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March 31, 2005

Meanwhile, in regard to another troubled business

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.

Posted by Tom at 8:06 AM | Comments (1) | TrackBack (0)

Hope for the Warwick?

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.

Posted by Tom at 6:34 AM | Comments (0) | TrackBack (1)

Absolutely Enronesque

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.

Posted by Tom at 5:07 AM | Comments (0) | TrackBack (2)

March 30, 2005

What's going on in Wayne's World?

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.

Posted by Tom at 8:38 AM | Comments (1) | TrackBack (0)

JPMorgan Chase wins a key decision in Enron-related litigation

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.

Posted by Tom at 6:41 AM | Comments (0) | TrackBack (0)

Well, at least it's warmer in Honolulu

After losing out on the Northern State University job in South Dakota, former Oilers coach Jerry Glanville has resurfaced in Hawaii.

Posted by Tom at 6:24 AM | Comments (2) | TrackBack (0)

Baylor Med and M.D. Anderson announce huge new research project

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.

Posted by Tom at 5:34 AM | Comments (0) | TrackBack (0)

Big news for Houston law firms

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.

Posted by Tom at 5:01 AM | Comments (1) | TrackBack (0)

March 29, 2005

James A. Hippard, RIP

One of the true characters of the University of Houston Law Center over the past generation -- James A. Hippard -- died this past Friday at the age of 78 after a long battle with Parkinson's Disease.

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.

Posted by Tom at 6:51 AM | Comments (0) | TrackBack (0)

Meanwhile, the Enron investigation goes on and on and on

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.

Posted by Tom at 5:56 AM | Comments (0) | TrackBack (0)

The Lord of Regulation goes after the Oracle of Omaha

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.

Posted by Tom at 5:04 AM | Comments (0) | TrackBack (0)

March 28, 2005

Stros trade Redding for catching prospect

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.

Posted by Tom at 11:40 AM | Comments (1) | TrackBack (0)

The headhunter business of the Lord of Regulation

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 "assistance" in regard to a governmental investigation.

Posted by Tom at 5:55 AM | Comments (1) | TrackBack (0)

March 27, 2005

But what about this issue?

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.

Posted by Tom at 7:25 AM | Comments (0) | TrackBack (0)

March 25, 2005

Big Game at the Loch

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!

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Tracking the changes in the Bankruptcy Code

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.

Posted by Tom at 6:12 AM | Comments (0) | TrackBack (0)

The Lord of Regulation demands even more from AIG

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.

Posted by Tom at 5:06 AM | Comments (1) | TrackBack (0)

March 24, 2005

The Schiavo case

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.

Posted by Tom at 8:17 AM | Comments (3) | TrackBack (0)

Morgan Stanley tries to fire Kirkland & Ellis in Perelman-Sunbeam litigation

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.

Posted by Tom at 6:14 AM | Comments (0) | TrackBack (2)

Not good legal advertising

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.

Posted by Tom at 5:50 AM | Comments (0) | TrackBack (0)

The Texas City blast

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.

Posted by Tom at 5:07 AM | Comments (0) | TrackBack (0)

March 23, 2005

The real reason why Barry might not play?

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.

Posted by Tom at 7:44 AM | Comments (0) | TrackBack (2)

Professor Ribstein on the Law and Economics of Blogging

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.

Posted by Tom at 7:16 AM | Comments (0) | TrackBack (0)

The real story behind the game

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.

Posted by Tom at 6:13 AM | Comments (0) | TrackBack (0)

Updating the Yukos case -- Yukos throws in the bankruptcy towel

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.

Posted by Tom at 5:02 AM | Comments (0) | TrackBack (0)

March 22, 2005

New Provost named at UH

Anne Linehan over at blogHouston.net alerts us to this University of Houston announcement that Donald J. Foss has been named the University's new Provost.

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.

Posted by Tom at 8:26 AM | Comments (1) | TrackBack (0)

Well, at least it's playing close by

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.

Posted by Tom at 7:06 AM | Comments (1) | TrackBack (1)

Rocket Boy disses the Space Shuttle program

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.

Posted by Tom at 6:17 AM | Comments (0) | TrackBack (0)

Former WorldCom chairman finally settles

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.

Posted by Tom at 5:37 AM | Comments (0) | TrackBack (0)

AIG sacrifices more to the Lord of Regulation

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?

Posted by Tom at 4:57 AM | Comments (0) | TrackBack (0)

March 21, 2005

Meanwhile, on the Tour . . .

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.

Posted by Tom at 7:55 AM | Comments (0) | TrackBack (0)

A Walk in the Park

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.

Posted by Tom at 6:08 AM | Comments (0) | TrackBack (0)

March 20, 2005

John DeLorean, RIP

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.

Posted by Tom at 2:54 PM | Comments (2) | TrackBack (0)

Interesting graph on the historic price of oil

Oil prices are a common theme of many posts on this blog, and this interesting Forbes magazine graph does a great job of placing current oil prices in historical perspective over the past 145 years.

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.

Posted by Tom at 12:06 PM | Comments (2) | TrackBack (0)

More on "Conspiracy of Fools"

Following this earlier excerpt, The New York Sunday Times is running this second excerpt from Kurt Eichenwald's new book on the Enron scandal, Conspiracy of Fools.

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.

Posted by Tom at 11:16 AM | Comments (3) | TrackBack (0)

More on the impact of the Baylor-Methodist split

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.

Posted by Tom at 7:11 AM | Comments (0) | TrackBack (0)

March 19, 2005

Good news from Kissimmee

The Stros have scheduled a news conference for this afternoon in which they will announce that the club and All-Star Lance Berkman have agreed to a six year, $85 million contract.

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<