June 30, 2005
Rogers shoved two cameramen before the Rangers' game against Los Angeles on Wednesday in a videotaped tirade that included throwing a camera to the ground and threatening to break more.
"Kenny is having anger issues right now," Rangers general manager John Hart said. "I don't know what's going on inside. We're responding to something that's very unusual."
Rogers, who missed his last start with a broken pinkie he sustained during an outburst earlier this month, lashed out at the cameramen as they filmed him walking to the field for pregame stretching. He wasn't scheduled to pitch and was sent home by the club following the incidents . . .
The 40-year-old left-hander first shoved Fox Sports Net Southwest photographer David Mammeli, telling him: "I told you to get those cameras out of my face."
Rogers then approached a second cameraman. He wrestled the camera from Larry Rodriguez of Dallas-Fort Worth television station KDFW, threw it to the ground and kicked it.
The 6-foot-1, 210-pound pitcher saw two other cameramen who were recording from the Rangers' dugout and walked toward them. He did not make contact with the men, who were backing away.
"I'll break every ... one of them," Rogers said before he was escorted to the clubhouse by catcher Rod Barajas.
The Rangers sent Rogers home about an hour later . . .
Texas lost eight of nine entering Wednesday night's game.
Rogers, who leads the team with nine wins, has refused to talk to reporters all season. He has also boycotted most media since a report before spring training that he threatened to retire if he wasn't given a contract extension.
But as impressive as Rogers' snit was, Hinn is not backing off. Unimpressed with the number of Nigerians who attended his latest crusade, Hinn went ballistic on the disrespectful Africans:
Whatever disappointment he felt on the first and second days of the miracle crusade, Hinn kept to himself - but he opened up with anger on the final day.
"Four million dollars down the drain," he shouted into the microphone from the huge rostrum.
He said that he had been assured by the local organising committee that at least six million people would attend the crusade - but the total turnout was only around one million. As a result, he realised that all the mega public address equipment he had flown in from the US was not needed.
He also complained about some claimed expenditures, the charges imposed on pastors who attended his day-time seminar, and journalists who sought to cover the crusade.
He then announced publicly that he would not provide any more funds, and that the local organisers should pay all outstanding bills from the collections they made on the first two days.
Winner of the snit contest to be announced in a few days. Hat tip to Chris Elam for the link to the Hinn article.
Over 15 months after opening a criminal investigation into Royal Dutch/Shell Group's overstatement of oil and gas reserves, federal prosecutors announced Wednesday that they will not charge the company in the continuing criminal probe. Here are previous posts over the past year and a half in regard to the reserve estimate mess and related problems that Shell and other energy companies have been confronting as a result of the government's investigation.
Learning from the Department of Justice's dubious decision to put Big Five accounting giant Arthur Andersen out of business through a misguided criminal prosecution, the Department of Justice observed as follows in its statement yesterday:
Because Shell has cooperated fully with the government's investigation, has implemented substantial remedial efforts to enhance its reserves reporting and compliance, and has paid a $120 million civil penalty to the [Securities and Exchange Commission], the public interest has been sufficiently vindicated. Moreover, criminal prosecution would likely have a severe and unintended disproportionate economic impact upon thousands of innocent Shell employees.
However, just to make sure that no one should jump to the conclusion that the DOJ is backing off its questionable policy of prosecuting agency costs, David Kelley, the U.S. Attorney for the Southern District of New York, confirmed in an interview yesterday that the role of individuals in the energy reserve accounting scandal at Shell is still being investigated.
In 2004, Shell reported it has misstated for several prior years its oil and gas reserves, which are a key market gauge of the long-range health of an exploration and production company. Subsequently, Shell's audit committee generated a report that blamed senior executives for ignoring warnings from Shell employees regarding the accounting of the reserves. As a result, Shell fired the chairman of its committee of managing directors and the chief executive of its exploration-and-production unit, and removed about 23% of the barrels of oil equivalent reserves from its books (about 4.5 billion barrels). Shell settled with the SEC and British regulators over the matter last year.
June 29, 2005
The Stros' future Hall-of-Famer Craig Biggio set the modern Major League record for being hit by a pitch this afternoon in Denver during the Stros' game against the Rockies.
The Rockies Byung-Hyun Kim nailed Bidg in the 4th inning, which was the record setting 268th time that Bidg has been hit by a pitch. Bidg replaces Don Baylor as MLB's modern hit-by-pitch record holder.
The folks over at Plunk Biggio are going nuts. By the way, that blog has the best disclaimer that I have seen in the blogosphere:
Moral disclaimer: The author of this blog does not support or endorse intentionally throwing at Craig Biggio.
Shelby Foote, the historian whose three-volume The Civil War: A Narrative took him 20 years to write and who became the star of Ken Burns' 11-hour 1990 PBS documentary on the Civil War, died on Monday at a Memphis hospital at the age of 88.
Here is Mr. Foote's description of Gen. Robert E. Lee's slow ride home after surrendering at Appomattox:
Grief brought a sort of mass relaxation that let Traveller [Lee's horse] proceed, and as he moved through the press of soldiers, bearing the gray commander on his back, they reached out to touch both horse and rider, withers and knees, flanks and thighs, in expression of their affection.
Houston Chronicle Enron reporter Mary Flood battles through the chloroforming pace of the trial to file this report on the fourth day of testimony of the third of the five defendants to tesify -- former Enron Broadband CEO Joe Hirko. Given the glacial examination and cross-examination of the defendants, my earlier prediction was wrong that the trial would pick up speed during the defense case. It now appears that the trial will not wind up until sometime in mid-July.
The trial has resembled a low-scoring, extra innings baseball game -- long periods of tedious boredom spiked by brief spasms of chaotic excitement. Although it is impossible to predict from outside the courtroom how the jury is responding to the tedium, one thing appears to be reasonably clear -- a case that looked like a layup for the prosecution at the beginning of the trial has turned into an old fashioned dogfight.
The trial began in a lively manner as former Enron CEO Jeff Skilling popped in to check out the proceedings first hand, resulting in the prosecution requesting that the judge exclude him from the courtroom for the rest of the case. Then, the prosecution's troubles began when the testimony of it's key witness -- former Enron Broadband co-CEO Ken Rice -- was impeached as the defense showed on cross-examination that a portion of his testimony related to a video segment that was never shown to analysts as the prosecution and Mr. Rice had represented to the jury on direct. The prosecution compounded that error by attempting to shift the blame for its oversight to a female video contractor, a tactic that could well backfire among a jury of predominantly middle-aged Texas men.
However, after those interesting early stages of the trial, the remainder of the prosecution's case-in-chief was mind-numbingly boring, which sparked a jury rebellion at one point. Understandably nervous about the effect of the slow proceedings on the jury, the prosecution quickened their presentation so that they completed their case-in-chief in five weeks, but, in so doing, may have undersold their case against two of the five defendants -- former EBS executives Kevin Howard and Michael Krautz -- whose criminal exposure relates to their participation in a structured finance transaction that is separate and apart from the insider trading and money laundering charges against the other three defendants.
Then, as the defense case opened, the prosecution's case took another huge potential hit when a former Enron Broadband engineer testified that the prosecution had threatened him if he chose to testify during the trial, which brought into focus a dubious Enron prosecution tactic of chilling key defense witnesses in the Enron criminal trials. Nevertheless, as with the early excitement in the trial, that opening dust-up in the presentation of the defense case has evaporated into tedious examination and cross-examination of the three defendants who have testified to date -- Mr. Hirko, Scott Yeager, and Rex Shelby. Given the prosecution's emphasis on its insider trading and money laundering charges against those three and the relative paucity of the prosecution case against Messrs. Howard and Krautz (who are not subject to those charges), it remains unclear whether the latter two defendants will testify, although my sense is that they will.
Although its problematic predicting how all of this plays with the jury, it's clear from Ms. Flood and John Roper's reports from the trial that the three defendants who have testified to date have acquitted themselves reasonably well on the stand. As Ms. Flood's latest report on Mr. Hirko's testimony reflects, Mr. Hirko is defending himself effectively during the prosecution's cross-examination over the key question of whether he and Messrs. Shelby and Yeager overhyped the EBS technology in news releases and at a 2000 stock analysts' conference in order to boost Enron's stock price and cash-in by selling their stock. Inasmuch as the defense probably wins the trial if they can establish reasonable doubt in the jurors' minds on that issue, the fact that the prosecution has not scored a knockout blow on any of the three defendants who are being prosecuted on the insider trading charges bodes well for the defense. Moreover, even if the "elephant in the courtroom" -- that is, the huge amount of money in Enron stock sales that those three defendants made -- is too much for Messrs. Hirko, Yeager and Shelby to overcome, the prosecution appears to have real problems in its case against Messrs. Howard and Krautz, who have been largely ignored for most of the trial.
Consequently, in a case that looked like a tap-in for the prosecution at the beginning of the trial, the Enron Task Force has to be nervous. Despite the Task Force's effective public relations campaign to make the name "Enron" synonomous with "business corruption," the Task Force still has not actually done much in court to prove that proposition. Of the 33 indictments so far in connection with the Enron scandal, 15 defendants have pled guilty and only six (including just one former Enron executive) have been convicted -- five defendants in the controversial Nigerian Barge case and Arthur Andersen, whose conviction was overturned by the U.S. Supreme Court. If some or all of the Enron Broadband defendants are acquitted, then that result will confirm that the federal government's questionable policy of criminalizing agency costs is not nearly as effective as its campaign to destroy reputations.
June 28, 2005
Former HealthSouth Corp. CEO Richard M. Scrushy was found not guilty today by the jury in the trial over over his alleged participation in a $2.7 billion accounting fraud at the huge health services company. Along with the sentencings in the Enron-related Nigerian Barge trial, the reversal in the Arthur Andersen case and the recent acquittal of Theodore H. Sihpol, the acquittal of Mr. Scrushy is the latest in a series of setbacks to governmental prosecutors' attempts to criminalize business figures in the period after the meltdown of Enron at the end of 2001. Previous posts on the Scrushy case are here and here.
The Scrushy trial had turned into the legal equivalent of the Bataan Death March, as the jury was forced to endure four months of trial and 21 days of deliberations before arriving at a not guilty verdict on all 36 criminal counts against Mr. Scrushy, most of which related to conspiracy and securities fraud charges. The acquittal also marked the Department of Justice's failure in its first attempt to convict a CEO for violating the 2002 Sarbanes-Oxley Act that requires CEO's and CFO's to confirm the accuracy of corporate regulatory filings personally.
But at the end of the day, the Scrushy case will stand for the dubious nature of the government's policy of criminalizing merely questionable business practices. As much as the government protests that true business crimes are deterred by such vigorous prosecution of questionable business conduct, the fact of the matter is that any reasonable interpretation of justice is strained in squaring the result in the Scrushy case with the results in the Martha Stewart case, the sad case of Jamie Olis, the case of Dan Bayly, the case of William Fuhs, the DOJ's handling of the Global Crossing case, the Tyco case, the Bernie Ebbers case and many others. As Professor Ribstein has noted:
So white collar prosecutions become a sort of lottery. If the prosecution can come up with something colorful, it wins, or maybe loses if it's too colorful (Sardinia). These are not the elements of a rational criminal justice system.
Professor Ribstein comments further here.
I'm not wild about this proposed deal, but it's certainly not a disaster. Despite his nice run at the end of last season, Backe is still a below average National League pitcher whose value may be at its peak right now. The switch-hitting Winn is no savior, either, but he is similar to Orlando Palmeiro (3/.318/.379/.471), which is not bad, and is a definite upgrade over Chris Burke (-12/.220/.269/.285) in left field. I'd rather have Austin Kearns (-4/.224/.306/.394) and take on the risk that he could turn his career around, but it takes two to tango and the Reds have not shown any inclination to date to dangle Kearns in a trade with the Stros. As noted here, the Stros need to take major steps in improving almost every non-pitching position on the team, and acquiring Winn would be a small step in the right direction.
Sebastian Mallaby joined the Washington Post editorial page in 1999 after 13 years with The Economist magazine, and is the author of The World's Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations (Penguin Press 2004).
In this fine piece regarding the China National Offshore Oil Corp.'s hostile takeover bid for Unocal (previous posts here and here), Mr. Mallaby points out that it's usually a bad idea to prevent a foreign company from overpaying for an American company:
Does it matter if China owns U.S. companies? Japan went on a corporate spending spree in the 1980s, and the chief victims were not Americans, as the protectionists predicted, but the Japanese themselves. The Japanese paid inflated prices for Hollywood studios and landmark New York buildings. The exiting American owners made off with a nice profit. The Japanese got burned.
The Unocal bid has triggered the same muddled complaining that attended those Japanese takeovers. The protectionists say the Chinese want to pay for Unocal with cheap loans from their taxpayers, just as Japanese corporations were once denounced for accessing cheap capital from servile banks. But this means that China's taxpayers are offering sure profits to Unocal's shareholders. Admittedly, it also means that Chevron's shareholders stand to forgo a business opportunity, but then that opportunity may not have paid off. From the view of U.S. economic interests, this is a net plus.
Q: What do you think of ChevronTexaco's decision to acquire Unocal?
Mr. Raymond: I can never remember an industry consolidating at high prices. But I can remember an industry consolidating at low prices.
Q: Some people think prices will keep going up.
Mr. Raymond: Maybe. I'll bet they'll be lower at some point.
If a store is selling quality products at low prices, why would anyone want to shut it down?
By the way, courtesy of John Wagner, Mark Palmer -- who was Enron's head public relations spokesperson as the company slid toward bankruptcy -- is CNOOC's public relations point person in its bid for Unocal.
The following is noted at the end of this NY Times article about American International Group Inc.'s proxy statement that was recently published in anticipation of the company's annual meeting on August 11:
A.I.G.'s proxy also noted that the cost of insuring directors and officers against lawsuits had increased significantly since the company disclosed a number of accounting irregularities earlier this year. The premium A.I.G. paid for such coverage last year was $9.4 million; the current premiums are about $32.8 million.
Following on this post from over the weekend regarding the developments in the ongoing criminal investigation of lawyers in two firms who used to practice together in the well-known plaintiffs class action law firm formerly known as Milberg Weiss Bershad Hynes & Lerach, this Wall Street Journal ($) article reports that Paul L. Tullman, a former stockbroker and lawyer who referred clients for class action cases to the firm, is cooperating with federal investigators in their criminal investigation of the way in which the firm recruited class representatives in the class action cases that the firm handled. Mr. Tullman was charged with in May 2004 with fraud and false statements on tax returns, and the WSJ reports that he copped a plea late last year. The plea agreement remains under seal.
As Professor Ribstein has pointed out, there is already a witch hunt aura to the government's recent public disclosures regarding its investigation into Milberg Weiss' practices. Referral fees in all types of lawsuits have been common and legal for decades, and there is not even an allegation yet -- much less proof -- that Milberg Weiss failed to disclose any such fees in either its tax filings or disclosures to the various federal courts in the various class action cases. Nevertheless, the government is using leaks of information to play to the general public's resentment toward wealthy lawyers in turning up the pressure in its investigation of Milberg Weiss. Business interests may consider Milbert Weiss' current plight sweet irony, but that does not make what the government is doing right.
As noted in this earlier post regarding Eliot Spitzer's similar tactic toward former AIG chairman and CEO, Maurice "Hank" Greenberg, after over five years of investigating Milberg Weiss, if the government has a case against the firm, then it should get on with it.
June 27, 2005
Michael Ignatieff is the Carr professor of human rights at the Kennedy School of Government at Harvard, and the editor of the new book American Exceptionalism and Human Rights. In this superb NY Sunday Times Magazine piece, Professor Ignatieff analyzes the risks that American society faces in pursuing a foreign policy based on the Jeffersonian dream of inevitable world-wide Republicanism. The entire article is balanced and well-written, as the following excerpts reflect:
Until George W. Bush, no American president -- not even Franklin Roosevelt or Woodrow Wilson -- actually risked his presidency on the premise that Jefferson might be right. But this gambler from Texas has bet his place in history on the proposition, as he stated in a speech in March, that decades of American presidents' "excusing and accommodating tyranny, in the pursuit of stability" in the Middle East inflamed the hatred of the fanatics who piloted the planes into the twin towers on Sept. 11.
If democracy plants itself in Iraq and spreads throughout the Middle East, Bush will be remembered as a plain-speaking visionary. If Iraq fails, it will be his Vietnam, and nothing else will matter much about his time in office. For any president, it must be daunting to know already that his reputation depends on what Jefferson once called "so inscrutable [an] arrangement of causes and consequences in this world."
The charge that promoting democracy is imperialism by another name is baffling to many Americans. How can it be imperialist to help people throw off the shackles of tyranny?
If the American project of encouraging freedom fails, there may be no one else available with the resourcefulness and energy, even the self-deception, necessary for the task. Very few countries can achieve and maintain freedom without outside help. Big imperial allies are often necessary to the establishment of liberty. As the Harvard ethicist Arthur Applbaum likes to put it, ''All foundings are forced.'' Just remember how much America itself needed the assistance of France to free itself of the British. Who else is available to sponsor liberty in the Middle East but America? Certainly the Europeans themselves have not done a very distinguished job defending freedom close to home.
On this issue, there has been a huge reversal of roles in American politics. Once upon a time, liberal Democrats were the custodians of the Jeffersonian message that American democracy should be exported to the world, and conservative Republicans were its realist opponents. . . The liberals who founded Americans for Democratic Action refounded liberalism as an anti-Communist internationalism, dedicated to defending freedom and democracy abroad from Communist threat. The missionary Jeffersonianism in this reinvention worried many people -- for example, George Kennan, the diplomat and foreign-policy analyst who argued that containment of the Communist menace was all that prudent politics could accomplish.
The leading Republicans of the 1950's -- Robert Taft, for example -- were isolationist realists, doubtful that America should impose its way on the world. Eisenhower, that wise old veteran of European carnage, was in that vein, too: prudent, risk-avoiding, letting the Soviets walk into Hungary because he thought war was simply out of the question, too horrible to contemplate. In the 1960's and 70's, Richard Nixon and Henry Kissinger remained in the realist mode. Since stability mattered more to them than freedom, they propped up the shah of Iran, despite his odious secret police, and helped to depose Salvador Allende in Chile. Kissinger's guiding star was not Jefferson but Bismarck. . .
It was Reagan who began the realignment of American politics, making the Republicans into internationalist Jeffersonians with his speech in London at the Palace of Westminster in 1982, which led to the creation of the National Endowment for Democracy and the emergence of democracy promotion as a central goal of United States foreign policy. . . the withdrawal of American liberalism from the defense and promotion of freedom overseas has been startling. The Michael Moore-style left conquered the Democratic Party's heart; now the view was that America's only guiding interest overseas was furthering the interests of Halliburton and Exxon. The relentless emphasis on the hidden role of oil makes the promotion of democracy seem like a devious cover or lame excuse. The unseen cost of this pseudo-Marxist realism is that it disconnected the Democratic Party from the patriotic idealism of the very electorate it sought to persuade.
It would be a noble thing if one day 26 million Iraqis could live their lives without fear in a country of their own. But it would also have been a noble dream if the South Vietnamese had been able to resist the armored divisions of North Vietnam and to maintain such freedom as they had. Lyndon Johnson said the reason Americans were there was the "principle for which our ancestors fought in the valleys of Pennsylvania," the right of people to choose their own path to change. Noble dream or not, the price turned out to be just too high.
If you read just one article this month on American foreign policy, then Professor Ignatieff's article should be it. Kudos to the Times for running it.
Peter Jackson, Oscar-winning director of the "Lord of the Rings" film trilogy, is suing Time Warner subsidiary New Line Cinema, the company that financed and distributed the three movies, for at least $100 million in connection New Line Cinema's handling of revenues from the "Fellowship of the Ring" movie in the trilogy.
In essence, Mr. Jackson is claiming in the lawsuit that New Line did not offer the subsidiary rights to such things as "Lord of the Rings" books, DVD's and merchandise to the open market and, thus, sold them to affiliated companies for far less than fair market value. And in typical Hollywood style, the gloves are already off in the litigation, as the following quote about the portly Mr. Jackson from one of New Line's lawyers reflects:
A litigator for New Line, speaking on the condition of anonymity because he is working on this lawsuit, said the money paid to Mr. Jackson so far is in line with the contract he signed.
"Peter Jackson is an incredible filmmaker who did the impossible on 'Lord of the Rings,' " this lawyer said. "But there's a certain piggishness involved here. New Line already gave him enough money to rebuild Baghdad, but it's still not enough for him."
Mr. Jackson has received about $200 million to date from the Rings trilogy, which was produced for about $285 million and has produced over $4 billion in retail sales from worldwide film exhibition, home video, soundtracks, merchandise and television showings. New Line has made over $1 billion in net profits from the trilogy.
This post from last week made the following comment about the "finite risk" insurance transaction that is at the center of Eliot Spitzer's investigation of AIG and Berkshire Hathaway unit General Re, and AIG's former chairman and CEO, Maurice "Hank" Greenberg:
Despite the government's bludgeoning of various AIG and General Re executives into plea deals and the AIG's board acquiescence to Mr. Spitzer and other governmental investigators, it still has not been proven that the transaction in question in AIG's case was even accounted for improperly, much less illegal. Should not the government wait to address possible criminality (and its corresponding negative effect on value) until at least the underlying transaction has been proven to be violative of applicable accounting rules?
In this letter to the editor in today's Wall Street Journal ($), Mr. Greenberg observes as follows about the same transaction:
That transaction is the subject of litigation so I am not free to respond fully. I can assure you that an appropriate response will be made at a proper time in a proper forum. (I do note that rules for finite reinsurance are opaque and only now have the NAIC and FASB undertaken to clarify these rules.)
June 26, 2005
My son Cody and I attended the Stros' (33-40) Sunday afternoon game against the Rangers (38-35) and enjoyed the 10-inning 3-2 win behind the solid pitching of Andy Pettitte and the game-winning single of 3B Morgan Ensberg. The Stros have now won 13 of their last 20 games, which has generated all sorts of speculation on some local sports talk radio shows and in the Chronicle sports section that this club actually has a chance to make a playoff run.
Well, despite that optimism, this Stros club remains a poor hitting team that will struggle to win as many games as it loses, and likely will not win a playoff spot this season absent a major trade soon for at least one very good hitter or more likely two above-average hitters. Through 73 games (45% of the season), the Stros have scored 67 fewer runs than an average hitting National League club would have scored in an equivalent number of games ("RCAA" explained here). Only one of the other 29 MLB clubs -- the woeful Rockies (24-48) has a worse team RCAA than the Stros. Only three regular players (Berkman 2 RCAA/.265 AVE/.369 OBP/.411 SLG; Ensberg 13/.271/.377/.547; and Bidg 3/.273/.333/.465) have created more runs than an average National League hitter and, beyond Berkman at 1B and Ensberg at 3B, every other non-pitching position on the club is in need of an upgrade.
That does not mean that every regular player in those other positions should or could reasonably be replaced. For example, it probably makes sense to see if Taveras (-7/.279/.317/.359) will turn into an every day player in centerfield given that he jumped from AA ball to MLB. Nevertheless, contrary to glowing reports that one reads about him in the mainstream media, Taveras is no sure thing given that his negative RCAA, poor on base percentage, and anemic slugging percentage are far below average for a MLB hitter (current National League average is 0/.270/.340/.431). Indeed, so far this season, the Stros' regular outfield of Taveras, Jason Lane (-7/.231/.281/.467) and Chris Burke (-14/.202/.248/.269) is producing .35 runs per game less than an outfield of just average National League hitters would produce.
The fact that Bidg remains an above-average National League hitter at the age of 39 is probably remarkable enough to let him stay at 2B for the time being. But beyond Taveras and Bidg's positions, the Stros should be looking at every possible upgrade available in the trade market -- that's what its going to take to turn this miserable hitting club around. Here are the Stros hitters' RCAA so far this season through this past Saturday's game, courtesy of Lee Sinins:
Morgan Ensberg 13
Craig Biggio 3
Orlando Palmeiro 3
Lance Berkman 2
Jeff Bagwell 0
Eric Bruntlett -2
Humberto Quintero -3
Luke Scott -4
Jose Vizcaino -4
Todd Self -5
Willy Taveras -7
Jason Lane -7
Raul Chavez -10
Mike Lamb -10
Brad Ausmus -12
Adam Everett -12
Chris Burke -14
Meanwhile, the Stros pitching staff continues to carry the club and is the only reason that the Stros have a fighting chance of winning as many games as they lose this season. The Rocket and Roy O are now first and third in the National League in runs saved against average ("RSAA," explained here), and Pettitte has a double figure RSAA that is rising with each start. The remainder of the staff has been solid, except for the horrifying fifth starter trio of Duckworth, Astacio, and now Rodriguez. Even with those three dragging down the staff, the Stros are fourth in the National League in RSAA. Replace those three with a fifth starter who would be simply an average National League pitcher in RSAA and the Stros would have the top pitching staff in the National League, by far. The Stros pitchers' RSAA so far this season through this past Saturday's game:
Roger Clemens 34
Roy Oswalt 23
Andy Pettitte 11
Dan Wheeler 9
Brad Lidge 7
Chad Qualls 1
John Franco -1
Chad Harville -1
Mike Burns -2
Russ Springer -5
Brandon Backe -8
Brandon Duckworth -11
Wandy Rodriguez -11
Ezequiel Astacio -14
Speaking of the fifth starter role, the Stros quietly promoted their best pitching prospect in the high minors -- Fernando Nieve -- from AA Corpus Christi to AAA Round Rock last week. If Nieve pitches well at Round Rock, then look for the Stros to promote him to the big league club to assume the fifth starter role sometime after the All-Star break.
By the way, in connection with the Stros' ceremony this past weekend to retire Jimmy Wynn's jersey, Lee Sinins compiled the top ten Stros hitters in career RCAA:
1 Jeff Bagwell 680
2 Craig Biggio 349
3 Jose Cruz 277
4 Lance Berkman 256
5 Cesar Cedeno 249
6 Jimmy Wynn 240
7 Bob Watson 216
8 Joe Morgan 170
9 Moises Alou 128
10 Terry Puhl 114
The Stros hit the road this week for seven games at Colorado and Cincy (30-45), then return home next Monday for seven games against the Padres (41-34) and the Dodgers (35-39) before breaking for the All-Star game.
The entire post is a must read, as reflected by the following excerpt:
The economic literature on stadium subsidies is thus very clear: economic development provides no basis for justifying public investment in stadia. Yet peddlers of fantasy under the economic development banner make their living aiding and abetting major league owners in their quest for public handouts. In Kelo, the Supreme Court had the opportunity to ban this tripe from the courtroom in takings cases. But the decision gives these same peddlers the license to aid and abet developers in tearing down neighborhoods.
As Harris County figures out whether to undertake the boondoggle of converting the Astrodome into another underperforming convention center hotel, I am now officially marking time until a promoter engages Commissioner's Court with plans for a "Texanville" development next to the Dome and Reliant Stadium.
June 25, 2005
The dozens of securities fraud lawsuits against Enron and various other parties are consolidated under the federal multi-district litigation rules in Houston federal court. The legal community involved in those cases is abuzz today with the news that a federal indictment last week of two Southern California lawyers is a sign that the lead plaintiff's lawyer in the Enron securities fraud litigation -- William Lerach -- and his former firm (Milberg Weiss Bershad Hynes & Lerach) may also be targets of the investigation. Mr. Lerach and Milberg Weiss split last year, and Mr. Lerach started a new firm based in San Diego.
The indictment of almost 70 pages (press release here) accuses a former Milberg Weiss client -- Palm Springs lawyer Seymour Lazar -- of taking $2.4 million in kickbacks from a "New York law firm," presumably Milberg Weiss. Although Mr. Lazar's personal attorney -- Paul Selzer -- was also named in the indictment, the indictment contains no formal charges against "the New York firm." The indictment alleges that the New York firm reaped $44 million in attorney fees from over 50 cases in which Mr. Lazar was the lead plaintiff. As an inducement for Mr. Lazar and his family members to serve as lead plaintiff, the indictment alleges that the New York firm and others secretly paid Mr. Lazar kickbacks out of a portion of the firm's attorneys fees.
The indictment is the result of an investigation that began in 2002 that resulted in subpoenas being issued to dozens of law firms that have been co-counsel with Milberg Weiss in securities fraud class action cases over the years. Speculation is rampant throughout the plaintiffs' securities class action bar that the purpose of the indictment of Messrs. Lazar and Selzer is to pressure them to turn on the former Milberg Weiss lawyers.
In addition to observing that it is "saddened" by the indictment, a Milberg Weiss press release stated the following:
"We are also surprised and disappointed that, in the face of recent criticism of the government following the reversal of the Arthur Andersen conviction, the U.S. attorney's office would risk harming the Milberg Weiss firm and its many fine lawyers and staff by making this accusation in circumstances where the firm cannot defend itself."
As usual, Professor Ribstein provides insight and caution regarding this latest use of governmental power against an unpopular target (i.e., plaintiffs' class action securities fraud lawyers) of the day. Moreover, check out Professor Hennings' thoughts on the differences between the government's potential case against Milberg, Weiss and the prosecution of Arthur Andersen, and Professor Bainbridge's comments regarding the implications of the possible indictments on the prosecution of class actions.
Houston personal injury lawyer Gene Burd pleaded guilty Friday to a charge of making a false statement on his 1997 Federal Income Tax Return in connection with a kickback scheme that Mr. Burd engaged in with a local chiropractor, Paul Samson Christie. Here is the Justice Department's press release on Mr. Burd's guilty plea (as well of that of his co-defendant, Mr. Christie), and the earlier press releases on the indictment and superceding indictment are here and here.
According to the DOJ press release, Mr. Burd employed runners to bring him auto accident victims. After signing the victims up to a contingency fee contract, Mr. Burd would refer the clients to Mr. Samson's chiropractic clinics for physical therapy. Subsequently, Mr. Burd would pay the clinics for the chiropratic services provided to the clients out of a portion of the insurance settlement that he would negotiate on behalf of his clients. Mr. Samson would then turn around and kickback to Mr. Burd in cash 40-50% of the payment that Mr. Burd would make to the clinics. Mr. Burd did not report the cash kickbacks as income on his tax returns.
Mr. Burd faces a maximum of three years in federal prison, without parole, a $100,000 fine, and civil monetary penalties. Sentencing is scheduled for September 30 before U.S. District Judge Melinda Harmon.
This NY Times article interviews Bruce A. Williamson, the former Duke Energy executive who the Dynegy, Inc. board brought in to restructure (some would say liquidate) the company following the economic fallout in the energy trading industry resulting from the company's failed bid for Enron and Enron's bankruptcy in late 2001. Previous posts are here and here regarding Dynegy's settlement of claims at least indirectly related to its Enron bid.
The entire interview is mildly interesting and certainly further evidence for the widespread rumors in the business community that Dynegy is for sale. However, Mr. Williamson's observation about life after Enron is priceless:
Q. Yes. What's the mood like [in Houston after Enron]?
A. If you're in the oil upstream exploration and production, there's a lot of money coming in. The biggest concern the upstream companies have is where to go from there. What do they do with the money? They're running out of places they want to go to explore.
The power merchants, and that includes ourselves and Reliant, El Paso, Calpine, Duke, are all recovering and have all been inwardly focused for the past two and a half years. I think broadly in the community in Houston, it goes in waves. Enron sort of dies down and then something rears its head up and washes it back in the news.
The Enron movie came out at the River Oaks Theater, literally a few blocks from where Ken Lay lives, and that was quite an event. One person - a board member that I will keep nameless - told me he hadn't been to a movie like this since he was 12 and went to see "Hopalong Cassidy." Someone would come on the screen and people would boo and hiss and throw popcorn.
One of the highlights in the development of the blogosphere over the past several years has been the emergence of specialized blogs. As an inveterate golfer, an interesting part of the blogosphere for me has been the golf blogs, a number of which are listed in the blogroll on the right.
One of the golf bloggers who I particularly enjoy is Jay Flemma (he actually maintains two blogs, here and here), who is a New York City-based intellectual property and entertainment lawyer who is carving a name for himself in writing about golf course design. In his latest post, Jay addresses an issue that this Ron Whitten Golf Digest article explored earlier this year: Is well-known golf course designer Tom Fazio good for the game?
Jay's analysis of Fazio's latest designs is timely in this neck of the woods because Fazio's new course here in The Woodlands, Texas -- where many folks still believe the Shell Houston Open should be played -- will open on a beautiful piece of land in the western part of The Woodlands later this year. After noting that several analysts of golf course design are observing that Fazio's recent designs are boring and excessively expensive to maintain (much less play), Jay observes the following about the direction of Fazio's course design:
I stuck up for Fazio here. I love World Woods, Barton Creek, Pine Hill, PGA, TPC-MB, Ventana. . . lots of Tom. Then I played Atunyote in Utica and was underwhelmed. There was nothing of interest except two good risk reward par-5s, 5 and 12, and 9, 11 and 18 were good. The rest was nothing I had not seen before. This is $175. Casino Golf - nuff said. The design was muted, the natural setting was ordinary farmland and the price was twice what it's worth . . . That's why architectural echo is an important factor in rating a golf course. It offers a way to compare courses to the greats.
Jay covered the U.S. Open last weekend and his blogs include interviews with players and a level of analysis that you simply will not see in the mainstream media. If you are interested in golf, take a moment to check out the golf section of my blogroll, particularly Jay's blogs, Geoff Shackelford's, and Texas Golf. The golf blogs are another reflection of how the blogosphere is redefining the way in which specialized information and knowledge is communicated.
Apart from the redevelopment boondoggles that will necessarily follow from the U.S. Supreme Court's Kelo decision, this Washington Post article reports on yet another reason that governmental promoters will cite to support this.
June 24, 2005
Continuing relentlessly to avoid addressing the real issue, this NY Times article speculates that the problem with Eliot Spitzer's recent unsuccessful prosecution of Theodore C. Sihpol, III was not that he charged Mr. Sihpol in the first place, but that he should have charged all of Mr. Sihpol's superiors, too. In so speculating, the Times confirms that it still does not understand that the governmental policy of regulating business through criminalization of merely questionable business transactions is a slippery slope toward injustice that ultimately undermines the rule of law.
Take the case of William Fuhs. He is the former mid-level Merrill Lynch executive who was recently convicted and sentenced to over three years in prison as a result of his participation in the Enron-related Nigerian Barge case. As has already been noted in regard to the conviction of Daniel Bayly -- the former head of global investment banking at Merrill Lynch and one of Mr. Fuhs' bosses -- the government's prosecution of the Merrill Lynch executives in regard to the Nigerian Barge transaction was dubious, at best. The resulting convictions are a plain miscarriage of justice.
As with its prosecution of Mr. Bayly, the government's case against Mr. Fuhs strains credulity. Of the four Merrill Lynch defendants in the Nigerian Barge case, Mr. Fuhs was the only one who was not a managing director of Merrill Lynch. Mr. Fuhs did not participate in the one telephone conference with former Enron CFO Andrew Fastow in which Mr. Fastow allegedly assured Mr. Bayly and other Merrill Lynch executives that Enron would find a buyer within six months of the interest that Merrill was buying in the barges.
In fact, Mr. Fuhs' only role in regard to the transaction was the ministerial processing of the transaction after Merrill Lynch had agreed to buy the interest in the barges from Enron. Incredibly, during the government's case-in-chief in the Nigerian Barge trial, none of the government's fact witnesses knew or interacted with Mr. Fuhs -- indeed, the only government witness who had ever worked at Merrill had neither met, spoken to, nor even heard of Mr. Fuhs! Mr. Fuhs never conferred with anyone at Arthur Andersen (Enron's auditors) regarding the transaction and the deal was the only Enron transaction that Mr. Fuhs ever worked on. In short, the government presented no witnesses or evidence during its case-in-chief that Mr. Fuhs -- who is not an accountant -- had any idea that Enron's booking of a $12 million gain on the Nigerian Barge transaction was arguably improper, much less that he intended to promote Enron's accounting of the transaction.
Nevertheless, while Mr. Sihpol walks away from the New York courthouse a free man, Mr. Fuhs -- a young man with a wife and two young children -- faces a shattered professional and family life and 37 months in federal prison. As Professor Bainbridge noted in this TCS op-ed and Professor Ribstein has repeatedly observed, the contrasting results in the cases of Mr. Sihpol and Mr. Fuhs -- not to speak of the sad case of Jamie Olis -- confirms that the pursuit of justice in such cases has become a sort of lottery. If the prosecution pursues a bit player such as Mr. Fuhs but can come up with something particularly distasteful to the jury -- such as Merrill Lynch's involvement with the corporate pariah, Enron -- then it wins. On the other hand, if the government slams a little guy such as Mr. Sihpol while not pursuing his dastardly superiors, then the government loses. This is a radical abuse of our criminal justice system, and the carnage to the families of Martha Stewart, Mr. Bayly, Mr. Fuhs, Mr. Olis and others who are caught in this troubling spiral simply cannot be responsibly dismissed as a "trade-off" of an imperfect system.
But as great as my compassion is for members of those families, my even greater concern is for the principles of justice and respect for the rule of law upon which the success of our society is largely based. If we lose those, then, as Sir Thomas More asked Will Roper in A Man for All Seasons, "do you really think you could stand upright in the winds [of abusive state power] that would blow then?"
In a controversial 5-4 decision, the U.S. Supreme Court ruled in Kelo v. New London on Thursday that a local government may seize private property in facilitating profit-making private re-development as a legitimate form of "public use" under the Constitution. You can review and download the syllabus, majority opinion, the concurrence, and the dissents here.
My first impression of the decision is that it increases markedly the number of bad business deals that local governmental units will be able to consider. From the perspective of a Houstonian, the thought of a Redevelopment Department at the Metropolitan Transit Authority is truly frightening.
At any rate, the most troubling aspect of the majority decision by Justice Stevens is that, even though a local government could not take homeowners' property "simply to confer a private benefit on a particular private party," the project involved in this particular case is "a carefully considered development plan." Therefore, the majority reasoned, the plan is a legitimate form of public use -- despite the fact that the the resulting project would not be open for public use -- because there is no literal Constitutional requirement of such an outcome. As the Court put it:
"For more than a century, our public use jurisprudence has wisely eschewed rigid formulas and intrusive scrutiny in favor of affording legislatures broad latitude in determining what public needs justify the use of the takigs power."
"Those who govern the city [of New London] were not confronted with the need to remove blight . . ., but their determination that the area was sufficiently distressed to justify a program of economic rejuvenation is entitled to our deference. . . . Clearly, there is no basis for exempting economic development from our traditionally broad understanding of public purpose."
Joining Justice Stevens in the majority were Justices Breyer, Ginsburg, Kennedy, and Souter, although Justice Kennedy filed a concurring opinion (see analysis below). Justice O'Connor's dissenting opinion was joined by Chief Justice Rehnquist and Justices Scalia and Thomas, although Justice Thomas also wrote a dissenting opinion.
The court's ruling came in a case out of New London, Conn., a city that has long been generally depressed economically. In 1998, the city's economic prospects were improved when Pfizer Inc. announced plans to open a research facility there. In the excitement of that economic shot-in-the-arm, local city officials proposed to redevelop the adjacent residential Fort Trumbull neighborhood to capitalize on the new Pfizer presence, including a hotel and a pedestrian riverwalk. Most landowners sold their properties voluntarily, but nine refused and the city condemned their property under principles of eminent domain. Inasmuch as the Fifth Amendment of the Constitution prohibits the government from taking private property "for public use without just compensation," the landowners sued and claimed that the redevelopment plan was not a "public use" because it provided for re-sale of the property to private interests for non-public use. The Connecticut Supreme Court denied the landowners appeal, which prompted the appeal to the U.S. Supreme Court.
In one sense, the decision is consistent with the Supreme Court's tradition of giving government broad discretion to decide what constitutes public use. In 1954, the Court endorsed postwar urban-renewal efforts that paved over neighborhoods in a bid to eradicate blight. However, the difference in the current case is that no one could argue that the middle-class area in New London had fallen into blight. Accordingly, the homeowners and property-rights activists requested that the Court draw a line in the sand between governmental use of its eminent domain power to eradicate slums, on one hand, and using the eminent domain power to promote a trendy redevelopment plan, on the other. In the end, the Court simply declined to make such a distinction.
In her dissenting opinion, Justice O'Connor aptly summed up the risk of the majority decision:
"[T]he specter of condemnation hangs over all property. Nothing is to prevent the state from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory."
"Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms."In his dissent, Justice Thomas essentially accuses the majority opinion of endorsing a governmental land grab by replacing the Fifth Amendment's "Public Use Clause" with a very different "public purpose" test:
"This deferential shift in phraseology enables the Court to hold, against all common sense, that a costly urban-renewal project whose stated purpose is a vague promise of new jobs and increased tax revenue, but which is also suspiciously agreeable to the Pfizer Corporation, is for a 'public use.'"
Indeed, Justice Thomas' dissenting opinion is one that folks should remember whenever they hear the common criticism of Justice Thomas that he is a shameless capitalist roader who favors corporate interests against the powerless, including his fellow African-Americans. Hard to square that criticism with his dissent in Kelo.
But the biggest impact of the Kelo decision just may be its erosion of the Constitutional requirement of "just compensation" for the governmental taking of private property. In short, where private developers are investing capital, there really is no need to invoke eminent domain -- the developers should be willing to pay what the owners consider just compensation. In that regard, "just compensation" may differ considerably from so-called "fair market value" given the sentimental and other special value that homeowners may attribute to their homes. Indeed, Kelo will affect even willing sellers because developers in cahoots with local governments will have an incentive to lowball their pre-eminent domain bids on property because they now know that they will be able to take advantage of the government's eminent domain power if the property owner refuses their offer.
In that connection, Justice Kennedy's separate concurring opinion appears to put local governments on notice not to go too far in using the added power that the majority opinion appears to have given them to seize land for economic development. Although he joined the majority opinion, Justice Kennedy's concurring opinion clearly reflects that he perceives the prospect of abuse of the eminent domain power was more evident than the majority opinon acknowledges. Inasmuch as his vote was necessary for the City of New London to prevail in the case, Justice Kennedy's concurring opinion has more clout than a typical concurring opinion. He notes:
"There may be private transfers in which the risk of undetected impermissible favoritism of private parties is so acute that a presumption (rebuttable or otherwise) of invalidity is warranted under the Public Use Clause."
Thus, if an economic development project favors a private developer "with only incidental or pretextual public benefits," Justice Kennedy asserts that the Court tolerate such a use of eminent domain power even by applying the minimum standard of "rational basis review." Nevertheless, he did not elaborate on the heightened standard further by stating that the Kelo decision "is not the occasion for conjecture as to what sort of cases might justify a more demanding standard."
Despite the concurrence and the dissents, Kelo remains a troubling decision for owners of private property in an area where a savvy developer with local political connections sells a compliant city council on a grandiose redevelopment plan. When local governments make bad decisions such as this, it's a very small step to making even worse decisions that favor private developers' interests over those of local property owners.
June 23, 2005
U.C.L.A. law professor Stephen Bainbridge is one of America's leading experts in the area of corporate and securities law, and he has long been generous in sharing his expertise on those subjects and others on his popular ProfessorBainbride.com weblog. Professor Bainbridge is also a formidable writer who is particularly gifted in breaking down complex legal issues in a simple and straightforward manner.
In this TCS Central op-ed (his blog post on the article is here), Professor Bainbridge takes dead aim at the dubious governmental policy of criminalizing business interests through the prosecution of agency costs, which are essentially the costs of poor corporate governance. The entire op-ed is a must read, and here is the money quote:
[S]hareholders deserve protection from theft, but not from risk taking, even when the risk in question is how much to pay an executive. Unfortunately, it's not clear that prosecutors know the difference -- or even care.
This NY Times article reports on a new research study to be published today in the New England Journal of Medicine that is strong evidence that chemotherapy greatly improves the chances of survival for early-stage lung-cancer patients. Lung cancer is by far the leading cause of death from cancer, exceeding annual deaths from colon, breast, pancreatic and prostate cancer combined.
Lung cancer has long been one of most difficult cancers to treat. A high percentage of lung cancer victims are are smokers or former smokers, and because there is no systematic screening process for lung cancer, almost half of the 175,000 annual lung cancer cases are not discovered discovered until the cancer is metastatic (i.e., spreading), which makes survival unlikely. Currently, only about 15% of lung cancer victims survive beyond five years.
The standard treatment for early-stage lung cancer has long been surgery to remove the lobes containing the tumor, but that treatment has resulted in only a 54% survival rate beyond five years. Until this new study, no published research studies had shown a substantial benefit from chemotherapy after surgery for early-stage lung-cancer patients, who represent nearly a third of all cancer cases.
The results of the 10-year trial of 482 patients with early-stage lung cancer show that intravenous chemotherapy drugs improved five-year survival rates to almost 70%. That 15-point improvement will make doctors and patients much more willing to consider follow-on chemotherapy, which sometimes requires hospitalization. "There's never been a lung-cancer trial that showed this benefit of treatment in any stage of disease," commented Katherine M.W. Pisters, M.D., an oncologist at Houston's M.D. Anderson Cancer Center in the Texas Medical Center, who has an op-ed on the study in the current issue of the Journal. In response to the findings, the American College of Clinical Oncology and the American College of Chest Physicians are currently rewriting their official guidelines to physicians to recommend chemotherapy for early-stage lung-cancer patients.
The study was funded by the American and Canadian governments' National Cancer Institutes, and received $1.6 million from GlaxoSmithKline PLC.
Consistent with that theme, this Wall Street Journal ($) article reports today that Mr. Kozlowski -- who essentially was convicted of embezzling excess compensation from Tyco -- wrote this letter several years ago to a Houston assistant district attorney in which he requests that the prosecutor seek the maximum prison term for a former executive of a Tyco unit who had been found guilty in a Houston state court for -- you guessed it -- embezzlement.
In his letter, Mr. Kozlowski wrote that the former Tyco unit executive's crime "cannot be condoned in any manner" and that "not only did he steal from the stockholders ... but he breached the fiduciary duty placed in him." In advocating the "maximum term," Mr. Kozlowski noted that the court needed to send a message that "wrongdoing of this nature against society is considered a grave matter."
The former Tyco unit executive got 20 years, although he was paroled after four.
Cnooc Ltd., China's third-largest oil company and it's major explorer of offshore oil and gas, yesterday made an unsolicited $18.5 billion cash bid for El Segundo, CA.-based Unocal Corp. The bid is attempting to scuttle the earlier $16.5 billion bid that San Ramone, CA.-based Chevron Corp. made for Unocal in April.
If successful, Cnooc's bid would be the largest foreign acquisition ever attempted by a Chinese company and would be the first time that a Chinese and U.S. company have competed in a takeover battle. Cnooc had been considering making a bid for Unocal in April, but backed off at the last minute.
Inasmuch as a good case can be made that Chevron's bid was over-priced, Cnooc's offer for Unocal reflects that China's government (about a 70% owner of Cnooc) will pay a high price to gain direct control over more energy assets to fuel its booming economy. Nearly half of Unocal's reserves -- the oil and natural gas equivalent of about 1.75 billion barrels -- consists of natural gas in Asia. Cnooc is offering $67 a share for Unocal, and would have to pay Chevron a $500 million breakup fee and assume Unocal's $1.6 billion in debt.
Although Cnooc's bid will undoubtedly raise political concerns in Washington, prominent U.S. executives advised political interests to remain calm. The Wall Street Journal reported that Exxon Mobil Corp. Chief Executive Lee Raymond said it would be a "big mistake" for the U.S. government to block Cnnoc's bid. "You have to have free trade. If you start to put inefficiencies in the system, all of us eventually pay for that."
June 22, 2005
U.S. District Judge Karon O. Bowdre today appointed an alternate juror to replace a male juror suffering from "recurring health problems" during jury deliberations in the corporate-fraud trial of former HealthSouth Corp. CEO Richard M. Scrushy (a previous post on the trial is here). With that move, the judge proceeded to instruct the jury that it would have to start over in its deliberations toward a verdict on the 36 criminal counts against Mr. Scrushy.
This development probably went over about as well as the proverbial turd in the punchbowl with the Scrushy jurors, who have been deliberating on the case since May 19 after enduring a trial that began on January 25.
The 36 counts against Mr. Scrushy include conspiracy, fraud, false statements and one count of false certification under the Sarbanes-Oxley Act. Mr. Scrushy used the "honest idiot" defense during the trial, contending that the finance executives at the company who engineered the fraud hid it from him.
Check out this creative interactive map to the federal courts organized by federal circuit.
This is just another example of how the Administrative Office of the U.S. Courts has embraced technological advances in streamlining litigation in federal courts. The ECF (electronic filing) system that is available now in most federal courts is the prototype for electronic filing systems in other courts around the country.
In his weekly WSJ ($) column, Alan Murray examines the motives of former AIG chairman and CEO Maurice "Hank" Greenberg to arrange the structured finance "finite risk" insurance transation that is at the heart of Eliot Spitzer's lawsuit and public allegations that Mr. Greenberg engaged in fraud while at AIG. According to Mr. Spitzer's theory of the case, the deal allegedly involved a phony, risk-free swap of insurance assets that allowed AIG to boost short-term reserves and assuage the concerns of analysts, who had been fretting that AIG was drawing down its loss reserves to boost profits. In return, the company paid Berkshire Hathaway's General Reinsurance Corp. unit a fee of $5 million.
Mr. Murray's column dismisses Mr. Spitzer's contention that Mr. Greenberg's arrangement of the questionable transaction was motivated purely by the Mr. Greenberg's greed in propping up the value of his extensive AIG equity holdings. Rather, Mr. Murray focuses more on Mr. Greenberg's obsession with short-term results over taking a longer term view of AIG's financial health.
However, the more interesting question is whether it makes any sense for the government to criminalize taking the risk of financial transactions that may push the edge of the envelope of applicable accounting rules, but that may nevertheless lead to preservation or creation of wealth for equity owners? Despite the government's bludgeoning of various AIG and General Re executives into plea deals and the AIG's board acquiescence to Mr. Spitzer and other governmental investigators, it still has not been proven that the transaction in question in AIG's case was even accounted for improperly, much less illegal. Should not the government wait to address possible criminality (and its corresponding negative effect on value) until at least the underlying transaction has been proven to be violative of applicable accounting rules?
Meanwhile, in his weekly WSJ ($) column, Holman Jenkins examines how the government's criminalization of structured finance transactions almost scuttled a market that has turned out to be perfectly legitimate and hugely beneficial for consumers of life insurance -- i.e., the business of buying and selling "used" life insurance policies where the buyer of the unwanted insurance policies (such as AIG) buys a life insurance policy from a seller, keeps up the premiums until the seller of the policy dies, and then collects the death benefit. As a result, owners of life insurance now have a legitimate market in which they can liquify their life insurance policy before the insured's death.
Whether you consider that market ghoulish or not, the market serves a legitimate financial demand of owners of life insurance policies. Nevertheless, as Mr. Jenkins reports, part of Mr. Spitzer's lawsuit against AIG attempts to penalize the company for its accounting of its investment in that market, and discovery in the lawsuit has already revealed that Mr. Greenberg wrote in a memo that adverse public relations emanating from an investment in the market may outweigh its financial benefit for AIG. But as Mr. Jenkins points out, Mr. Spitzer's assault on AIG's involvement in the market risks damaging a market that is valuable for ordinary citizens and actually a market that government should be encouraring:
Gone are the days when insurance companies were the sole market for policyholders who wanted something to show for decades of paying premiums without having to die first.
Once, these policies might have been allowed to lapse or returned to the company for a minuscule "surrender" payment. But -- here's the peculiar calculation -- where the covered person has suffered a health reverse that reduces his or her life expectancy, the real economic value of the death benefit may be far greater than the surrender value, even after the premiums that would have to be paid until he or she finally dies.
Now that institutional investors are buying and selling hundreds of policies at a time, vanished is the specter of an investor seeking to hasten his payoff with a blunt object. Pricing will improve too, as securitization takes advantage of the law of large numbers to remove much of the risk from mortality estimates.
The new securities are expected to appeal particularly to pension funds, always looking for ways to match the maturities of their investments with the timing of their payouts. Thus the recycling of life insurance by older Americans will become, twice over, a way for them to finance their own retirements.
Indeed, Mr. Spitzer's assault on the "used" life insurance policy market is taking place at the same time as he is hammering the sub-prime mortgage market, another market that benefits ordinary citizens (previous posts here and here).
Thus, in the wake of the morality plays of Mr. Spitzer and governmental prosecutions involving structured finance transactions that the prosecutors either mischaracterize or do not understand, legitimate and productive business transactions are unfairly and incorrectly portrayed as complex business frauds. The misguided nature of the government and the Enron bankruptcy examiner's criminalization of many of Enron's valid structured finance transactions has already been well-chronicled by University of Chicago structured finance expert Christopher Culp and others in the recent books, Corporate Aftershock (Cato 2003) and Risk Transfer (Wiley 2004). Mr. Spitzer and his minions are eminently capable of misusing the power of the state to deprive citizens of other valuable markets when what they really ought to be doing is encouraging the type of risk-taking that creates valuable markets for citizens such as the one that Mr. Jenkins describes.
June 21, 2005
Earlier in my legal career, while managing a downtown Houston law firm for 20 years, I tried to foster collegial relationships between the attorneys and staff. In that connection, one of my steadfast rules for attorneys when something went wrong was the following: Don't blame a secretary.
This article -- which reports on the uproar over a senior associate at a major law firm requiring his secretary to pay for removal of a ketchup stain from his clothing -- reflects the validity of my rule.
Hat tip to Brian Leiter for the link to the article.
This Wall Street Journal ($) article picks up on the theme of this post from late last year -- i.e., that the government's regulation of accounting firms through criminalization of their services is contributing to the shortage of accounting firms that have sufficient resources to provide the specialized services that big companies need:
Intel Corp. is one of the many big companies now bumping up against the limitations. After using Ernst & Young LLP as its auditor for more than three decades, the semiconductor maker considered switching recently for a fresh look at its financials. But it stuck with Ernst after receiving proposals from the other Big Four firms: Deloitte & Touche LLP, KPMG and PricewaterhouseCoopers LLP. That is because federal regulations bar the three other firms from serving as Intel's independent auditor unless they give up valuation, computer-software and other work they do for Intel.
Worries about the shrinking number of top-tier auditing firms began mounting with the collapse of Arthur Andersen LLP in 2002, after its conviction for obstruction of justice tied to its audits of Enron Corp. (The conviction was reversed last month by the Supreme Court.) The Sarbanes-Oxley corporate-governance act, passed by Congress in response to the accounting scandals at Enron and elsewhere, has complicated the situation, as well, by forbidding auditors from providing certain nonaudit-related services to audit clients. The restrictions, aimed at enhancing the independence of auditors, have led some companies to distribute nonaudit work to the other Big Four firms. But that puts these companies in a bind if they want to switch auditors.
Meanwhile, KPMG is learning that playing nice with the Justice Department may not be all that it's cracked up to be. As noted here last week, the threat of an indictment has KPMG pursuing a settlement of the government's criminal investigation into its promotion of tax shelters under a deferred-prosecution agreement. As a part of that effort, KPMG issued a well-publicized admission of wrongdoing and public apology last week regarding its involvement in the tax shelters.
However, as a result KPMG's public admission, this NY Times article reports KPMG is now a sitting duck for damages in the myriad of civil lawsuits involving the tax shelters and even unrelated accounting issues, and that KPMG's co-defendants in the tax shelter civil cases are furious over the financial implications to them of KPMG's public admission of wrongdoing.
All of this is having a devastating effect on KPMG financially. KPMG reported earlier this year that it had revenue of $4.1 billion last fiscal year, but that "practice protection costs" -- i.e., insurance, legal fees and litigation settlements -- were running at the staggering amount of more than $400 million annually, or more than 10 percent of the firm's revenue.
Thus, the cost of avoiding an indictment might just cause KPMG to meltdown anyway. At very least, the cost of cooperation will cause substantial financial damage to the firm, resulting in job loss and less competition for audit services for big companies. And let me get this right -- this is a "business-friendly" Republican Administration pursuing these policies?
In a surprising development, the U.S. Supreme Court yesterday declined to clarify its its decision earlier this year in U.S. v. Booker (previous posts here), in which the Court struck down the mandatory nature of the federal criminal sentencing system. Without comment, the Supreme Court declined to hear a new case -- Rodriguez v. U.S. -- even though the Justice Department had recommended last week in a parallel case (U.S. v. Barnett) that the Court adjudicate the issue in the case, which is whether a criminal sentence that violates Booker's constitutional principle is "plain error" and must be overturned.
U.S. v. Booker limits federal judges in punishing convicted defendants for aggravating factors that were not proven to a jury or that the defendant did not admit. That decision threw the federal sentencing system into a bit of a kerfuffle as thousands of inmates challenged their sentences and many petitioned for earlier release dates. In Booker, the Supreme Court did not specify how the decision should be should be applied, so the federal circuit courts of appeal have been supervising application of the decision.
Four circuits have ruled that any sentence longer than the maximum allowed under the jury's findings of fact or the defendant's admissions usually would require a new sentences. One circuit decided that the trial courts would have to decide whether resentencing was needed, and two other circuits concluded that defendants would not be entitled to a rehearing on their sentences unless they could show that the trial court would have handed down a lighter sentence had the federal sentencing guidelines been deemed to be advisory rather than mandatory. Consequently, there is a clear conflict at this point among the circuit courts on how Booker is to be applied to previous sentences.
June 20, 2005
Anne Linehan over at blogHouston.net alerts us to this Chronicle article that updates the situation facing the City of Houston in regard to its investment in two downtown Houston hotels, The Magnolia and the Crowne Plaza. This earlier post examined the City's problem investments in the hotels, while this post addressed the soft market for hotel rooms in downtown Houston.
As Anne notes, not much has changed in regard to the situation since the prior report on the hotels' financial problems. The hotels are still not generating enough revenue to service the City's subordinated debt on the hotels, and it is not at all clear from the article that the hotels are even generating positive cash flow from operations exclusive of debt service. Thankfully, the City's total investment in both hotels is under $15 million, which is a drop in the bucket compared to this other dubious investment.
Nevertheless, after throwing a few $15 millions around, you could be talking about some real money, so the City needs to address the situation responsibly. As noted in the earlier post, despite its notes on the properties, the City is really just a preferred equity investor in these hotels. Consequently, the main issue at this point is whether the hotels are being managed properly and whether there is a reasonable chance that they can generate enough revenue to break even from an operations standpoint. Assuming a "yes" answer to those two questions, then the City simply needs to look at these properties as long-term (make that very long-term) investments that need to be monitored as a part of its long-term investment portfolio. The hotels could also be productively used as poster children from time to time whenever some City official floats the idea that it is good economically for the City to loan money on a project that private financing will not support.
On the other hand, if either of the answers to the foregoing questions is "no," that raises additional issues that a City government is institutionally incapable of handling well. In that event, some second or third buyer of one of these hotels might just be able to turn a profit on the City's dime.
Oil prices surged almost 10% last week and are widely expected to top $60 a barrel this week. The recent price gains show a sharp turn in the short term market since only a month ago, when reports of steady growth in U.S. oil inventories drove oil down to $46.20 a barrel on May 20.
Meanwhile, even as short term oil prices escalated, the price of the December 2011 oil futures contracts fell, which increased what is referred to as the "backwardation" of oil prices -- i.e., when futures prices are below current spot prices.
The mainstream media always seems to struggle with the economic implications of volatility in oil prices, so cruise over to this Econbrowser post, in which University of California at San Diego economics professor James D. Hamilton -- an insightful specialist in oil price fluctuations -- analyzes the current situation. This earlier post notes Mr. Hamilton's views on why the current run-up in oil prices is unlike those that occurred during the 1970's and early 80's.
Finally, here is an excellent Forbes Magazine graph that shows the real and nominal price of oil over the past century and a half.
Following on the NY Times list contained in this post from earlier this year, this Washington Post article reviews the likeliest pool of candidates that President Bush would draw from in nominating a new justice to replace any of the several elderly Justices who could retire in the near future from the U.S. Supreme Court.
The WaPo list is the same as the earlier NY Times list, except that the WaPo list includes Fifth Circuit Judge Emilio Garza as one of the candidates.
My personal favorite in this group remains John J. Roberts, who has been a clear thinker and superb writer while on the D.C. Court of Appeals.
This Wall Street Journal ($) article examines the increasing criminalization of business in the post-Enron era, which has been a frequent topic on this blog. Although the article does a reasonably good job of summarizing the troubling trend, it comes up somewhat short on analyzing the key implications of the trend, such as the disincentive to take risks resulting from regulating business through criminalization and the degradation of the rule of law resulting from the government's overly broad application of criminal laws in its quest to convict business interests. For more analysis in that regard, review this thread of blog posts over the past year and a half.
The money quote in the article come from Joseph Grundfest (earlier post here), the Stanford University business law professor and former SEC commissioner who is currently researching the implications of the government's growing power to bludgeon business interests into cooperating with a criminal investigation even if those business interests do not believe that they have done anything wrong:
"It's a lot like the scene in 'The Godfather' where Marlon Brando explains how he's going to make an offer they can't refuse."
Along those same lines, this WSJ ($) article reviews the prison sentences that have been and are expected to be handed down in the latest string of criminal prosecutions of business executives, while this article examines the unusual arrangement in which the Newark, N.J. U.S. Attorney has inserted himself into the management of Bristol-Myers Squibb Co.. The company's board agreed to the arrangement in order to stave off a large fine stemming from a criminal investigation into an alleged $2.5 billion fraud at the company.
American International Group Inc.'s board should get ready for the same type of arrangement with the Lord of Regulation. And don't miss Professor Ribstein's cogent analysis of the situation, in which he notes the big difference between prosecuting agency costs -- such as sloppy corporate controls over executive compensation -- and prosecuting a more clear-cut crime where the thief robs the victim at gunpoint.
By the way, Professor Ribstein's point about the arbitrary nature of prosecuting agency costs is perhaps best reflected by the irony that the key prosecution witness against Messrs. Kozlowski and Swartz -- Tyco outside counsel David Boies -- is simultaneously defending Maurice "Hank" Greenberg against Mr. Spitzer's criminal assault on AIG's agency costs.
It does all get quite confusing, doesn't it?
June 19, 2005
Inasmuch as I am one of ten children of the marriage of Walter M. and Margaret Kirkendall, I have a large number of family members (over 30 nieces and nephews at last count), many of whom are regular readers of this blog. This particular blog post is primarily for those family members and our family friends, but even if you are not a member of those groups, feel free to read on and learn about a special father and a remarkable Houstonian.
The memory of where I was when my father died remains indelibly etched on my mind.
Shortly after 8:00 a.m. on Saturday morning, July 13, 1991, I was preparing to play golf in Iowa City, Iowa during my 20th high school reunion. Unexpectedly, the pro shop summoned me from the first tee that I had a telephone call. When I reached the phone, my brother Matt was on the line with terrible news.
Our father, Dr. Walter M. Kirkendall, had suffered a serious heart attack moments earlier in a Chicago-area hotel room while preparing to attend his niece Sarah's wedding with our mother. At the time of the call, Matt did not know whether our father had survived the attack. Minutes later, after I had quickly returned to my hotel room to gather my things for a hurried trip to Chicago, Matt called again. Our father had died that morning in Chicago at the age of 74, probably before I had left the golf course in Iowa City.
Consequently, my memories of Walter Kirkendall's death are inextricably intertwined with golf. To a large degree, that is utterly appropriate because, over the final 15 years of his life, Walter and I spent countless hours together golfing.
These regular golf games began in 1976 when I entered law school at the University of Houston. Back then, we would rise early most weekend and holiday mornings to play the venerable back nine at Memorial Park Golf Course in Houston.
In 1982, we transferred those weekly games at Memorial to several Houston-area clubs, concluding at Lochinvar Golf Club. The final time I saw Walter alive was the Sunday morning before his death when we played golf together at Lochinvar. Inasmuch as he played quite well that day, one of my enduring memories of Walter is his chortling in the clubhouse as he collected his golf bets from me.
Thus, my golfing memories of Walter are surrounded by an aura of good fortune and warm appreciation. Good fortune because golf allowed me to enjoy many hours of Walter's wisdom, insight, and humor. Warm appreciation because golf allowed me to give something back to this man who premised his life on giving to others.
You see, despite his love of golf, Walter never became an active member of a private golf club. Walter gladly sacrificed something that would have been primarily for his enjoyment -- that is, golf on a private course -- for what he considered the more important needs of his large (ten children!) family. Accordingly, as I joined several golf clubs over the final decade of Walter's life, I made a point to give Walter an opportunity to play golf at those clubs as much as he wanted. His pure enjoyment of our golf outings is one of my life's greatest satisfactions.
In addition to being a special father, Walter Kirkendall was a remarkable doctor and teacher. Born in 1917 and raised in Louisville, Kentucky, Walter graduated from the University of Louisville Medical School in 1941 and then went to the University of Iowa in Iowa City for an internship the following year. As with many men of his generation, Walter finished his internship and residency at Iowa just in time to serve three years as an Army medical officer in North Africa and Italy during World War II, after which he returned to Iowa City to complete his training in medicine.
In 1949, Walter joined the University of Iowa Medical School Faculty and -- along with esteemed colleagues such as Jack Eckstein, William Bean, Lew January, Frank Abboud and many others -- proceeded to play a major role in the development of the University of Iowa's fine medical school over the next 23 years.
Walter and his colleagues were at the forefront of the post-WWII doctors who embraced the optimistic view of therapeutic intervention in the practice of medicine, which was a fundamental change from the sense of therapeutic powerlessness that was widely taught to these men by their pre-WWII professors. Several of Walter's colleagues have told me that Walter's attitude of therapeutic optimism was his greatest contribution to the education of his students.
Over his 40+ year academic career, Walter developed a program of teaching and research in hypertension and renal disease for which he received national and international recognition. His first professional publications were on renal disease, but by the mid-1950's, he was publishing papers on hypertension and the effects of drugs in patients. After 1960, almost all of his 85 abstracts and 72 papers involved research on the clinical pharmacology of hypertension. In addition to his teaching, research, and service on multiple professional committees, Walter also directed the Cardiovascular Research Laboratories at the University of Iowa from 1958-70 and the Renal-Hypertension Division from 1970-72. Iowa honored Walter for his contributions to the University by awarding him the Distinguished Achievement Award in 1986.
Perhaps most remarkably, however, is that Walter in 1972 -- at the age of 55 when most other academics are settling in to comfortable surroundings -- decided to uproot his large family and move to Houston where he became the first Chairman of the Department of Medicine at the then-new University of Texas Medical School in Houston's famed Texas Medical Center.
In Houston, Walter continued his professional passions -- teaching, research and clinical medicine -- for the remainder of his life at UT-Houston. In addition to being the first Chairman of the Department of Medicine, Walter was director of UT-Houston's Hypertension Unit from 1976 and director of the General Medicine Division from 1982 until his death. During his 20 years at UT-Houston, Walter became the patriarch of UT-Houston's faculty and student body, reflected by the UT-Houston alumni awarding him the first Benjy F. Brooks Medal in 1991 as the outstanding clinical faculty member, the school's naming of it's internal medicine library and suite in Walter's honor, and the Walter M. Kirkendall Endowed Lecture Series that UT-Houston sponsors each year.
Consequently, the foregoing outlines Walter's remarkable professional legacy -- two institutions served for over 20 years each while teaching and pursuing cutting edge research in a key area of medicine throughout his career. James T. Willerson, M.D., the current president and medical director of the Texas Heart Institute, observed the following in his eulogy at UT-Houston's memorial service for Walter:
Dr. Frank Abboud called me two days ago, wanted to come join me yesterday, early in the morning to visit and talk about Dr. Kirkendall, and then go to his funeral with me. . . Dr. Abboud told me that people in Iowa at the Medical School had never felt that Dr. Kirkendall had left. He was still there. What he had given, what he represented, what he continued to give was part of Iowa.
Can you imagine having that impact on an institution, and people years after you've left? Dr. Kirkendall did. How many of us could claim the same thing, ever?
But the foregoing summary cannot adequately convey Walter's truly endearing qualities. He was a devoted teacher to his medical students and residents, and was constantly interested in the development of their careers. Patients appreciated his thoroughness, fairness and profound concern for them and their families. Many conversations with Walter invariably turned to stories about his aversion to wastefulness, the clutter in his office, his sense of humor, his competitiveness, and his suspicion that the sodium ion is bad for one's health.
The following eulogies that were given at Walter's funeral and memorial service elaborate on these qualities: the eulogy of my brother Bud, who is a district judge in Seguin, TX; my eulogy; the eulogy of my brother Matt, who is an internist in Dubuque, Iowa; the memorial service closing of my sister Mary, who is a pediatric emergency room physician in San Antonio; the eulogy of Dr. Willerson; the eulogy of Dr. Chevis M. Smythe, and the eulogy of Dr. Philip Johnson.
I close with two of my favorite stories about Walter. One is recounted by Tom S. McHorse, M.D., former president of the Travis County, Texas (Austin) Medical Association. Dr. McHorse recalls vividly his experience with Walter in examining a patient while in medical school:
The setting is the University of Iowa Hospital staff service ward one February morning. For physicians who graduated after 1980, ward is defined as a large room with eight to ten patient beds separated by curtains, as many emergency rooms currently have. As medicine was practiced in 1968, acute MIs, bacterial endocarditis, and other illnesses were treated in hospital for six weeks or more. The patient in bed four was such an extended stay patient.
Dr. Kirkendall was rounding with his entourage of residents and nurses. As we approached this frequently examined patient, a distinct change was obvious from the day before. The patient truly had the worst "soup bowl" haircut you can imagine. At bedside, Dr. Kirkendall addressed his first question to the patient:"Who cut your hair?"
"The hospital barber," replied the patient, somewhat taken aback.Dr. Kirkendall was clearly not pleased as he turned to his residents and declared:"Incompetence at any level should not be tolerated."
I have no memory of the patient's diagnosis or anything else Dr. Kirkendall taught us that week, but I have long remembered that statement of Dr. Kirkendall.
The second story was passed along by Dr. Smythe in his eulogy during UT-Houston's memorial service for Walter, in which he recounted a particularly personal experience with Walter:
Now, at this time, I want to skip ahead to something very personal. 1975-76 was also not a bed of roses at this institution. And, when I was bounced out of the Dean's Office, I was profoundly hurt, very profoundly hurt, and, I was also puzzled. Since those who were relatively active in my demise had been the people to whom I was closest, I was also alone and considerably puzzled as to whom to turn.
Now, Dr. Kirkendall himself was under no mean pressure at that same time. And indeed, the forces that were playing on us were pretty much identical. But, Walter is the person who said "Cheves, come to my office every Thursday at 11:00 o'clock." And, he was a person who said "I will help you retrain yourself as a physician." And, he did.
And, that episode illustrated this man's extraordinary generosity of spirit more than anything that I've ever seen.
I will be grateful to him for the rest of my life.
Walter's understanding of the importance of service to others is the thread that binds the fabric of families, friendships, schools, professions, communities, and, ultimately, societies. In his quiet and confident manner, Walter understood the importance of his life's work, and this understanding formed the cornerstone of his unbendable sense of fulfillment and contentment in his personal and professional life. In my book, that's quite a fine legacy, and I am taking this Father's Day to appreciate my blessing to have been touched by it.
June 18, 2005
The morning brings several interesting obserations regarding yesterday's guilty verdict in the trial of former Tyco International, Ltd. executives, L. Dennis Kozlowski and former Tyco finance chief Mark H. Swartz.
Over at Conglomerate, Professor Hurt (a former Houstonian, by the way) notes insightfully in this post that, on one hand, the case against Messrs. Kozlowski and Swartz differs from most other corporate crime prosecutions because of its relative simplicity, but that -- on the other hand -- such simplicity insures that no amount of regulation will ever prevent such actions from occurring again.
Meanwhile, over at the White Collar Crime Prof Blog, Professor Henning makes a key technical point about the way in which the prosecution handled the more recent prosecution after the first trial ended in a mistrial:
The government made its case in about 25% less time (13 weeks as opposed to 18 weeks in the first trial), and kept the accounting and reporting issues front-and-center. Going technical is usually a recipe for disaster (see the Enron Broadband Services prosecution for an example of mind-numbing detail), but in this case the Manhattan D.A.'s office concentrated on what was truly important.
Finally, in this remarkable analysis, Professor Ribstein questions the wisdom of unleashing the power of the state based upon the human frailties that drive most prosecutions of questionable business conduct:
Not merely envy (one's discomfort at comparing oneself with another), or wanting to have what another person has, but disliking that person for having it and believing that his good fortune is undeserved. The resenter wants to lower the envied person to his level.
This is the common element in Tyco, Martha Stewart, Mike Milken and many other cases of this ilk, despite the facial dissimilarity of the offenses being tried.
Resentment is pernicious enough in itself because it seeks to degrade human achievement. But it's worse when it leads to criminal prosecutions for what amount to agency costs -- failure to get the requisite corporate approval for expenditures. The marginal criminality of these offenses is what leads to months of hugely expensive trials.
The supposed social payoff is deterrence. But the Kozlowskis of the world probably will keep doing this stuff while the legitimate sorts will be ever more afraid of taking chances. Not that the conduct in Tyco was particularly worth encouraging, but Mike Milken was a different case, in my view, and I don't see much chance of politically ambitious prosecutors being able or willing to tell the difference.
So white collar prosecutions become a sort of lottery. If the prosecution can come up with something colorful, it wins, or maybe loses if it's too colorful (Sardinia). These are not the elements of a rational criminal justice system.
Nor is it rational to base corporate criminal prosecutions on the timing of going bust.
Following on the heels of this earlier post, this NY Times article reports on the lawsuits that the Office of the Comptroller of the Currency and the Clearing House Association filed on Thursday in Manhatten U.S. District Court to enjoin the Lord of Regulation from using his subpoena power to obtain nonpublic credit score and loan information from national banks such as HSBC Holdings, J. P. Morgan and Wells Fargo. Here is an earlier post on Mr. Spitzer's latest attempt to injure a productive part of the national economy, this time the sub-prime mortgage market.
Not pleased with competition in the regulation market that infringes on his demagogic ways, Mr. Spitzer commented as follows about the lawsuits:
"While such a move was expected from the banks, it is shameful that a federal regulator would join in an effort to shield the banks from scrutiny by state regulators."
To which I wish the Comptroller of the Currency would respond:
"While we understand that Mr. Spitzer enjoys undertaking investigations that will provide publicity for his political purposes, we do not expect him to undertake investigations into areas that are the province of federal regulation and that will harm the ability of low-income families to climb the ladder to prosperity through home ownership."
The Houston Chronicle has added another blog -- Eric Berger's SciGuy -- to its impressive and expanding Chronicle bloglist that Chronicle tech writer Dwight Silverman has spearheaded. Kudos to Dwight and the Chronicle editors for being pioneers in this emerging method of delivering their product to customers.
In this post, Mr. Berger notes the National Institutes of Health annual ranking of U.S. medical schools by the amount of research funding, which is a key indicator of a medical school faculty's research capabilities. Here is a listing of medical schools of local interest:
1. John Hopkins University, Baltimore, Md., $449 million
11. Baylor College of Medicine, $248 million
21. UT Southwestern Med. Center, Dallas, $172 million
35. Cornell Univ. Medical School (Methodist Hospital) $124 million
39. UT Medical Branch at Galveston, $104 million
48. UT Health Science Center at San Antonio, $80 million
64. UT Health Science Center at Houston, $51 million
In addition, although not a medical school, UT's M.D. Anderson Cancer Center in the Texas Medical Center generated another $145 million in research last year. Consequently, as Mr. Berger notes, the institutions in the Texas Medical Center pump almost half a billion of research funds into the local economy.
By the way, the NIH list dovetails nicely with the ranking of university endowments that was noted in this earlier post. Given the size of Baylor Medical School's endowment and annual research funding, one has to respect the risk that Baylor took in ending its longtime partnership with the even better-endowed Methodist Hospital ($2.3 billion endowment). Hopefully, the competition between the two institutions for research funds will enhance the amount and quality of research being performed at the Texas Medical Center.
June 17, 2005
The New York state court jury in the criminal trial against former Tyco International Ltd. CEO L. Dennis Kozlowski and former Tyco finance chief Mark H. Swartz has rendered a guilty verdict against the two former Tyco executives on 22 of 23 counts, including grand larceny, conspiracy, securities fraud and falsifying business records. In essence, the jury concluded that the two had masterminded a scheme to loot Tyco of millions of dollars in unauthorized compensation and perks.
The result is not particularly surprising, especially after Mr. Kowlozski's less-than-inspiring performance on the witness stand (see previous posts here and here). Prosecutors will propose that the two serve between 15 and 30 years in prison, but my sense is that the two will be sentenced to considerably less than that. Sentencing is tentatively scheduled for August 2.
During the trial, prosecutors contended that Messrs. Kowlozski and Swartz stole millions in secret bonuses, including the forgiveness of $37.5 million in loans from Tyco. The defense contended that the two former executives did not hide the bonuses from either the Tyco board or outside auditors and, thus, lacked the requisite mens rea to commit the crimes alleged.
The first Tyco trial ended with a mistrial last year under colorful circumstances after two weeks of jury deliberations when one of the jurors -- who, it was later learned, had been holding out in favor of acquittal -- received a letter she perceived as threatening. The juror's name had been published by several media outlets after she had appeared to make a "thumbs up" hand signal to the defense team in court. After the declaration of mistrial, several of the jurors said that the panel was 11-1 in favor of conviction on most counts.
This post from mid-May noted former Merrill Lynch executive Daniel Bayly's motion to the Fifth Circuit Court of Appeals requesting that he remain free during the appeal of his conviction and sentence in the Enron-related Nigerian Barge case. Subsequently, the Fifth Circuit summarily denied Mr. Bayly's motion in a one page order.
However, the May 31st Anderson decision of the U.S. Supreme Court has prompted the Bayly appellate team to file this compelling motion requesting that the Fifth Circuit reconsider its denial of Mr. Bayly's motion for release pending appeal. The money section:
The fundamental errors in this case begin with the government's novel and unduly creative use of an "honest services" thoery in connection with the wire fraud statute. See 18 U.S.C. 1343, 1346. As Bayly's motion for release shows, the honest services charge in this case permitted a criminal conviction for conduct -- the accelerated booking of gain -- that was undertaken primarily on behalf of the alleged victim (Enron), which knew every aspect of the transaction, and not for the self-interest of the alleged conspirators (see Bayly motion at 16-20). No court ever has sanctioned such a broad application of the honset services statute -- especially where, as here, no bribe or gratuity was provided to, nor were there any undisclosed conflicts of interest as to, the employees of the purtative victim (Id. at 19-20). As in Andersen, the Enron Task Force in this case secured a conviction through application of an entirely unprecedented theory in a hotly-contested area of the law. . . The government does not dispute that, if our view of the limits of Section 1346 prevails, all three counts of conviction must be set aside. (footnote omitted).
The motion goes on to address other grounds for reversal of Mr. Bayly's conviction, particularly the trial court's granting of the Enron Task Force's objection to a jury instruction that the defense proposed on a key defense theory in the case -- i.e., that the Enron promise to Merrill Lynch to arrange a sale of the interest in the barges within six months to a third party -- as opposed to an Enron promise to repurchase the interest within that time frame -- did not undermine Enron's accounting of the transaction and, thus, did not constitute the basis of a crime. Inasmuch as Enron ultimately arranged for such a sale to a third party as opposed to buying back the interest in the barges from Merrill itself, the lack of a jury instruction on that issue appears to be another solid basis for reversal of Mr. Bayly's conviction.
But read the entire motion, which is only eight pages. It is a masterful example of appellate advocacy and brevity that persuasively outlines the major injustice of the convictions of the Merrill Lynch executives in the Nigerian Barge case. Mr. Bayly worked on this relatively small transaction for less than two hours in the ordinary course of one of his business days. He is now facing two and a half years away from his family during the autumn of his life because of the government's broad application of criminal statutes to cover what is not even clearly questionable business conduct, much less clear criminal conduct.
The Fifth Circuit's Anderson decision is not a highlight of that body's judicial decision-making, as the U.S. Supreme Court's decision in the case reflects. Here's hoping that the Fifth Circuit sits up and takes notice before yet another grave injustice takes place in the case of Daniel Bayly.
Over a year ago, this post noted Hoover fellow and former U.S. Iraqi advisor Larry Diamond's reservations the United States' failure to provide adequate security for the Iraqi people who are willing to risk commitment to democratic principles.
Now, Mr. Diamond has written a book on his experiences in Iraq and, according to this New York Times book review, the book harshly criticizes the Bush Administration's adoption of the Rumsfeld Policy of attempting to reconstruct Iraq with a relatively small fighting force:
Mr. Diamond believes that one of the "most ill-fated decisions of the postwar engagement" was President Bush's acceptance of the plan designed by Secretary of Defense Donald H. Rumsfeld - "to go into Iraq with a relatively light force of about 150,000 coalition troops, despite the warnings of the United States Army and outside experts on post-conflict reconstruction that - whatever the needs of the war itself - securing the peace would require a force two to three times that size." Committing more troops than the United States initially did, Mr. Diamond argues, "would have necessitated an immediate mobilization of the military reserves and National Guard (which would come later, in creeping fashion), and might have alarmed the public into questioning the costs and feasibility of the entire operation" - a development that might have slowed the gallop to war.
The lack of sufficient troops, Mr. Diamond goes on, would create a further set of problems: an inability to prevent looting and restore law and order, which would further undermine Iraqis' trust in the United States; and inability to seal the country's borders, which would allow foreign terrorists to enter and help foment further violence. "The first lesson," Mr. Diamond writes, "is that we cannot get to Jefferson and Madison without going through Thomas Hobbes. You can't build a democratic state unless you first have a state, and the essential condition for a state is that it must have an effective monopoly over the means of violence."
First, U.S. District Judge Ewing Werlein, Jr. announced yesterday that he would be taking senior status on December 31. Although he will continue to hear cases, Judge Werlein's election to take senior status opens up a vacancy on the local District Court bench. As readers of this blog know, Judge Werlein has been in the news over the past year for his handling of the Enron-related Nigerian Barge trial.
Meanwhile, former Texas Supreme Court Chief Justice Tom Phillips, who resigned in September, 2004 to become a law professor at South Texas College of Law in Houston, announced yesterday that he would be joining the Houston-based firm of Baker & Botts, LLP in September, 2005 as an appellate specialist in the firm's Austin office. Mr. Phillips previously practiced trial law in the Houston office of Baker Botts from 1975 until 1981 before becoming a Harris County District Judge and eventually a Texas Supreme Court Justice.
Finally, longtime State District Family Court Judge Linda Motheral announced that she is stepping down from the bench to continue her recovery from temporal lobe epilepsy, an affliction that forced her to take a leave of absence from the bench last year. Judge Motheral Motheral was appointed to the family law bench in 1993 and won re-election twice.
June 16, 2005
How many people would have predicted that Steve Jobs would give the best commencement speech of the year?
The text of his address to the graduating class of Stanford University proves that he did. After noting his experience as a cancer survivor, Mr. Jobs observed:
Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.
Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.
Read the entire speech. Bravo!
Update: Here is an audio link to Mr. Jobs speech.
As predicted here and here, this Todd Ackerman/Chronicle article reports that the Texas Medical Center managers' board of directors rejected Baylor College of Medicine complaint's Wednesday that the Medical Center's historic charter and deed restrictions prohibit Methodist Hospital's creation and operation of its own education and research programs and its partnership with the New York-based Cornell University Weill Medical School.
As an aside, Mr. Ackerman notes that the TMC board and the Texas Attorney General are tiring of the Baylor-Methodist spat:
In a letter to the presidents of Baylor and Methodist, the board also delivered a rebuke of sorts, reminding the battling institutions of their historic obligation to cooperate "to better serve the interests of the people of Texas" and calling for them to resolve their dispute. It marked the first time since the longtime partners split in April 2004 that the TMC made such a formal appeal.
A similar appeal was made after the meeting by Texas Attorney General Greg Abbott's office, which previously had stayed out of the dispute. Saying it has concerns about the future of the Medical Center, it released a statement expressing hope the two institutions "exhaust every avenue in trying to work out their differences."
My sense is that a lawsuit between the two former Medical Center partners is still a distinct possibility. Stay tuned.
The Sihpol acquittal from last week has generated much needed criticism of the demagogic ways of New York AG Eliot Spitzer, including this Wall Street Journal ($) editorial the day after the acquittal. While the WSJ editorial rightly criticizes Mr. Spitzer's questionable tactic of criminalizing merely questionable business practices, the editorial concludes with the following observation:
One lesson here is that juries, forced to make a decision about a defendant's fate, want to make sure that the alleged behavior is in fact criminal. Prosecution by press release won't do in court.
The Justice Department has understood this, and has built a record in business fraud cases that has held up in court on Enron, WorldCom and Adelphia. Mr. Spitzer, by contrast, has used New York's overbroad Martin Act to prosecute financial cases of dubious legal merit. Business fraud deserves to be prosecuted, but the criminalization of widely accepted business practices ex post facto is both unjust and offensive to the rule of law.
Well, that dubious compliment of the Justice Department's equally egregious conduct toward criminalizing business practices did not sit well with Harvey Silvergate, a Boston civil rights attorney and author who is working on a book on abusive federal prosecutions. In this WSJ letter to the editor, Mr. Silvergate notes the following:
The reason for the Justice Department's success is that the federal courts have aided and abetted in contorting the law by affirming dubious convictions for dubious crimes. The Supreme Court's welcome reversal of the Arthur Andersen conviction, one hopes, signals a counter-revolution rather than a mere blip in the continuing degradation of the federal criminal code.
However, in my book, a more insightful criticism of the WSJ's misguided compliment of the Justice Department comes from Ben Edwards, former American business editor for The Economist magazine, who wrote the following letter to the WSJ editors, which the WSJ has chosen not to publish, at least as of yet:
Your otherwise commendable editorial calling New York Attorney General Eliot Spitzer to account for his abusive disregard of the rule of law falls once again into what has become a most unfortunate and unthinking habit of mind regarding the rights and wrongs of the Justice Department's wider war on white-collar "crime".
While damning Mr Spitzer, you lavish praise on those wise folk at Justice for building "a record of business fraud cases that has held up in court". Two thoughts spring to mind.
First, just as with Mr Spitzer, most of the actions the Justice Department takes against white-collar defendants never end up in front of a jury of peers. Federal prosecutors use the threat of ultra-long jail sentences to bludgeon plea-bargain agreements from their victims instead. Who, in this climate, fancies their chances of acquittal in court, no matter how persuasive their defense?
Second, some of the cases that have reached the courts seem notable for reasons other than fine prosecutorial legal work. So far, we have had willful and abusive misinterpretation of the law (Arthur Andersen), absurd and dangerous criminalization of civil disputes (the Enron broadband trial) and stunning abuse of hearsay and other evidentiary rules to damn defendants with whispers and slurs (the Enron-related "Nigerian Barge" trial). No doubt, as the nation's temperature cools, more of these convictions will be overturned on appeal.
Of course, federal judges share some of the blame for failing to restrain this appalling government behaviour. But surely the thundering editorialists at the Wall Street Journal can muster the courage to stand up to the howling lynch mob and call this for what it quite nakedly is: a witch hunt.
Over this past weekend, this NY Times article reviewed the civil litigation and criminal investigation into KPMG's mass-marketing of dubious tax shelters from the late 1990's through late 2003. Here are the previous posts over the past year and a half on KPMG's tax shelter woes.
Now, based on this Wall Street Journal ($) article, it appears that KPMG is literally fighting for its life as the Justice Department decides whether to indict the firm over is role in promoting the tax shelters. What is particularly troubling about KPMG's perilous situation is that the firm has cooperated with the Justice Department in an effort to stave off a criminal indictment. That should give the American International Group Inc. board members pause as they consider their similar decision to cooperate with governmental investigations into AIG.
The threat of an indictment already has KPMG pursuing a settlement of the case under a deferred-prosecution agreement or other settlement with the Justice Department. However, some partners in KPMG management are now convinced that even a deferred-prosecution settlement of potential criminal charges would seriously damage the firm and possibly cause an Arthur Andersen-type meltdown. An indictment would almost certainly cause thousands of innocent KPMG employees to lose their jobs and force KPMG's dozens of equally innocent institutional clients to find another accounting firm among the remaining three large accounting firms.
So, the dubious governmental policy of criminalizing merely questionable business practices may result in some big companies not being able to to find an accounting firm capable of providing adequate audit services at all.
Some governmental policy, eh? And even if an indictment of KPMG is justified in this particular circumstance, Professor Ribstein points out the irony in the situation.
June 15, 2005
However, Baseball America gives Stros fans a reason for some optimism during this dreary season as it lists three Stros minor leaguers (including the top 2) in its current Top 20 Prospect Hot Sheet (paid subscription required):
1. Troy Patton, lhp, Astros (Low Class A Lexington)It's now been over a month since Patton gave up a run, spanning 32 innings over five starts. During that span, he's limited opponents to 10 hits and six walks, while striking out 35. In 12 starts on the season, he's allowed zero earned runs seven times, one earned run three times, and two earned runs twice.
2. Hunter Pence, of, Astros (Low Class A Lexington)Pence went on the DL last night with a strained quadriceps, and that's the only thing that will slow down the minor league home run leader with 23, who has slugged 16 home runs in his last 32 games.
17. Jimmy Barthmaier, rhp, Astros (Low Class A Lexington)As if Patton and Pence (The Killer Ps --we're copyrighting that and printing t-shirts as you read this) aren't enough, Barthmaier gives the Legends three Hot Sheet designations by tossing 19 scoreless innings in his last three starts and lowering his season ERA to 1.77.
Patton -- the Tomball, Texas High School star who the Stros plucked in last year's draft from the clutches of the University of Texas baseball squad -- had his scoreless streak ended last night at 32 innings as he lost his first game of the season.
Nevertheless, with studs such as this in the lower minors, and several solid pitching prospects at AA Corpus Christi and AAA Round Rock, it sure would be nice if the hitting-deprived Stros would try to cobble together a trade for this potentially very good hitter, who is currently on the outs with his pitching-deprived club. Looks as if the Stros might be able to negotiate a real bargain.
I speculated facetiously awhile back that some NY Times editors are reading this blog. Now, I'm really starting to wonder.
First, over the weekend, the NY Times ran this less than flattering article on the Lord of Regulation's recent defeat in the Sihpol case, which dovetails with much of the criticism that this blog has leveled toward Mr. Spitzer over the past year.
Now, Joseph Grundfest pens this Times op-ed in which he addresses an issue that this blog has been hammering on for a long time: that is, the tactic of prosecutors damaging or -- in the case of Arthur Andersen -- effectively terminating a business entity before the nature or scope of alleged criminal activity is proven:
Andersen's demise did serve as a stern reminder to corporate America that prosecutors can bring down or cripple many of America's leading corporations simply by indicting them on sufficiently serious charges. No trial is necessary. ...
The current situation of the insurer American International Group is a case in point. Would you buy an insurance policy from a company that might be crippled by a criminal indictment that the New York attorney general, Eliot Spitzer, decides to file tomorrow morning? Neither would I. If the government insists that A.I.G.'s chief executive be fired as part of the price of not indicting the firm, the chief executive is gone. It doesn't matter that he ranks among the most powerful executives in America. A.I.G. has no realistic choice but to cooperate fully with the government, even if evidence might later demonstrate that the government's theories were legally infirm or that factual allegations couldn't withstand cross-examination. Who, after all, wants to be put out of business when indicted, only to be vindicated years later by a jury verdict or appellate ruling? . . .
. . . The prosecutor's decision to indict is largely immune from judicial review. The prosecutor acts as judge and jury. Traditional due process safeguards, like the right to confront witnesses, can't protect the potential corporate defendant. The innocent can therefore be punished as though they are guilty, and penalties imposed in settlements need not bear a rational relationship to penalties that would result at a trial that will never happen.
Hat tip to Professor Bainbridge for the link to the Mr. Grundfest's op-ed.
On the heels of the dramatic testimony that occurred late last week, this Chronicle article reports that Rex Shelby, former senior vice president of engineering and operations for Enron Broadband, yesterday became the first of the five defendants in the ongoing trial to take the stand in his own defense.
All of the five Enron Broadband defendants are expected to testify during the trial, which is a significantly different tactic than the defense team used in the previous Enron-related Nigerian Barge trial, the only other trial that has taken place involving former Enron executives. In that trial, only three of the six defendants testified and one of those -- former Enron in house accountant Sheila Kahanek -- was acquitted. All of the other five defendants in that case -- including the only other Enron defendant (Dan Boyle) -- were convicted.
Although not without risk, the defense move of having the defendants testify is sound. Juries in white collar cases almost always expect to hear what the defendants have to say and generally hold it against the defendants if they do not testify (even though they are instructed not to do so). The biggest obstacle that the defendants in the Broadband case have is attempting to explain the elephant in the courtroom -- that is, the huge amount of money on Enron stock sales that Mr. Shelby and two of the other defendants made -- and attempting to humanize the defendants by having them testify is an essential component of that explanation.
On the heels of Citigroup's settlement last week, J.P. Morgan Chase & Co. elected to avoid the risk of being placed in the "last to settle" position that it found itself in the WorldCom class action securities fraud litigation and agreed to pay about $2.2 billion to settle claims against the firm in the Enron securities fraud class action.
The Enron securities fraud class action accuses a group of Wall Street banks and securities firms of misleading investors by facilitating Enron transactions that removed billions of dollars of debt that allegedly should have been reported on the firm's public financial statements. The lawsuit specifically claimed JP Morgan underwrote Enron securities, lent more than $1 billion to the company, and syndicated more than $4 billion of bank loans for Enron while the bank's analysts were issuing allegedly false positive reports about the company.
Combined with the Citigroup settlement and previous settlements of lesser amounts (here, here and here), the JP Morgan settlement pushes the total amount of settlements in the Enron class action over $5 billion and ever closer to the $6 billion standard that the settlements in the WorldCom class action established.
JP Morgan's settlement is not surprising given what happened in the WorldCom litigation, in which the firm and its counsel were heavily criticized by analysts and investors for waiting until the courthouse steps to settle. JP Morgan settled that case for $2 billion, but that was reportedly $630 million more than it would have had to pay had the firm settled earlier.
The Citigroup and JP Morgan settlements ups the price of poker on the remaining institutional defendants in the Enron class action, which include Merrill Lynch & Co., Credit Suisse Group's Credit Suisse First Boston, Barclays PLC, Toronto-Dominion Bank, Royal Bank of Canada, Royal Bank of Scotland Group PLC and Goldman Sachs Group Inc. Plaintiffs counsel in the litigation has publicly stated that they are seeking $40 billion in damages in the case, but the pace and size of settlements indicates that the total amount recovered will be far south of that amount. Nevertheless, the total amount of settlements will certainly be higher than the WorldCom settlement total and, thus, will establish a new record for the highest amount recovered in a U.S. securities fraud class action against financial institutions.
Flying under the radar screen of the more well-publicized criminal trials of unpopular businesspersons, jury selection began yesterday in the retrial of the corporate fraud criminal case against former Westar Energy Inc. executives David Wittig and Douglas Lake in Kansas City federal court. Here is a previous post on the mistrial that occurred in the first trial of the case.
The retrial of the case is particularly interesting because of a battle over whether Westar is responsible to pay the defense costs of the defendants. In an order this past Friday, the 10th Circuit Court of Appeals denied the two former executives' motion that sought a postponement of the trial while they appealed an a trial court order that bars Westar from advancing their legal fees. Although the appellate court turned down their stay motion, the 10th Circuit did agree to dispose of the appeal of the legal fee issue on an expedited basis.
To date, Westar has advanced about $8 million for the attorney's fees and expenses the men have incurred in the ongoing criminal case. Westar's by-laws provide for payment of such fees in litigation arising from its executives' employment. After the first trial ended in a mistrial, however, prosecutors contended that the money was the product of the defendants' illegal activities and was subject to forfeiture. Last month, U.S. District Judge Julie Robinson -- who battled with defense attorneys throughout the first trial -- sided with prosecutors and reversed her earlier order that authorized Westar to advance the fees.
While the 10th Circuit considers the executives' appeal on the legal fee issue, Westar will place funds equal to their defense costs in escrow. If the 10th Circuit reverses Judge Robinson's ruling, then the money will be made available to pay the executives' defense costs. If it upholds her ruling, then the money will be released to pay the fees if the executives are acquitted or, possibly, if the case ends in a mistrial again.
If the first trial was any indication, this retrial is one worth watching.
June 14, 2005
This Dan Feldstein/Chronicle article reports that the brother of former Houston mayor Lee P. Brown was implicated this morning during the opening stages of the federal corruption trial of Cleveland, Ohio businessman Nate Gray:
[O]n the first day of a major bribery trial here of three other men, prosecutors played a wiretapped cell phone conversation in which Cleveland businessman Nate Gray brags that "the mayor's brother and I are like this."
"I can go into Houston and have more juice than a local guy," Gray told a young attorney who wanted to learn the ropes of Gray's consulting business.
"Greasing palms" was how to get things done, said Gray, who faces 44 counts of bribery-related charges.
Two other people Gray allegedly gave cash and gifts were Houston city officials ? former Brown chief of staff Oliver Spellman and building services director Monique McGilbra.
Both pleaded guilty to accepting bribes and are expected to testify against Gray. . .
Prosecutors said Brown got monthly payments totaling thousands of dollars and even a payment specifically for promising to talk to his mayoral brother about a pending contract.
Where there is smoke in such matters, there is often fire. Stay tuned on this one.
David Letterman last night on the not guilty verdict in the Michael Jackson trial in Santa Maria, CA:
"This just in . . . Saddam Hussein wants his trial moved to Santa Maria, California."
And from Jay Leno:
"This trial lasted 14 weeks. Do you realize that?s 6 weeks longer than average NBC sitcom?"
"Rory made an interesting decision to speed up play and didn't invite Ben along."
By the way, Sabbatini publicly apologized for his conduct on Monday.
Predicting the lifespan of popularity for a demagogue is a risky business, but recent mainstream media pieces certainly indicate that New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot Spitzer's fifteen minutes of fame as the nation's self-appointed Lord of Regulation may be coming to an end. Here are the posts from over the past year and a half that catalog Mr. Spitzer's relentless self-promotion campaign at the expense of business interests.
First, this NY Times article from this past weekend reviews Mr. Spitzer's resounding loss in the Sihpol case, where Mr. Spitzer had sought to put away for 30 years a young broker who simply was following orders in doing his job. It's never a good sign for a business regulator such as Mr. Spitzer when the NY Times -- not exactly on par with the Wall Street Journal's editorial page as a supporter of business interests -- suggests that his tactics are overreaching.
Meanwhile, in this Tech Central Station op-ed, Dominic Basulto points out what is really going on:
It is perhaps all too obvious why Spitzer has preferred to use headline-grabbing tactics, intimidation and the threat of criminal prosecution to achieve his ends rather than depend on the U.S. legal system. After all, Eliot Spitzer is not just campaigning against financial wrongdoing on Wall Street -- he is also campaigning to become the future governor of New York in 2006. His Spitzer2006.com Web site may not state it outright, but he is trying to leverage his crusade against the most corrupt of Wall Street practices to win over the hearts and minds of New York voters. Sound familiar? To some extent, it's the same strategy that Rudy Giuliani used to campaign for New York City Mayor nearly fifteen years ago. A few more setbacks in the courtroom, though, and New York voters may view Spitzer only as an over-reaching political opportunist.
Finally, in this OpinionJournal op-ed, Kimberly Strassel reports that Mr. Spitzer's well-publicized case against former New York Stock Exchange chairman Richard Grasso and NYSE board member Kenneth Langone (previous posts here) is not looking particularly rosy, either. In fact, it's looking downright baseless:
The AG charges in his suit that Mr. Grasso's compensation was not "reasonable"--that directors awarded him money based on "incomplete, inaccurate and misleading" information; and that Mr. Grasso influenced his awards. Mr. Spitzer is also suing former compensation committee head Ken Langone--on grounds that he misled directors about the true size of the compensation package--as well as the Exchange itself.
But [more than 1,000 pages of interviews with more than 60 former and current NYSE directors and staff, as well as third parties that Mr. Spitzer attempted to exclude from the lawsuit] refute much of this. Key directors admit that they knew exactly what they were doing in paying Mr. Grasso as they did, and continue to defend their actions.
In the end, Ms. Strassel asks the $64,000 question about the Grasso lawsuit:
Does it serve the interests of the NYSE? Or does it fuel, instead, the political Odyssey of Mr. Spitzer?
This Houston Business Journal article is reporting that former Continental Airlines CEO Gordon Bethune is leading one of the investor consortiums that the United Airlines' Creditors' Committee is touting as one of the groups that is interested in investing in a plan of reorganization in United's chapter 11 case. Mr. Bethune stepped down as Continental's CEO this past December 31, and is widely credited with managing Continental in a manner that avoided a third chapter 11 case for the Houston-based airline.
It's yet another reflection of the abysmal nature of the airline business that a CEO's success in that business is defined by whether he can manage around a chapter 11 filing.
The Greater Houston Partnership Monday named Jeff Moseley as its new Executive Director to replace Jim Kollaer, who announced his resignation in February after 15 years in that position. Mr. Moseley is a former Denton County Judge who is currently the Executive Director of Texas Economic Development office, an agency that markets Texas for business and tourism development. Here is the Chronicle story on the appointment.
The Greater Houston Partnership is a private, non-profit organization formed in 1989 that serves as the primary advocate of Houston's business community and is dedicated to building economic prosperity in the region. It counts about 2,000 local businesses as members.
Update: Mr. Kollaer reminisces on his tenure in this Chronicle interview, in which he notes that the highlight was helping to arrange for the new downtown ballpark and the lowlight was the demise of Enron. One particularly interesting observation is the following:
Q: How about the economy of Houston? How will that look in 20 years?
A: In 1982 we were 82 percent energy. Today we're at 45 percent energy. In 20 years we'll be somewhere in the low 30s if we continue on the path we're on now.
In the face of an exodus of key employees and an embarrassing $1.45 billion jury verdict in the Perelman case, Philip J. Purcell and the Morgan Stanley board jointly announced yesterday that Mr. Purcell was resigning as CEO of the venerable financial services firm.
Although some characterized the fight that Mr. Purcell faced at Morgan as a dispute between Morgan's financial bluebloods with Mr. Purcell's more modest banking types, that's really a gross over-simplification of the reason for the infighting. Rather, Mr. Purcell represented the dubious concept of the "financial supermarket," which prompted Morgan's 1997 merger with Dean Witter. The theory of that merger was that bringing together a top investment bank creating stocks and bonds with the business of advising retail investors which stocks and bonds to buy was a sure-fire winner.
Geez, what a doozy of a miscalculation that was.
The carnage at Morgan over the past couple of years was borne of the resentment by the Morgan investment banker-types over just how badly Dean Witter's Mr. Purcell had taken them to the cleaners over that merger. Dean Witter's Discover credit card unit accounted for just 5% of the market eight years ago and still accounts for 5% of the market. Similarly, Dean Witter's mutual funds were mediocre performers then and remain mediocre performers now. Finally, Morgan Stanley paid a $50 million civil penalty a couple of years ago because former Dean Witter brokers had been highly compensated for steering customers to inferior mutual funds. So, it's not exactly like Dean Witter added much to Morgan Stanley's reputation.
However, Mr. Purcell continually outmanuevered Morgan Stanley's investment bankers in taking control of the combined company. Mr. Purcell refined his management skills as a McKinsey consultant who advised Sears on its financial diversification, then spun off his Dean Witter unit while Sears spit the bit on his financial diversification model.
In the merger with Morgan Stanley, Mr. Purcell allegedly arranged to have himself named initially as chairman and CEO, but agreed to have Morgan's John Mack takover after the merger had stabilized. Regardless of whether such a promise was really made, Mr. Purcell quickly stacked the board in his favor and Mr. Mack eventually left Morgan in a huff in 2001.
Accordingly, over the past several years, many key traders, bankers and rainmakers exited Morgan as it became clear that loyalty to Mr. Purcell was a condition for advancement. Meanwhile, a growing contingent of former Morgan executives began a campaign to oust Mr. Purcell, most of whom were embarrassed by the way Mr. Purcell orchestrated the 1997 merger and all of whom believed that Dean Witter and Mr. Purcell had kidnapped the firm's formerly sterling investment banking reputation. It simply grates the old-time Morgan executives to no end that Mr. Purcell and his Dean Witter allies control Morgan's name while the Morgan investment bankers still contribute most of the firm's profits. Meanwhile, the Dean Witter businesses that Mr. Purcell brought to the table continue to contribute relatively little to Morgan's bottom line.
At any rate, Mr. Purcell's resignation is not particularly surprising, given the recent exodus of top executives, the Perelman mess and the fact that has stated repeatedly that he would retire in three years, anyway. Any bitterness on Mr. Purcell's part over his earlier-than-expected exit will be softened by the fact that he will likely walk away with a total of at least $62.3 million in restricted stock, stock options, pension benefits, deferred compensation and other retirement savings.
One can only wonder what he would have earned had the 1997 merger gone well?
June 13, 2005
With the U.S. Open Golf Tournament gearing up this week at Pinehurst, S.I.com has this interesting roundtable discussion on the state of golf between golf writer Geoff Shackelford, PGA Tour player Brad Faxon, USGA Executive Director David Fay and Callaway Golf spokesman Larry Dorman.
While the entire discussion is interesting and worth reading, the following comment indicates that Mr. Faxon and Jack Nicklaus probably aren't playing many practice rounds together:
SI: Why is everybody talking about the ball? Deane Beman, Jack Nicklaus, Greg Norman, Arnold Palmer, Gary Player -- they all say the ball needs to be rolled back in the pro game.
FAXON: If Jack Nicklaus had a successful ball, he would never say another word. But he's never sold a ball that's made a dime. There are so many other, more important things to worry about. Like allowing the putter to touch a part of your body other than your hands. . . .
By the way, an interesting incident occurred yesterday during the final round of the Booz Allen Classic at Congressional Country Club in Bethesda, MD. On the 17th hole, Rory Sabbatini, who is a fast player, got tired of waiting for his playing partner Ben Crane, who is a slow player. So, Sabbatini hit his second short on 17, walked up to the green ahead of Crane, chipped up and putted out of turn, and then left for the 18th green and teed off out of turn before Crane putted out on 17. Subsequently, on the 18th green, Sabbatini barely acknowledged Crane during the traditional post-round handshake and then walked to the scoring tent spewing expletives. In short, over the course of about fifteen minutes, Sabbatini established himself as a first-class jerk.
Then, ABC on-course reporter Judy Rankin interviewed Crane after the incident. In a truly remarkable moment in this day of self-absorbed professional athletes, Crane exhibited grace and depth by refusing to criticize Sabbatini, acknowledging that he is a slow player, admitting that he is working on getting faster, and essentially downplaying Sabbatini's infantile reaction.
Thus, in less than a one minute interview, Ben Crane became one of my favorite PGA Tour golfers.
By the way, ABC commentator Paul Azinger appropriately proceeded to do what Crane would not, which was to hammer Sabbatini on the air for his conduct. Good for you, Zinger.
Following up on a story noted in this earlier post, the Chronicle's Todd Ackerman continues his outstanding reporting over the past year on the historic split between Baylor Medical School and Methodist Hospital with this article in which he reports that Baylor has formally accused Methodist of attempting to put the medical school out of busienss in connection with an administrative proceeding before the entity that manages the Texas Medical Center.
The context of the current phase of the dispute between the two longtime Medical Center partners is a proceeding before the Texas Medical Center's covenant compliance committee in which the committee will determine whether Methodist is violating the Medical Center's deed restrictions by starting competitive education and research programs with New York's Cornell University Weill Medical School. Baylor contends that the programs and affiliation between Methodist and Cornell is an attempt by Methodist to harm Baylor.
Although a legal longshot (Texas law does not favor covenants that restrict competition), Baylor's latest salvo is another public relations nightmare for Methodist, which is attempting to carve out a post-Baylor plan to remain a primary research institution. Methodist has a big advantage in that its $2.3 billion endowment is over twice the size of Baylor's endowment, but Baylor is aggressively pursuing new affiliations with other Medical Center institutions. Consequently, there is no assurance that Methodist's current financial advantage will result in a dominant position in the Medical Center five to ten years down the road, particularly if Methodist's research affiliations do not compete effectively with those of Baylor and other Medical Center institutions.
As noted in this earlier post, new NASA chief administrator Michael D. Griffin is shaking things up at the space agency. This Washington Post article reports on Mr. Griffin's latest moves, which include the building of a less political and more scientifically-oriented management team to implement the initiative to return humans to the moon by 2020 and eventually send them to Mars. One particularly interesting part of the article is the following:
"[Mr. Griffin] wanted to be NASA administrator for a long time and has given a lot of thought to what has been done well or badly," one congressional source said. "Because of that, he is not going to take a year or two to get to know the organization."
Instead, the sources said, he expressed dismay that NASA over the past several years had put a lot of people in top management positions because of what one source described as "political connections or bureaucratic gamesmanship -- not merit."
Several sources spoke of a corps of younger scientists and engineers, including Griffin, who had been groomed in the 1970s and 1980s as NASA's next generation of leaders only to be shoved aside during the past 15 years. They said Griffin hopes to bring them back.
"The people around him will be quite outstanding," one source said. "The philosophy is that good people attract outstanding people. This is going to be a very high-intensity environment, and NASA needs experienced, outstanding people."
As predicted in this earlier post, this NY Times article reports on the guilty plea of Richard Napier -- a senior vice president at General Re in 2000 and 2001 when the questionable transaction with American International Group occurred -- to a single criminal conspiracy count in United States District Court in Alexandria, Va. on this past Friday. Here are the previous posts on the investigation into AIG and Berkshire Hathaway, Inc.'s General Re.
Meanwhile, General Re continued its attempt to hedge the risk of loss resulting from the criminal probes by negotiating with the government about settling a continuing criminal investigation that focuses on whether General Re conspired with AIG to distort its finances and mislead investors. The negotiations are complicated by the competing government investigations into AIG and General Re, which a Justice Department probe, an SEC investigation, and the New York attorney general office's investigation.
A deal between General Re and the government would be based upon the Justice Department's 2003 Thompson Memo, which contains guidelines that federal prosecutors are supposed use to charge companies in criminal cases. For example, prosecutors can offer lighter charges against companies that "identify culprits" within their organizations, make witnesses available to prosecutors, disclose results of their own internal investigations and waive attorney-client protection.
Berkshire's Warren Buffet has been pushing General Re's cooperation with authorities as a basis for leniency. Berkshire's lawyers have instructed General Re executives to provide emails, notes and other documents to investigators in connection with the various investigations, and Berkshire has publicly stated several times that it is cooperating fully with all government investigations of its reinsurance businesses. AIG's Board has adopted a similar approach with regard to the investigations.
On one hand, this NY Sunday Times article laments just how close some of the major airline companies are to breaking even on an operations basis. It is perhaps the best reflection of the state of the airline industry that breaking even on an operational basis is viewed as a breakthrough achievement for many airlines.
On the other hand, this Wall Street Journal ($) article on Monday reports that Northwest Airlines appears headed toward chapter 11. The company's stock has lost 42% of its value this year and its largest individual shareholder is bailing out. Rating agencies recently downgraded the company's senior unsecured debt to junk while citing unsustainably high labor costs and pension-plan obligations.
June 12, 2005
With a quintessential Roy O quickie-shutout (1 hr., 50 min.) on Sunday afternoon, the Stros (26-35) continue to show signs of life by winning their fifth straight game and seventh out of their least ten. The streak has allowed the Stros to exit last place in the NL Central for the first time in awhile by a half-game over the pitching-challenged Reds (26-36).
Although a good stretch tends to generate good vibes, the Stros are still a seriously flawed team. Through 38% of the season, the Stros are dead last in Major League Baseball in hitting by scoring -73 fewer runs in their 62 games than an average-hitting National League club would have scored in those games. That -73 runs created against average ("RCAA," explained here) is almost 33% worse than any other club in Major League Baseball. Only 3B Morgan Ensberg (8 RCAA/.283 AVE/.374 OBA/.551 SLG) has a well above-average RCAA, although 1B Lance Berkman (-4/.252/.341/.369) and RF Jason Lane (-4/.232/.278/.442) have started to swing the bat better recently and appear prepared to raise their RCAA well into positive numbers.
So, the Stros are still in the market for at least one and possibly two above-average hitters. The remainder of the team, with the possible exception of the fading Biggio (1/.276/.330/.477), appears destined for below average RCAA, and even if Lane and Berkman improve into positive RCAA figures, the Stros as a team will probably end the season somewhere around -60 to -80 RCAA without acquisition of a hitter or two. My sense is that the Reds -- with their glut of hard-hitting outfielders and pathetic pitching -- remain the logical trade partner for the Stros.
Meanwhile, the Stros pitching remains rock solid. The staff's aggregate runs saved against average ("RSAA," explained here) is 7th of the sixteen National League staffs, and would be at the top of the league if not burdened by the poor individual RSAA's of their trio of fifth starters -- Duckworth (-12), Astacio (-14) and Rodriguez (-9). Inasmuch as the Rocket continues to lead the National League in RSAA, Roy O is in the top 10 of RSAA for NL pitchers, and Pettitte, Lidge and Wheeler all have solidly positive RSAA's, the Stros pitching staff will likely keep the club in most games despite the lack of hitting.
The Stros are on the road this week against the Orioles (36-26) and the Royals (20-41) before returning home next week for a six game homestand against the Rockies (20-40) and the Rangers (33-28). In the meantime, keep your eye on the trade wire.
June 11, 2005
Following on the heels of this post from yesterday, the slumbering Enron Broadband trial was jolted Friday as Lawrence Ciscon -- a former Enron Broadband systems engineer who the Enron Task Force has fingered as a target of its ongoing criminal investigation -- dramatically testified that Enron Task Force prosecutors had repeatedly threatened him in attempting to dissuade him from testifying on behalf of the five Enron Broadband defendants. Here are the previous posts on the Enron Broadband case.
The sparks began to fly when the prosecution attempted during cross-examination to impeach Mr. Ciscon's favorable testimony for the defendants that had been elicited during his direct examination. On cross, the prosecution had Mr. Ciscon confirm that prosecutors had advised him that he was a target of the Task Force's ongoing criminal investigation, thereby implying that Mr. Ciscon was testifying in favor of the Broadband defendants to save his own skin.
On re-direct examination, Mr. Ciscon confirmed that prosecutors had recently made three telephone calls to his attorney to "remind" Mr. Ciscon that he remained a target of the Task Force's criminal investigation. Defense counsel then asked Mr. Ciscon whether he considered those calls to his attorney as a "warning" not to testify? Mr. Ciscon replied that he did not consider the calls as merely a warning, but a "threat" by the Task Force prosecutors.
After that explosive testimony, the prosecution on re-cross-examination had Mr. Ciscon confirm that the prosecution's calls had all been to his attorney and that he had not talked directly with the prosecutors. Then, in a questionable move that simply highlighted the prosecution's thinly-veiled threat to Mr. Ciscon, the prosecution requested that Judge Gilmore strike Mr. Ciscon's testimony about the calls as inadmissible hearsay testimony.
Judge Gilmore -- who favored the prosecution during the early stages of the trial, but appears to be warming to the defense recently -- quickly denied the prosecution's request and pointed out that the government had waived any objection to Mr. Ciscon's testimony on the subject. The jurors watched the entire episode with rapt attention.
As noted in this previous post, the Task Force used the same tactic effectively during the trial of the Nigerian Barge case to suppress the testimony of dozens of former Enron employees who would have likely contradicted the testimony of Ben Glisan, the prosecution's main witness in that trial. However, due to the fact that none of the "chilled" witnesses in the Nigerian Barge trial came forward to testify as Mr. Ciscon has courageously done in the Broadband trial, the jury in the Nigerian Barge trial never heard about the government's tactic of fingering witnesses as targets of its criminal investigation to suppress favorable testimony for the Nigerian Barge defendants.
Thus, in a trial that looked like a tap-in for the prosecution at the beginning, a feisty defense team appears to have the Enron Task Force prosecutors back on their heels again. Earlier in the trial, the prosecution was in a similar position when it allowed its key witness to testify falsely regarding a video shown to the jury and then compounded that mistake by attempting to blame the error on a clearly intimidated woman who previously provided video services for Enron. Moreover, as this Mary Flood/Chronicle article reports, the prosecution's case appears to be so weak against two of the Enron Broadband defendants that they and their counsel are practically being ignored at this point in the trial.
Alas, one can only speculate as to the effect that any of this has on the jury. Three of the Enron Broadband defendants still have to overcome the "elephant in the courtroom" -- that is, the huge amount of money that they made from Enron stock sales during the period in which they were making their allegedly false public statements -- and that is no easy task under even the best of circustances.
But regardless of the outcome of this trial, the Enron Task Force's ugly tactic of effectively suppressing important testimony of witnesses favorable to Enron defendants has now been fully exposed. As a result -- and particularly in view of the Task Force's ongoing effort to suppress virtually all testimony favorable for the defendants in its case against former Enron CEO Jeff Skilling and former Enron chairman Ken Lay -- it is becoming clearer by the day that our government's "Justice" Department is not interested in justice at all when it comes to prosecuting unpopular business executives.
June 10, 2005
Citigroup Inc., the nation's largest financial institution, announced this morning that it has agreed to pay $2 billion to settle class-action claims over its role in the sale of Enron Corp. stock and bonds prior to the company's collapse into bankruptcy at the end of 2001. As this earlier post notes, Citigroup had set aside $6.7 billion to cover its litigation exposure relating primarily to claims against the bank in the Worldcom class action and the Enron class action.
As is typical in such deals, in announcing the settlement, Citigroup denied any wrongdoing and said it had agreed to settle solely to hedge the risk of a bigger claim being awarded in the litigation. The settlement must be approved by the Board of Regents of the University of California (the lead plaintiff in the case) and the Board of Directors of Citigroup. It is also subject to the approval of the U.S. District Court for the Southern District of Texas.
Citigroup is the first really large bank settlement in the Enron class action litigation. Other bank defendant include J.P. Morgan Chase & Co., Merrill Lynch & Co.; Credit Suisse First Boston, a unit of Credit Suisse Group; Deutsche Bank AG; Canadian Imperial Bank of Commerce; Barclays PLC (BCS); Toronto-Dominion Bank; and Royal Bank of Scotland PLC. My sense is that we will see a steady stream of settlements for the remainder of this year as the financial institutions strive to clean up the Enron liability on their financial statements before the end of the year and the plaintiffs' lawyers attempt to exceed the total $6 billion in settlement proceeds from the defendants in the WorldCom class action.
Oscar Robertson is one of the five greatest players in the history of basketball. At 6-5 and 215 pounds, the Big O could play any position on the court and averaged an incredible triple-double (i.e., 10 or more points, rebounds and assists in a game) for the entire 1961-62 NBA season. Not surprisingly, he continues to hold the NBA record for triple-doubles with 181 and remains the single-season leader with 41. He was the first player to lead the league in both assists (9.7 apg) and scoring average (29.2 ppg) in the same season (1967-68).
You know that blogging has really arrived when the Big O decides to blog the current NBA Championship Series.
Last month, Michael Shelby announced that he was resigning as the U.S. Attorney for the Southern District of Texas.
Yesterday, Mr. Shelby and Houston's Fulbright & Jaworski, LLP announced that he would be joining the firm's white collar criminal defense section. The Chronicle article on the announcement is here.
As noted in the earlier post, Mr. Shelby's resignation is only the latest in the revolving door of U.S. Attorney resignations over the past decade from the local U.S. Attorney's office.
The Sihpol acquittal yesterday focuses attention on an important aspect of the current wave of criminalizing merely questionable business transactions -- that is, the government's destruction of good reputations in its quest to obtain convictions and prevent juries from hearing testimony that is favorable to unpopular defendants.
In this excellent Chicago Tribune op-ed (free registration req.), David Hall -- a former editor of the Cleveland Plain Dealer and Denver Post who covered Arthur Andersen as a Chicago reporter in the 1960s -- decries the cultural climate and the lack of prosecutorial discretion that led to the destruction of Andersen:
Andersen's head on the U.S. Justice Department's dish, with unjust charges regarding Enron Corp. and the connivance of a slow-witted judge, is a parallel in today's political-legal-news culture--blame quickly, accuse broadly and dare the accused to defend. Bloody heads on plates satisfy the evening news and pundits looking for the easy prey of righteousness.
The Justice Department, eager to demonstrate its conservative stance would not be cowed by big business, maliciously destroyed a fine American company, a contributor to orderly commerce for eight decades. Andersen stumbled amid the stampede of cliffside accounting in the '90s, particularly regarding Sunbeam Corp. and Waste Management, but nothing deserved a judicial death sentence. . .
Many institutions, private and public, must feel under such siege, must fear the plow and the salt and the unjust destruction of Andersen. Every good-faith act should not be turned into an inquisition--by politicians polishing campaign ads, prosecutors primping for the boss, or reporters intent on bringing the first head on a dish.
Meanwhile, as the defense in the ongoing Enron Broadband trial proceeds with putting on their case, an interesting development is taking place. As the Chronicle's Mary Flood reports, Lawrence Ciscon, a former Enron Broadband systems engineer, is testifying on behalf of his five former Enron Broadband colleagues despite the fact that prosecutors have told him that he is a target of the Enron criminal investigation and could be indicted himself.
Mr. Ciscon's decision to testify brings into focus an abominable governmental tactic that ensures that the jury will never hear much of the favorable testimony for the defense. In both the Enron Broadband case and the earlier Nigerian Barge case, the prosecutors have identified dozens of former Enron executives as either targets of the Enron criminal investigation of unindicted co-conspirators of the defendants. As a result, the government has effectively prevented many witnesses with favorable testimony for the defendants in both the Broadband and Nigerian Barge cases from testifying because those witnesses would waive their Fifth Amendment privilege and probably face further perjury charges if they chose to tesfify contrary to the government's position in those cases. Indeed, in the case against former Enron CEO Jeff Skilling, former Enron chairman Kenneth Lay, and former Enron chief accountant Richard Causey, the Enron Task force has identified 114 unindicted conspirators in an effort to chill as much favorable testimony for the defendants as possible.
Thus, the "Justice" Department is not really interested in "justice" at all, or even in having a jury fairly evaluate all evidence relating to its charges against unpopular business figures. Rather, our "Justice" Department is much more interested in indulging public bias against unpopular businessmen, regardless of the reputations of citizens that it destroys in the process. Something is seriously wrong with the administration of justice in America when it takes the uncommon courage of someone such as Lawrence Ciscon for a jury to hear favorable testimony for businessmen who are facing their government's overwhelming power to imprison them for most of the rest of their lives.
As anticipated in this post from earlier this week, John Houldsworth, a former high-level executive of the Cologne Re Dublin unit of Berkshire Hathaway Inc.'s General Reinsurance Corp., implicated four other senior General Re executives while pleading guilty on Thursday in Alexandria, Va. to conspiring to commit securities fraud. Mr. Houldsworth is the the first person to be indicted from the various governmental investigations into finite risk insurance transactions between General Re and American International Group Inc. Here are the previous posts on the investigations into AIG and Berkshire.
According to the criminal complaint, Mr. Houldsworth, Ms. Monrad, Mr. Napier, and another unknown executive in late 2000 conspired to structure a reinsurance contract to allow AIG to pass its auditor's "smell test" and to create a paper trail to make the transaction appear legitimate.
The other executives identified in a parallel SEC civil suit who are referred to by title in the the criminal complaint are former General Re CEO Ronald E. Ferguson, former CFO Elizabeth Monrad, current senior VP Richard Napier (who is expected to plead guilty to similar charges today), and Chris Garand, an underwriter in General Re's international finite division. The complaint also cites another General Re "senior executive" whose identity is unknown to Mr. Houldsworth.
June 9, 2005
A New York state court jury acquitted former Bank of America Corp. broker Theodore C. Sihpol today on 29 criminal counts relating to alleged improper trading of mutual-fund shares. The jury deadlocked 11-1 in favor of acquittal on four additional counts, and the judge declared a mistrial on those counts. Here is a previous post on Mr. Sihpol's case.
The acquittal was a bitter blow for New York Aspiring Governor Eliot Spitzer, whose office tried the case against Mr. Sihpol as the first criminal trial emanating from Mr. Spitzer's crackdown on what he characterizes as abusive trading practices in the mutual fund industry. As is his custom in such matters, Mr. Spitzer bludgeoned settlements out of several major fund firms by threatening them with devastating criminal indictments, but the young Mr. Sihpol refused to back down. Thus, even though he threatened Mr. Sihpol with an absurdly harsh 30 year sentence in prison if he were to be found guilty of the charges, Mr. Spitzer was forced to try the case and, in the end, had his hat handed to him.
Couldn't happen to a nicer guy.
David Asman is an anchor at the Fox News Channel and host of "Forbes on Fox." In this must read piece for anyone interested in the differences between a centralized and a decentralized health care finance system, Mr. Asman compares the care and cost that his wife received in the British and American health care systems earlier this year after she suffered a serious stroke during a vacation in London. The entire op-ed is interesting, but I found the following observation particularly telling:
When I received the bill for my wife's one-month stay at Queen's Square [Hospital, in London], I thought there was a mistake. The bill included all doctors' costs, two MRI scans, more than a dozen physical therapy sessions, numerous blood and pathology tests, and of course room and board in the hospital for a month. And perhaps most important, it included the loving care of the finest nurses we'd encountered anywhere. The total cost: $25,752. That ain't chump change. But to put this in context, the cost of just 10 physical therapy sessions at New York's Cornell University Hospital came to $27,000--greater than the entire bill from British Health Service!
There is something seriously out of whack about 10 therapy sessions that cost more than a month's worth of hospital bills in England. Still, while costs in U.S. hospitals might well have become exorbitant because of too few incentives to keep costs down, the British system has simply lost sight of costs and incentives altogether.
Meanwhile, Washington Post business columnist Steve Pearlstein contends in this column that most Americans are willing to dispense with market allocation in regard to health care:
For most Americans, providing health care ought to be different from selling soap; they won't tolerate doctors acting like commissioned salesmen and investment bankers. And if that means having less market competition and more regulation in the health care system, it seems to be a trade-off they're willing to make.
H'mm, I'm not so sure about that. Hat tip to Arnold Kling for the links to the articles.
It's a good sign that it's not going to be a good day at the office for a Republican politician when the morning's edition of the Wall Street Journal has both an editorial and an op-ed piece critical of the politician.
But that's precisely what Texas governor Rick Perry is confronting today. In this WSJ editorial ($) aptly entitled "What's the Matter with Texas?", the Journal editors pick up on a theme that was noted earlier in this post -- that is, the utter lack of leadership being exhibited by Republican politicians:
Republicans control every lever of political power in Austin for the first time since Reconstruction and had promised a sweeping reform agenda. Property tax relief. Vouchers for kids in failed inner-city public schools. An end to Robin Hood school financing. And passage of a fiscally tight budget.
This entire legislative agenda was ambushed. The school voucher pilot program for 20,000 mostly minority kids was rejected by the very Democratic legislators representing the families who would have benefited from the opportunity to attend private and parochial schools that actually work. The depressing fact that nearly half of the black and Hispanic children in the state fail to graduate from public high schools wasn't perceived as a sufficient crisis to give choice a chance.
Most of the other failings of this legislature must be laid at the feet of the Republicans.
The Journal goes on to note that the Republicans are playing with serious political fire by failing to address the problem of spiraling property taxes in Texas:
But it's almost inconceivable that the legislature would adjourn until 2007 without chopping property taxes. Skyrocketing appraisals are taxing Texans out of their houses, and infuriated home owners are ready to march on Austin. One Dallas legislator reported that he was accosted by irate voters at his kid's swim meet this week. . .
[I]f property taxes aren't cut meaningfully right now, the Republicans might not be coming back to Austin after the next election.
Meanwhile, over at OpinionJournal, J.R. Labbe, senior editorial writer and columnist for the Fort Worth Star-Telegram, pens this op-ed that addresses the challenges from within the Texas Republican Party that Mr. Perry is expected to face in the upcoming election campaign, and notes in particular that Mr. Perry's recent political staging of a signing ceremony for parental consent legislation in the gymnasium of a Ft. Worth church could backfire:
But the community of faith, even in the Lone Star State, is not a monolith. Plenty of Texan Christians were put off by what they perceived as Gov. Perry's use of religion as a theatrical prop. Witnessing oneself as a godly governor might be more effectively demonstrated if religion weren't turned into a sideshow.
As I observed to Charles Kuffner during lunch yesterday, I'm not sure what's worse -- the risk that government will embrace the worst characteristics of certain Christian churches, or that those churches will embrace the worst characteristics of government.
June 8, 2005
Milton Friedman is the most influential economist of the past half-century and, at the age of 92, is still as sharp as a tack (here are previous posts on Mr. Friedman). Craig Newmark passes along this recent interview of Mr. Friedman, which includes the following pearls of wisdom:
On Social Security:
Asked why, if Social Security is so terrible, it is the most popular government program in American history, Friedman replied, "Well, because why does a Ponzi game work? It's easy to understand why it's popular. So far, on the average, retirees have gotten more out of the system than they put into it. "
What about the fact that Social Security has reduced poverty among the elderly?
"Well," he replied, "what it has done is transfer a lot of income from the young to the old. It is certainly true it has made the old people of the United States the best treated old people in the world."
But why is that a bad thing? "Oh," Friedman replied. "It's not a bad thing for them, but what about the young?"
On rent controls and his influence in political debates:
When [Mr. Friedman] moved to San Francisco in the 1970s, the city was debating rent control, he recalled. So he wrote a letter to The Chronicle saying, "Anybody who has examined the evidence about the effects of rent control, and still votes for it, is either a knave or a fool."
What happened? "They immediately passed it," he laughed.
"[A] private firm that makes a serious blunder may go out of business. A government agency is likely to get a bigger budget."
A sure sign that a discussion on a particular subject has deteriorated to an unrecoverable level is a participant's allegation that the other side's position defends Nazism in some respect. With regard to discussions about business, it's quickly becoming evident that such discussions have degenerated into uselessness when one participant accuses the other side's position of defending Enron.
This NY Times article reports on a Congressional hearing yesterday in which Delta Air Lines Chief Executive Gerald Grinstein, Northwest Airlines President and Chief Executive Officer Douglas Steenland, and UAL Chairman, President and CEO Glenn Tilton testified in favor of proposed legislation that would allow airlines to freeze pension plans and extend their current obligations over 25 years. Last month, United Airlines obtained Bankruptcy Court approval to shift its employee-pension plans -- including their nearly $10 billion shortfall -- on to the federal government's Pension Benefit Guaranty Corp.
In response to the airline executives' rather reasonable comments in support of common-sense legislation, Senator Charles Grassley (Rep. Iowa) called United Airlines a "catastrophe" and compared United Airlines to Enron Corp., saying the carrier used "illusory investment gains" to "hide and disguise" the true financial condition of its pension plans. "Unlike Enron, however," concluded Sen. Grassley. "Everything United did was perfectly legal."
Well, playing the Enron card may make for a good sound bite, but it's a sure sign that Mr. Grassley wants to avoid addressing what's really troubling the airline industry -- i.e., Big Labor supported by compliant politicians. Let's take United as a case in point. At a time when unions owned over 50% of the company, controlled three board seats, and effectively hired and fired the company's CEO, the unions decided to increase their retirement compensation by approving unfundable pension obligations while, at the same time, extracting maximum current wage benefits that made United uncompetitive from an operations standpoint. Thus, United's owner-employees effectively looted the company with high current compensation benefits while, at the same time, effectively insuring that they would also ultimately loot the federal government's Pension Benefit Guaranty Corporation, which they knew would be the guarantor of at least a substantial portion of United's unfundable pension obligations.
Frankly, even the Enron sharpies didn't think of such a scheme.
In an interview yesterday with Wall Street Journal columnist Alan Murray, New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot Spitzer observed that he agreed with the recent Supreme Court decision in Arthur Andersen LLP v. United States and that a criminal indictment of a company often is the wrong way to proceed in an investigation because of the risk of destroying the company. Comparing his investigations to those of the heavy-handed Enron Task Force, Mr. Spitzer made the following comment:
"I've always said Andersen was an improper indictment, because it wasn't proportionate. We use a scalpel, not a meat ax."
If what Mr. Spitzer is using on American International Group Inc. is a scalpel, then he must own one helluva meat ax.
Meanwhile, this NY Times article reports that Mr. Spitzer's immunity deal with former AIG executive Joseph Umansky was not coordinated with other ongoing investigations into AIG and effectively removed Mr. Umansky as a realistic target of those investigations.
June 7, 2005
Washington Post columnist George F. Will adds this column to the growing body of opinion that the Wright Amendment -- which restricts Southwest Airlines from flying to most states from its Dallas Love Field hub -- is at least obsolescent and probably bad public policy in the first place. Here are previous posts on the Wright Amendment.
In his column, Mr. Will passes along a humorous anecdote from Herb Kelleher, Southwest's chairman, regarding the Wright Amendment and the beginning of the airline:
In 1971, after years of harassing litigation by two airlines averse to competition, Southwest Airlines was born. It had just three aircraft and flew only intrastate, between Dallas, Houston and San Antonio. This first of the no-frills, low-cost airlines, under the leadership of its ebullient founder Herb Kelleher, was to democratize air travel and revolutionize the airline industry.
The cities of Dallas and Fort Worth, and the Dallas/Fort Worth airport, which opened in 1974, tried unsuccessfully to force Southwest to move its operations from close-in Love Field out to DFW, arguing that the new airport depended on this. Today Kelleher laughingly recalls telling a judge:"If a three-aircraft airline can bankrupt an 18,000-acre, nine-miles-long airport, then that airport probably should not have been built in the first place."
Last night, my boys and I attended Cinderella Man, the Ron Howard-produced movie about Depression-era fighter and folk hero Jim Braddock (played by Russell Crowe), the unlikely underdog who defeated heavyweight champ Max Baer in a 15-round free-for-all in 1935.
Although flawed in several respects, the movie is highly entertaining. Leads Crowe and Renee Zellweger are superb, and the staging of the fight scenes is flat-out remarkable, even making Scorsese's fine depiction of the fights in Raging Bull seem pedestrian in comparison.
However, the movie is worth attending alone to see the performance of Paul Giamatti, who steals the show in playing Joe Gould, Braddock's manager and friend. In hilarious and believable fashion, Giamatti uses the phrase "sonuvabitch" throughout the movie to express a remarkably wide range of reactions and emotions. His performance is one of the most nuanced and intelligent that I have seen in years, and reflects an actor who is clearly at the top of his profession right now. Don't miss it.
This Telegraph.com article updates the Enron-related case of the "NatWest Three," the three former National Westminster Bank PLC bankers based in London who are charged in Houston with bilking their former employer of $7.3 million in a scheme allegedly engineered by former Enron CFO Andrew Fastow. Here are the previous posts on the NatWest Three.
Yesterday, the three bankers -- David Bermingham, Giles Darby and Gary Mulgrew -- filed their appeal to England's High Court of the decision last month of Charles Clarke, the Home Secretary, who upheld an earlier decision by a judge at Bow Street Magistrates' Court in central London to extradite the three bankers to Houston to face the charges. The case has been undergoing increasing scrutiny in the English media because the U.S. is attempting to extradite the three men under the 2003 Extradition Act, which has been criticized in English legal circles for allowing British courts to extradite British citizens without proper evaluation of U.S. prosecutors' charges and evidence.
Of particular interest is the article's analysis of the three bankers' procedural options in the foreign courts if they lose their current appeal:
If [the NatWest Three] lose, they will take the matter to the House of Lords and then, if necessary, on to the European Court of Human Rights. The process could take over five years.
Five years?! The thought of the Enron Task Force remaining in business for another five years is definitely not comforting.
George Melloan is deputy editor of The Wall Street Journal, where he is responsible for the editorial pages of The Wall Street Journal Europe and The Asian Wall Street Journal and writing a weekly column called Global View. Mr. Melloan has won the Gerald Loeb Award for excellence in financial journalism and two Daily Gleaner awards from the Inter-American Press Association for writings about Central America.
In this column in today's Journal ($), Mr. Melloan takes dead aim at the government's abuse of the rule of law to pursue currently unpopular businesspeople:
The Supreme Court has now ruled that it was excessive prosecutorial zeal and inadequate jury instruction that destroyed Arthur Andersen in 2002, not the merits of the federal obstruction-of-justice case. . .
For some years now, U.S. business corporations have been caught between the Scylla of predatory class-action lawyers and the Charybdis of overzealous prosecutors, regulators and lawmakers on the prowl for "white-collar crime." . .
In a democracy, arrogance or misbehavior by public figures with important responsibilities invites popular resentment.
Then, Mr. Melloan superbly summarizes how we got to this point:
Sensing the public mood, a Congress never reluctant to make work for fellow lawyers whooped through the Sarbanes-Oxley bill, proclaiming it an antidote to corporate corruption. In fact, it's a law that for proper compliance would require every assistant vice president to have a lawyer seated on his left and an accountant on the right to monitor his every movement, including trips to the WC. CEOs must now sign their annual reports with a trembling hand, knowing full well that a transgression by some anonymous drone in Walla Walla might cost a severe penalty. Corporate board members shiver for the same reason.
The sour public mood has had other effects. Staffers at the Securities and Exchange Commission and other regulatory agencies have been able to break free of adult supervision by appointive commissioners and have set about to regulate everything that moves. U.S. attorneys have endeavored to make their reputations pursuing big names in the business world. Martha Stewart went to jail for fibbing to investigators about what she had told her stockbroker, a misdemeanor at best.
The now-renowned Eliot Spitzer of New York and other state attorneys general began calling press conferences to denounce "crimes" never before known to man. Mr. Spitzer so terrorized the board of AIG, the global insurance giant, that it dumped CEO Maurice R. Greenberg. Among Mr. Greenberg's sins was "smoothing" quarterly reports, a common practice in industry that probably gives investors a better idea of a company's condition than letting the numbers bounce around from quarter to quarter. In a further act of appeasement AIG has now restated its profits for the last five years, lopping off $4 billion, which will surely cause confusion among tax collectors.
Read the entire piece. One of the most disturbing aspects of the recent trend of government using its enormous power to criminalize merely questionable business transactions has been much of the public's acquiescence to this abuse of power. The business-oriented media and blog commentators such as Professor Ribstein and Professor Bainbridge have decried the trend, but prosecutors -- with the help of compliant politicians -- continue to appeal to the general public's animus toward wealthy businesspeople in pursuing dubious business-related prosecutions. As we have seen in the Martha Stewart case, the sad case of Jamie Olis, and the Enron-related Nigerian Barge case, the personal loss to individuals and their families resulting from this abuse of power is enormous. Sadly, the damage to the rule of law may be even greater.
June 6, 2005
John Houldsworth, an executive at Berkshire Hathaway Inc.'s General Reinsurance Corp. unit, has agreed to plead guilty to a charge of criminal conspiracy in connection with the company's nontraditional insurance finance transactions with American International Group Inc. Although Mr. Houldsworth -- who is on paid leave, but who headed General Re's reinsurance unit in Dublin -- faces up to five years in prison for participating in the disputed 2001 transaction between AIG and General Re, that sentence will likely be less so long as Mr. Houldsworth fulfills his pledge to cooperate with the U.S. Justice Department and the Securities and Exchange Commission in their investigation of AIG and Berkshire. Here are the previous posts on the various investigations of AIG and Berkshire.
The Chronicle's Mary Flood reports that Lea Fastow -- who served a longer sentence under harsher conditions because of her marriage to former Enron CFO Andrew Fastow -- was released to a halfway house from the Federal Detention Center in downtown Houston today. She is scheduled to be released from the halfway house on July 11. Here are the previous posts on the Lea Fastow case.
Although U.S. District Judge David Hittner's handling of the Lea Fastow case has received the most media attention, the case is really a prime example of the Enron Task Force's lack of prosecutorial discretion and heavy-handed plea bargaining tactics. In reality, Judge Hittner simply never appeared comfortable with the Task Force's indictment of Mrs. Fastow. The indictment was a blatant move to place pressure on Mr. Fastow to cop a plea and cooperate with the prosecution, which he eventually did. During Mrs. Fastow's sentencing, Judge Hittner harshly criticized prosecutors for vascillating between an original indictment of six felonies and a final charge of just one misdemeanor, suggesting that justice may not have been served in either instance. "Such maneuvering as is present in this case might be seen as a blatant manipulation of the justice system," Judge Hittner stated on the record.
Yale law professor John Langbein, who has written extensively regarding prosecutorial abuse of the American plea bargaining system, identifies the problem in the following manner:
"Plea bargaining concentrates effective control of criminal procedure in the hands of a single officer. Our formal law of trial envisages a division of responsibility. We expect the prosecutor to make the charging decision, the judge and especially the jury to adjudicate, and the judge to set the sentence. Plea bargaining merges these accusatory, determinative, and sanctional phases of procedure in the hands of the prosecutor. Students of the history of the law of torture are reminded that the great psychological fallacy of the European inquisitorial procedure of that time was that it concentrated in the investigating magistrate the powers of accusation, investigation, torture and condemnation. The single inquisitor who wielded those powers needed to have what one recent historian has called 'superhuman capabilities [in order to] keep himself in his decisional function free from the predisposing influences of his own instigating and investigating activity.'"
"I cannot emphasize too strongly how dangerous this concentration of prosecutorial power can be. The modern prosecutor commands the vast resources of the state for gathering and generating accusing evidence. We allowed him this power in large part because the criminal trial interpose the safeguard of adjudication against the danger that he might bring those resources to bear against an innocent citizen -- whether on account of honest error, arbitrariness, or worse."
This post from last year addressed the economic failure of the urban rail system in Washington, D.C. Now, the Washington Post is running a series of articles (first one here) that is examining the dubious economics and management of D.C.'s subway system. Here are other posts on various urban rail boondoggles.
Tory Gattis over at Houston Strategies picks up on the same WaPo article and observes the following regarding the failed economics of most urban rail systems:
Quite the depressing and scary litany. It's really hard to have good management at a public agency, and transit is a seriously complicated and expensive business with billions of dollars at stake, especially rail transit. Amtrak's a mess. DC's a mess. NY, Chicago, SF/San Jose, and LA all have serious problems with their transit agencies. What makes us think Houston Metro can buck this trend?
It's been awhile since we have checked in on the travails of Krispy Kreme Doughnuts, Inc. (earlier posts here), so it seems appropriate to pass along this CFO.com article that does a good job of summarizing the mistakes that the once-trendy franchisor made in quickly expanding beyond its Carolina roots:
How could a company in business for nearly 70 years, with an almost legendary product and a loyal customer base, fall from grace so quickly? The story of Krispy Kreme's troubles is, at bottom, a case study of how not to grow a franchise. According to one count, there are at least 2,300 franchised businesses in the United States, and many are extremely successful. But there are pitfalls in the franchise model, and Krispy Kreme ? through a combination of ambition, greed, and inexperience ? managed to stumble into most of them.
And what's the solution for this troubled company? It's really quite simple. As one commentator observed:
"They need to emphasize the hot-doughnut experience, rather than the cold, old doughnut in a gas station."
Ellen Podgor over at the White Collar Crime Prof Blog points us to two documents that raise important issues relating to the federal government's questionable policy of attempting to regulate business through criminalization of what it deems to be questionable business practices.
As noted in this earlier post, Frank Quattrone's appellate attorneys have based his appeal in this reply brief squarely on last week's Supreme Court decision in Anderson. The following is the hard-hitting first paragraph from that brief:
The government's brief is an effort to weave a rope of sand, and to imbue a trial with evidentiary substance and procedural fairness when it was sorely lacking in both. With regard to the evidence, the prosecutors dutifully characterize the defendant as plainly guilty, and describe their proof as "strong" or even "compelling." [record reference omitted]. This is standard rhetoric for those who write the red-covered briefs in criminal cases. But if this was a "strong" case, then there is no such thing as a weak one. Notwithstanding the government's cavalier description, this case turned on a "threadbare phrase," United States v. Mulheren, 938 F.2d 364, 370 (2d Cir. 1991) -- Quattrone's one-line e-mail urging his colleagues to "follow [the] procedures" contained in a standard corporate document retention policy. As the Supreme Court reminded the government only recently, "[i]t is, of course, not wrongful for a manager to instruct his employees to comply with a valid document policy under ordinary circumstances." Arthur Andersen LLP v. United States, No. 04-368, 2005 WL 1262915, *5 (U.S. May 31, 2005).
Moreover, Professor Geraldine Szott Moohr of the University of Houston Law Center has written this law review article -- Prosecutorial Power in an Adversarial System: Lessons from Current White Collar Cases -- in which she points out that the increasingly common prosecutorial tactic of bludgeoning white collar defendants into plea bargains (noted earlier here) undermines the deterrent purpose of such prosecutions. Here is the synopsis for the article:
Successful disposition of the cases against Arthur Andersen, Martha Stewart, high-level Enron officers, and scores of mid-level executives testifies to the authority of federal prosecutors. A review of these cases identifies the sources of prosecutorial power and traces their effect in the investigation, charging, and sentencing phases of white collar crime.
A comparison of the roles of American federal prosecutors and their European counterparts in investigating, charging, and sentencing corroborates the judgment that our present system has a decidedly inquisitorial cast. The power of inquisitorial prosecutors is constrained by inherent safeguards that impose formal and informal limitations on their discretion. In contrast, federal prosecutors exercise greater power in the investigation and charging phases and exercise even more authority in sentencing and plea bargaining. The combination belies adversarial values.
Retreat from the adversarial trial can undermine the goal of deterring business misconduct in several ways. Inconsistent sentences that result from plea bargains can forfeit the moral authority of criminal law in the business community, the very group one wishes to deter. In contrast, public trials provide a rationale for sentences and educate the business community about the illegality of specific conduct, a requirement for optimal deterrence that is especially relevant in white collar crimes. Public trials also strengthen shared social norms of the business community against fraudulent practices. In sum, disposing of criminal cases through quasi-inquisitorial investigation and plea bargaining forfeits an opportunity to reinforce the standards of lawful business conduct and thereby strengthen deterrence.
In that connection, note Professor Langbein's related comments in this post about the Lea Fastow case.
June 5, 2005
This Sunday Chronicle article has the nice graphic on the left that puts into perspective the size of the new Wal-Mart Distribution Center in the Cedar Crossing Business Center near Baytown between Houston and Beaumont by comparing it to other large facilities in the Houston area.
By the way, Tory Gattis over at the smart Houston Strategies blog provides this nice analysis of the probable economic impact of the Wal-Mart Distribution Center on the Houston area economy. In particular, Tory notes the following:
It's an important part of Houston's economic diversification to offer quality blue-collar jobs outside of the oil industry. One of the things I've always liked about Houston is our mixed white/blue-collar economic base, which I think makes for a more diverse and interesting city.
On a related note, this Houston Business Journal article points out that Wal-Mart received $19 million in infrastructure improvements and property tax exemptions for the Wal-Mart Distribution Center in Baytown, which was the fifth largest of over $1 billion in such subsidies that Wal-Mart has received from various governmental entities to induce the company to build facilities around the country.
June 4, 2005
As noted in this previous post, Mark Felt admitted earlier this week that he was the mysterious "Deep Throat" source for Washington Post reporters Bob Woodward and Carl Bernstein during the Watergate scandal that brought down the Nixon Administration. Although generally hailed as a hero in the mainstream media, some alternative views are starting to circulate.
Former Nixon White House special counsel Charles W. Colson is one of the most interesting participants in the Watergate scandal. After serving a stint in jail during the scandal for leaking confidential FBI files, Mr. Colson abandoned politics and founded Prison Fellowship Ministries, which is an outreach program to convicts, victims of crime, and justice officers. In this interview, Mr. Colson expresses skepticism regarding the propriety of Mr. Felt's leaking of information:
Many others have voiced disagreement with you about this, saying Felt brought down a corrupt White House and should be applauded. Doesn't that argument have some merit?That's the curse of relativism. That's the era we live in that is so dangerous. That is saying, "I could sit there and make a judgment about what is right even when the law says something else." This is not a case of civil disobedience like Martin Luther King in the Birmingham jail, in which he appeals to a higher law saying that the law at the time was unjust and therefore he couldn't obey it. That was a principled position. He was correct. But that's not the case of Mark Felt. Mark Felt had an obligation to report obstruction of justice to the officials and to a grand jury, if necessary?not to leak it to reporters.
You basically believe he should have just gone to the President and then, if necessary, held a press conference?
What he could have done is gone first to the director of the FBI and say, "There's criminal activity going on in the White House, and these guys are obstructing justice." If the director of the FBI wouldn't go with him to the President, then if Mark Felt had called me, I could tell you, guarantee you, I would have gotten him in to see the President because, I would have been afraid that if [we] didn't, the FBI would bring down the President. And the President would have done something immediately, not out of moral compunction but out of self-interest, because you can't have the No. 2 official in the FBI believing there is obstruction of justice in the White House.
What would have happened differently if he'd taken the route that you suggest?I think it would have precipitated an immediate crisis. If the No. 2 guy in the FBI says, "There's wrongdoing out in the White House and they won't listen to me, I'm resigning," the President would clean house in a hurry, or the impeachment would have taken place within two weeks, instead of nine more months.
And so the great mystery, "Who was Deep Throat?" reaches its anticlimax. He turns out to be a toady who oversaw black-bag jobs for J. Edgar, violated his oath and, out of malice and spite, leaked the fruits of an honest FBI investigation to the nest of Nixon-haters at the Washington Post, then lied about it for 30 years.
Why did Felt lie? Because he knew he had disgraced himself and dishonored everything an FBI agent should stand for.
He didn't want his old comrades to know what a snake he had been. Linda Tripp, savaged by the same press lionizing Felt, at least had the moral courage to go public and take the heat when she blew the whistle on Bill Clinton.
And Mr. Buchanan remains equally unimpressed with the mainstream media's self-congratulatory treatment of the entire affair:
When you look back at it, what was Watergate all about? A black-bag job at Larry O'Brien's place like the ones "hero" Felt used to run for Hoover. Liddy and Hunt on an escapade to get Daniel Ellsberg's file from his shrink, which probably would have been too heavy to carry anyway. And, oh yes, 200 pizzas Segretti sent with those 30 African ambassadors in native costume to Ed Muskie's D.C. fundraiser.
Not one miscreancy committed by Nixon's men did not have its antecedent in the White Houses of JFK or LBJ. But they got away with it, including the distribution to the press of dirt on Martin Luther King, picked up by secret FBI photo and wiretap.
Wednesday night, sipping on a glass of Chalk Hill, I watched as Ted Koppel, at his most oleaginous and unctuous, fed up one cheese ball after another to Ben Bradlee.
What do you think of Buchanan calling Felt a "traitor?" said Koppel, misquoting me.
"Gimme a break!" croaked Bradlee.
Well, you give us a break, Ben. All this bullhockey about how you and the Great Stenographers saved the republic is getting so thick the tourists will need to rent chain saws to cut through it.
Finally, don't miss this John Tierney op-ed in the NY Times in which he notes that it is not Mr. Felt who ultimately profited from the Watergate scandal:
I hope Mark Felt and his family get the big payoff they want, but they've already hurt their chances by ignoring his famous advice as Deep Throat. They didn't follow the money.
They didn't appreciate how seriously we journalists take our ethical standards. We are bound by the sacred vow we make to our sources: if the information you give us turns out to be profitable, we will keep the money.
Mr. Felt's family tried profiting from his revelation, but the news cartel held firm. People and Vanity Fair both rejected the family's overtures and held to their policy of not paying sources for news.
The best their lawyer could manage for disclosing the greatest secret in journalism was a fee from Vanity Fair for writing the article. He got about $10,000, which is less than what the magazine has paid for articles in which movie stars disclose they have a major motion picture about to open in a theater near you.
Without [Mr. Felt's] actions, Richard Nixon might well have stayed in office and the University of Texas library would never have paid $5 million for the papers of Mr. Woodward and Carl Bernstein. Even if they'd brought down the president without him, "All the President's Men" would never have sold so many copies and movie tickets without Mr. Felt's dramatic touches - the coded signals he devised, the secret meetings in the parking garage.
Now the reporters are rushing out another book, and Mr. Felt is still not supposed to get any money from it. He deserves a cut, not only for what he did for them but for what they and their editor did to him. He risked his career to expose corruption in the White House, and they ensured that his name will be forever linked in the annals of history with a 1970's porn flick. They owe him.
Morgan Stanley announced yesterday that Donald Kempf will step down as its general counsel two weeks after the firm was hammered with a $1.45 billion jury verdict in Florida state court over a lawsuit brought by billionaire financier Ronald Perelman. Previous posts on the Perelman lawsuit may be reviewed here, here, and here.
Mr. Kempf joined Morgan in 1999 from the firm's longtime counsel, Kirkland & Ellis, where he was a well-known defense lawyer in the hard-knuckled world of Chicago business litigation. Morgan began its search for a new general counsel toward the end of the Perelman trial when the firm named prominent lawyer David Heleniak as a new vice chairman with oversight of the general counsel's office.
Mr. Perelman sued the firm in 2003 for its role in advising Sunbeam Corp. in 1998 when the billionaire sold his 82% stake in camping gear company Coleman Inc. to Sunbeam, which was a Morgan Stanley client. He claimed the firm knew or at least should have known about Sunbeam's accounting shams and the case eventually spun out of control when Morgan's repeated failure to produce documents prompted the judge hearing the case to sanction Morgan by entering a default judgment on the liability issue in the case.
Consequently, Mr. Kempf is clearly taking the fall for that mishap, but it's doubtful that he really should be. Mr. Kempf recommended that Morgan settle the case for $20 million early in the litigation, but Morgan's investment-banking division rejected the proposed settlement on two separate occasions. Sounds to me as if those investment banker types at Morgan need to listen to their main investment banker on litigation matters more carefully.
By the way, this NY Sunday Times article goes into the Perelman v. Morgan case in detail, including Morgan's pre-litigation threat to Mr. Perelman that the firm would attack him personally if he proceeded with the lawsuit.
Mickey Herskowitz is the dean of Houston sportswriters, and several of his previous columns have been the subject of several posts on this blog. Mr. Herskowitz is at his best when his columns address the legends of sports, so the death earlier this week of the National Basketball Association's first true big man -- George Mikan -- gave Mr. Herskowitz an opportunity to pen another strong column. Here are a couple of tidbits:
In the fall of 1949, Slater Martin was an All-America guard out of Texas, a 5-10 rookie hoping to land a spot on the roster of the Minneapolis Lakers. Mikan was a foot taller, in his fourth year and the greatest attraction in a league struggling to survive.
Martin remembers his first glimpse of the legendary center . . .
"I was just shooting at a basket from the side of the court, and he walked over to where I was and said, 'Hey, throw me that ball, I'm going to shoot some free throws. Will you fetch 'em for me?' I said, sure. He was a very, very good free-throw shooter. Shot them the old way, underhanded, between his legs. He finally missed one and then he said, 'That's enough, you can go now.'
"He thought I was the ball boy."
Mr. Martin goes on to describe Mr. Mikan's playing style:
Mikan was, in Martin's words, "a teddy bear off the court." But he played the game without mercy. One of his victims was his brother Ed, a 6-8 center for the short-lived Chicago Stags.
"He had to guard George," Martin said. "I felt sorry for him. After the game, we went to a tavern his parents owned. Ed was all bruised and nicked up. He had a cut over his eye, scratches on his face.
"Their folks were Croatian. His mother called him Georgie. This night she said, 'Georgie, why you beat up your brother like that?'
"He said, 'Mama, if you had been out there I'd have beat you up, too.'"
June 3, 2005
One of the most difficult lessons to learn in becoming a wise counselor is to say "no" to a good client that desires to do something wrong. In this NY Times op-ed, Times business writer Floyd Norris observes that the demise of Arthur Andersen is attributable to its inability to say "no" to several lucrative clients who were engaging in shady deals.
He might be right. Certainly the double whammy of damages that a still-in-business Andersen would have probably had to pay in regard to such scandals as WorldCom and Enron would have been huge financial burdens. There is no certainty that the firm could have survived those hits.
But the fact remains that the federal government's decision to terminate Andersen through criminal prosecution was not only arbitrary and capricious, but bad public policy. Very few of the 30,000 employees of Andersen were engaged in any wrongdoing, and Andersen was only one of several firms who provided professional advice and services on shady transactions for WorldCom and Enron. Nevertheless, Andersen was singled out for criminal prosecution, and the result was economic hardship for thousands of its former employees and less competition for providing audit services for big companies. As we are now seeing in regard to American International Group Inc. and its auditor, PriceWaterhouseCoopers, the government's prosecution of Andersen did not deter professionals from helping their clients engage in risky transactions. That is why such deterrence should be left to the markets, which are much better than the government at efficiently sorting out the type of risk that is good from that which is not.
This Wall Street Journal ($) article reports that Manhattan District Attorney Robert Morgenthau has launched an investigation in New York of Bank of America, Dallas-based investor Sam Wyly and his brother, and several other institutions in regard to lucrative tax shelters that the Wylys set up in the English tax haven, the Isle of Man. Here is a previous post on the colorful Mr. Wyly, who was also one of President Bush's biggest campaign contributors in both the 2000 and 2004 election campaigns.
Although legally a possession of the United Kingdom, the Isle of Man operates as an independent country with its own financial laws, the most important of which is that a foreign government cannot enforce in the Isle of Man courts a claim for unpaid taxes against an Isle of Man entity. Thus, tax-shelter promoters often tout the Isle as a convenient tax haven just an hour's flight from London.
Mr. Morgenthau's office, and now the Internal Revenue Service and the Securities and Exchange Commission, are investigating a popular stock option that B of A helped the Wylys establish to lock in gains on stock options during the bull market of the 1990's. The IRS has already determined that the transaction was widely used as a tax shelter, so this new investigation is a part of a larger IRS drive to to identify and punish firms that promoted improper tax shelters.
Under the particular shelter under scrutiny here, wealthy businessmen and U.S. corporations donated options to trusts that they alleged were not under their control. The IRS contends that they retained control of the trusts and that over 40 U.S. corporations and dozens of executives used the arrangement to shelter income and avoid paying more than $700 million in taxes. The Wylys contend that they neither owned nor controlled the trusts, and that they were legitimate vehicles established for the benefit of family members and charities.
June 2, 2005
Yesterday morning, the headline to this Kurt Eichenwald/NY Times article was the following:
"Reversal of Andersen Conviction Not a Declaration of Innocence."
That headline prompted this yesterday morning post.
Today, the same Times article has the following headline:
"Analysis: Reversal of Andersen Conviction"
H'mm. Coincidence? ;^)
This NY Times article reports that former Credit Suisse banker Frank Quattrone, who was convicted of obstruction of justice last year for sending out an email regarding the bank's document retention policy, is raising new issues on his appeal based on the U.S. Supreme Court's decision earlier this week in the Arthur Andersen case.
Apparently, the jury instructions used in the Quattrone trial were similar to those used in the Andersen trial. Inasmuch as Quattrone was not charged with any other crime, those jury instructions appear to have become the key issue in his appeal.
Although the Stros (20-32) just won their second series in a row, the club is clearly not a contender for a playoff spot this season. Thus, Houston Chronicle sportswriter and fellow blogger Richard Justice and I have been corresponding regarding the mistakes that Stros management made that resulted in this season's currently last place club. Our friendly exchange is generating some interesting observations.
I initiated the exchange by making the following point in response to one of Richard's recent posts that seemed to blame the club's failure this season on Stros management's failure to sign free agents Jeff Kent and Carlos Beltran during this past off-season:
[A]lthough you and I agree on most things related to the Stros (particularly that they need more hitting), the statistics do not back up your assertion that the Stros should have signed both Kent and Beltran. Even with them this season, this Stros club would be among the worst hitting teams in MLB. Here's a recent post on my blog that discusses this point.
The reality is that the Stros were not a particularly good hitting team last season even with Kent and Beltran, but the late season surge made most folks overlook the problem. The lack of development of hitters such as Lane, Everett, and Burke -- coupled with the downturn of Bags and management's unwillingness to replace such poor hitters as Ausmus, Chavez, Bruntlett and Viz -- has had a much greater impact on the Stros than losing Kent and Beltran.
Here is Richard's response to my post.
Meanwhile, Brian Goff over at the Sports Economist chimes in with this insightful post in which he points out that it takes a balanced team effort -- and not just big stars -- for a club to be successful:
Houston offers a dramatic illustration of the fact that to excel in team sports requires a team -- not a high-priced superstar or two chewing up the team bankroll (basketball the possible exception with so few players). Clemens ($18M), Bagwell ($18M), and Andy Pettite ($8.5M) make up about 65 percent of the team's payroll -- an amount nearly equal to the Rangers' entire payroll. Besides Beltran, this $44 million would go a long way in providing another strong position player or two (catcher or SS being big needs) along with pitcher or two. Clemens is a great pitcher but very expensive for a player being used every 5th game. Bagwell's salary is commensurate with his career peak, not the form of the last three years. Pettite's salary exceeds Oswalt's by $2.5 million even though Pettite's career numbers are not in his league. Once again, I will push the theme that it's not just the amount of money available that matters but how they spend it.
Although Brian's argument is valid, I would point out that the situation with the Stros is not as dire as it seems in the thros of a probable last place season. Bags is probably done as a player, so the financial drain of his contract will likely be offset at least to some extent by proceeds from disability insurance. Clemens' deal -- which the Stros entered into only after Beltran signed with the Mets -- is for only this season, which leaves only Pettitte's contract as the Stros' last big obligation to an aging veteran. As a result, the Stros are in a financial position to begin making the free agent acquisitions and trades necessary to regain contender status. Berkman, Oswalt and Lidge -- along with emerging solid players such as Backe and Ensberg -- is not a bad nucleus to build around.
By the way, this Newsday report indicates that the Yankees may have some competition for Clemens if he elects to allow the Stros to trade him to a contender.
Securities and Exchange Commission Chairman William H. Donaldson announced yesterday that he will resign at the end of the month. President Bush appointed Mr. Donaldson in 2003 in reaction to the wave of hyper-publicized corporate scandals that resulted from the bursting of the stock market bubble in the early part of this decade. Here is the SEC press release on the resignation and an earlier post from late last year on concerns that business interests were expressing over Mr. Donaldson's performance.
President Bush intends to nominate Republican California Congressman Christopher Cox to replace Mr. Donaldson. Representative Cox was a White House counsel during the Reagan administration and a corporate finance attorney with the law firm of Latham & Watkins. He is in Washington for being one of the Congressional leaders advocating repeal of inheritance and estate taxes.
Mr. Donaldson clearly alienated business interests during his two and a half years at the Commission. He was an advocate of hefty fines for corporate wrongdoers, registration of hedge fund advisers and a requirement that stock marketplaces always give investors the best possible price. Although it was enacted before he was appointed, Mr. Donaldson was the first SEC chairman who was required to deal with enforcement of the landmark Sarbanes-Oxley corporate reform law, which has been no picnic. Most business leaders have criticized the law as another costly governmental regulation of business. Finally, Mr. Donaldson was often at odds with his two fellow Republican commissioners as he increasingly sided with the commission's two Democrat commissioners in pushing through controversial proposals.
However, the straw that broke the camel's back was probably the disclosure last week of the Commission's $48 million budget shortfall stemming from real-estate costs relating to its sparkling new building in Washington and a GAO audit report that found that the agency had failed to institute some of the same financial controls that it requires of public companies. Oops!
Update: Professor Oesterle over at the Business Law Prof Blog notes in this interesting post that the SEC's abysmal handling of the increased costs resulting from Sarbanes-Oxley was the more than enough to justify Mr. Donaldson's exit.
June 1, 2005
American International Group Inc. released its long-delayed annual report yesterday and, as expected, reported a 2.7% hit to the company's net worth along with cautionary notes about the longer-term cost that AIG is confronting as it deals with multiple governmental investigations. Here are the previous posts on the travails of AIG.
In a particularly important disclosure, AIG noted that credit downgrades over the past several weeks have forced it to post an additional $1.16 billion in collateral for certain financial contracts. Although that amount is manageable for the time being, AIG noted that "additional downgrades could result in requirements for substantial additional collateral, which could have a material effect" on how AIG manages its short-term liquidity needs.
As noted in this earlier post, a failure of trust is what caused Enron's failure, and credit downgrades and customer trepidation over AIG's financial difficulties can cause the same downward spiral for that company. In its latest annual report, accounting adjustments reduced AIG's previously reported net income for 2004 by 12% ($1.32 billion) to $9.73 billion, and reduced AIG's book value by $2.26 billion to $80.61 billion. Overall, the restatement reduced AIG's net income from 2000 through 2004 by 10% ($3.9 billion).
The Stros pulled out a rare win last night, but the real story this week is that Roger Clemens reached a milestone that reflects that he is the best pitcher that any of us will ever have the pleasure of watching.
As regular readers of this blog know, I am somewhat of a stathead in regard to baseball, and I particularly find that the Lee Sinins-developed statistic -- runs saved against average ("RSAA") -- is the best statistic for evaluating a pitcher's performance.
As with its counterpart for comparing hitters -- runs created against average ("RCAA," explained here) -- RSAA is particularly valuable to evaluate pitching because it focuses on the two most important things for a pitcher in winning baseball games -- that is, not giving up runs and getting hitters out. RSAA measures the number of runs that a pitcher saves for his team relative to the number of runs that an average pitcher in the league would give up while obtaining an equivalent number of outs for his team (as with RCAA, RSAA is park-adjusted). Inasmuch as the hypothetical average pitcher's RSAA is always zero, a player can have either an RSAA that is a positive number -- which indicates he is an above average pitcher (i.e., Clemens) -- or an RSAA that is a negative number, which means he is performing below average (i.e., Brandon Duckworth or Tim Redding)
Moreover, just as RCAA is a valuable tool for comparing hitting ability of hitters from different eras, RSAA is a very good measure for comparing pitchers who played during different eras. Inasmuch as RSAA measures a pitcher's ability against that of an average pitcher in the pitcher's league for each particular season, a pitcher's lifetime RSAA measures how that pitcher performed against an average pitcher in his era, which is really the best way to compare pitchers from different eras. On the other hand, comparing other pitching statistics -- such as earned run average, wins and hitting statistics against -- is often skewed between pitchers of hitter-friendly eras (i.e., the current era) versus pitchers of pitcher-friendly eras (i.e., such as the late 1960's and early 70's).
Well, even though the Stros lost on Monday, Clemens pitched well (8 IP, 4 H, 2 R/ER, 1 BB, 7 K's) in his 650th career start and, in so doing, set the modern major league record for career RSAA:
1 Roger Clemens 671
2 Lefty Grove 668
3 Walter Johnson 643
4 Greg Maddux 556
5 Grover C Alexander 524
6 Randy Johnson 512
7 Pedro Martinez 488
8 Christy Mathewson 405
9 Tom Seaver 404
10 Carl Hubbell 355
Even including pitchers from the 19th century, Clemens ranks 3rd on the all-time RSAA list:
1 Cy Young 813
2 Kid Nichols 678
3 Roger Clemens 671
4 Lefty Grove 668
5 Walter Johnson 643
6 Greg Maddux 556
7 Grover C Alexander 524
8 Randy Johnson 512
9 John Clarkson 508
10 Pedro Martinez 488
Moreover, during his career, Clemens has led the league (or tied) in RSAA during a season 6 times and finished in the top 5 an incredible thirteen times:
1986 AL T1ST 46
1987 AL 2ND 46
1988 AL 2ND 42
1989 AL T3RD 28
1990 AL 1ST 55
1991 AL 1ST 50
1992 AL 1ST 49
1994 AL T2ND 40
1996 AL 3RD 46
1997 AL 1ST 69
1998 AL 1ST 51
2000 AL 2ND 32
2001 AL T6TH 24
2004 NL 4TH 32
Even more remarkably, Clemens' 26 RSAA that he has generated to date during the 2005 season is already a major league record for a 42 year olds pitcher:
RSAA YEAR RSAA
1 Roger Clemens 2005 26
2 Jack Quinn 1926 23
T3 Hoyt Wilhelm 1965 21
T3 Nolan Ryan 1989 21
T3 Warren Spahn 1963 21
6 Babe Adams 1924 15
7 Sad Sam Jones 1935 14
8 Doug Jones 1999 13
T9 Connie Marrero 1953 11
T9 Red Ruffing 1946 11
T9 Grover C Alexander 1929 11
T9 Dutch Leonard 1951 11
Finally, after only one and a third seasons with the Stros, Clemens already ranks 7th in career RSAA for Stros pitchers:
1 Roy Oswalt 115
2 Billy Wagner 99
3 Mike Hampton 76
4 Dave Smith 75
5 Octavio Dotel 67
6 Nolan Ryan 60
7 Roger Clemens 58
8 Wade Miller 56
9 Don Wilson 55
10 Joe Sambito 53
Roger Clemens is truly a pitcher for the ages.
Former billionaire Russian oil magnate Mikhail Khodorkovsky was sentenced to nine years in prison yesterday by a Russian court in a case that businesspersons from around the world have followed carefully as a sign of the Russian government's willingness to treat business interests fairly. Here are the previous posts on Mr. Khodorkovsky and his now largely dismantled company, OAO Yukos.
Russian governmental officials have presented the case against Mr. Khodorkovsky as a repudiation of the corrupt capitalism in the early days of Russia's market economy of the 1990s that allowed Mr. Khodorkovsky to win control over Yukos, which was then Russia's largest oil company. Thus, the Russian government's actions against allegedly corrupt business leaders is quite popular among most Russians, who resent Mr. Khodorkovsky and the other Russian tycoons who made fortunes during the 1990's while most Russians struggled under the new market economy.
Nevetheless, the price that the Russian government will pay for prosecuting Mr. Khodorkovsky may be costly. Western governments and investors have begun to question the Russian government's commitment to the rule of law in regard to its treatment of business interests that compete with the government's business interests. Moreover, the government's dismantling of Yukos has made given foreign investors yet another reason to avoid investment in Russian capital markets precisely at a time when Russia's undercapitalized economy desperately needs that investment.
But lest we in the U.S. get too self-righteous about the Russian government's handling of Mr. Khodorkovsky's case, remember that the sentence pursued by U.S. prosecutors and handed down by a U.S. federal court in the sad case of Jamie Olis makes the Russian government's handling of Mr. Khodorkovsky's case look downright reasonable. And if you do not believe that a prosecution of a U.S. business figure could be based on similar political aspirations as those involved in Mr. Khodorkovsky's case, just watch the upcoming case against Maurice "Hank" Greenberg develop.
What parallel universe are we living in when the U.S. government's criminalization of business interests appears as bad, if not worse, than that of the Russian government's?
This headline -- "Reversal of Andersen Conviction Not a Declaration of Innocence" -- to this NY Times/Kurt Eichenwald story about the Supreme Court's decision in Andersen is revealing of the mainstream media's mindset in regard to the government's dubious policy of criminalizing merely questionable business practices.
In reality, the Andersen decision is not a "declaration of innocence" for an entirely different reason than the ones set forth in the article. Indeed, Andersen does not need such a declaration because of a fundamental principle of American jurisprudence that the mainstream media and the government prosecutors routinely overlook while pursuing "justice" in regard to unpopular businesspersons.
Andersen is innocent until proven guilty.
Mark Felt, a retired high-ranking FBI official during the Nixon Administration, confirmed yesterday the Vanity Fair magazine story in its July issue that he was "Deep Throat," the confidential shadowy source for Bob Woodward and Carl Bernstein, the Washington Post reporters who helped unravel the Watergate scandal that resulted in the resignation of President Richard Nixon over 30 years ago. Here is the exhaustive Washington Post coverage on the story.
The movie based on Woodward and Bernstein's decent book about the affair -- All the President's Men -- does a reasonably entertaining job of telling the story about the Watergate scandal. However, for a more complete and compelling source of information about the Watergate scandal, read the late J. Anthony Lukas' Nightmare: The Underside of the Nixon Years (Viking 1976).