against it in the litigation.
The plaintiffs in the class action essentially allege that Bank of America and the other underwriters failed to conduct adequate due diligence in regard to about $17 billion of WorldCom bonds that were issued in the early part of this decade. Citigroup Inc. agreed to pay $2.65 billion to settle its portion of the lawsuit in May 2004. The Bank of America and Citigroup settlements increases the price of poker for the 14 other underwriters in the lawsuit, who now face the prospect of having to pay a larger share of damages if they risk taking the case to trial.
The Bank of America settlement increases the settlement pot in the WorldCom class action $3.04 billion. In comparison, the similar class action litigation involved in the Enron case has generated a settlement pot of only about $500 million to date. The Enron case remains mired in the discovery phase with a trial date currently scheduled for some time in mid-2006.
In its public statement announcing the deal, BofA denied violating any laws and added that it settled solely to hedge the risk of litigation. For their part, the plaintiffs' representative in the lawsuit stated that Bank of America settled under the same formula used in the Citigroup settlement, which other underwriters protest because of their more limited role in WorldCom offerings. Under that settlement formula, J.P. Morgan -- another underwriter defendant in the litigation -- would have to pay about $1.3 billion in a settlement. Last year, J.P. Morgan set aside $2.3 billion of a $4.7 billion litigation reserve to cover the potential costs of litigation stemming from its role in arranging financing for Enron and for WorldCom.
Bank of America has been aggressive than most big underwriters in settling big class action claims over the past year. During that time, BofA has agreed to pay about more than $1 billion in settlements of various investment banking and trading claims. For example, in July 2004, BofA agreed to pay $70 million to settle claims against it in the Enron class action for its relatively limited role as an underwriter of various Enron deals. Similarly, earlier this year, the bank paid just south of $700 million in restitution, penalties, and reduction of fees consideration to settle various civil claims that it favored certain investors in engaging in "market timing"-trading and late trading of mutual funds.
March 3, 2005
On the heels of this earlier interview, don't miss this Dartmouth Review article reporting on the recent "just war" debate between Professor Hanson and popular Dartmouth adjunct history professor Ronald Edsforth. Included in the article is this interesting report:
Edsforth proposed that the human race has learned the dangers of war, especially after the blood-soaked twentieth century. ?Evolution [of human behavior] is a fact,? he said. ?It didn?t stop back in ancient times? We are capable of learning as humans and changing our environment in such a way that that which we abhor is less and less likely.? . . . He proposed that the United States adopt a foreign policy for ?the twenty-first century, not the fifth century B.C., not the nineteenth century, not 1941.? The world sees ?war as a legacy of the imperialist era,? he added.
Hanson, though, maintained that the human race has not changed significantly in the past several thousand years. ?Human nature is set,? he said?it was ?primordial, reptilian,? adding that man is always ?governed by pride and fear and envy.? He cited Thucydides, who wrote that his works would remain valid through the ages precisely because human nature is unchanging. ?We have not reached the end of history.?
Whether human opinion changes is irrelevant to the question of human nature, Hanson said; . . .
At a question-and-answer session at the end of the debate, this view of human nature was the subject of much disdain by many members of the audience. One fellow questioned whether ?you and Homer and Thucydides two-thousand years ago? were cut out for modernity. Another asked Hanson when the war in Iraq would come to end??when will we reap the benefits of preemptive war???and wondered whether ?Pericles would have any advice for defeating suicide bombers in an urban environment.? Actually, Hanson retorted, the juxtaposition was poorly-chosen, as Peloponnesian War lasted for ?twenty-seven and a half years.?
During one of the lighter moments, Hanson jokingly observed that the Iraq war had made some unlikely allies. ?I never thought in my lifetime that Noam Chomsky and Pat Buchanan would have an alliance of convenience,? he said, smiling.
One of the only good provisions of the bad Bankruptcy Reform legislation -- the anti-forum shopping provision for business bankruptcies -- was pulled out of the Senate bill yesterday in what appears to be a political deal between Texas Senator John Cornyn and Delaware Senator Joseph Biden to protect Texas' liberal homestead exemption law and Delaware's favored nation status for business bankruptcies.
This proposed legislation is the quintessential example of poorly-concieved special interest legislation. Outside of the credit card industry, there is no meaningful public support for these proposed reforms of the U.S. Bankruptcy Code, which is the preferred model for emerging countries to use in establishing their own insolvency and business reorganization systems. A radical overhaul of such a successful system is not only unnecessary, but unwise.
However, the credit card industry has contributed large amounts of cash to the campaign war chests of many Republican legislators, and the industry is now expecting a return on that investment in the form of this bad legislation. Remember that next time you are considering a vote for either Mr. Cornyn or Kay Bailey Hutchison, both of whom are supporting this abomination despite an extraordinary number of appeals to them from experts and professionals in the insolvency and reorganization field to do the right thing and reject this legislation.
Probably not, but this Washington Post article notes sure signs that the DeLay camp is concerned.
This Weekend Advisor column in the Wall Street Journal ($) advises us that the market for books on the Enron scandal has not been all that great. The best book on the subject to date -- Bethany McLean and Peter Elkind's Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio 2003) -- has sold only 75,000 hardback copies, which is not a great showing considering the $1.4 million advance paid to the authors. Heck, that number indicates that only a small portion of the lawyers involved in the Enron case have bought the book.
At any rate, publishers -- who never want to give up on an opportunity to hammer the Capitalist Roaders -- have concluded that the lackluster sales in regard to Enron books is because of reader fatigue. That is, the Enron story has been around for so long that casual readers have become bored by it all and have moved on to other matters. That's probably correct, although many of the previous media accounts of Enron have followed such a familiar script and lacked any real insight that even avid business scandal readers have become bored by it all.
Thus, Random House's Broadway Books is going to try a new tactic in regard to the newest book on the Enron saga. On March 14, Broadway is releasing the long-awaited (at least by folks involved in the case) book on the Enron scandal by NY Times reporter Kurt Eichenwald, who has covered the Enron scandal from Day One. In so doing, the publisher hopes to break through the fog of Enron books by marketing Conspiracy of Fools to the John Grisham-novel crowd as a "true-crime thriller" rather than a business book. The name "Enron" appears no where on the book jacket and, although the book is nonfiction, the publishers hired well-known mystery novel editor Stacy Creamer to edit the book.
So, while publishers and other mainstream media types attempt to tell the Enron story in fashionable manner, the truly compelling human stories continue to be largely ignored -- the sad case of Jamie Olis, the federal government blithely depriving thousands of innocent people their jobs by pursuing a dubious prosecution that put Arthur Andersen out of business, the "Justice" Department sledgehammering businesspeople into pleading guilty to questionable criminal charges out of fear of receiving of what amounts to a life sentence if they risk asserting their Constitutional right to a trial, or how the traditional form of corporate governance contributed to Enron's collapse. Analysis of these more interesting, but admittedly harder, issues has been largely left to the world of blogs.
Nevertheless, Broadway is certainly bullish on the new book's prospects. It has ordered 127,500 copies of the book and engineered a pre-release publicity campaign, which includes a desk drop of 1,000 copies to prominent CFOs and CEOs. Broadway's release of 10,000 early copies of the book is the largest prerelease print of any Random House book since The Da Vinci Code.
By the way, Mr. Eichenwald's last true-crime book -- The Informant -- is currently being made into a movie in which Matt Damon will play the mole who uncovers a price-fixing scheme at Archer-Daniels-Midland.
H'mm, Matt Damon as Andy Fastow? What do you think?
March 2, 2005
Temple University mathematics professor John Allen Paulos, author of Innumeracy (Hill 2001) and the more recent A Mathematician Plays the Stock Market (Basic 2003), wrote this insightful Wall Street Journal ($) op-ed yesterday in which he describes how even a bright mathematics professor who knows better can get caught up in the irrational exuberance of a stock bubble:
Bernie Ebbers's testimony yesterday that he emphatically was not aware that his accountants were cooking WorldCom's books while he was CEO brought back unpleasant memories of my disastrous "relationship" with the man. It began in 2000, when I received a small and totally unexpected sum of money. I considered it "mad money," a term that, in retrospect, seems all too appropriate. Nothing distinguished the money from my other assets except this private designation, but being so classified made my modest windfall more vulnerable to whim. In this case it entrained a series of ill-fated, and much larger, investments in what WorldCom's ads called "the pre-eminent global communications company for the digital generation."
Professor Paulos goes on to explain how his limited research into WorldCom validated his interest in the stock, so he bought a few shares. And then:
After buying the initial shares, I found myself idly wondering, Why not buy more? I didn't think of myself as a gambler, but I willed myself not to think, willed myself simply to act, willed myself to buy more shares of WCOM, shares that cost considerably more than the few I'd already bought. Usually a hard-headed fellow, I nevertheless succumbed to confirmation bias, looking disproportionately hard for what made my investment look good and essentially ignoring everything that made it look bad. This wasn't difficult, given the stellar reports and strong buy recommendations that analysts kept bringing forth. In any case, I fell in love with the stock and saw every drop in its price as bringing about an even better buying opportunity. So-called averaging down (buying more shares when the price drops) is often indistinguishable from catching a falling knife, and in my case the result was thoroughly bloody hands.
Unfortunately, Professor Paulos found his initial bias toward the WorldCom stock hard to shake:
I'd grown tired of carrying on one-sided arguments with TV and online commentators as they delivered relentlessly bad news about WorldCom. So, in late fall 2001, some six months before its final swoon, I contacted a number of them and, having spent too much time in the immoderate atmosphere of WorldCom chatrooms, I chided them for their shortsightedness and exhorted them to look at the company differently.
Finally, out of frustration with the continued decline of WCOM stock, I even e-mailed Bernie Ebbers in early February 2002, suggesting that the company was not effectively stating its case and quixotically offering to help in any way that I could. WorldCom, I fatuously informed him, was well positioned, but dreadfully undervalued.
Even as I was writing them, I knew that sending these electronic epistles was absurd, but it gave me the temporary illusion of doing something about the free-falling stock. The realization that doing so had indeed been a no-brainer was glacially slow in arriving, and I didn't dump it until April 2002, after it had lost almost all value. I gradually woke from this nightmarish infatuation with WorldCom to wonder how it had transformed me from a prudent investor in low-fee index funds into a monomaniacal speculator in a single dubious company.
Mr. Paulos concludes by answering his own question in the context of the ongoing sriminal trial of Mr. Ebbers:
Whatever the [Ebbers] trial's outcome, however, I've long since come to a verdict on my behavior: guilty of stupidity in the first degree. No jail term, just a very substantial fine.
Yet, the ever-insightful Professor Ribstein notes in this post that attempting to deter this type of investor bravado through government regulation really just ensures that such irrational exuberance will eventually reappear:
A cause of the recent frauds is investors' belief that they can outguess the market. Unfortunately, this erroneous belief is perpetuated and entrenched by court decisions and regulation that convey the impression that the markets are, again, safe for this foolish activity.
Quoting from a draft of his paper, Market v. Regulatory Responses to Corporate Fraud, 28 J. Corp. L. 1 (2002, Professor Ribstein observes:
Corporate frauds arguably were facilitated because there was too much investor confidence, as indicated by investors' willingness to ignore what the market knew about questionable accounting and to not question firms' extravagant claims about unproven business plans. Overselling regulation might perpetuate this misjudgment and mislead investors back into the same complacency that contributed to the recent frauds.
Ian Woosnam will be announced today as the captain of the European team in the 2006 Ryder Cup competition that will be played at Kildare Golf and Country Club, Straffan, County Kildare, Irelandin Ireland.
Just what we need -- a former boxer leading the European team as it kicks the American team's ass again.
Eight former Afghan and Iraqi prisoners represented by the American Civil Liberties Union and Human Rights First have filed a federal lawsuit (bugmenot login: "colinsearle" pword: "bristol") in Illinois seeking unspecified damages against Defense Secretary Donald Rumsfeld for authorizing abuse of prisoners in violation of the U.S. Constitution and international law. The plaintiffs contend that they were never combatants against the U.S. and eventually were released without any charges being filed against them.
In what seems like a weekly event, the Justice Department is investigating whether former employees of Houston-based Halliburton Co. conspired with other companies to rig bids for large overseas construction projects. Halliburton disclosed the bid-rigging investigation in its annual 10K filing with the Securities and Exchange Commission. This new antitrust investigation has grown out of an earlier investigation into whether a consortium of companies bribed Nigerian officials to win a lucrative contract to build a liquefied natural-gas plant there.
Although Halliburton is a major provider of oilfield services, it also owns the giant construction and government-contracting unit called Kellogg Brown & Root. KBR is one of the world's largest overseas construction firms and specializes in building large and complex projects in foreign countries. Halliburton announced in late 2004 that it would likely sell its KBR unit, but that such a sale would take considerable time to finalize and consummate.
The antitrust and Nigeria investigations are focused on Albert J. "Jack" Stanley, who was the former chairman of the Halliburton unit Kellogg Brown & Root. Halliburton canned Mr. Stanley this past June for allegedly receiving improper payments from an agent of the Nigeria construction consortium. The Justice Department is looking into Mr. Stanley's activities dating back to the mid-1980s when he worked for construction firm M.W. Kellogg. Dresser Industries acquired Kellogg in 1988 and then Halliburton bought Dresser in 1998 while U.S. Vice-President Dick Cheney was CEO of Halliburton.
This current probe is just one of many investigations that are confronting Halliburton, which appears to be defense lawyer's dream client. Another federal grand jury is investigating whether the company violated U.S. sanctions against doing business in Iran, while another investigation is attemptting to determine whether Halliburton overcharged the U.S. military for running dining halls in Iraq.
You don't say? H'mm. Please pass the potatoes.
March 1, 2005
Despite hiking electricity rates 50 percent in the past four years and disconnecting a record number of customers for failure to pay bills, a Seattle area, publicly-owned utility has become a West Coast hero for, as this Washington Post article puts it, "goring the bankrupt carcass of the disgraced Enron Corp. and spilling buckets of deliciously embarrassing blood."
Snohomish County Public Utility District entered into a costly nine-year contract with Enron in January 2001 during the middle of the West Coast power crisis. At the time, the spot-market cost of regional power had spiked more than a hundred-fold due primarily to dysfunction related to dysfunctional deregulation of power markets. Snohomish's deal with Enron committed the utility to buy power at three times the cost of any previous long-term contract and about four times the historical rate for electricity in the Pacific Northwest. As a result, the utility had to increase rates substantially to its 295,000 customers.
When Enron filed bankruptcy late 2001, Snohomish seized the opportunity to terminate the Enron contract, which by that time was over-market. Enron's bankruptcy estate filed an illegal termination claim against the utility seeking $122 million in damages for lost profits from the terminated contract.
Rather than simply fight the Enron lawsuit on technical legal grounds, Snohomish took a more creative approach -- the utility sought to obtain through discovery audiotapes of hours of ludicrously obnoxious conversations between Enron power traders during the West Coast power crisis of 2000-2001. The Justice Department had seized the tapes in connection with its criminal investigation into Enron, and a federal judge eventually ordered the government to turn copies of the tapes over to the utility.
The tapes proved to be a gold mine for Snohomish, which has spent about $200,000 over the past year on a team of transcribers who are transcribing more than 2,800 hours of recordings. The first transcriptions of the cynical conversations were released this past June and created a firestorm of media attention even in this Enron-soaked media environment. The utility has continued to release damning transcripts to the public periodically since that time.
Nevertheless, it's far from clear that the discovery of the obnoxious Enron trader conversations will have any effect whatsoever on the legal question of whether the Snohomish is liable for the $122 million in damages to the Enron estate. That issue remains pending before a federal administrative judge and a decision is expected later this year. Consequently, the entire affair may turn out to be a $122 million anti-Enron public relations campaign for the utility, which commonly receives emails from its customers such as this one quoted in the WaPo article: "I just want to say, 'You guys rock!'"
I wonder if that customer will have the same reaction if he has to pay his $420 share of the utility's anti-Enron P.R. campaign cost?
So, in anticipation of reviewing this year's edition, I cruised over to the Baseball Prospectus ($) website to check things out, only to find Joe Sheehan dropping some serious bad karma on the Stros. After identifying the Indians as the team most likely to take a big step forward this season, Mr. Sheehan votes the Stros most likely to take a big step in the other direction:
The flip side of the Indians' story is that of the Astros. Their Cinderella run from seventh in the wild-card chase to the seventh game of the ALCS was one of '04's great stories. It also provided an object lesson in how the length of the baseball season makes fools of those of us who make broad statements based on how things look at any point in time.
On February 28, though, it's hard to see how the Astros can repeat last year's success. They are going to lose a ton of runs from even last year's average attack--seventh in the NL in EqA. Carlos Beltran is gone. Jeff Kent is gone. Their best hitter, Lance Berkman, is going to miss at least a few weeks rehabbing a knee injury. Jeff Bagwell and Craig Biggio are a year older. Even in the best-case scenario, where Chris Burke and Jason Lane are allowed to win jobs and both hit to expectations, that just makes up for the losses of Beltran and Kent.
After pointing out the Stros' inexplicable continued reliance on Brad Ausmus, and the problems that Bidg creates in blocking the progress of younger players, Mr. Sheehan turns to the Stros' pitching staff:
The Astros aren't going to make it up on the pitching side. Keeping Roger Clemens around just kept them running in place. They still have the same depth issues as they did a year ago, with a host of injury cases and suspects vying to fill out the rotation behind Clemens and Roy Oswalt and the bullpen in front of Brad Lidge. A healthy Andy Pettitte makes up some of that, but there's still the question of whether two starters can be found from among Brandon Backe, Carlos Hernandez, Tim Redding, or even a longshot like Ezequiel Astacio.
Mr. Sheehan concludes with the following ominous warning:
Last year's playoff run happened because the front end of the Astros' roster included some very dominant players. They're down two stars this year, and the likelihood that Clemens and Lidge can match '04's work is slim. They don't have the depth to make up for that kind of slippage. Not only are the Astros unlikely to return to the postseason, I doubt they can stay in contention.
Well, that analysis did not make my day.
I will have more on the Stros later during spring training, but my short retort to the above analysis is that Mr. Sheehan overstates the Stros' problems, just like he did last August in this earlier post. Thus, even the best sabermetricians are not infallible.
Although the Stros are clearly a team in transition from the Biggio-Bagwell era, I'm cautiously optimistic that the club can continue to contend even during this period. Yes, losing Beltran hurt, but as noted here, not as much for the long term prospects of the club as one might think. Moroever, my sense is that the loss of Kent will be nowhere near as big a problem as Mr. Sheehan makes it out to be, particularly if Chris Burke emerges as a solid major leaguer. In fact, if now seasoned veterans such as Ensberg and Everett can become just average National League hitters this season, then that improvement will likely more than make up for any difference in run production between Beltran and his replacement, Jason Lane. Finally, both of the Stros' main National League Central rivals -- the Cardinals and the Cubs -- are notably weaker this season, so I don't see either of those clubs, or the improved Reds, running away from the Stros in the division race.
Consequently, despite Mr. Sheehan's reservations, don't give up on the Stros just yet. This is a club that has been pretty darn good for a very long time, and I don't see it as one that will slide into mediocrity without a good fight. Let's at least wait to see how spring training unfolds.