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August 31, 2005
DeGabrielle is the choice for U.S. Attorney
First Assistant U.S. Attorney Don DeGabrielle -- the favored candidate of most of Houston's criminal defense bar -- was recommended to President Bush today by Texas Senators Kay Bailey Hutchison and John Cornyn to become the next U.S. Attorney for the Southern District of Texas. Mr. DeGabrielle will replace his former boss, Michael Shelby, who resigned in June to join Houston-based Fulbright & Jaworski's white collar crime section.Chuck Rosenberg, a former chief of staff to U.S. Deputy Attorney General James Comey, has been the interim U.S. Attorney since Mr. Shelby's resignation.
Inasmuch as Mr. DeGabrielle has been with the local U.S. Attorney's office since 1986, he is well-known to the local criminal defense bar that has become somewhat frustrated with the revolving door nature of the U.S. Attorney's job in Houston over the past decade. Given the misconduct of the Enron Task Force in a number of high-profile Enron-related criminal cases over the past year, a huge sigh of relief could be heard from Houston's criminal defense bar when Mr. DeGabrielle was recommended instead of one of the prosecutors off of the Task Force, at least one of whom was known to have applied for the position. Mr. DeGabrielle and the rest of the local U.S. Attorney's office recused themselves at the outset of the criminal investigation into Enron, which led to the creation of the Enron Task Force in the first place.
Meanwhile, Senators Hutchison and Cornyn also recommended to President Bush that Fulbright & Jaworski partner and well-known local maritime lawyer Gray Miller replace U.S. District Judge Ewing Werlein Jr., who is scheduled to take senior status at the end of this year.
Posted by Tom at 5:17 PM | Comments (0) | TrackBack (0)
AG intervenes in Baylor-Methodist squabble
The Chronicle's Todd Ackerman continues his fine reporting on the saga of the Medical Center divorce between The Methodist Hospital and Baylor College of Medicine with this report that Texas Attorney General Greg Abbott has engaged the feuding ex-partners in a series of meetings over the past two weeks for the purpose of ending the bickering between the institutions, which has been going on for the better part of two years now.
In the meantime, Mr. Ackerman reports that, even as the talks took place, eleven Baylor cardiologists left for Methodist, bringing to 80 the total number of physician and faculty defections that Baylor has suffered since the split in April, 2004. Previously, Baylor departments of pathology, neurology/neurosurgery, plastic surgery, anesthesiology and orthopedics suffered physician or faculty losses to Methodist.
A former Houstonian, Mr. Abbott clearly is taking a special interest in resolving the Baylor-Methodist feud that has shaken Houston's Texas Medical Center. Mr. Abbott was a young attorney in private practice in Houston during the early 1980's when he was paralyzed from the waist down after being seriously injured by a falling tree branch while jogging at Houston's Memorial Park. Mr. Abbott was treated at Medical Center hospitals, and he has often publicly expressed his appreciation for the extraordinary treatment that he received there, particularly his rehabilitation stint at The Institute for Rehabilitation and Research (known as "TIRR"). As such, he is a powerful voice for the public interest in mediating the Baylor-Methodist dispute.
Posted by Tom at 6:25 AM | Comments (0) | TrackBack (0)
The David Boies Copy Club
Let's see if we can keep this all straight.
David Boies -- who champions himself as an advocate of honest corporate governance -- was Tyco's outside counsel in connection with investigating corporate fraud by Tyco management, and one of the prosecution's main witnesses in the corporate fraud trial against former Tyco executives Dennis Kozlowski and Mark Swartz.
On the other hand, Mr. Boies is one of the members of Maurice "Hank" Greenberg's defense team in connection with defending Mr. Greenberg from Eliot Spitzer's allegations that Mr. Greenberg perpetrated fraud at AIG.
In the meantime, Mr. Boies just resigned as special counsel for Adelphia for violating the Bankruptcy Code and Rules by failing to disclose to the Adelphia Bankruptcy Court that members of his family indirectly own a substantial interest in a document management services company that did between $5 and $10 million of business with Adelphia. Apparently, other clients of Mr. Boies' firm also have paid substantial sums to the document management company without knowing of the affiliation to Mr. Boies' family members.
This Wall Street Journal ($) article has more, as does Larry Ribstein.
Posted by Tom at 5:56 AM | Comments (2) | TrackBack (2)
Further assessment of Katrina's economic impact
As companies involved in the U.S. oil and gas industry continue to assess the damage that Hurricane Katrina has caused to Gulf of Mexico and Gulf Coast production facilities, Royal Dutch Shell PLC announced on Tuesday that its Mars floating production platform, which generates about 220,000 barrels of oil and 220 million cubic feet of natural gas daily, has sustained significant damage, as reflected by the picture on the left. It appears that the platform's above-water module has overturned as a result of the storm. Here are the previous posts over the past several days on Hurricane Katrina.
Meanwhile, initial damage assessments from the hurricane sent oil and gasoline futures prices sharply higher as the storm appears to have knocked out about 10% of U.S. refining capacity for what could be an extended period of time. Katrina has flooded the areas around several major refineries and possibly the refineries themselves, so even when crude-oil production in the Gulf of Mexico is restored, converting that oil into gasoline and other products requires refineries that may not be online for quite some time. Eight major U.S. refineries in the Gulf Coast that produce gasoline, heating oil and other products for distribution across the Southeast and the East Coast remain closed as damage assessments continue.
In anticipation of the storm, producers in the Gulf shut down wells that produce 1.4 million barrels a day. To put that in perspective, that level of production is comparable to the excess pumping capacity of OPEC. However, most of OPEC's excess capacity is in Saudi Arabia, so it takes over a month to import that oil and many U.S. refineries cannot process the high-sulfer Saudi crude oil. Consequently, increased Middle East oil production is not a quick fix to the current shortages being caused by the damage from Katrina.
The wholesale price of gasoline increased by almost $0.42 a gallon yesterday and retail prices went over $2.80 a gallon in Chicago. October crude-oil futures settled up $2.61 for the day at a new nominal record of $69.81 a barrel in trading on the New York Mercantile Exchange. Although frenetic buying ahead of big storms is normal in commodity markets, it is almost unheard of for the after-storm response to be even worse, which is a signal that the markets are betting that the recovery from the storm will take months. Indeed, the next five monthly contracts all closed at successively higher prices (called a "contango" in the trading business), with the last three all higher than $70 and futures for March, 2006 delivery closing at $70.11 a barrel. At very least, in view of the 55 cent per gallon rise in the price of September gasoline futures, my sense is that it is safe to say that we are all in for a huge shock at the gasoline pump over the next several weeks.
The status of most of the New Orleans-area refineries remains largely unknown. For example, Murphy Oil Corp.'s Meraux, La., refinery, which is located 10 miles southeast of New Orleans, is in an area with substantial flooding. Similarly, Chevron has been unable to reach its huge refinery in Pascagoula, Miss. and Exxon Mobil Corp. has not been able to get into its refinery in Chalmette, La., yet. On the other hand, Valero Energy Corp. announced that two key units of its St. Charles refinery were under three feet of water and that widespread electrical damage had occurred. The company estimated that it would take two weeks to re-start the refinery even after power is restored. Thankfully, the Louisiana Offshore Oil Port ("the Loop")-- the key Gulf Coast importation facility for tankers arriving from foreign producers of oil -- did not incur any catastrophic damage.
Clear Thinkers favorite James Hamilton has these further thoughts on the probable economic effects of Katrina. And this Wall Street Journal ($) article provides an excellent analysis of the New Orleans levee system and what needs to occur for the flooding in New Orleans to recede. Finally, Houston blogger Banjo Jones has a creative idea on how Houston can chip in to help the homeless of New Orleans.
Posted by Tom at 4:19 AM | Comments (0) | TrackBack (1)
August 30, 2005
Situation in New Orleans deteriorating
The already dire situation in New Orleans has taken a turn for the worse this morning as the breach in the 17th Street Canal Levee is now 200 feet wide and slowly flooding the entire city. In short, the worst-case scenario may be occurring as flood waters completely fill the below sea-level bowl that is New Orleans, potentially turning Lake Pontchartrain and the city into one big toxic lake.
For those of you who cannot monitor developments via television, Brendan Loy has been doing an incredible job of blogging developments as they occur, so check on his site frequently for updates. Also, WWLTV in New Orleans has established this blog that provides continual updates on developments in the city. Finally, the Interdictor is also providing up-to-date eyewitness accounts of developments in New Orleans.
In addition, the Chronicle's Eric Berger has been doing an outstanding job of analyzing Hurricane Katrina developments on a more thorough basis on his SciGuy blog. The Chronicle's Loren Steffy has also been doing a fine job of keeping up with the financial implications of the hurricane over at his Full Disclosure blog. Finally, here is an excellent Washington Post article that summarizes the difficult situation well.
The disastrous situation in New Orleans is exhibiting how weblogs are becoming an increasingly important medium for disseminating urgent and specialized information. The Chronicle's excellent technology writer, Dwight Silverman, pushed the local newspaper into the blogosphere, and the brilliance of his vision is now being fulfilled by the his work and that of his colleagues. Kudos to Chronicle management for embracing this important information medium.
Posted by Tom at 12:05 PM | Comments (2) | TrackBack (0)
"You're a bully, Mr. Lanier, and you're not going to get away with it now"
That was one of the comments of Richard A. Epstein, the James Parker Hall Distinguished Service Professor of Law at the University of Chicago and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, during this heated exchange with Merck slayer Mark Lanier on Larry Kudlow's show over the merits of the Ernst v. Merck verdict. The debate comes on the heels of Mr. Epstein's impassioned criticism of the Merck/Vioxx fiasco in this Opinion Journal op-ed, in which he accused Mr. Lanier of intentionally misleading the jury during the trial. Here are the previous posts on the Merck/Vioxx case.
During the interview, Mr. Lanier resorts to throwing mud at Professor Epstein as his main argument, but the following exchange comes closest to a substantive exchange of positions:
Prof. EPSTEIN: Well, look, the government stories are based upon both the cost and the benefits. And we know that Vioxx in many ways, with respect to arthritic pain and with respect to intestinal discomforts and inflammations all of that stuff, is much better than any other drug. And whenever you want to make these assessments, you've got to look at the benefit side as well as the cause side. And so the judgment to use it is a perfectly sensible judgment. I've gotten, after I wrote my critique of Mr. Lanier in The Wall Street Journal, statements from physicians who just lamented the fact that they couldn't use the drug which they regarded as best for themselves and for other people. And what happens here is you are basically taking a set of risks, which are uncertain, and are using this to knock out a drug which, as best I can tell, is better than many of the alternatives. It's much too paternalism.Mr. LANIER: Last word, if the professor had a student write that on an exam, he'd flunk him out of law school...
Prof. EPSTEIN: No, I would not.
Mr. LANIER: ...because it's simply not the case. The truth of the matter is, this was about Merck knowing it increased your risk of a heart attack five times and refusing to tell anyone because it wanted to make more money. The Merck document said, "If we can put off warning for just four months, we'll make an extra $229 million." And it's not whether or not you sell it, it's don't we have a right to know if it's going to kill us? And I think we have a right to know.
Hat tip to Walter Olson over at PointofLaw.com for the link to the Epstein-Lanier debate.
Posted by Tom at 7:14 AM | Comments (2) | TrackBack (1)
More on the Originalists
Following on this post from last week, Yale Law School Constitutional Law professor Jack Balkin (of the popular Balkinization blog) pens this Slate op-ed in which he makes the case against originalism and in favor of the "living Constitution" approach to interpreting the U.S. Constitution. He notes:
Nobody, and I mean nobody, whether Democrat or Republican, really wants to live under the Constitution according to the original understanding once they truly understand what that entails. Calls for a return to the framers' understandings are a political slogan, not a serious theory of constitutional decision-making.
In fact, the contemporary movement for originalism began as a conservative political slogan used to attack the Warren Court's decisions on race and criminal procedure. It mutated from a concern with the original intentions of the framers, to the intentions of the ratifiers, to how the public would have understood and applied the Constitution's words at the time they were adopted.Today's originalism is hauled out to attack decisions that judges and politicians don't like. But when it comes to decisions they do like, or would be embarrassed to disavow, the same judges and politicians quickly change the subject. In practice contemporary originalists pick and choose when they will demand fidelity to original understanding. Sometimes they even mangle the history to get to results they like.
Professor Balkin closes with the following pragmatic defense of the living Constitutional approach:
In the long run, the Supreme Court has helped secure greater protection for civil rights and civil liberties not because judges are smarter or nobler, but because the American people have demanded it. When social movements like the civil rights movement or the feminist movement convince the center of the country that their claims are just, the court usually comes around. Sometimes it gets ahead of the center of public opinion, and sometimes it's a bit behind. But in the long run it reflects the national mood about the basic rights Americans believe they deserve. . .Rather than a set of shackles designed by long-dead slave-owners, the framers bequeathed to us a Constitution that could adapt to the needs and aspirations of each succeeding generation. Their faith in the possibilities of the future, and our enterprise in realizing that future, have made us the great and free nation we are today.
Read the entire piece, and also Stuart Buck's blog post challenging a portion of Mr. Balkin's analysis.
Posted by Tom at 6:32 AM | Comments (1) | TrackBack (0)
Evaluating Katrina's damage to oil and gas production facilities
Officials of oil and gas companies and refineries with facilities in the path of Hurricane Katrina were scurrying around yesterday somewhat helplessly attempting to evaluate the extent of the storm's damage on key oil and natural-gas production facilities that rattled energy markets early yesterday. The bottom line is that it's going to take at least a few days -- and perhaps weeks -- to assess the damage fully and determine how long those facilities will be off-line.
Oil futures surged past $70 per barrel in overnight electronic trading on Monday, but fell back during the day. Oil for October delivery settled at $67.20, up $1.07 from Friday's price, but still below the previous record. When adjusted for inflaction, oil prices overall are still well below the high of $95.26 reached in April 1980.
Meanwhile, Hurricane Katrina set off a frenzy in the natural-gas trading pits, where the New York Mercantile Exchange imposed unprecedented emergency restrictions. Inasmuch as the U.S.'s major natural-gas-delivery terminal -- Louisiana's Henry Hub -- shut down early Sunday evening and did not reopen until midday yesterday, the Nymex Exchange declared an extremely rare "force majeure" delay of deliveries against its futures contracts. Although the force majeure declaration likely would cause only a minor delay in delivery on about 100 contracts (affecting a relatively small amount of $11 million in gas deliveries), such declarations nevertheless cause jitters in the gas markets that can affect prices.
Nymex gas futures for September delivery soared to a high of $12.07 per million British thermal units and settled up nearly 11% at $10.847, which was a record finish. The natural gas supply chain is particularly vulnerable to disruption because it must be moved at high pressure through specific delivery points and pipelines, while oil and other liquid fuels can be transported by truck, if necessary.
Another problem is that the nine Gulf Coast refineries that were shut down because of Katrina cannot be re-started by just flipping a switch. As noted in this Oil Drum post, restarting a refinery is a complicated process and, even in the best case, will require a period of several days to get back to 100% refining capacity. As noted yesterday, the Gulf region now supplies roughly one-quarter of the oil and natural gas consumed in the U.S. The New Orleans area alone is responsible for about 12% of domestic refining capacity that turns crude oil into gas for autos, jet fuel, heating oil and other products.
As the storm moved onshore, oil and gas companies began dispatching planes and divers into the Gulf of Mexico to begin evaluating the damage to rigs, pipelines and production platforms. Royal Dutch Shell PLC reported that two drilling rigs it had under contract -- Transocean's Nautilus and Noble Corp's Jim Thompson -- had been moved by the storm (the rigs are designed to float), but did not appear to be extensively damaged. Likewise, a BP PLC official fly-by inspection on Monday afternoon of several deepwater platforms also showed no significant damage. However, what takes more time to assess is possible damage to underwater pipeline infrastructure, which was already damaged last summer by underwater mudslides that resulted from the much smaller Hurricance Ivan.
Finally, don't miss Clear Thinkers favorite James Hamilton's piece on why Katrine could have a much bigger effect on the price of gasoline and natural gas than on the price of crude oil.
Posted by Tom at 4:57 AM | Comments (1) | TrackBack (0)
The Enron Task Force attempts to muzzle Sherron Watkins
When the Task Force fingered the record number of 114 co-conspirators in their legacy case against former Enron chairman Ken Lay, former CEO Jeff Skilling and former chief accountant Richard Causey, the Task Force effectively ensured that most defense witnesses would be chilled from testifying during the upcoming trial out of fear that their testimony would result in a retributive Task Force indictment. Moreover, when a targeted witness (Lawrence Ciscon) decided to testify on behalf of the defendants anyway during the recent Enron Broadband trial, the Task Force threatened him in an attempt to induce him not to testify. Rumors have been circulating in Houston for months of similar incidents involving other defense witnesses in regard to Enron-related trials, but the threatened witnesses are relunctant to describe such threats on the record out of fear of Task Force reprisal.
However, the lengths to which the Enron Task Force will go to suppress testimony in Enron-related cases reached truly absurd levels this past week when the Task Force filed this motion in the main Enron securities fraud class action attempting to postpone the testimony of the one witness who may talked more about Enron publicly than any other person -- Sherron Watkins.
You remember Ms. Watkins. She is the former mid-level Enron accountant who parleyed this warning memo to Mr. Lay into a lucrative talk-pundit career of waxing eloquent on all things Enron. She testified to a fawning Congressional committee, co-authored an Enron book, was one of the primary Enron employees interviewed during the Enron movie, and then made a few bucks on the rubber-chicken circuit as a whistleblower talking about the need for corporate reforms after Enron. The fact that Ms. Watkins was not a whistleblower (she never alerted anyone on the outside about alleged Enron improprieties) and that her memo to Mr. Lay characterized Enron's problems as primarily a public relations issue has gotten lost in the Enron milieu. Meanwhile, whereever there is a camera and a light, Ms. Watkins continues to be willing to pontificate about Enron.
Inasmuch as Ms. Watkins is mentioned 35 times in the plaintiffs' complaint in the Enron securities fraud class action, it is reasonable for the defendants to find out what she has to say under oath. However, Ms. Watkins is apparently also going to be a key prosecution witness in the upcoming criminal trial against Messrs. Lay, Skilling and Causey, so the Task Force in its motion suggests that Ms. Watkins' deposition testimony in the civil case would provide some kind of "unfair" advantage to the three former Enron executives in preparing to defend their freedom. As Mr. Lay's response points out, the Task Force's request to muzzle Ms. Watkins is without any meaningful basis, particularly given the fact that any tactical advantage that the Task Force may lose as a result of her tesimony in the civil case is miniscule because everyone knows about Ms. Watkins' views on Enron, anyway. In short, reasons Mr. Lay's lawyers, what's the big deal with a deposition of Sherron Watkins?
Well, the issue is not about Ms. Watkins' testimony. The real issue here is that the Justice Department and the Enron Task Force does not want the true story of Enron to be told in the Lay-Skilling-Causey criminal trial, just as it did not want the true story told during either the Enron-related Nigerian Barge trial or the Enron Broadband trial. As a result, the "Justice" Department is not about "justice" at all. Rather it is about fulfilling pre-conceived political notions of alleged wrongdoing regardless of whether those notions comport with the truth. To those of you who prefer to see that Messrs. Lay, Skilling and Causey be convicted of Enron-related crimes, please answer the following question -- Is this really the way in which you want that goal accomplished?
Posted by Tom at 4:00 AM | Comments (0) | TrackBack (0)
August 29, 2005
Shoe drops on eight former KPMG partners
With its deferred prosecution agreement with the government finalized, the first criminal indictments were filed today against former KPMG partners in connection with the creation and promotion of tax shelters that still threatens the firm ability to survive as a going concern. Today's indictment charges eight former KPMG executives -- including former KPMG deputy chairman Jeffrey Stein and four other lawyers (including one former Sidley Austin partner) -- with conspiracy for designing and marketing the fraudulent tax shelters. Here are the previous posts on KPMG's tax shelter woes, and here is the indictment.
Although the criminal charges and probable future charges against other KPMG personnel ensure bad publicity for the firm for years, the government's controversial decision to terminate former accounting giant Arthur Andersen by indicting that firm is ironically the reason that KPMG just may survive the fallout over the tax shelter indictmetns. With large public companies having so few other choices for auditors left, KPMG's still stout audit practice may be able to generate enough business to makeup for the loss of KPMG's once lucrative tax shelter practice.
The admissions that KPMG made today in connection with its deferred prosecution agreement will assist the government in prosecuting the indicted individuals and in future cases against other former KPMG partners, bankers, lawyers, and outside advisers who participated in creating and promoting the shelters. For example, KPMG admitted the tax shelter that it sold under the name "Bond Linked Issue Premium Structure" ("Blips") was a fraudulent tax shelter and admitted that the firm engaged in fraudulent conduct in connection with two other shelters, known as "Flip" and "Opis." Among the major banks that provided financing for the shelter transactions were Deutsche Bank AG, HVB Group and UBS AG, whose former executive -- Domenick DeGiorgio -- has already pled guilty to fraud and conspiracy charges in connection with the Blips transactions.
Here is the KPMG statement on the deferred prosecution agreement.
Posted by Tom at 1:55 PM | Comments (1) | TrackBack (1)
"My Daughter and Bill Murray"
This post is a father's description of his eight year old daughter's first date, which happened to be with Bill Murray, who introduced her "as my wife."
Posted by Tom at 6:58 AM | Comments (0) | TrackBack (1)
The betting on the effect of Katrina
The early bets on the effect of Hurricane Katrina are rising rapidly this morning as traders are reacting to what is turning out to be the worst-case scenario for the U.S. energy industry
In overnight electronic trading on the New York Mercantile Exchange, October crude-oil futures opened up more than $4 over Friday's close, topping $70 a barrel for the first time. September gasoline futures were up over 20 cents (over 10%) to around $2.12 a gallon. September natural-gas futures, which expire today, increased by more than $2 (over 22%) to about $12 per million British thermal units. Some energy analysts are predicting the possibility of $80-a-barrel oil and $15 per million British thermal unit natural gas as a result of the storm.
These increases followed a selloff Friday afternoon when it appeared Katrina would move on the eastern part of the Gulf of Mexico and spare oil and gas production and refineries in the central Gulf. Over Friday night, the category 4 hurricane moved on a more westerly course that it through the middle of the oil and gas-producing areas of the central Gulf and the Louisiana refining system, which generates about 15% of total U.S. capacity. The Gulf of Mexico is the source of about a fifth of U.S. gas production and more than a quarter of U.S. oil production.
Three of the key facilities for the Gulf region's oil and gas production have been shut down by the storm -- the Louisiana Offshore Oil Port, the "Superman" facility that receives and distributes imports of crude oil, and Port Fourchon, which supports much of the Gulf's oil-and-gas production facilities, and the Henry Hub, which is the pipeline nexus for the U.S. natural gas industry and the delivery point for the Nymex futures contracts.
By the way, for an impressive picture loop of Katrina, check out this website. And, unfortunately, longtime New Orleans blawger Ernie the Attorney was not able to get out of New Orleans in time, so he is riding out Katrina in New Orleans.
Posted by Tom at 5:14 AM | Comments (0) | TrackBack (5)
Criminalizing statements that perpetuate a myth
Regulation FD requires full disclosure of securities issuers’ communications with analysts for the supposed purpose of protecting the hypothetical ordinary investor. It's one of those regulations that sounds good on the surface, but fails miserably in practice.
The truth is that Reg FD attempts to regulate statements that perpetuate a myth -- i.e., that the securities markets are a level-playing field for the ordinary individual investor. In fact, securities markets are hopelessly rigged against the individual investors, who really have no business attempting to compete in those markets against the pros. Rather, study after study has shown that the individual investor would be much better off simply investing in index funds rather than operating under the myth that the securities markets are fairer for the ordinary investor than, say, playing the slots in Las Vegas.
Nevertheless, most securities regulation is premised on the assumption that the little guy investor needs to be protected from being taken advantage of by the sharpies. Without such regulations, the theory goes, the ordinary investor will think that the securities markets are rigged and will not participate, which hurts those markets. Larry Ribstein aptly coined this syndrome of regulating statements that perpetuate the myth that securities markets are safe for ordinary investors as "the great securities regulation scam." As Larry notes in this post:
In short, capitalism and its regulators desperately need to hide fundamental truths about investing from the little guy. You might say the whole setup is a vast conspiracy that depends on investors being foolish and irrational and does everything it can to perpetuate this irrationality.
With that backdrop, Bruce Carton of the Securities Litigation Blog and Larry had some fun with the announcement last week that the government has broadened its investigation into Dreamworks to include Pixar's over-estimation of sales of its Incredibles DVD and "whether showing a gathering of analysts a prescreening of a movie constitutes disclosure of material information to a group of select people." Larry comments:
How far is this going to go? Twenty years ago when I lived in Macon, Georgia, we used to get a lot of previews. I think it was the "play-in-Peoria" phenomenon. Maybe that's still true. I remember seeing a sneak preview of ET, before I'd seen any publicity on the film. I decided that it was shlock filmmaking, not up to Spielberg's earlier Duel, but was convinced it would be phenomenally successful. I almost went and bought some stock, and regretted not doing so for years.Now I wonder, would this have been wrong of me? Even criminal?
And while regulating the pre-screening of movies borders on the absurd, the criminalization of similar statements is downright scary. As we recently witnessed in the Enron Broadband trial -- which largely involved prosecution of statements made to securities analysts -- these are not easy cases to prosecute, even where the government has promoted an effective propaganda campaign in support of its case. As a result, prosecutors -- whose careers may depend on a successful prosecution in such a high-profile case -- are highly incentivized to cross the line and utilize abusive tactics to buttress their difficult case, such as intimidating witnesses, eliciting false testimony from a key witness, and violating limine orders.
When such government abuse results from enforcement of laws to regulate these statements, it makes you appreciate the wisdom behind a certain Constitutional Amendment that really ought to protect those statements from regulation.
Posted by Tom at 4:00 AM | Comments (1) | TrackBack (1)
August 28, 2005
Andy Pettitte
Pitcher Andy Pettitte is the subject of the fifth in the ongoing series about the key Stros players (previous posts here, here, here and here).
Pettitte is the hometown boy (Deer Park High School in suburban east Houston area) who returned to Houston in 2004 with a $31.5 million three year contract after a brilliant nine year stint with the New York Yankees that coincided with the Yankees winning four World Series Championships. Pettitte's first season was highly frustrating as an elbow injury resulted in a premature end of the season before the Stros caught fire and came within a game of the World Series. One would not be going out on a limb to suggest that the Stros would have made the World Series in 2004 had Pettitte been able to pitch the entire season.
Despite that disappointment, Pettitte has rebounded this season with one of the best seasons of his career, currently 4th in the National League in runs saved against average ("RSAA", explained here). Under contract to the Stros at $17.5 million for one more season, the 33 year old Pettitte is at a crossroads -- he probably still has several more seasons left in his tank, but the final season of his contract coincides with the Stros over-priced contract on Jeff Bagwell, so it is unlikely the Stros would pay an aging Pettitte at the same level that the club would pay younger pitchers such as Oswalt and Lidge. On the other hand, the Stros would love to have Pettitte as the elder statesman of their Berkman-Oswalt-Ensberg-Lidge nucleus over the next several years. Accordingly, if Pettitte is willing to take less to continue playing near home, then a deal is definitely possible that would likely keep Pettitte a Stro until he retires. His impressive stats are here.
Posted by Tom at 2:36 PM | Comments (1) | TrackBack (0)
Andy Pettitte statistics
| Andy Pettitte | |||||||||||||
| YEAR | AGE | RSAA | ERA | G | GS | IP | SO | SO/9 | BR/9 | W | L | NW | NL |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 31 | 8 | 4.02 | 33 | 33 | 208.1 | 180 | 7.78 | 12.01 | 21 | 8 | 16 | 13 |
| 2004 | 32 | 4 | 3.90 | 15 | 15 | 83 | 79 | 8.57 | 11.06 | 6 | 4 | 5 | 5 |
| 2005 | 33 | 33 | 2.60 | 26 | 26 | 176.2 | 137 | 6.98 | 9.93 | 12 | 9 | 15 | 6 |
| CAR | 167 | 3.82 | 324 | 317 | 2052.1 | 1491 | 6.54 | 12.31 | 167 | 91 | 150 | 108 | |
| LG AVG | 0 | 4.65 | 2052.1 | 1441 | 6.32 | 13.28 | 115 | 115 | |||||
Posted by Tom at 2:35 PM | Comments (0) | TrackBack (0)
Thoughts about Martha
Martha Stewart -- who was unjustly prosecuted and convicted for allegedly misleading the government about an supposed crime that the government could not prove -- finishes the home confinement component of her sentence next week. Ellen Podgor (she of "Busted for Yoga" fame) wonders in this post which of the following will be the legacy of the Stewart case:
1. Tell the truth to the government when questioned.OR
2. Don't talk to the government when they seek information.
Given recent developments in other cases (here, here and here), the following alternative might also be added:
3. Waive the attorney-client privilege, offer up others as sacrificial lambs for the government to prosecute, and enter into a deferred prosecution agreement with the government to avoid criminal charges.
Posted by Tom at 8:02 AM | Comments (0) | TrackBack (0)
August 27, 2005
A potential disaster may be developing along the Gulf Coast
For years, experts have been warning that a potential disaster looms if a major hurricane hits the New Orleans metropolitan area, much of which sits beneath sea level. It is beginning to look as if those predictions may come true later this weekend.
Over last evening, Hurricane Katrina took a westward course away from the Mobile, Ala.-Florida Panhandle area and appears to be headed directly for the New Orleans area.
This website (be patient, takes awhile to load) shows the catastrophic flooding that will occur in the New Orleans area as a result of a category 3 hurricane. Hurricane Katrina is currently predicted to hit the Louisiana coast as either a category 4 or even a 5 storm. Hat tip to my friend Scott Hagen for the link to this website.
If you are in New Orleans and reading this post, you should seriously consider getting out. Now.
Posted by Tom at 12:33 PM | Comments (2) | TrackBack (1)
KPMG - DOJ settlement done
The anticipated settlement of criminal charges over KPMG, LLP's creation and promotion of allegedly illegal tax shelters has been finalized between the accounting firm and the Department of Justice and will be announced on Monday. Here are the previous posts on KPMG and its tax shelter saga.
Under the deal, KPMG will pay $456 million in fines, accept former chairman of the Securities and Exchange Commission Richard C. Breeden as an independent monitor of the firm's operations through at least 2006. The firm will also agree to limits on the scope of its tax practice and continue to serve up to prosecutors for possible criminal charges former KPMG partners and other professionals who worked on the tax shelters, which the DOJ contends cost the U.S. Treasury at least $1.4 billion in unpaid taxes. KPMG allegedly earned fees of $124 million on creating and promoting the tax shelters to about 350 clients.
As noted in earlier posts, the settlement with the Justice Department does not mean that KPMG is out of the woods yet by any stretch. KPMG still faces potentially enormous civil liability as a result of its admission of wrongdoing in regard to the tax shelters. Even more importantly, KPMG's serving up of its former partners on a platter to prosecutors has so damaged partner morale at the firm that key partners may leave the mess behind for greener pastures at competitor firms. Thus, even when it tries to do so, the federal government may not be capable of avoiding an Arthur Andersen-type meltdown of one of the few remaining big accounting firms available to handle the increased regulatory requirements that the government has imposed on public companies.
Update: This NY Sunday Times article -- purportedly based on inside sources -- tells the story on how KPMG's management came to embrace, and then abandoned the defense of, the tax shelter promotion scheme.
Posted by Tom at 4:46 AM | Comments (0) | TrackBack (0)
August 26, 2005
Morgan Ensberg's remarkable season
The subject of the fourth segment of the series of posts analyzing the key Stros players (previous posts here, here, and here) is thirdbaseman Morgan Ensberg, who is enjoying one of the best seasons of any hitter in Stros history.
Ensberg is a late bloomer out of college baseball, who came up through the Stros' farm system with fellow USC baseball star Jason Lane. Interestingly, Lane was always considered the better prospect, but Ensberg was the one who burst on to the Stros scene first with his strong first full season in 2003.
Unfortunately for Ensberg and the Stros, that first season coincided with the tenure of former Stros manager Jimy Williams, whose inexplicable prejudice against young players prompted him to platoon Ensberg that season with the far inferior Geoff Blum (-23 RCAA (ouch!)/.295 OBA/.379 SLG/.674 OPS). As noted in this post from last season regarding Williams' managerial limitations, a good case can be made that Williams' decision to take away at bats that season from Ensberg by platooning him with Blum was the difference between the Stros winning the NL Central Division in 2003 and finishing second to the Cubs by a measly one game.
For the first half of 2004, Ensberg endured the difficult combination of Williams as manager and tendonitis in his right elbow that hampered his capacity to drive the ball. Accordingly, his offensive productivity plummeted and he ended up platooning much of the season with Mike Lamb, who had a much better 2004 season than the one he's having this season.
Despite his bad 2004 season, Ensberg has bounced back to become one of the five best hitters in the entire National League this season. If he finishes out this season at the same level that he has played to date, Ensberg will join Bagwell, Berkman, Moises Alou, and Richard Hidalgo as having one of the top ten most productive hitting seasons in Stros history. With this fine season in hand, the 30 year old Ensberg joins Berkman, Oswalt, and Lidge as a fine nucleus for the Stros to build around over the next several seasons.
Ensberg's stats are here.
Posted by Tom at 2:12 PM | Comments (0) | TrackBack (0)
Morgan Ensberg statistics
| Morgan Ensberg | ||||||||||||
| YEAR | AGE | RCAA | OBA | SLG | OPS | AVG | HR | RBI | SB | G | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 27 | 20 | .377 | .530 | .907 | .291 | 25 | 60 | 7 | 127 | ||
| 2004 | 28 | -12 | .330 | .411 | .742 | .275 | 10 | 66 | 6 | 131 | ||
| 2005 | 29 | 37 | .389 | .581 | .971 | .287 | 33 | 91 | 6 | 125 | ||
| CAR | 41 | .364 | .497 | .861 | .280 | 71 | 236 | 21 | 436 | |||
| LG AVG | 0 | .340 | .431 | .772 | .269 | 44 | 180 | 22 | ||||
| POS AVG | -6 | .335 | .430 | .765 | .267 | 45 | 191 | 14 | ||||
Posted by Tom at 2:10 PM | Comments (0) | TrackBack (0)
Big banks taking a flyer on UAL
UAL Corp.'s shopping excursion for reorganization take-out financing has apparently resulted in a preliminary commitment of a cool $3 billion in financing from four lending lending institutions that, if consummated, would allow the troubled airline to emerge from over three years in chapter 11. The four lenders involved in the negotiations with UAL are apparently Citigroup Inc., J.P. Morgan Chase & Co., General Electric Co. and Deutsche Bank AG.
The take-out financing would allow UAL to repay a $1.3 billion debtor-in-possession loan it has been relying on during its chapter 11 case, and will be incorporated in a reorganization plan that the company plans to file with its Chicago Bankruptcy Court soon. In the meantime, UAL continues to bleed, incurring a net loss of almost $275 million for July as the company incurs huge non-cash reorganization expenses relating to renegotiation of leases on key aircraft.
Meanwhile, Northwest Airlines contemplates replacing UAL in chapter 11 -- perhaps prior to October 17 -- as it continues to deal with a machinist's union strike. Although Northwest reported decent liquidity of $2.1 billion as of June 30, the company is currently heading toward four straight years of operating losses, most recently reporting net losses of $450 million in the first quarter and $217 million in the second quarter of this year. In addition to ever-increasing fuel prices, Northwest is also trying to figure out a way to deal with its various pension plans, which are currently underfunded to the tune of $3.8 billion.
As has been noted before here, it's darn hard to pull the plug on even an incredibly unprofitable airline.
Posted by Tom at 5:45 AM | Comments (0) | TrackBack (0)
Did Gordon Gekko think of that?
Well, the government's seemingly relentless campaign to criminalize business in the post-Enron era has finally reached the one industry -- the movie business -- that relishes such matters when they happen to somebody else.
The Wall Street Journal ($) is reporting today (free article here) that an ongoing investigation into DreamWorks Animation SKG Inc has been broadened by an SEC informal inquiry into Pixar Animation Studios after Pixar had over-estimated the number of sales upon its release of The Incredibles DVD.
This particular saga began when DreamWorks cut its earnings forecasts twice after heavy returns of its Shrek 2 DVD. In the case of DreamWorks, the SEC is apparently focusing on whether the studio should have informed investors earlier of the problems with Shrek 2 given the studio's knowledge that DVDs were having an increasingly short shelf life than previous DVD issues. DreamWorks shares fell about 5% in May ahead of the release of its first-quarter results after an online report predicted that the results would be worse than expected, and then the company subsequently warned of lower earnings forecasts because Shrek 2 DVD sales had fallen short of expectations. Similarly, on June 30, Pixar announced that it would miss its second-quarter earnings because it had underestimated the rate of returns by retailers of The Incredibles DVD and that sales of the movie's DVD had fallen about 7% short of estimates.
The studios are probably already working on a documentary similar to this one. As for what such a film would look like, Professor Ribstein -- the expert on how business is portrayed in films -- presents his case.
Posted by Tom at 4:56 AM | Comments (0) | TrackBack (1)
Prosecution increases the stakes in another trader case
The Justice Department announced Thursday that it has filed a superseding indictment alleging additional counts of wire fraud and reporting fake trades against former El Paso Corp. trader Donald Burwell. The superseding indictment is the latest development in a series of criminal cases that the U.S. Attorney's office for the Southern District of Texas has been pursuing against former traders of natural gas who worked for various Houston-based companies. Previous posts on the trader cases are here, here, here, here, here, here, here and here.
Mr. Burwell was previously charged in November 2004 with one count each of conspiracy, false reporting and wire fraud relating to his involvement in the transmission of allegedly inaccurate trade reports to an industry newsletter in July 2000. The latest superseding indictment incorporates the pending charges and adds two counts of false reporting and two counts of wire fraud relating to allegedly inaccurate trade reports that Burwell was allegedly involved in transmitting to trade publications in August and October, 2000.
The case against Mr. Burwell is one of 10 that the Justice Department is pursuing in regard to alleged manipulation of natural gas trading indexes, which are used to value billions of dollars in gas contracts and derivatives. Industry publications such as Inside FERC Gas Market Report use data from traders to calculate the index price of natural gas, which affects the level of profits that traders can generate. In Mr. Burwell's case and in the related trader cases, it remains unclear in what context the allegedly false information was transmitted or whether the publication even used any false information. However, the government's theory of criminal liability is that it needs only to prove that fake trades were reported to the publications and not that the trades were actually published or affected the markets.
As noted in previous posts here and here, this superseding indictment appears to be a transparent effort by the government to increase the alleged market loss attributable to the alleged false reporting for purposes of seeking a longer jail term for Mr. Burwell. Inasmuch as Justice Department lawyers have been making some rather absurd positions on that particular issue in other cases recently, it remains to be seen whether the Justice Department's attempt to increase the stakes in the prosecution will bludgeon yet another defendant to cop a plea in the hopes of avoiding a Jamie Olis-like prison sentence.
Nine other former traders have been charged in similar cases. Six of those traders (five from El Paso and one formerly of Reliant Energy) have pleaded guilty to the fake reporting charges, while three others are awaiting trial, including former Dynegy trader Michelle Valencia, former El Paso trader Greg Singleton, and former El Paso trader James Phillips, whose trial is tentatively scheduled to commence next month.
Posted by Tom at 4:15 AM | Comments (0) | TrackBack (0)
Biggio and Lane
Continuing on our series of posts (previous posts here and here) providing a more thorough statistical analysis of the Stros' key players, today we examine the star-crossed careers of Craig Biggio and Jason Lane.
Bidg is already a Stros legend and may well be the first true Stros player to be elected to the Baseball Hall of Fame. Bidg was the best secondbaseman in Major League Baseball during the decade of the 90's, and baseball stat guru Bill James has rated him as the fifth best secondbaseman in Major League Baseball history. Accordingly, Bidg's place as one of the best Stros players of all-time is well-secured.
However, even though Bidg remains a formidable presence at the age of 39, his skills are facing the inevitable erosion that comes with aging, particularly as each season drags into the dog days of summer. Bidg is now barely an above-average National League hitter and he is well below-average defensively. Given his age, Bidg's performance is unlikely to improve over the next couple of seasons as he pursues his goal of 3,000 base hits, and his presence in the lineup blocks younger players who -- given the game experience that Bidg is occupying -- would likely produce more for the Stros than Bidg will.
Which brings us to Lane, who is a good example of the complications that occur as a result of the Stros' decision to placate Bidg. Lane had long been one of the best hitters in the Stros' farm system and was ready to play full-time in the major leagues three seasons ago. However, the Stros decision to sign Jeff Kent to play second base and to move Bidg to the outfield effectively blocked Lane from a starting role with the Stros until this season.
Thus, rather than a rising star in his mid-20's gaining valuable playing experience, Lane is now effectively a 29 year old rookie struggling from time to time as he plays his first full season as a Major League starter. As a result, the Stros may well have left several of Lane's most productive seasons on the bench, and if Stros management placates Bidg's desire to play at least a couple more seasons at second base, then the Stros risk delaying the development of Chris Burke in the same manner.
So, the Stros face a tough decision with regard to Bidg. The good thing is that Bidg is not a particularly expensive player anymore and remains a great presence in the clubhouse. Nevertheless, players such as Lane and Burke have more productive seasons to provide for the club than Bidg, and delaying those contributions risks hurting the ballclub's performance.
Finally, as for each player's statistics, Bidg is a very productive 39 year old ballplayer, but -- as noted above -- he has seen his better days and now is just an average National League player, at best. Lane has had an up and down season, which is not unusual for a player enduring his first season as a major league starter. He has shown flashes of power, but he lacks plate discipline, which has resulted in far too few walks and, thus, a below-average on-base average. Lane is an above-average defensive player in right field, so if he can develop more plate discipline over the next couple of seasons, he has a chance of being a well above-average National League player for the next five seasons or so. That would fit nicely into the Stros' nucleus of Berkman, Oswalt, Lidge and Ensberg.
Biggio and Lane's key statistics are here.
Posted by Tom at 4:10 AM | Comments (2) | TrackBack (0)
Biggio and Lane statistics
| Craig Biggio | ||||||||||||
| YEAR | AGE | RCAA | OBA | SLG | OPS | AVG | HR | RBI | SB | G | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 37 | 1 | .350 | .412 | .763 | .264 | 15 | 62 | 8 | 153 | ||
| 2004 | 38 | 8 | .337 | .469 | .806 | .281 | 24 | 63 | 7 | 156 | ||
| 2005 | 39 | 7 | .334 | .456 | .790 | .269 | 17 | 50 | 11 | 122 | ||
| CAR | 353 | .371 | .436 | .807 | .285 | 251 | 1044 | 407 | 2531 | |||
| LG AVG | 0 | .338 | .419 | .757 | .268 | 274 | 1213 | 205 | ||||
| POS AVG | -102 | .333 | .392 | .726 | .265 | 198 | 1022 | 229 | ||||
| Jason Lane | ||||||||||||
| YEAR | AGE | RCAA | OBA | SLG | OPS | AVG | HR | RBI | SB | G | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 26 | 3 | .296 | .815 | 1.111 | .296 | 4 | 10 | 0 | 18 | ||
| 2004 | 27 | 3 | .348 | .463 | .812 | .272 | 4 | 19 | 1 | 107 | ||
| 2005 | 28 | 1 | .306 | .499 | .804 | .260 | 19 | 61 | 6 | 111 | ||
| CAR | 11 | .323 | .509 | .832 | .267 | 31 | 100 | 8 | 280 | |||
| LG AVG | 0 | .340 | .430 | .770 | .269 | 19 | 80 | 10 | ||||
| POS AVG | 10 | .349 | .461 | .810 | .271 | 24 | 88 | 10 | ||||
Posted by Tom at 4:00 AM | Comments (0) | TrackBack (0)
August 25, 2005
Curt Sampson on Bobby Jones
Curt Sampson has already written the best biography on Ben Hogan, and now he is attempting to equal that feat in regard to Bobby Jones, who remains the only golfer to win the Grand Slam of Golf in the same year and who retired from competitive golf almost immediately after doing so. Mr. Sampson's new book on Mr. Jones is excerpted in this Golf World piece entitled Bobby in a New Light - Seventy-five years after his Grand Slam, Bobby Jones is more compelling than the myths surrounding him:
[L]ike Lincoln and Churchill and Marilyn Monroe, Jones led a life big enough to be considered from a variety of angles and with varying levels of awe and skepticism. Perhaps by considering his life in reverse, we can appreciate golf's greatest hero in a new light. After all, he won the Slam at age 28, and then quit the game. He lived 41 more years.
Hat tip to Geoff Shackelford for the link to the Golf World piece.
Posted by Tom at 7:37 AM | Comments (0) | TrackBack (0)
"Slime in the Ice Machine" Online
The City of Houston webpage now provides this online search tool for reviewing current health department reports on Houston restaurants and other eating establishments. It's sort of like an online version of Marvin Zindler's "Slime in the Ice Machine" local television segments.
As an aside, after watching one of Marvin's slime machine reports while on his first evening visiting Houston several years ago, a London solicitor asked me the following question in that quintessentially understated manner shared by many British lawyers:
"To what parallel universe have I been transferred?"
Some of the online reports are quite interesting. For example, as a result of this one, my wife and daughters are going to be avoiding an inexplicably popular restaurant in the Galleria.
Posted by Tom at 6:42 AM | Comments (1) | TrackBack (0)
Key questions on American health care
Malcolm Gladwell's recent New Yorker polemic regarding the state of American health care prompts Marginal Revolution's Tyler Cowen to post this handy list of observations on the key issues facing the American health care system. One point that Tyler makes is particularly important:
The U.S. health care system probably is the world's best for some class of people, namely the well-off and I don't mean just the super-rich. Trying to extend those benefits -- however this might be accomplished -- is a better approach than nationalizing the sector.
Mr. Gladwell's piece falls into the common trap of blurring the issues relating to the quality of American health care -- which is quite good -- with the issues pertaining to the way in which America finances health care, which is not so good. Tyler's post does a much better job of delineating that key distinction.
Posted by Tom at 6:01 AM | Comments (2) | TrackBack (0)
Contingent fees and tort reform
The jury verdict in the Merck/Vioxx trial generated a good bit of debate about tort reform, and one of the common topics in that discussion is the effect that contingent fees have on the civil justice system. Contracting for a contingent fee is a way in which a plaintiff can hedge the cost of a lawsuit by shifting a portion of the risk of loss to an attorney. Many tort reformers propose to do away with -- or at least severely restrict -- contingent fees on the premise that they inevitably lead to increased frivolous litigation.
Along those lines, Ted Frank passes along this interesting AEI project from Alex Tabarrok (of Marginal Revolution fame) and Eric Helland in which they review the results of their study on the probable effects of limiting contingent fees. In short, they question whether the purported benefit of capping contingent fees merits the extreme measure of limiting the contractual right of a plaintiff to contract for a contingent fee:
If America is a "lawsuit hell," then contingent-fee lawyers are often considered its devils. Contingent fees have been called unwarranted and the lawyers who accept them have been denounced as unethical and uncivilized. Furthermore, in the midst of increased filings and escalating awards, it is difficult not to notice that some plaintiffs' lawyers have become very rich. As a result, tort reformers have called for limits on contingent fees and many states have obliged. But limits have been enacted without any evidence that contingent fees were either responsible for the liability crisis or that limiting them would produce benefits.
This study, one of the first empirical examinations of contingent-fee limits, finds that contingent fees benefit plaintiffs and do not cause higher awards. Furthermore, contingent-fee limits are unlikely to reduce lawyers' income very much, since they will simply switch to hourly fees. Since hourly fee lawyers are willing to take more cases to court than contingent-fee lawyers, contingent-fee limits can increase the number of low-value "junk suits."
Tort reform is an important goal, but limiting the contractual rights of plaintiffs and their lawyers is an unattractive and likely ineffective method of achieving that goal.
Posted by Tom at 5:29 AM | Comments (1) | TrackBack (0)
August 24, 2005
The amazing Roger Clemens
The Stros lost last night, but not due to any lack of effort from Roger Clemens. The Rocket continued his amazing season as the best 43 year old pitcher in the history of Major League Baseball, which only serves to cement his place as one of the three best pitchers in Major League Baseball history. Following in line with this earlier post on providing more detailed statistical analysis on the performance of Stros players, some of Clemens' amazing statistics are set forth below. "NW" and "NL" refer to "Neutral Wins" and "Neutral Losses," which are the number of wins and losses that Clemens would have had if his team had always generated a league average number of runs in support of his pitching. Here are the stats.
Posted by Tom at 12:45 PM | Comments (2) | TrackBack (0)
Roger Clemens statistics
| Roger Clemens | |||||||||||||
| YEAR | AGE | RSAA | ERA | G | GS | IP | SO | SO/9 | BR/9 | W | L | NW | NL |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 41 | 10 | 3.91 | 33 | 33 | 211.2 | 190 | 8.08 | 11.14 | 17 | 9 | 14 | 12 |
| 2004 | 42 | 32 | 2.98 | 33 | 33 | 214.1 | 218 | 9.15 | 10.67 | 18 | 4 | 15 | 7 |
| 2005 | 43 | 54 | 1.56 | 26 | 26 | 178.1 | 162 | 8.18 | 8.43 | 11 | 6 | 15 | 2 |
| CAR | 699 | 3.12 | 666 | 665 | 4671.1 | 4479 | 8.63 | 10.82 | 339 | 170 | 336 | 173 | |
| LG AVG | 0 | 4.38 | 4671.2 | 3109 | 5.99 | 12.95 | 262 | 262 | |||||
Posted by Tom at 12:44 PM | Comments (0) | TrackBack (0)
Structured finance to the rescue
Professor Ribstein notes an interesting development in the entertainment business, where creative financial types are securitizing revenue streams from artists' work into financial instruments such as "Bowie Bonds," which are then sold to investors to provide an income source for the artists and their recording studios. Given the revenue loss that some artists and record companies have incurred as a result of illegal downloads, Larry notes the sweet irony of capitalists rescuing "the artists from the non-respecters of property rights."
Unfortunately, this creativity will only last until the government figures out what is really going on and puts a stop to it.
Posted by Tom at 8:33 AM | Comments (0) | TrackBack (0)
Securities litigation is like Being John Malkovich?
Peter Henning comes up with that apt description of Bruce Carton's analysis of the black hole that is developing in the securities litigation arena, where litigation seemingly begets litigation about the original litigation. The latest example is speculation over Milberg Weiss becoming a class action target as a result of the criminal investigation into the firm's handling of dozens of class actions over the years. Cracks Bruce, "Presumably the lawyers bringing any shareholder lawsuit against Milberg would be . . . lawyers who only file non-frivolous lawsuits seeking non-outrageous punitive damages."
In discussing all of this, Bruce refers to this hilarious Toronto Globe and Mail commentary on the imminent securities class action against CIBC that will claim damages caused by CIBC's recent generous settlement of claims against it in the Enron securities class action lawsuit:
While CIBC's shareholders may indeed have the right to feel like they're stuck in the intensive care unit without health coverage, the logic in taking this to court would seem distinctly fuzzy. If they blame the Enron settlement for hitting the value of their shares, what happens when their lawsuit is launched? Won't the share price drop even further? And when that happens, shouldn't they sue themselves? And eventually, won't they have to end up paying billions to themselves to have their own lawsuit go away?In the end, CIBC's share price would be sucked in on itself and go into negative territory, a kind of financial black hole that only Stephen Hawking would understand.
Posted by Tom at 8:03 AM | Comments (0) | TrackBack (0)
Stop daydreaming!
According to this Washington Post article, now daydreaming may be hazardous to your health:
The brain areas involved in daydreaming, musing and other stream-of-consciousness thoughts appear to be the same regions targeted by Alzheimer's disease, researchers are reporting today in an unusual study that offers new insights into the roots of the deadly illness.
While some unknown third factor may be responsible for triggering daydreaming as well as Alzheimer's, . . . a causative link between the two would explain a mystery that has long bothered scientists: why Alzheimer's generally affects memory first. . . [T]the undirected thought patterns that most people slip into readily may result in the kind of "wear and tear" that ends in Alzheimer's disease, . . .This theory, however, clashes with the evidence that intellectual activity plays a protective role against Alzheimer's disease. Far from the "wear and tear" model, other research has suggested that the brain runs on a "use it or lose it" system.
The best observation in the article is from a scientist who cautions that the findings are preliminary and should be taken with a grain of salt:
"I look forward to the public health campaign to stop people from engaging in these dangerous, risky behaviors," he quipped. "Maybe we can equip ourselves with anti-daydreaming monitors that shock us when we slip into reverie."
Posted by Tom at 7:28 AM | Comments (0) | TrackBack (0)
Don Willett to be nominated for Texas Supreme Court seat
The Chronicle is reporting this morning that 39 year-old Don Willett, an Austin attorney with close ties to President Bush, will be nominated today by Governor Rick Perry to replace Priscilla Owen on the Texas Supreme Court.
Mr. Willett is a native Texan who graduated from Baylor University and received a JD with honors and an AM in Political Science from Duke University in 1992. After law school, Mr. Willett clerked for Judge Jerre S. Williams of the U.S. Court of Appeals for the Fifth Circuit and then worked in employment law at the Austin office of Haynes & Boone for several years.
From 1996-2000, Mr. Willett served as Research/Special Projects Director for then-Governor Bush in Texas and advised Mr. Bush on various political and legal issues. He parlayed that position into a Domestic Policy & Special Projects Advisor position on the Bush-Cheney 2000 Presidential Campaign and then later on the Presidential Transition Team. In 2002, Mr. Willett was appointed as Deputy Assistant Attorney General in the Office of Legal Policy where he developed civil and criminal justice initiatives and special projects for the President, including coordinating assistance with judicial nominations and confirmations. After that stint, Mr. Willett served as Special Assistant to the President and Director of Law and Policy for the White House Office of Faith-Based & Community Initiatives and, most recently, as a key advisor for his old friend, Texas Attorney General Greg Abbott.
After nomination, Mr. Willett could serve on the Supreme Court without Senate confirmation until the Legislature is called into session, but he would still have to run for election to the seat next year.
Posted by Tom at 6:37 AM | Comments (0) | TrackBack (1)
Judge Hughes hammers the FDIC in the Hurwitz case
One of the more interesting (and longstanding) local civil lawsuits turned an interesting corner yesterday.
U.S. District Judge Lynn Hughes -- unquestionably the Houston federal judge most likely to challenge the government's position in any case -- handed down this 133 page broadside yesterday ordering the Federal Deposit Insurance Corp. to pay Houston financier and longtime environmentalist target Charles Hurwitz $72.3 million in sanctions for the FDIC's conduct in connection with prosecuting a civil lawsuit to hold Mr. Hurwitz and other directors of the defunct United Savings of Texas personally responsible for $250 million in connection with the $1.6 billion loss resulting from the S&L's 1988 failure.
There is a lot of background to this saga. The FDIC sued Mr. Hurwitz -- the chairman and chief executive of Houston-based Maxxam Inc. -- and other United Savings directors (including the talented Barry Munitz) in 1995. Interestingly, the FDIC did not contend in the lawsuit that Mr. Hurwitz and Maxxam had looted United Savings; rather, the agency contended merely that Mr. Hurwitz and Maxxam had an obligation to invest more money in the sinking ship of United even after it was clear that the S&L was going down the tubes.
Meanwhile, Mr. Hurwitz and his attorneys smelled a rat, and they contended in a counterclaim that the lawsuit was simply a device to mollify environmentalists and pressure Maxxam subsidiary Pacific Lumber to give up 5,000 acres of redwood forests in Northern California. The FDIC denied any such political motivation, but discovery in the lawsuit revealed that the FDIC representatives had, in fact, consulted extensively with environmental groups on the so-called "debt-for-nature" swap before filing the lawsuit. Judge Hughes was not pleased when that evidence was revealed to him, and he reiterated that displeasure in his opinion:
"The record shows that the swap was the only reason for this suit. It also shows that the FDIC knew that it had no factual or legal basis for its claims, and that its cases here and in Washington were shams."
At any rate, the lawsuit lagged on for years, and I had a running joke with Mr. Hurwitz's attorneys when I would see them at the federal courthouse that they were engaged in the legal equivalent of Bill Murray's plight in Groundhog Day. After imnumerable run-ins with Judge Hughes, the FDIC tried to just drop the whole mess in 2002, but Mr. Hurwitz refused to drop his counterclaim against the agency for improperly funding another government agency's investigation against Maxxam on the same subjet matter of the lawsuit. As a result of that investigation, the Office of Thrift Supervision filed a similar suit against Mr. Hurwitz and Maxxam for $821 million, but settled that lawsuit in 2002 for a paltry $200,000.
As usual, Judge Hughes is acerbic in his opinion regarding the FDIC's conduct, noting in particular that FDIC officials "lied about it all under oath" and they "discarded the mantle of the American Republic for the cloak of a secret society of extortionists." Another gem:
"It's hard to find a word that captures the essence of the FDIC's bringing this action. Irresponsible is close. Arbitrary, dishonest, exploitative, extortionate, and abusive all fit."
Judge Hughes concluded that Hurwitz and Maxxam "will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation." The $72.3 million awarded to Maxxam and Hurwitz covers attorneys costs and interest incurred in connection with the governmental investigations, which will be reduced to $15.3 million if the Fifth Circuit rules that Mr. Hurwitz and Maxxam can only recover costs from the FDIC.
Posted by Tom at 5:21 AM | Comments (1) | TrackBack (0)
August 23, 2005
Berkman and Oswalt
From time to time, I am going to pass along detailed statistics on the Stros' players. In last night's win, two of the players around whom the Stros will build over the next several years -- Lance Berkman (whose stats are down a bit this season as he is playing while rehabbing from off-season knee surgery) and Roy Oswalt -- had good games. Their respective statistics are here, including how they compare against the National League average. They are two of the best players in the National League at their respective positions.
Posted by Tom at 4:17 PM | Comments (0) | TrackBack (0)
Berkman and Oswalt statistics
| Lance Berkman | ||||||||||||
| YEAR | AGE | RCAA | OBA | SLG | OPS | AVG | HR | RBI | SB | G | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 27 | 40 | .412 | .515 | .927 | .288 | 25 | 93 | 5 | 153 | ||
| 2004 | 28 | 69 | .450 | .566 | 1.016 | .316 | 30 | 106 | 9 | 160 | ||
| 2005 | 29 | 21 | .408 | .493 | .901 | .293 | 13 | 53 | 2 | 95 | ||
| CAR | 275 | .415 | .555 | .971 | .302 | 169 | 588 | 42 | 870 | |||
| LG AVG | 0 | .342 | .434 | .776 | .269 | 95 | 384 | 49 | ||||
| POS AVG | 67 | .359 | .472 | .830 | .276 | 121 | 435 | 56 | ||||
| Roy Oswalt | ||||||||||||
| YEAR | AGE | RSAA | ERA | G | GS | IP | SO | SO/9 | BR/9 | W | L | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 25 | 21 | 2.97 | 21 | 21 | 127.1 | 108 | 7.63 | 10.60 | 10 | 5 | |
| 2004 | 26 | 22 | 3.49 | 36 | 35 | 237 | 206 | 7.82 | 11.62 | 20 | 10 | |
| 2005 | 27 | 33 | 2.68 | 27 | 27 | 191.2 | 134 | 6.29 | 10.57 | 15 | 10 | |
| CAR | 138 | 3.02 | 147 | 137 | 930.2 | 800 | 7.74 | 10.82 | 78 | 37 | ||
| LG AVG | 0 | 4.26 | 930.2 | 695 | 6.72 | 12.76 | 52 | 52 | ||||
Posted by Tom at 4:16 PM | Comments (0) | TrackBack (0)
New Fifth Circuit automatic stay decision
To proceed or not to proceed? That is often the question that a creditor has in regard to taking further legal action against a debtor that has just filed a bankruptcy case.
Under section 362 of the Bankruptcy Code, a wide-ranging injunction -- dubbed the "automatic stay" -- arises immediately upon the filing of a bankruptcy case. That injunction enjoins -- pending further Bankruptcy Court order -- most legal actions by creditors against either the debtor or the debtor's property, which is referred to in bankruptcy parlance as "property of the [debtor's] estate." Although the automatic stay is quite clear, it is often decidedly unclear whether a particular piece of property is "property of the estate" at the time of a debtor's bankruptcy and, thus, subject to the automatic stay against creditor actions. Given that it is rarely a good idea to violate a court-imposed injunction, the breadth of the stay is an issue that tends to interest most business lawyers and businesspeople.
The Fifth Circuit recently addressed the issue in Brown v. Chesnut and held that the creditor should err on the side of presuming that the automatic stay applies or risk sanctions for violating the stay. Writing for the Court, Judge Clement concluded that the automatic stay is violated where a creditor forecloses on property that "arguably" belongs to the debtor, even though a state court subsequently determines that it is not "actually" the debtor's property. The U.S. District Court had previously concluded that, because the debtor's claim of ownership in the property was subsequently held to be without merit, the creditor's foreclosure sale of the property without first obtaining a modification of the automatic stay did not violate the stay. However, Brown v. Chestnut stands for the proposition that, where the merits of the debtor's ownership claim have not yet been resolved at the time of foreclosure, the risk of damage to the debtor's estate was sufficient to require the creditor to seek a modification of the automatic stay before proceeding with foreclosure.
In short, tread carefully when confronted with an argument that the automatic stay enjoins an intended action. Getting the stay modified to allow an action against property is usually simpler and more efficient than defending the cloud on title to the property that results from an assertion that an action taken without Bankruptcy Court approval violated the automatic stay.
Posted by Tom at 6:39 AM | Comments (0) | TrackBack (0)
Justice Breyer takes on the Originalists
This Wall Street Journal ($) book review previews U.S. Supreme Court Justice Stephen Breyer's soon-to-be-published book, Active Liberty: Interpreting Our Democratic Constitution (Knopf Sept. 2005) in which Justice Breyer offers a rejoinder to his longtime intellectual opponent on the Supreme Court, Justice Antonin Scalia, who advocates "originalism" - i.e., a more literal interpretation of the Constitution's meaning at the time of its writing. Justice Scalia's views were set forth in his book, A Matter of Interpretation: Federal Courts and the Law (Princeton Univ. Press 1997).
In the book, Justice Breyer advances the longstanding criticism that originalism is simply a self-righteous political cover for the fact that all Supreme Court justices, regardless of their judicial philosophy, rely on common elements such as "language, history, tradition, precedent, purpose and consequence" when interpreting laws. It's the way in which they afford different weight to each factor, contends Justice Breyer, that often has a monumental impact on the American republic.
Justice Breyer's view does have merit, as the entire originalist rationale has a questionable historical basis (the Founding Fathers had widely divergent views on the Constitution and the role of the judiciary) and certainly does not always lead to a coherent uniform approach to resolving cases. However, even though some of the originalist-based decisions have had the consequence of enlarging the governmental bureaucracies and divesting local communities of control, my sense is that Justice Breyer's approach is still more likely to result in debacles such as this.
Update: Jim Lindgren over at the Volokh Conspiracy speculates as to the source of Justice Breyer's theory.
Posted by Tom at 4:54 AM | Comments (3) | TrackBack (1)
Evaluating the true risk of Vioxx
At the start of the recent Merck/Vioxx trial, this post noted the dearth of clinical evidence that Vioxx was a particularly risky drug.
In light of last week's big verdict in the case, long-time Clear Thinkers favorite James D. Hamilton (prior posts here) evaluates one of the recent clinical studies on Vioxx and explains the study's statistical basis for the conclusion that there is a slightly elevated risk of heart attack for certain Vioxx users. Professor Hamilton then juxtaposes the following question against one of plaintiff's lawyer Mark Lanier's more disingenuous questions during the trial:
How did we arrive at a system in which 12 random Texans are assigned responsibility for evaluating the scientific merits of statistical evidence of this type, weighing the costs and benefits, and potentially sending a productive blue-chip American company into bankruptcy protection?
Posted by Tom at 4:22 AM | Comments (2) | TrackBack (1)
August 22, 2005
Best line of the weekend
Best crack of the weekend came from CBS Golf on-course commentator, Irishman David Feherty, during the final round of the NEC Golf Championship, discussing Irish golfer Paul McGinley's background as a Gaelic football player:
"Gaelic football? Now, that's one tough sport. Just one rule: No homicide."
Posted by Tom at 5:22 AM | Comments (2) | TrackBack (0)
August 21, 2005
Judge Roberts opinion archive
Genie Tyburski via Tom Mighell passes along this AskSam website that provides a well-categorized database of the opinions of U.S. Supreme Court nominee, D.C. Circuit Judge John G. Roberts (prior posts here).
By the way, Tom is the grand-daddy of Texas blawgers and his legal research and technology blog -- InterAlia -- reached its three year milestone this past week. Tom's blog is a phenomenal resource for anyone involved or interested in legal research, and Tom is one of the pioneers in redefining the way in which high-quality, specialized information is delivered to large numbers of people through the blawgosphere. Congratulations to Tom for a job well done and keep up the good work!
By the way II, in case you missed it on television, go over to the Comedy Central website, scroll down and watch the "Judge Report" video clip from the Daily Show, in which Jon Stewart cleverly excoriates the NARAL over its now infamous ad against Judge Roberts. It's absolutely hilarious.
Posted by Tom at 11:20 AM | Comments (1) | TrackBack (0)
Posner v. the Media
Three weeks ago, 7th Circuit Judge Richard Posner (prior posts here) penned this "review" of eight books on the media in the NY Times Review of Books. "Review" is in parenthesis because the piece was not so much a review of the eight books as a forum for Judge Posner to pass along his always entertaining views, this time on the media in America. Among his many observations, Judge Posner discounted the ability of even conscientious reporters and editors to put their personal beliefs aside to generate fair and honest journalism.
Well, in an interesting development, New York Times executive editor Bill Keller has written this Letter to the Editor (scroll down to the second letter) of his own newspaper in which he harshly criticizes Judge Posner's article on the media as, among other things, "tendentious and cynical." Bill Moyers and Eric Alterman also chime in. Finally, Dean Velvel provides this more extensive analysis on Judge Posner's article, and Professor Ribstein has an interesting view of the journalists' protective reaction to Judge Posner's criticism.
I look forward to Judge Posner's response, which will probably be published here.
Posted by Tom at 10:27 AM | Comments (0) | TrackBack (0)
Mark Lanier's next case?
This BBC article indicates that none other than Steve Jobs may be the next executive to be on the receiving end of the tort liability merry-go-round:
The surge in sales of iPods and other portable music players in recent years could mean many more people will develop hearing loss, experts fear.
Mark Lanier is licking his chops.
Posted by Tom at 7:27 AM | Comments (0) | TrackBack (1)
Piling on KPMG
As KPMG attempts to finalize a deferred prosectution agreement with federal prosecutors that would avoid an Arthur Andersen-type indictment and probable meltdown, now they have another front on the criminal battlefield to be worried about:
Mississippi likely will file criminal charges against accounting giant KPMG because it created a tax strategy the state says illegally let WorldCom, now called MCI Inc. shield billions of dollars from taxes, sources close to the case said on Friday.Although a few other states have also weighed this strategy, Mississippi Attorney General Jim Hood is the most determined and his state would be the first to take this step, said the sources, who requested anonymity.
Under Mississippi law, "any person who willfully attempts in any manner to evade or defeat any tax . . . or assists in the evading of that tax or payment thereof" can be found guilty of a felony, one of the sources said. Penalties can be up to five years in prison, while fines can be as much as $500,000.
Analysts say Congress and corporate America would not want another of the nation's biggest accounting firms put out of business because the industry would be overly concentrated.
Mississippi might not share the federal government's concern that there could be too few auditors if KPMG collapsed, experts said, so KPMG might have less leverage in any talks with the state.
Hat tip to Ellen Podgor for the link to the Mississippi action.
Posted by Tom at 7:00 AM | Comments (0) | TrackBack (0)
August 20, 2005
Mayor White, hard-knuckled real estate speculator
Who would have thought when Bill White was elected that he would be spending a good amount of his time as Houston's mayor threatening to foreclose on downtown hotel properties?
Anne Linehan over at blogHouston.net reviews the entire sordid tale.
Note to Mayor White -- before you have the City foreclose its second lien on either of those hotel properties, please check to see whether either of them is generating enough revenue to pay operating expenses, much less debt service on the first lien indebtedness. Hotel properties "eat" money, and if the current owners are at least contributing enough to subsidize negative cash flows to operations, considering an alternative to foreclosure could save the City a ton of money. Sometimes you get more than you wish for when driving a hard bargain.
Posted by Tom at 11:07 AM | Comments (1) | TrackBack (1)
Dreaming of making "the Show"
George Will, who knows a bit about baseball, wrote this interesting column yesterday in the Washington Post in which he explores the South Atlantic Minor League Baseball League, otherwise know as "the Sally." The Sally is the hinterland of professional baseball, a low-A league in which the best players on their respective high school teams are evaluated to determine whether they have what it takes to move on to the next level of baseball's brutally efficient meritocracy. As Mr. Will notes:
The RiverDogs play 140 games in 151 days, traveling by bus, living at least two to a room in motels, some earning as little as $1,050 a month -- and only during the season -- with a $20 per diem for food. "Sometimes," says a player touchingly grateful for life's little blessings, "the motel is near an Outback." A young man from west Texas says, "I had a brother working in the oil fields. So if I wake up tired one day, I think, 'I could be doing that.' " Most of today's Sally Leaguers will be doing something like that sooner than they can bring themselves to imagine. But for now they are delighting some of the 40 million fans who will see minor league baseball this summer.
About 40 percent of the players on the 40-man rosters of the 30 major league clubs each spring are Sally League alumni, including, last April, Derek Jeter, Curt Schilling, Ivan Rodriguez, Luis Gonzalez, Scott Rolen, Andruw Jones and John Smoltz. But nowhere near 40 percent of Sally League players get to the majors. Most were the best on their high school teams and are slow -- mercifully so -- to understand the severity of professional baseball's meritocracy.
If you are interested in baseball, read the entire article. By the way, the Stros' farm team in the Sally is the Lexington Legends ball club. Hat tip to Phil Miller over at the Sports Economist for the link to Mr. Will's column.
Posted by Tom at 7:52 AM | Comments (0) | TrackBack (0)
August 19, 2005
Merck gets hammered
As anticipated by this prior post, a Brazoria County jury found that Merck & Co. was liable for $253 million in damages ($24 million in actual damages, plus $229 million in punitive damages) as a result of its negligence in the death of a 59-year-old Robert Ernst, who at the time of death was taking Merck's prescription painkiller Vioxx that over 20 million Americans took regularly before it was pulled from the market last year over concern that it might cause increased risk of strokes and heart attacks. The prior posts on the Merck/Vioxx trial are here, here, and here.
Inasmuch as Merck is currently facing another 4,200 Vioxx lawsuits, the verdict is not exactly a rousing start for Merck in the defense of the lawsuits. Merck's defense in the lawsuit seemed to be reasonably strong -- that is, Mr. Ernst, who had only taken Vioxx for eight months, died of arrhythmia that Vioxx has not been shown to cause. However, the Brazoria County coroner testified -- over Merck's strenuous objection because of the plaintiff's failure to designate the coroner as an expert prior to trial -- that Mr. Ernst's arrhythmia could have been caused by a heart attack. That testimony seemed to hurt Merck badly, as the Chronicle interviewed an alternate juror who had been dismissed from the trial immediately before deliberations began who remarked that Merck "wasn't doing the right thing by marketing the drug the way they were." Plaintiff's lawyer Mark Lanier accused Merck of dragging its feet after the Food and Drug Administration told it in late 2001 to put a label on Vioxx warning of potential heart risks, and during closing arguments, Mr. Lanier contended that Merck saved $229 million by waiting months to add the warning label. Not surprisingly, that's the amount of of punitive damages awarded by the jury.
Estimates of Merck's potential liability in the Vioxx cases range from $4 billion to $20 billion, which could be as large as a third of Merck's market capitalization. Although the price of Merck's shares dropped 8% today on the news of the verdict, that's not as bad as the 25% plus decline that occurred last September on the day Merck withdrew Vioxx from the market. Moreover, media reports on the jury's verdict have not differentiated between the plaintiff's economic and non-economic damages, but that distinction will be important to Merck's ultimate liability in this case when the court applies Texas' statutory cap on punitive damages to the jury verdict. You can be reasonably certain that the ultimate amount recovered will be far less than the jury verdict. Given that, and in view of the fact that Brazoria County is going to be one of the more plaintiff-friendly jurisdictions for a Vioxx trial, the market may be overreacting a bit to the verdict, although that's about the best spin that Merck can put on this result.
As usual, Professor Ribstein has insightful comments on the absurdity of all this, as does Ted Frank, Professor Bainbridge, Kevin M.D., Derek Lowe, Jonathon Wilson, and Walter Olsen.
Posted by Tom at 5:31 PM | Comments (8) | TrackBack (5)
To file or not to file? That is the question.
The Wired GC -- which is an excellent blog resource for any attorney who is, or advises, a general counsel of a company -- has this interesting post today about the tough decisions that some currently troubled companies currently have regarding whether they should risk a delay in filing a reorganization case under chapter 11 until after the new Bankruptcy Code Amendments of 2005 go into effect on October 17. The Wired GC also points to this handy summary by Lorraine S. McGowen of the Orrick firm regarding the changes in chapter 11 practice that will result from the amendments.
My sense is that the October 17 effective date will generate a few more reorganizations than normal over the next couple of months, but not that many. Certainly, if a company knows that a chapter 11 filing is inevitable in the near future, then filing a case sooner rather than later makes sense in light of the impending changes to the Bankruptcy Code. However, management of even the most financially-challenged companies rarely believe that bankruptcy is inevitable, so most companies will take their chances with filing under the amended Bankruptcy Code, if necessary. Finally, the Wired GC speculates that the effect of the new amendments may be to increase the number of reorganizations that end up in liquidation, which -- as we have seen in regard to the legacy airlines -- may not be all that bad a thing.
Posted by Tom at 10:29 AM | Comments (0) | TrackBack (0)
But what about Jamie Olis?
Doug Berman points out that Thursday was a busy day in New Orleans as the Fifth Circuit Court of Appeals issued over 160 published and unpublished decisions that appear mostly to involve rejection of various Booker sentencing claims. It's safe to say that the release of that many decisions sets a federal appellate record for the number of opinions issued by a court on one day.
Lost amidst all that activity, however, is the fact that the Fifth Circuit still has not ruled on the appeal in the sad case of Jamie Olis, even though oral argument in that appeal occurred on January 30 of this year. And while that appeal has been pending, Mr. Olis has been moved -- due to the absurd length of his 24 year sentence -- from a minimum-security prison in Bastrop, Texas to a medium-security prison at Oakdale, La., where prison gangs are common and many prisoners are serving multiple life sentences.
The Fifth Circuit's reputation in business cases took a serious hit with its Arthur Andersen decision, which was resoundingly rejected by a unanimous Supreme Court earlier this year. The Fifth Circuit has an opportunity to begin redeeming its reputation in business cases in the Olis appeal, but justice delayed is often justice denied. Here's hoping that a decision in the Olis appeal is forthcoming any day now.
Posted by Tom at 7:20 AM | Comments (4) | TrackBack (0)
Definitely not drinking buddies
Various PGA Tour officials are scrambling today to make sure that recently-crowned PGA Tournament Champion Phil Mickelson is not paired to play with Australian journeyman and PGA Tour player Paul Gow after Gow had this to say during an Austrailian radio interview earlier this week about his fellow Tour players' opinion of Mickelson:
"They wouldn't feed him. He ignores the other players. He's an arrogant person. He's the opposite - what you see on television is totally different to what he is around the clubhouse. And Tiger is the opposite - he will talk to you, he will sit down next to you at lunch and ask about your family and stuff. Phil is the opposite. He has done some great acting classes in Hollywood and they've worked out for him."
Posted by Tom at 6:55 AM | Comments (0) | TrackBack (0)
Is the noose tightening in the investigation of the Brown Administration?
The Chronicle's Dan Feldstein continues his solid coverage of the Cleveland, Ohio corruption trial of Cleveland entreprenuer Nate Gray, who is the person from whom two former Houston officials -- Lee Brown Administration chief of staff Oliver Spellman and building services director Monique McGilbra -- testified that they took cash and gifts. A previous trial of Mr. Gray ended in a mistrial, and the retrial that resulted in the conviction began earlier this month. Earlier posts on the trial and the related investigation of Brown Adminsitration officials are here, here, here and here.
Mr. Feldstein sums up what the result of this trial means to the Houston part of the ongoing criminal investigation:
In Houston, the question is this: What did it mean when a federal prosecutor asked FBI agent R. Michael Massie on the witness stand whether the investigation was finished in Houston and Massie testified, "No"?McGilbra admitted she took favors from five companies. Mayor Brown's brother, Earl, was a "subconsultant" to Gray on Houston matters. Gray paid him to talk to Mayor Brown on behalf of his company, which was seeking a shuttle bus subcontract at Bush Intercontinental Airport.
Although he was not a registered lobbyist as would be required, Earl Brown said he did [talk to Mayor Brown]. Former Mayor Lee Brown has denied it.
McGilbra and Spellman are scheduled to be sentenced here in Houston on their plea deals on September 2nd.
Posted by Tom at 6:13 AM | Comments (0) | TrackBack (0)
An economist's marriage proposal
NBC News correspondent Andrea Mitchell is a part of one of Washington's most formidable power couples through her marriage to Federal Reserve Chairman Alan Greenspan. Asked during a Time magazine/CNN.com interview this past week as to whether Mr. Greenspan ever engaged at home in "Greenspeak" -- i.e., the art of ambiguous economic pronouncements -- Ms. Mitchell observed:
"Occasionally. In fact, he claims he proposed three times before I was able to understand. He was so oblique."
Posted by Tom at 5:40 AM | Comments (0) | TrackBack (0)
The Banks and KPMG
Following on this post from last week regarding a plea deal of a former banker who had promoted KPMG's tax shelters, this Wall Street Journal ($) article provides more information on the involvement of several banks -- namely UBS AG, Deutsche Bank AG and HVB Group -- in providing billions of dollars in credit lines to KPMG clients -- and, in turn, earning substantial bank fees -- in connection with KPMG's promotions of tax shelters to its clients.
According to the WSJ article, Deutsche Bank, which happens to be a KPMG audit client, earned almost $80 million in bank fees from the Opis and Blips transactions that are at the heart of the questionable tax shelter vehicles. HVB, which is also a KPMG audit client, earned 5.5 million on Blips transactions in just three months during 1999 and millions more in 2000. UBS participated in 100 to 150 transactions in 1997-1998, but the amount of UBS' fees are unclear.
Interestingly, the article points out that Deutsche Bank lawyers cautioned the company's bankers that Blips transactions posed substantial risks for the bank's reputation. Nevertheless, the CEO of Deutsche Bank's U.S. unit at the time approved the bank's participation in the transactions so long as "any customer found to be in litigation be excluded from the product . . . and that a low profile be kept on these transactions."
I think it's safe to say that the low profile has been blown.
Posted by Tom at 5:17 AM | Comments (0) | TrackBack (0)
Coudert Brothers kaput
Coudert Brothers LLP, one of the oldest big U.S. law firms, elected to disband yesterday in a vote of its partners. The firm will remain in business as its lawyers move on to new jobs.
The firm was established in New York in 1853 and has long had international offices and clients. It was one of the first U.S. law firms to open offices in Paris, London, Hong Kong and other foreign locales, and it still has 17 offices in Europe and Asia. Nevertheless, in recent years, Coudert had seen many of its top partners cherry-picked by competitors, and merger negotiations with several firms over the past two years had been difficult because of Coudert's inferior profitability compared with the prospective merger partners. Thus, the partners apparently concluded that a liquidation held more value for owners than a bad merger.
Now, if only this process could occur with regard to a few legacy airlines . . .
Posted by Tom at 4:55 AM | Comments (0) | TrackBack (0)
August 18, 2005
KPMG rumbles with the McNair boys
This NY Times article has the skinny on the slobberknocking litigation that is taking place between harried but feisty KPMG and R. Cary and D. Calhoun McNair, sons of Houston Texans' owner Bob McNair, over tax shelters that KPMG allegedly promoted to the McNairs back in 1999.
KPMG is walking a fine line in this lawsuit and numerous other civil lawsuits that have arisen over the firm's former clients having problems with the IRS over claiming deductions for shelters that the IRS ultimately determined were abusive. Inasmuch as KPMG has already conceded that certain of its tax partners engaged in "unlawful conduct" in creating and selling the tax shelters, KPMG now has to juggle the dueling positions of being contrite while attempting to avoid a criminal indictment through negotiation of a deferred-prosecution agreement while fighting similar allegations in civil lawsuits with former clients to avoid potentially huge damage awards that could also sink the firm.
In the McNair lawsuit, KPMG is asserting that the McNairs knew fully well what they were getting into with regard to the tax shelter when they filed their returns. Consequently, KPMG is attempting to discover information about advice that the McNairs' tax lawyers and investment advisers gave them in connection with filing the returns. In that regard, KPMG is also asserting that the lawyers and the advisers are responsible third parties for at least a portion of the damage award if the firm is found to be liable to the McNairs.
These lawsuits in which both sides are alleging that one is worse than the other in regard to the alleged wrongful conduct are among the dirtiest lawsuits imaginable. My sense is that KPMG would not normally ever allow this type of lawsuit to go to trial because of the risk that a jury would really lay the wood to KPMG for not only giving dubious tax advice on the shelters to the plaintiffs, but also for throwing dirt at the plaintiffs and their advisors. However, KPMG is in a highly difficult position these days, and the precedent of a large settlement in a case such as this may not be consistent with the firm's plan for survival as a going concern. Therefore, KPMG may figure that it does not have much to lose by taking the case to trial because of the high risk that the firm will liquidate if it is hit with substantial damage awards in the large number of similar cases. If that is the case, the trial of this one could be very interesting -- I've always advised clients to be very wary of litigating with a party that has little or nothing to lose.
Peter Henning also has interesting observations on the case.
Posted by Tom at 12:41 PM | Comments (0) | TrackBack (0)
The latest Dome redevelopment plan
Following on these earlier posts (here and here), this Chronicle story reports that an outfit named Astrodome Redevelopment Corp. has obtained a preliminary $450 million financing commitment to redevelop the Astrodome into a Gaylord Texan-type hotel and entertainment complex. Astrodome Redevelopment Corp. is an investment company comprised of Oceaneering International Inc., a publicly traded firm working in engineering, science and technology; URS, a large architectural and design firm; NBGS International, a theme park developer; and Falcon's Treehouse, a Florida-based design firm.
Emphasis here should be on the word "preliminary." A project of this magnitude would entail working out huge problems, such as how an additional 1,200 rooms can be justified to lenders and equity investors in light of Houston's current glut of hotel rooms, parking woes during football games and the Houston Livestock Show and Rodeo, and the dubious nature of the pitiful Astroworld Six Flags Amusement Park across the freeway from the Dome as a draw for the hotel. As a result, my sense is that this deal will never come together, but crazier financial decision have been made -- just look at the Metro Light Rail line! ;^)
Anne Linehan over at blogHouston.net summarizes local reaction to this latest Dome boondoggle.
Posted by Tom at 10:32 AM | Comments (2) | TrackBack (1)
More on when justice destroys good reputations
This post from awhile back noted one of the by-products of the current trend toward criminalizing merely questionable business transactions -- i.e., the government's destruction of good reputations in its quest to obtain convictions against unpopular defendants.
Along those lines, this U.S.A. Today article from yesterday catches up with Mark Belnick, the former Paul Weiss partner and Tyco general counsel who was indicted and acquitted in connection with the prosecutions of former Tyco executives after he had coordinated the company's cooperation with the criminal investigation of former Tyco executives Dennis Kozlowski and Mark Swartz. Here is a longer New York Magazine article on Mr. Belnick's ordeal.
In the article, Mr. Belnick discusses with the reporter the misery that he endured during a prosecution that was based upon grand larceny charges for compensation that was Tyco's CEO and CFO indisputably approved:
"When I was threatened with grand larceny, I thought, 'What did I steal — my stock bonus?' " says Belnick. "I didn't even understand what the theory of grand larceny could be here."
During the trial, the prosecution described Belnick as a "man who lost his moral compass" and accepted excessive compensation that he knew was a payoff for his silence about wrongdoing committed by Messrs. Kozlowski and Swartz. This, of course, after the same prosecutor had received Mr. Belnick's assistance in uncovering the alleged wrongdoing by Messrs. Kozlowski and Swartz.
So it goes in the continuing criminalization of agency costs.
Posted by Tom at 9:38 AM | Comments (2) | TrackBack (1)
Review of the Tournament Course at Redstone Golf Club
As noted in this previous post, the Rees Jones-designed Tournament Course at Houston's Redstone Golf Club opened for play earlier this month to generally positive reviews. The Tournament Course -- the new specially-designed home of the Shell Houston Open PGA Tour Golf Tournament -- is the latest step in the Houston Golf Association's efforts to revive the lagging event, which relocated to Redstone three years ago after a spectacularly successful 28 year run in The Woodlands, primarily at the East (formerly the TPC) Course.
Several days ago, three pals and I teed it up at the Tournament Course for the first time. Although we should have had our heads examined, we decided -- in order to get the full flavor of the course -- that we would walk the course with caddies (in 95 degree temperature with 90% humidity!) and play the course from the tournament (i.e., the longest) tees. Inasmuch as the ground was still quite wet from a heavy rain storm the previous afternoon, we received no roll on our drives and felt like we trudged every one of the 7,500 yards of the course. Despite the challenging conditions, we had a jolly good time, and the following is my report (with photographs) on the newest addition to the generally underrated family of Houston championship golf courses.
Overall, the Tournament Course is an outstanding addition to the Houston golf scene. It is already a very good golf course, and has a chance to become a truly superior one. At this point, I would give the course a strong B+, but my sense is that the Houston Golf Association -- which did a wonderful job refining The TPC Course in The Woodlands over the years -- will make the improvements and modifications necessary to elevate the Tournament Course to one of the best golf courses in Houston and Texas. A strong golf course will not be enough alone to attract the best professional golfers back to the Shell Houston Open (a more favorable date help even more), but a strong course is a necessary component of a successful event, and the Tournament Course is certainly a good start to fulfiling that need.
Interestingly, despite its prodigious length, the Tournament Course is not simply a long course. It starts out with three relatively short, wide-open par 4's before it begins to bear its teeth on a couple of par 4's (holes five and six) midway through the front nine. In fact, four of the ten par 4's on the course are under 400 yards, which is almost unheard in these days of increasingly long tracts.
The course requires a variety of shots, and the greens (Mini-Verdie grass, very good condition) are well-adapted for the particular holes -- relatively flat and receptive for the longer holes, but quite undulating for the shorter ones. As with the TPC Course, the Tournament Course bears its teeth on its final two holes, the brutal 487 yard (uphill!) par 4 and the beautiful 485 yard par 4 18th that bends in and out of a lake that runs along the left side. Combine those two holes with the 200 yard par 3 sixteenth and you have a group of finishing holes that will take a back seat to few others in terms of difficulty. The course has a stout 138 slope rating from the tournament tees, and the 132 slope rating from the next set of tees up from the tournament tees is comparable to the tips at several very good Houston-area courses, such as Lochinvar Golf Club.
Despite the wet condition of the course when we played, the turf conditions on the Tournament Course are generally good with the exception of the 15th hole, where the fairway has simply not grown in well. The rough is already quite thick in most places and will be truly troublesome when the HGA allows it to grow for tournament conditions. Somewhat surprisingly, Redstone and the HGA elected not to use the sandcapping process on the fairways of the course, which has been been a big success at Carlton Woods Golf Club in expediting the return of the course to playability after heavy rains (a common occurrence in Houston generally and during Shell Houston Open week, in particular). The course is generally easy to walk, although there are long walks required between the green of the 1st hole and the 2nd tee, the 9th green (which is not near the clubhouse) and the 10th tee, and the green of the 17th hole and the 18th tee (where is a Metro light rail line when you really need one?). In my view, those long walks detract much from the otherwise attractive ambiance of the course.
The course is not as spectator-friendly as the TPC Course, but there are several wide open areas (particularly on holes 1, 17 and 18) and a huge practice area that will accomodate large numbers of spectators. The HGA will probably make gradual modifications to the course that will make it better for spectators than either Champions Cypress Creek (which has hosted several PGA Tour events) or the Jacobsen-Hardy Course at Redstone that has hosted the Shell Houston Open for the past three years. As with Lochinvar and Whispering Pines Golf Club, the Tournament Course is a relatively rare Houston championship course that is not built into a subdivision, so the scenery on the course will not be disrupted over time with the development of home sites. Finally, Redstone is very proud of the course as their $135 green fee (including cart) reflects, but this is the type of course that one plays only on special occasions, so Redstone will probably have a steady stream of customers even at that relatively high price.
Driving the ball well from the tournament tees, this 8 handicapper shot an 85 on the Tournament Course, which is about as well as I could have played it. I'm looking forward to playing the course again when it's a bit drier and not 90/90 in terms of temperature and humidity, and certainly not from the tournament tees. Nevertheless, I give the Tournament Course at Redstone a strong thumb's up, so take the time to check it out in the near future.
Posted by Tom at 4:15 AM | Comments (5) | TrackBack (1)
August 17, 2005
More on criminalizing risk taking
Vic Fleischer over at the Conglemerate blog continues his campaign to increase the business of the white collar criminal defense bar with a couple of posts (here and here) in which he suggests that "financial engineering" of the type that KPMG was involved with in regard to its tax shelters should be criminalized. Vic differentiates such financial engineering from transaction cost engineering, which creates value by reallocating risk and, in Vic's world, is just fine. Vic's theory is really just an extension of one that was propounded by former Enron Task Force prosecutor-turned-law professor John Kroger in a law review article, Enron, Fraud and Securities Reform: An Enron Prosecutor's Perspective.
Vic's theory is a classic example of one that sounds somewhat appealing in theory but is a prescription for injustice in practice. As we saw in the previous Nigerian Barge case thread, implementation of Vic's theory resulted in the conviction of four Merrill Lynch executives -- among the dozens of Merrill executives who reviewed the deal -- for doing their jobs in connection with Merrill's purchase of a dividend stream that Enron, not Merrill, may have improperly accounted for, although even that issue has never really been proven. The give-and-take in that thread alone should establish that reasonable doubt exists as to the government's charges against the Merrill defendants, and that fact is reflected by the lengths to which the government must go in order to obtain convictions. The Enron-related prosecutions have been rife with prosecutorial abuse, including the chilling of dozens of witnesses favorable to the defense and, in the Nigerian Barge case, dramatic prosecutorial statements to the jury that Merrill's involvement in the relatively small deal played a meaningful part in Enron's downfall.
Moreover, the transparent nature of Vic's theory is even better reflected in the hypothetical case. Say a banker makes a much-needed loan to a longtime business customer that is clearly headed toward bankruptcy. The loan increased the amount of the bank's lien on the debtor's assets to the detriment of the debtor's other creditors. There was no transaction cost engineering -- it was clear that the debtor was going down the tubes and the loan would only delay the inevitable. There certainly is a financial engineering component to the loan because the value of other creditors's claims are diluted as a result of the transaction. In the hands of a crafty prosecutor, such a transaction would easily fall under Vic's definition of financial engineering that would call for a prosecution of the banker and the business owner. Indeed, under Vic's theory, almost any set of circumstances that would give rise to an equitable subordination claim against a creditor in a bankruptcy case would serve as the basis for a criminal indictment. Does anyone really believe that American business interests could "stand upright in the winds" of abusive state power that would blow if such transactions were to be criminalized?
Larry Ribstein dissects Vic's latest post and, in so doing, notes the following:
I'm concerned that the criterion is political rather than the social policies that should determine criminalization, . . . For example, based on the government's indictment, did Ken Lay, who was basically out of the picture until the very end at Enron, do more harm to the the public and engage in conduct that was more obviously culpable than the principals at Krispy Kreme? I don't know, but I do know that a government agency doesn't get the same goodies from going after a donut maker that it does from going after these people in Houston who have had movies made about them. When indictment decisions depend on considerations like that, it starts to look like a lottery, at least from the defendants' standpoint. . .The difference is a matter of degree, but it's a degree that matters. I don't think that corporate conduct is getting worse. But the politicization of the corporation has increased, helped along by the media, in the wake of Enron. We need to take a hard look at what's going on and make sure that it's really crimes and not politics that is landing people in jail and putting whole organizations out of business.
Indeed, even something as indiscriminate as having good timing in going bust can determine whether one goes to jail these days.
Posted by Tom at 7:17 AM | Comments (1) | TrackBack (1)
Trouble at SCI?
Houston-based funeral and cemetary operater Service Corporation International notified investors and federal regulators yesterday that it plans to delay its second-quarter earnings report to finish an accounting review involving 430,000 prepaid funeral services. The company said that it expects the delay to be about 10 days and it will file the second-quarter report shortly thereafter.
The company said it could have to restate financial reports for the first quarter of 2005, each of the four quarters of 2004 and 2003, and each of the fiscal years that ended Dec. 31, 2000 through 2004. The adjustments so far total $7.5 million, which -- if those are the only adjustments -- are not materially adverse for a company the size of SCI.
Posted by Tom at 5:35 AM | Comments (0) | TrackBack (0)
Holman Jenkins on the corporate case of the decade
Don't miss Wall Street Journal ($) columnist Holman Jenkins' analysis of the decision in the Disney case, which includes the following broadside at Disney CEO Michael Eisner:
Mr. Ovitz may be as disagreeable a personality as some press accounts insist. But the accusations leveled against him by Disney's CEO ("psychopath," "liar," "incompetent"), which were demonstrably intended to be conveyed to the press, might more readily apply to Mr. Eisner himself.
Posted by Tom at 5:06 AM | Comments (0) | TrackBack (0)
Two banks settle Enron bankruptcy estate claims
J.P. Morgan Chase & Co. and Toronto-Dominion Bank announced yesterday that they had agreed to pay about $420 million to settle their parts of the "Megaclaims" lawsuit that the Enron bankruptcy estate filed against 10 banks for allegedly aiding and abetting accounting fraud that Enron alleged prompted the company's collapse into chapter 11 at the end of 2001. Morgan Chase will pay $350 million of the total and Toronto-Dominion the balance.
Three other banks have already settled the Megaclaims litigation, so with the most recent settlements the aggregate amount of settlements in the litigation is approaching three quarters of a billion dollars for the Enron bankruptcy estate. The settling banks have also agreed to waive claims against the Enron estate in an aggregate amount in excess of $3 billion. The five banks that remain in the Megaclaims litigation are Citigroup Inc., Credit Suisse Group's Credit Suisse First Boston Inc., Deutsche Bank AG, Merrill Lynch & Co. and Barclays PLC.
The Megaclaims litigation is seperate from the Enron securities fraud class action case against the same banks that is pending in Houston and has already resulted in settlements in excess of $7 billion. Frankly, compared to the amounts that the settling banks have paid to date in that litigation, the amounts being paid to settle the Megaclaims litigation are practically nuisance value.
Posted by Tom at 4:39 AM | Comments (0) | TrackBack (0)
August 16, 2005
Ebert's most-hated films
Movie critic Roger Ebert has posted this "most-hated movies" column on his website, and it's an entertaining read. Inasmuch as I have been spared the chore of watching most of the films noted, it's hard to argue with his choices. However, even though it has been overrated generally, isn't it a bit harsh to include The Usual Suspects on this list?
Posted by Tom at 6:32 AM | Comments (2) | TrackBack (2)
Reliant settles with California utilities
The highly-publicized lawsuits by California-based utilities against Houston-based Reliant Energy Inc. over allegations that Reliant pumped up trade volumes and revenues during the 2000-01 energy crisis in Western states died with a whimper yesterday as Reliant agreed to pay $150 million cash and waive another $300 million in claims to settle the utilities' lawsuits.
The agreement ends investigations conducted by attorneys general in California, Washington and Oregon and all civil litigation filed by the California Attorney General's Office, including a pending antitrust lawsuit. The agreement comes just weeks after Reliant agreed to settle all shareholder class-action lawsuits relating to the power crisis for about $68 million. Previous posts here and here report on criminal indictments relating to this civil litigation.
Reliant did not admit to any liability and there were no court findings of any violations of securities laws. The various lawsuits and investigations against Reliant focused on allegations that Reliant failed to disclose certain trading activities from 1999 to 2001 that took advantage of the Western power shortage at that time to pump up Reliant's revenues. The various lawsuits claimed damages in the billions; the settlement amount that Reliant will pay is a fraction of the amount of those claims. Given the size of those claims and the highly-charged publicity surrounding them, the settlement is a clear victory for Reliant despite the self-serving statements of California politicians taking credit from protecting California residents.
Posted by Tom at 5:10 AM | Comments (0) | TrackBack (0)
Important substantive consolidation decision
The Third Circuit Court of Appeals issued this decision yesterday in connection with the Owen Cornings chapter 11 case in which it reversed a bankruptcy court decision that substantively consolidated Owens Corning and its numerous units as one entity for purposes of confirming the company's reorganization plan.
Substantive consolidation in large reorganization cases is a favored tactic of tort claimants (it was favored by asbestos claimants in the Owens Corning case) and creditors of a company's unprofitable units that allows those creditors to share in distributions generated from the company's more profitable units. Lenders to those profitable units generally balk at substantive consolidation because it dilutes the dividend that they would otherwise receive on their claims against the profitable unit by allowing the claims against the unprofitable units to share in distributions from the profitable unit. In the Owens Corning case, the Third Circuit's decision is a victory for a group of banks led by Credit Suisse Group's Credit Suisse First Boston that has hundreds of millions of dollars riding on the separation of Owens Corning from its more profitable units.
Owens Corning is a large manufacturer of building materials that filed a chapter 11 case in 2000 to resolve the risk of huge unliquidated asbestos-related personal-injury claims. However, some of Owens Corning's most profitable units did not file their own chapter 11 case. Accordingly, the effect of the Third Circuit's decision is that the lenders to those more profitable units will be able to claim superior distribution rights over those of tort claimants from the assets of the profitable subsidiaries, leaving the tort claimants and other creditors of the parent company to fight over the diminished assets of the parent.
Substantive consolidation was also recently used in the Enron Corp. chapter 11 case in connection with confirmation of the reorganization plan in that case. The tactic was opposed by creditors of certain of Enron's more profitable units and, as I recall, the Bankruptcy Court's decision overruling those objections was appealed. Thus, you can bet that the Third Circuit's decision is being studied this morning by lawyers involved in the Enron case to determine the possible impact on the Enron reorganization plan.
Posted by Tom at 4:41 AM | Comments (0) | TrackBack (1)
August 15, 2005
Stros 2005 Review: Player myths and the Stros' playoff chances
The bloom is officially off the Stros' (63-54) streak after the lowly Pirates (51-67) took two out of three from the Stros over the weekend, including the last two in which the Stros could not manage a run. Ouch!
Thus, after getting back into the NL Wild Card playoff race with a 41-14 streak, the Stros are now 7-10 over their last 17 games. Unfortunately, that latter stretch is more representative of this Stros club's ability-level. So, absent a late season acquisition of a strong hitter, it is not likely that this club will win the 27-30 games out of its last 45 that is probably necessary to clinch the Wild Card playoff spot.
The Stros continue to lead in the race for the NL Wild Card playoff spot, but the NL East teams that will probably overtake the Stros are gaining. The Phillies (63-55) and the Marlins (61-56) remain the strongest contenders, and the Nationals (62-55) continue to hang in the race although my sense is still that they will fade by Labor Day. Both the Cubs (57-61) and the Brewers (57-61) continue to fade from the race, although the Brewers are roughly as strong and certainly a better-balanced club than the Stros.
Combining each contending club's runs created against average ("RCAA", explained here) and its runs saved against average ("RSAA", explained here) is a good measure of each club's strength relative to the rest of the league, so here is how the clubs involved in the Wild Card race stack up:
Marlins 70 RCAA/1 RSAA = 71
Stros -21/79 = 58
Brewers 31/13 = 44
Mets 11/30 = 41 (59-58)
Phillies -32/58 = 26
Cubs 30/-14 = 16
Nationals -21/23 = 2
Thus, the Marlins remain the Stros' strongest competition, and their pitching appears to be coming around at the right time. The Mets are better-balanced than the Stros, but may not be dominant enough in either the hitting or pitching area to string together the winning streak necessary to contend for the Wild Card. The Phillies continue to contend with even worse hitting than the Stros, so they are a prime candidate to fall back in the face soon.
Here are the Stros hitters' individual RCAA through Saturday's games, courtesy of Lee Sinins:
Morgan Ensberg 39
Lance Berkman 19
Craig Biggio 12
Orlando Palmeiro 12
Jason Lane 2
Jeff Bagwell 1
Eric Bruntlett -4
Luke Scott -4
Todd Self -4
Humberto Quintero -6
Jose Vizcaino -6
Willy Taveras -8
Raul Chavez -10
Chris Burke -15
Adam Everett -16
Mike Lamb -16
Brad Ausmus -17
The Stros team RCAA of -21 remains 11th among the 16 National League clubs. The Stros hitters continue to be well under-average as a group, even with productive performances from Ensberg (39/.394/.599/.993), Berkman (19/.403/.486/.889), Bidg (12/.339/.475/.814), and Palmeiro (12/.388/.513/.900), and Jason Lane (2/.312/.497/.809)'s second half surge toward respectability. One of the Stros' biggest problems now appears to be Manager Phil Garner's incompetence, as he insists on giving substantial playing time to inferior players such as Taveras (-8/.333/.355/.688) and Burke (-15/.293/.304/.597). At this point in the season, there is no good reason to give substantial playing time to either Taveras or Burke in place of Palmeiro or Lane.
Which leads me to make an observation about Taveras, who is a good example of how many local media types (except for Charlie Pallilo, that is) and the Stros P.R. machine ignore facts in evaluating players. If you were to listen only to Milo Hamilton, then you would think Taveras is a viable Rookie-of-the-Year candidate and a sure-fire rising star as he is leading all MLB rookies in hits, batting average, games, singles, infield hits, bunt singles, and steals. And he may well be the Rookie-of-the-Year because the rookie class this season is relatively weak, and there is no question that Taveras has done a reasonably good job of making the difficult jump from Double A ball last season to the major leagues this season.
Nevertheless, Taveras is by no means a sure-fire star and -- in the best of worlds -- would have been better served by playing this season at Triple A Round Rock to work on his on-base percentage and slugging percentage. His lead in the above-described categories is nice, but a closer look shows that Taveras' performance leaves a lot to be desired. He's a below average hitter (-8 RCAA), a below average hitter for his position (CF) and thus, barely rates out as better than a replacement level player (i.e., the Stros would get about the same production from replacing Taveras with Eric Bruntlett (-4/.284/.425/.709). Taveras' lack of power, the mediocre on-base percentage for a top of the lineup hitter, and his 74 strikeouts versus only 17 walks all raise serious questions about his future potential. Although he is only 23 and thus could improve with more experience, Taveras should not currently be an everyday player on a club that also is playing weak hitters such as Brad Ausmus (-17/.334/.295/.630)and Adam Everett (-16/.287/.366/.653).
By the way, run scoring is down considerably for the Stros this year. Their 2005 runs scored per game (R/G) is down over 14% from the 2004 season and 12.2% from their average R/G of 2002-2004. MLB-wide run scoring in 2005 is down just 3.5% from 2004, and just 1.6% from the cumulative 2002-2004 period. Consequently, don't allow the Stros' nice streak earlier in the season fool you -- this club remains seriously hitting-deficient and needs to take bold steps in the off-season to bring in at least one far above-average hitter or at least two above-average hitters.
So, how have the Stros been able to overcome this abysmal hitting? Superior pitching can cover up a lot of warts, and the Stros have had outstanding pitching this season. Here are the Stros pitchers' individual RSAA through Saturday's games:
Roger Clemens 53
Roy Oswalt 33
Andy Pettitte 28
Dan Wheeler 14
Brad Lidge 10
Chad Qualls 4
Mike Gallo 3
Mike Burns 1
Chad Harville -3
John Franco -5
Russ Springer -7
Brandon Backe -10
Brandon Duckworth -12
Ezequiel Astacio -13
Wandy Rodriguez -17
The Stros team RSAA of 79 is 2nd among the 16 National League teams. Clemens (1st in NL RSAA), Oswalt (3rd in NL RSAA), and Pettitte (tied for 5th in NL RSAA) remain the strongest three starting pitchers on one team in MLB, while Lidge (despite a couple of blips over the weekend) and Wheeler are one of the strongest closing duos in the National League.
By the way, just to give you an idea of how good a level of pitching a club needs to overcome hitting as bad as this Stros team, Baseball Prospectus has a statistic called Runs Prevented (RP) that -- similar to RSAA -- measures how many runs a pitcher has kept from scoring relative to a league-average hurler throwing the same number of innings. If Clemens, Pettitte and Oswalt's combined performance so far this season holds through the end of the regular season, then that trio's combined RP total will be the best for three pitchers on one club in Major League Baseball history, better even than any season by the Braves' troika of Maddux, Smoltz and Glavine during their heyday of the late 1990's. Given that the Stros will certainly not win the NL Central with such superior starting pitching and may not make the playoffs at all, the foregoing is dispositive proof that this club needs a serious infusion of hitting talent to balance out a decidedly one-sided performance this season.
Finally, with this past Saturday night's gem, Clemens reached 50 RSAA for the 5th time in a season. He is third in that category since 1900:
1 Lefty Grove 9
2 Randy Johnson 7
3 Roger Clemens 5
T4 Walter Johnson 4
T4 Pedro Martinez 4
T4 Greg Maddux 4
T7 Carl Hubbell 3
T7 Dazzy Vance 3
T9 Juan Marichal 2
T9 Hal Newhouser 2
T9 Steve Carlton 2
T9 Bobo Newsom 2
T9 Cy Young 2 (8 times total)
T9 Lefty Gomez 2
T9 Grover C Alexander 2
The Chronicle is reporting today that Clemens will undergo an MRI this week to determine the cause of his increasingly sore back, so stay tuned on that front. If the Stros lose Clemens for any appreciable amount of time, then their playoff chances are officially toast.
The Stros continue their long homestand this week against the Cubs and then the Brewers before making another West Coast swing after next weekend. The Stros really need to take four out of their next six games to have any reasonable hope of maintaining their slim lead in the Wild Card playoff race.
Posted by Tom at 5:23 AM | Comments (3) | TrackBack (0)
August 14, 2005
The politics of Texas college football
If you are interested in college football, then don't miss the well-done series of articles in the by Mark Wangrin in today's San Antonio Express-News, The Great Texas Football Rebellion.
Mr. Wangrin does a nice job of recounting the details and intrigue behind the creation of the Big 12 Conference, including the parochial Texas politics that kept TCU and the University of Houston out of the conference and perennial doormat Baylor in.
Moreover, Mr. Wangrin tells the story about how the Texas schools -- particularly the University of Texas -- insisted upon more stringent entrance requirements for student-athletes in the new Big 12 Conference, which was a key development in the decline of Nebraska's football powerhouse. For decades, Big Red's program thrived in the Big 8 Conference on recruiting out-of-state players who did not meet many big school's entrance requirements, but who were able to meet NU's lenient entry requirements for football players -- remember Mike Rozier?. However, the leveling of entrance requirements in the Big 12 has slowed down the flow in the pipeline of out-of-state players to Nebraska, as the 5-6 record from last season (the worst since 1961) reflects. The most recent change in coaching staffs indicates that Nebraska is taking a different approach from the one that had been followed successfully for the past 45 years (indeed, it appears that arch-rival Oklahoma is the now the model for Nebraska's program), but it is still too early to say whether the Nebraska program can regain its stature among the elite college football programs.
Mr. Wangrin provides a wealth of background information on Texas college football and should be required reading for any fan of the collegiate gridiron. Check it out.
Posted by Tom at 8:50 PM | Comments (1) | TrackBack (0)
Elk on the advantages of being a Houstonian
One of my favorite professional golfers is fellow Houstonian and University of Houston alum Steve Elkington. Elk is just two shots out of the lead going into the final round of the PGA Golf Championship this weekend, and he noted one big advantage of living in Houston while responding to a media question on how he dealt with the stifling 109 degree heat index during his Saturday round at Baltusrol Golf Club in Springfield, New Jersey:
"Being Australian and living in Houston, I thought it was quite cool."
Posted by Tom at 12:20 PM | Comments (0) | TrackBack (0)
Analyzing the Harris County Jail problems
Earlier posts (here and here) have addressed the chronically abysmal condition of Houston's Harris County Jail. As noted in the posts, local politicians have an amazing propensity for blaming others rather than addressing the causes for an unpopular problem and resolving them in a responsible manner. Recently, the County Commissioners voted to throw some money at one of the symptoms of the jail's problems (i.e., serious overcrowding), but there still appears to be no meaningful action being taken on addressing why the jail's problems have continued to fester for decades.
Into that vacuum of action, Scott Henson over at Grits for Breakfast files this first in a series of posts that analyzes Harris County bail policies and their contribution to the jail's overcrowding. As Scott notes:
According to a recent consultant's report (download pdf), a major reason is clear: A shift in bail policy over the last decade to require cash bond in more cases instead of personal bond, or releasing defendants on their promise to later appear in court. Half of all inmates presently in the Harris County Jail are awaiting trial; a large proportion couldn't make bail.Though other factors are also at play, much of the Harris County Jail's overincarceration crisis can be explained by this shift in policy. In other words, Harris County's jail overcrowding crisis is a self-inflicted wound.
Read Scott's entire piece, and his future posts on this issue will be noted. As noted in the previous posts, the horrid condition of the Harris County Jail is an embarrassing reflection of our community's values. This is a problem for which all Houstonians should unite and demand resolution once and for all.
Posted by Tom at 7:12 AM | Comments (2) | TrackBack (0)
The KPMG Memorandum
The KPMG tax shelter saga has been a common topic on this blog over the past year or so, and this recent post observed that -- even if KPMG fades a criminal indictment -- it is by no means clear that the firm will be able to survive the after-effects of entering into a deferred prosecution agreement to settle the criminal probe.
Along those lines, Peter Henning passes along this extraordinary open memorandum that nine anonymous (and frustrated) current and former KPMG partners recently sent to several media outlets, the Justice Department and the KPMG board. The memo describes in detail the demoralizing effects of KPMG management's moves to avoid a criminal indictment at all costs and the devastating impact that the Justice Department's criminalization of agency costs has had on KPMG. Indeed, the memo outlines a number of the adverse effects of criminalizing agency costs that have been noted here, such as the following:
Bludgeoning employees into plea bargains;Criminalization of conduct that is not even clearly improper in a civil context -- much less criminal -- through "indictment via media" (also here);
Serving up sacrificial lambs and firing key partners who were simply doing their jobs;
The cost to owners of rolling over in the face of the investigation as opposed to standing up and fighting it; and
The high price of "cooperation" and the illusory attorney-client privilege.
Interestingly, the authors of the memo believe that KPMG can absorb the financial impact of a hefty fine and damage awards resulting from civil litigation over the tax shelters, but are less sanguine about the prospects for KPMG's survival because of the damage to partner morale resulting from management's handling of the tax shelter probe.
Posted by Tom at 6:30 AM | Comments (3) | TrackBack (3)
August 13, 2005
Barkley on golf
The TNT Network weekday coverage of the PGA Golf Championship was somewhat frustrating, as it basically followed Tiger Woods while he struggled to make the cut and then occasionally showed the players who are actually in contention. But then, out of the blue, the coverage was saved by none other than former NBA star Charles Barkley, who proceeded to provide a highly entertaining and funny interview about golf. Among Barkley's comments were the following:
As the coverage was showing Woods' reaction immediately after he had hit his ball into the water hazard on the 4th hole:
"Uh, oh, don't zoom in."
On his close friend Woods and the extremely hot weather during the tournament:
"It must be hot out there because Tiger is in great shape and he is sweating. When skinny people sweat, you know it's hot."
Answering a question on who is in better shape, Woods or Barkley?:
"Well he has a six pack and I have a keg . . . and I would never want to have just six beers."
On a revelation regarding his physical condition that he discovered while playing golf:
"I came to the realization a couple months ago that I am fat. If you get tired from walking - and that's all that golf is - then you are officially fat."
On Woods as a golf instructor:
"Tiger has spent numerous hours trying to work on my golf swing. He's not a very good teacher."On his recent performance at the American Century Celebrity Championship in which he finished directly behind Cheryl Ladd and fellow NBA player Chris Webber:
"It's embarrassing. If you are a man and you can't beat girls or the smart kids, you shouldn't be playing . . . I'm retiring from golf. I'm not going to play again."
But as funny as the Barkely commentary was, he actually passed along some insightful observations, including the following one about the competition between Woods, Phil Mickelson and Vijay Singh, as noted by Damon Hack in this NY Times article:
Barkley compared Woods to Michael Jordan as the greatest of his generation, and golfers like Mickelson and Singh to basketball players like himself and Patrick Ewing - as Barkley put it, great players, but not the greatest."I think Phil Mickelson is the most talented golfer I've ever played with in my life," Barkley said. "But I've never seen any jock in any sport work harder than Tiger. If Phil worked as hard as Vijay and Tiger, it'd be like a flip-flop all the time. That's how talented I think Phil is. But if Phil wants to compete with Vijay and Tiger, he's going to have to take it to another level, workout-wise.""I've said this about Phil before. Phil's so good, he just has to get out of his own way. And I've heard Joe Torre say that about A-Rod," referring to the Yankees' Alex Rodriguez. "It would really be scary if Phil were to work out as hard as Vijay and Tiger and practice as much. I would love to see that combination."
Hat tip to Geoff Shackelford for the link to Barkley's quotes.
Posted by Tom at 11:21 AM | Comments (0) | TrackBack (0)
Delta on the brink
This NY Times article reports that Delta Airlines is finalizing debtor-in-possession financing arrangements, which is a strong signal that the airline is likely to file a chapter 11 case in the near future.
Debtor-in-possession ("DIP") financing provides loans that a chapter 11 debtor taps immediately after the commencement of a chapter 11 reorganization to bridge the debtor's pre-bankruptcy financing arrangements with the financing that is ultimately approved under the debtor's confirmed reorganization plan under which the debtor emerges from chapter 11. The U.S. Bankruptcy Code provides several legal protections to induce lenders to provide DIP financing, so DIP financing -- particularly in big reorganization cases -- has become a quite lucrative area of the financing business that attracts a number of large lenders. Consequently, although it would at first seem somewhat counterintuitive in regard to a financially-strapped company such as Delta, there is probably quite a bit of competition going on within the DIP financing community for Delta's business in this area.
Posted by Tom at 7:44 AM | Comments (0) | TrackBack (0)
August 12, 2005
The effect of Sarbanes-Oxley on Krispy Kreme
This post from earlier this week addressed the wide-ranging negative effects of the Sarbanes-Oxley legislation that was supposed to curb and correct the corporate fraud that supposedly prompted the bursting of the stock market bubble earlier in the decade.
Meanwhile, Krispy Kreme's (previous posts here) board released earlier this week a summary of an internal investigation that detailed over $25 million in accounting errors and related management failures that occurred as the trendy company was rapidly expanding and fascinating investors. When rumors of those management failures became public last fall, Krispy Kreme's stock price tumbled.
Before enactment of Sarbanes-Oxley, revelations of such management failures would have almost certainly resulted in an internal board investigation and a shareholders' deriviative lawsuit. Reviewing all of this within the lottery framework of criminalizing agency costs, Larry Ribstein observes wryly:
[M]ost of the stuff at Krispy Kreme happened after Sarbanes-Oxley. And it’s getting fixed by a special committee and a derivative suit that the company has allowed to proceed. So what is it, exactly, that we are getting from Sarbanes-Oxley?
Posted by Tom at 7:40 AM | Comments (1) | TrackBack (0)
AIG's good year?
Given that American Insurance Group, Inc. restated $3.9 billion of profit earlier this year, had various government investigations wipe out about $60 billion of market capitalization, was sued by regulators, and unceremoniously dumped its longtime chairman and CEO Maurice "Hank" Greenberg, you would think that its leaders would at least acknowledge that the company's year has been about as bad as that of Mike Lamb.
Not so, and the reason is that the cost of the foregoing setbacks was merely the price of forging a productive relationship with the Lord of Regulation and other government regulators, as current AIG interim Chairman Frank G. Zarb told AIG shareholders yesterday in the company's annual meeting:
"A.I.G. in recent months has forged a productive, constructive, professional relationship with our regulators. This company is committed to working openly, without reservation."
Thus, the foregoing statement makes clear that AIG has changed its tune toward regulators from the position espoused by Mr. Greenberg, who once observed that regulators turn "foot faults into murder charges." It remains decidedly unclear whether that relationship will prove as valuable for AIG's shareholders as Mr. Greenberg's management of the company.
Posted by Tom at 6:53 AM | Comments (2) | TrackBack (0)
Now, that's having a tough season
Stros reserve firstbaseman Mike Lamb is having a bad season. Coming off the best season of his career in 2004 (11 RCAA/.356 OBP/.511 SLG./867 OPS), Lamb has regressed this season to an Ausmusian -11/.259/.389/.649 stat line.
Consistent with Lamb's futility at the plate this season, in the Stros' win on Wednesday against the Nationals this week, Lamb should have been credited with a walk in the sixth inning, but instead stayed in the box and popped out to third after the plate umpire lost track of balls and strikes. At least Lamb has retained his sense of humor, as reflected by his observation about the incident in today's Chronicle:
"What a year I'm having. Now I'm making outs on walks."
Posted by Tom at 6:14 AM | Comments (0) | TrackBack (0)
Abramoff indicted
Jack Abramoff, a lobbyist who is a top Republican fund-raiser and political ally of Houston congressman and House Majority Leader Tom DeLay, was indicted yesterday in Ft. Lauderdale, Florida on charges of defrauding two lenders in his purchase of a casino cruise line five years ago. Mr. DeLay is not mentioned in the indictment and apparently had no involvement in the activities that led to this particular indictment. As noted in these previous posts, the Justice Department is also investigating Mr. Abramoff for allegedly bilking four Indian tribes he represented in connection with his lobbying business.
The grand jury indicted Mr. Abramoff and a business partner for allegedly using a fake $23 million wire transfer in 2000 to help secure loans needed to purchase 11 cruise ships, 2,300 slot machines and 175 gambling tables in a deal for the $147.5 million SunCruz Casinos business operation. The indictment alleges that two lenders agreed to lend Mr. Abramoff and his partner $60 million for the purchase on the condition that the pair ponied up $23 million on their own. Mr. Abramoff and his partner are accused of falsifying wire transfer receipts to make it appear as if they had the $23 million. SunCruz later ended up filing a chapter 11 case.
Mr. DeLay's relationship with Mr. Abramoff came under media scrutiny and an ethics controversy earlier this year after it was reported that Mr. Abramoff or his clients had paid for Mr. DeLay to take several expensive tours of Scotland, London and Russia. Inasmuch as members of Congress are not allowed to accept trips from lobbyists, the matter has been under investigation by the House Ethics Committee, although the investigation has appeared to bog down over the past several months.
Posted by Tom at 5:08 AM | Comments (0) | TrackBack (0)
KPMG noose tightens
On the heels of this post from yesterday, this NY Times article reports on the plea bargain of Domenick DeGiorgio, a 42 year old former managing director at the New York branch office of Munich-based HVB, (formally known as Bayerische Hypo & Vereinsbank) under which he pled guilty to fraud, conspiracy and tax-evasion charges in the federal government's first criminal conviction in its investigation of allegedly fraudulent tax shelters that KPMG LLP created and promoted. Here are the previous posts on the KPMG tax shelter saga.
According to the plea bargain, Mr. DeGiorgio had been responsible for supervising HVB's participation in various shelter transactions that allowed wealthy individuals claim more than $1.3 billion in fake tax losses. Those transactions included a KPMG tax shelter known as "Bond Linked Issue Premium Structure" ("Blips), which the government has characterized as a fraudulent shelter. The investigation appears to be focusing on that shelter, which the plea bargain described the shelter in the following manner:
An essential part of creating reported tax losses depended on the bank purporting to provide a loan structured in a particular way," he said. "The loan proposed by the Blips promoters was a sham because, among other things, as designed, no money ever left the bank, and because HVB never set aside any of its own money or procured funds from the banking market in order to fund any of these loans.Blips was falsely represented to be a three-stage, seven-year investment program when, in reality, it was a short-term transaction designed to create tax losses.
In a prepared statement, the government stated the following regarding the plea bargain:
Our self-reporting tax system can not tolerate the fraudulent acts of bankers, accountants and lawyers who, under the guise of "sophisticated tax planning," create elaborate structures that have no purpose but to mislead and defraud the IRS, at the cost of billions of dollars to the U.S. Those who seek to devise, implement, and profit from these fraudulent structures should understand that we will devote whatever resources it takes to put a stop to them.
Mr. DeGiorgio's guilty plea turns up the heat on KPMG noted in yesterday's post as it negotiates the with prosecutors over a deferred adjudication agreement that would head off an indictment against the firm that would likely cause an Arthur Andersen-type meltdown of the firm. In that regard, look for a number of former KPMG tax professionals to be indicted in the coming weeks.
Posted by Tom at 4:36 AM | Comments (0) | TrackBack (0)
August 11, 2005
The Power of Pork
Tory Gattis and I recently generated some interesting discussion regarding mass transit generally and light rail in particular in a series of posts (here, here and here). Part of the psychology in favor of the light rail projects discussed in that blog thread is that the federal government -- regardless of economic merit -- is going to throw some political pork barrel funds at light rail projects, so light rail proponents reason that we might as well claim our fair share.
Although that line of reasoning is understandable, it doesn't really make me feel any better about the pork being distributed in the first place. This Washington Post article provides a good analysis of the politics of the new transportation bill:
Three years ago, President Bush went to war against congressional pork. His official 2003 budget even featured a color photo of a wind-powered ice sled -- an example of the pet projects and alleged boondoggles he said he would no longer tolerate.Yesterday, Bush effectively signed a cease-fire -- critics called it more like a surrender -- in his war on pork. He signed into law a $286 billion transportation measure that contains a record 6,371 pet projects inserted by members of Congress from both parties.
$286 billion in 6,371 pet projects? Let's see, we have 535 representatives and senators in Congress. So, that's about 12 pet projects per representative or senator. But if the number and cost of those projects troubles you, just remember that it's all relative:
[White House spokesperson Trent] Duffy replied [to a question about the bill's cost] that Bush pressured Congress to shave billions of dollars off the bill, and he said spending is "pretty modest" when spread out over five years. The transportation bill, at $57 billion a year, is a fraction of Medicare's $265 billion.Besides, Duffy said, "the president has to work with the Congress."
In other words, we are supposed to feel better because the annual cost of the pork, when spread over five years, is only about 20% of the blackhole of annual Medicare expenditures.
Somehow, that doesn't make me feel all that much better. Here is another critical analysis of the bill.
Posted by Tom at 7:34 AM | Comments (0) | TrackBack (0)
The high price of asserting innocence
A frequent topic on this blog has been the government's questionable tactic of bludgeoning business executives into plea bargains by playing on the executive's fear of a draconian prison sentence (often an effective life sentence) if the executive has the temerity to assert his or her Constitutional right to a fair trial by jury. Although prosecutors justify such tactics as a reasonable tool in seeking the truth about criminal acts of others, plea bargainers often undermine that goal by testifying falsely in order to obtain the favorable terms of the deal.
In this post, Ellen Podgor -- who blogs with Peter Henning over at the smart White Collar Crime Prof blog -- compares the sentences to date arising out of the prosecutions of former WorldCom executives, notes the wide disparity between those who cooperated with the government and those who did not, and then asks the right questions:
With the disparity in sentences so far (25 years for Ebbers in contrast to others), sentences not based solely on the culpability of the individual but significantly premised on cooperation, will defendants in other cases be encouraged to cooperate? . . . one also has to wonder if the incentive for cooperation is too high and may result in encouraging individuals to provide cooperation that may not be truthful.
What happens to the individual who is last to be indicted when there is no one left to talk against and no way to provide cooperation? What happens when the the accused has nothing to offer in cooperation because they did not see or hear anything? Are we punishing these individuals with heavier sentences merely because they have nothing to offer the government? Should we be afraid that they will invent something to tell the government just to obtain a reduced sentence?The Bill of Rights provides everyone accused of a crime with the right to a jury trial. Are we punishing individuals who avail themselves of this right?
Yale law professor John Langbein has written extensively regarding prosecutorial abuse in the American plea bargaining system, and he 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 situation reminds one of the scene in the movie The Aviator to which Larry Ribstein has referred on several occasions. In the scene, Howard Hughes asks Senator Brewster if he wants to go to war with him, and Brewster says:
"It's not me, Howard. It's the United States government. We just beat Germany and Japan. Who the hell are you?"
What really is the bigger problem to American society and the rule of law? Criminal business executives or out-of-control prosecutors?
Posted by Tom at 6:28 AM | Comments (1) | TrackBack (1)
KPMG strikes deal in tax shelter probe
You know that the criminalization of business in the post-Enron era has become routine when it's newsworthy that the government has decided not to use its prosecutorial power to prompt another Arthur Andersen-type meltdown of a major accounting firm.
This NY Times article reports that KPMG and federal prosecutors have agreed in principle to a deferred prosecution deal under which the accounting firm would avoid a devastating criminal indictment for its involvement in the creation and promotion of questionable tax shelters in return for KPMG paying a hefty fine, which the Times article reports could be as much as half a billion dollars. Here are the earlier posts on the KPMG tax shelter probe and related problems.
Interestingly, the Times reports that one of the reasons that prosecutors are considering not indicting KPMG is that reasonable doubt exists as to whether the tax shelters that the firm created were improper. Unfortunately, that little "not illegal" technicality has failed to deter prosecutors in this post-Enron era from prosecuting a raft of other business interests for merely questionable conduct that is not clearly improper. To make matters worse, the federal government pursued that dubious policy in putting Arthur Andersen out of business and thus decreasing the number of large auditing firms, while at the same time increasing corporate compliance responsibilities that require more services of large auditing firms. So much for well-coordinated public policy, eh?
Of course, KPMG is not out of the woods yet by any stretch. The enormous fines and legal fees attendant to resolving the tax shelter probe and lawsuits alone is enough to cast some doubt on KPMG's ability to survive as a going concern. However, given the paucity of large accounting firms these days to handle the demand for publicly-owned company auditing services, even the drain of high fines and litigation costs is probably not enough to push KPMG over the edge. KPMG customers will simply pay a substantial portion of KPMG's costs in the form of higher fees, which raises the following legitimate issue: Why on earth are they required to pay more for all of this?
Posted by Tom at 5:21 AM | Comments (0) | TrackBack (0)
August 10, 2005
A special talent
I have no idea where my nephew Richard comes up with such things, but the two minute video that he links to in this blog post is pretty darn clever.
By the way, Rich, I highly recommend that you do not attempt to perfect the skill evidenced in the video while juggling your distractions this fall at Northwestern University Law School. Not that it would interfere with your studies that much. Rather, too many professors would be pestering you to teach them how to do it! ;^)
Posted by Tom at 8:26 AM | Comments (1) | TrackBack (0)
The PGA at Baltusrol is this week
The PGA Golf Championship begins tomorrow at Baltusrol Golf Club in Springfield, N.J. Golf Digest has its usual excellent coverage here, including this nifty interactive map.
By the way, this interesting Golf Digest article on the 1965 PGA Tournament -- which was won by the late Houstonian Dave Marr -- includes a funny anecdote about Ben Hogan that Dave passed along to me years ago over lunch at Houston's Lochinvar Golf Club. Dave loved telling this story and did so humorously, so my written rendition of it cannot do Dave's oral version justice. But the story went something like this:
Hogan and the players with whom he was playing his practice rounds that week showed up for their Wednesday practice round and were promptly informed that there had been a misunderstanding on their tee time. As a result, Hogan's group could not tee off for two hours because there were so many groups already waiting in line ahead of his group. Hogan was not pleased.So, Hogan strolled over to the edge of the first tee and began intensely studying the practice swings of each of the club pros in the foursome who were warming up to tee off at that time. Hogan's scrutiny clearly made each of the pros uncomfortable -- not only was Hogan a legend among his peers, but every one of them knew about Hogan's discriminating (and sometimes bluntly derisive) opinion of his rivals' golf swings.
Under Hogan's stern glare, the first club pro finally gathered the courage to tee up his ball and swing, which produced an ugly flinch and a sky ball that went less than 100 yards. The second pro hurriedly teed his ball up and then swung, producing a severe duck hook into the trees. Next, the third pro stepped up the tee and promptly topped his ball just past the ladies tee. Finally, the fourth pro teed his ball up, but as he attempted to take a practice swing, he could not even make himself take the club back under Hogan's penetrating stare. So, rather than attempting to tee off, the fourth pro picked up his ball and walked over to Hogan:
"Look, Mr. Hogan, if you don't tee off in front of us, I'm afraid that I won't be able to swing the club today. Also, our group is so traumatized by what we just did here in front of you that we'll play so slow that everyone teeing off behind us probably won't finish their rounds today before dark. So, would you mind cutting in front of us right now and teeing off?"Hogan graciously accepted the offer and his group proceeded to tee off immediately.
By the way, Marr is legendary (at least among Texans) for his characterization of a syphon used during the early days of the PGA Tour to steal gasoline to fuel travel between tournaments as "an Oklahoma credit card." ;^)
Posted by Tom at 6:45 AM | Comments (0) | TrackBack (0)
The SOX drain
The Sarbanes-Oxley legislation (pdf) is an example of government at its worst -- a knee-jerk reaction that addressed a relatively small problem (i.e., crooked businesspeople) that had little to do with the circumstances (i.e., the bursting of a stock market bubble) that prompted legislators to think that they needed to do something in the first place. Inasmuch as the SOX legislation coincided with the beginning of this blog, the counterproductive nature of the legislation has been a regular subject here, here, here, here, here, here, here and here.
In this timely article, financial columnist Bruce Bartlett (his blog is here) notes that the SOX effect on the economy is only getting worse, and reviews the growing body of research on the negative economic impact of SOX:
Estimates of the cost of the legislation in terms of higher audit fees and lost productivity have risen every year, as companies learn more about its provisions. It is now commonly estimated to be about $15 billion per year, or about $1 million per $1 billion of sales. This estimate is pretty consistent among the organizations that have looked at Sarbanes-Oxley carefully, including Financial Executives International, a trade group; Foley and Lardner, a Chicago law firm; and A.R.C. Morgan, a Dutch consulting company.
Two University of Illinois accounting professors estimated last year that companies had spent 120 million hours complying with Sarbanes-Oxley and that outside auditors had spent another 12 million hours, for a total of 132 million hours. This is equivalent to 66,000 people working for one year on nothing else.
But these direct costs pale in comparison to intangible costs. Corporate executives report an enormous amount of distraction from their core businesses as the result of Sarbanes-Oxley, and they have become much more conservative in their investment strategies. . .The latest study looks at how the stock market reacted to passage of Sarbanes-Oxley. University of Rochester economist Ivy Zhang found that passage of the bill wiped out $1 trillion of market capitalization. Zhang found no economic benefits to the legislation whatsoever, . . .
Despite the fact that Sarbanes-Oxley has done nothing to improve business performance or investor value, Mr. Bartlett concludes with the following observation:
Bush administration officials are well aware of the negative effects of Sarbanes-Oxley on the economy and the stock market, but they will not do anything about it -- a view recently reiterated by Rep. Michael Oxley, Republican of Ohio and co-author of the legislation. They would rather see businesses and investors continue to suffer than admit the possibility of error.
Remember that the next time you hear the Republican Party assure you that the GOP is the "business-friendlier" major political party.
Posted by Tom at 5:52 AM | Comments (3) | TrackBack (0)
Disney Board wins the corporate case of the decade
The Delaware Chancellory Court issued its ruling yesterday in favor of the Walt Disney Company Board of Directors in the corporate case of the decade -- i.e., the civil lawsuit over The Walt Disney Co. board's decision to pay Michael Ovitz a rather generous severance package for essentially doing nothing during his short stay at Disney (earlier posts on the case are here, here and here). You can download a copy of the 175 page decision here and, based on a preliminary review, it appears that Larry Ribstein nailed it with his earlier prediction, which also provides excellent background on the fact and legal issues involved in the case. H'mm, I wonder if Professor Ribstein got any odds on his bet on the outcome of the decision?
As noted in this earlier post, check in at the Conglomerate blog for a discussion of the Disney decision by an outstanding group of corporate law scholars. Should be highly entertaining.
From my preliminary review, Chancellor Chandler rejected the plaintiffs' arguments, although he did toss several sharp barba at Disney chairman and CEO Michael Eisner and the Disney directors' actions during the Ovitz affair, including that the board's conduct "fell significantly short" of best business practices. Nevertheless, that's not the same as a breach of their fiduciary duties or waste, the judge concluded:
"It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk -- the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known."
Mr. Eisner hired Mr. Ovitz in 1995, but the hiring quickly turned into a debacle that led to a termination of Mr. Ovitz without cause after roughly a year. Shareholders argued that Disney's directors failed to fulfill their fiduciary duties in regard to either the hiring or the without cause termination, and contended that Mr. Ovitz should have canned for cause and denied his severance package. Accordingly, the plaintiff shareholders asked the court to assess damages of more than $262 million -- $129.8 million in damages plus $132.5 million in interest -- against some current and former members of the board, including Mr. Ovitz and Mr. Eisner. The directors countered by arguing that they agreed to the without cause termination and payment of severance to Mr. Ovitz to head off an expensive lawsuit that would have distracted management and risked causing shareholders much more in reduced share price than the settlement amount paid to Mr. Ovitz.
Here are a few money quotes from the decision:
"Should the Court apportion liability based on the ultimate outcome of decisions taken in good faith, decision-makers would take decisions that minimize risk, not maximize value."
"By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz's hiring in particular, Eisner to a large extent is responsible for the failings . . . that infected and handicapped the board's decisionmaking abilities.""Eisner stacked his (and I intentionally write 'his' as opposed to 'the Company's') board of directors with friends and other acquaintances who .. were certainly more willing to accede to his wishes . . . than [act as]truly independent directors."
"As it relates to [Ovitz's] job performance, I find it patently unreasonable to assume that Ovitz intended to perform just poorly enough to be fired quickly, but not so poorly that he could be terminated for cause. First, based on my personal observations of Ovitz, he possesses such an ego, and enjoyed such a towering reputation before his employment at the Company, that he is not the type of person that would intentionally perform poorly. Ovitz did not build Hollywood's premier talent agency by performing poorly."
Interestingly, Professor Bainbridge's Texas Law Review article on executive compensation is cited in the decision's first footnote.
Posted by Tom at 4:15 AM | Comments (0) | TrackBack (0)
August 9, 2005
The politics of charity in the world of health care
Wealthy Houston plaintiff's lawyer John O'Quinn (earlier posts here and here) recently proposed to donate $25 million to St. Luke's Episcopal Hospital -- the largest gift in the hospital's 50 year history -- in return for renaming the hospital's highly-recognizable medical tower the "O'Quinn Medical Tower at St. Luke's."
Well, the Chronicle's Todd Ackerman, who does a fine job of staying on top of Medical Center stories, reports in this article that the St. Luke's board's decision to accept the donation from Mr. O'Quinn is not going over well with a number of St. Luke's doctors:
The plan to rename the edifice after John O'Quinn in recognition of a $25 million donation by his foundation has infuriated many St. Luke's doctors, who last week began circulating a petition against it and Monday night convened an emergency meeting of the medical executive committee.
"Perhaps you are unaware of the intensity of feelings held by many physicians about Mr. John O'Quinn," says the petition, which is addressed to the Rev. Don Wimberly, bishop of the Episcopal Diocese of Texas and chairman of the St. Luke's Episcopal Health System board of directors. "The primary source of his financial success has been representing plaintiffs in medical liability and products liability cases, many of them groundless."
Dr. Priscilla Ray, a psychiatrist who wrote the petition, said that even though doctors were let out of the breast-implant litigation, it was onerous because they had to hire lawyers, prepare for trial and be deposed."The bottom line is, Mr. O'Quinn has contributed toward the litigious environment in which doctors work, toward the changed relationship between doctors and patients," said Ray. "Now, doctors have to fight not to see each patient as potential plaintiff, and patients might have impaired confidence in their doctor."
"It offends us to have money we earned — and which he took by suing us — going to name after him a medical building in which we work each day," says the petition. "The naming of buildings at the law school or perhaps at a medical liability carrier seems much more appropriate."
Well, the University of Houston is way ahead of the docs on that idea, as the law school has already named its library after Mr. O'Quinn. But now that idea on the medical liability carrier building . . .
Despite the current hub-bub, my sense is that this will die down soon and the board's decision to accept the donation will not be changed. Raising funds is too important in the dog-eat-dog worlds of academic medicine and health care finance to let little things such as principle stand in the way of a big donation.
Posted by Tom at 6:21 AM | Comments (2) | TrackBack (2)
George Melloan gets it
A couple of months ago, this post noted Wall Street Journal columnist George Melloan's op-ed on the Supreme Court's Andersen decision in which he harshly criticized the government's abuse of the rule of law to pursue currently unpopular businesspeople. Today, in this WSJ ($) Global View column, Mr. Melloan focuses on a common subject of this blog -- the unjust nature of criminalizing corporate agency costs.
Mr. Melloan's column focuses on the agency cost of corporate accounting:
Corporate accounting, contrary to popular belief, is chock-full of judgment calls. It's a happy hunting ground for a prosecutor looking for decisions he can say were intended to mislead investors and might thus constitute criminal fraud. If an admiring press rewards him with a big headline, who's to know, . . ?
Mr. Melloan then points out how prosecutors play to public bias in frightening boards of directors and executives into submission:
The frightened AIG board played into Mr. Spitzer's hands by summarily firing Mr. Greenberg and ordering a five-year review of AIG financial statements. The restatement reduced stockholder equity by a net $2.264 billion. How could the earlier results reported have been that far off? A credulous public is likely to suspect that Mr. Greenberg was guilty -- of something.
But corporate accounting is not a black and white world, notes Mr. Melloan:
But most people don't know how flexible corporate accounting can be, particularly in an insurance company. At AIG, the auditors and some of the executives who furnished the restatement had produced the very reports they were revising. AIG operates in 130 countries and conducts "tens of millions" of transactions every year. Restatements in such a complex world aren't extraordinary, for reasons, like honest mistakes, that are not criminal in nature. Merely adjusting the amount of earnings set aside for loss reserves -- a judgment call based on guesses about what damage the future holds -- can make a world of difference. . .Accountants' views on such matters may differ widely, but one or the other conclusion does not necessarily imply intent to defraud. Indeed, accounting is a profession well known among its insiders for its uncertainties and ambiguities. When the outside auditors of American companies sign off on a financial report, they don't claim infallibility.
In closing, Mr. Melloan notes the dire consequences of this criminalization policy, including one that has been common in the case of Enron -- the bludgeoning of executives into plea bargains by threatening effective life sentences if the executive risks defending his or her actions in court:
Another troubling sign . . . is that companies are fleeing from the court system, convinced that it is better to plea bargain with an aggressive prosecutor than to risk a jury trial. "Going to trial has become too risky for too many corporations because so many aspects are stacked against defendants . . .," says Exxon-Mobil Chief Counsel Charles W. Matthews, Jr., . .What this suggests is that the American legal system is itself breaking down under the burden of too much rule making and litigation aimed at raiding the deep pockets of business corporations. . . It would be nice to think that this will bring better decisions and greater transparency of benefit to investors. But what it looks like now is just a lot more money -- a lot more -- for lawyers and accountants.
For another case study in the syndrome that Mr. Melloan identifies, note this post and related posts referred to therein on the prosecution of the four Merrill Lynch defendants in the Enron-related Nigerian Barge case.
Posted by Tom at 4:58 AM | Comments (0) | TrackBack (1)
On the Internet's booms and busts
Rich Karlgaard is publisher of Forbes magazine and author of Life 2.0 (Crown Business, 2004). In this wonderful Wall Street Journal ($) op-ed, Mr. Kaalgaard examines the tremendous progress of the Internet over the past 20 years by pointing out that the risks taken in the booms and busts during the period are the engine of that progress. He uses the wildly over-priced Netscape IPO of 10 years ago (has it really been that long?) as one of his examples of the risk-taking that did not work out, and wryly passes along the following anecdote about one analyst's attempt at a joke about pricing Internet companies during those exuberant times:
Analyst Bill Gurley sends out a spoof email. After noting the history of deteriorating valuation benchmarks, from cash flow, to EBIT, to EBITDA, to "price-per-click," announces the ultimate Internet valuation benchmark: EBE, or "earnings before expenses." Most readers don't realize Mr. Gurley is joking.
Posted by Tom at 4:37 AM | Comments (0) | TrackBack (0)
August 8, 2005
This is a bit out of my league
This NY Times article reports on the progress of the new Liberty National Golf Club, which is located just across the Hudson River from Manhattan. With its breathtaking views of the Manhattan skyline and the Statute of Liberty, the golf course is generating quite a buzz in golfing circles, although not among the crowd that I normally play with:
[T]he lush and very private Liberty National Golf Club has sprouted across from the Manhattan skyline. This $150 million project by Paul B. Fireman, the property's owner and the chief executive of Reebok; his son Dan; and the golf-design tandem of Kite and Bob Cupp is creating a buzz less than a year before the first players tee off.Built on 160 acres and covering 4,000 feet of waterfront, the course stretches 7,400 yards from the back tees, with small rivers running through it and a $1 million cart path built with Belgian stones. . . The course will offer a 15-minute luxury yacht service from Manhattan and, for those with quicker needs, a helipad.
Each member will have a custom-made set of clubs that will always be available at the course, a kind of thank-you gift for joining a club with an initiation fee of around $500,000.
Sure am glad they put in that helipad. ;^)
Posted by Tom at 9:27 AM | Comments (3) | TrackBack (0)
Plaintiffs in Enron class action plaintiffs turn up the heat on Merrill Lynch
Assuming that you have not already been chloroformed by the recent discussion of the Nigerian Barge criminal case, this AP story reports on a development last week that tees up Merrill Lynch's involvement in that transaction where it ought to be examined -- in a civil lawsuit.
This past Friday, the plaintiffs in the main Enron securities fraud class action lawsuit filed a motion for partial summary judgment against Merrill Lynch requesting that the federal district court find that the jury findings in the Nigerian Barge criminal case collaterally estop Merrill from defending itself in the class action on the liability issue regarding its alleged participation in Enron's misleading financial reporting to investors. If U.S. District Judge Melinda Harmon were to grant the motion, then the parties would proceed to trial with a liablity finding against Merrill Lynch and the only issue for the jury to determine in regard to Merrill would be the amount of damages that should be assessed against Merrill. As Morgan Stanley can tell you, that's not a position that a corporate defendant wants to be in at the beginning of a trial.
Interestingly, the lawyers for the plaintiffs in the Enron class action apparently prepared a similar motion and presented it to Canadian Imperial Bank of Commerce, which then chose to settle last week rather than take the risk of being left with only damage issues during the trial on the merits. The same tactic was used on Merrill, which apparently rejected the opportunity to settle before the motion was filed.
Merrill Lynch has already paid $80 million to the Securities and Exchange Commission to settle civil allegations related to its involvement in the Nigerian Barge transaction, but -- as is common in such settlements -- Merrill neither admitted nor denied wrongdoing. I have not had an opportunity to read the motion yet, but my inital sense is that it is a longshot, at best. Merrill was not a party to the criminal proceeding against the four former Merrill Lynch defendants who were convicted in the Nigerian Barge criminal case, so a threshold issue exists as to whether application of collateral estoppel is even appropriate. Moreover, as noted in the blog thread on the criminal case, the evidence during the Nigerian Barge criminal trial was equivocal, at best, as to whether Merrill did anything wrong in connection with the transaction.
Posted by Tom at 6:35 AM | Comments (0) | TrackBack (0)
Is Berkshire becoming a target?
This NY Times article reports that Berkshire Hathaway Inc. has disclosed that government authorities are probing at least one of the company's insurance subsidiaries other than General Reinsurance Corp. over accounting of "finite risk" reinsurance transactions. Here are the previous posts on the wide-ranging probe into Berkshire, General Re, and others over such transactions.
Moreover, as noted in this London Telegraph article, Berkshire announced that it is also facing regulatory investigations in England, Ireland, Germany and Australia. In that regard, Berkshire also announced that it had terminated the employment of former reinsurance executive Milan Vukelic, who has been under investigation by those overseas authorities.
Berkshire's General Re unit surfaced earlier this year as part of state and federal authorities' investigations into American Insurance Group and its former chairman and CEO, Maurice "Hank" Greenberg, over whether some insurance companies have disguised loans as "finite-risk" reinsurance. Reinsurance is coverage that insurance companies buy to allocate risk of loss on the policies that they sell, and finite-risk reinsurance is a nontraditional type of structured finance transaction that blends finance with insurance. This latest disclosure is the first indication that regulators are focusing on the the Berkshire subsidiaries' own accounting own accounting of the transactions and not just their involvement with AIG in regard to such transactions. Two former General Re executives have pleaded guilty to conspiring to commit fraud to help AIG misrepresent its financial results.
Meanwhile, the magnitude of the change in Berkshire's reported reinsurance results prompted several equity analysts -- including Standard & Poor's Equity Research -- to issue a "sell" recommendation on Berkshire shares based on profitability concerns and reputational risk. Mr. Greenberg and former Enron executives are well-prepared to advise the Oracle of Omaha on the vagaries of such reputational (or sometimes called "headline") risk.
By the way, Mr. Buffett has been an outspoken bear for some time on the U.S. dollar. However, his sizable currency bets over the past couple of years have been were a continuing drain on Berkshire's finances. For the most recent quarter, Berkshire reported about a $620 million pretax loss in market value on its foreign-currency investments, compared with a pretax loss of almost $450 million a year earlier.
Posted by Tom at 6:02 AM | Comments (0) | TrackBack (0)
Heat turned up a notch on Milberg Weiss
This Wall Street Journal ($) article reports that federal investigators have turned up the pressure in its investigation of several prominent plaintiffs class action securities lawyers at the former Milberg, Weiss law firm, including granting immunity to a former Milberg Weiss lawyer who worked closely with William S. Lerach, who has already been fingered as a target of the investigation. Here are the prior posts on the investigation and related matters pertaining to the firms involved.
The long investigation (at least four years) is focused on whether Milberg Weiss arranged to have undisclosed payments made to individuals whose names the firms repeatedly used as "name" plaintiff in securities class-action lawsuits. Payments to name plaintiffs in such lawsuits are generally subject to approval by the courts overseeing the cases to minimize the inherent conflict-of-interet that exists between the individual's desire for compensation and the interests of the rest of the class.
Interestingly, Alan Schulman, the former Milberg, Weiss partner who is now apparently cooperating with investigators under the immunity grant, left the firm in 2000 and opened the San Diego office of Bernstein Litowitz Berger & Grossmann LLP (known as "BLB&G"). BLB&G, Milberg, and Mr. Lerach's new firm regularly compete for lead counsel status in plaintiffs class action securities fraud cases. Mr. Lerach's firm -- which is the lead law firm for the plaintiffs in the big Enron securities fraud class action -- recently announced a settlement that put the aggregate settlements in the Enron class action over the previous record that BLB&G helped establish as lead counsel in the WorldCom securities fraud class action. The fact that BLB&G could benefit from an indictment against Milberg or its former partners by having less competition for lead counsel status in future class action lawsuits casts a troubling light on Mr. Schulman's immunity deal and related testimony.
Meanwhile, this LA Times article reports on the testimony in the divorce case of Stephen Cooperman, the former Beverly Hills eye surgeon who has served up testimony against Milberg Weiss as a means by which to obtain a lighter sentence for his 2001 conviction in an insurance scam. Mr. Cooperman, served as name plaintiff in about 60 class action cases that Milberg Weiss handled, has admitted engaging in several fraudulent schemes and likely will not be a credible witness against Milberg, Weiss.
Posted by Tom at 5:13 AM | Comments (0) | TrackBack (1)
More thoughts on the Merrill Lynch defendants' Nigerian Barge appeal
Having tended to my "day" job at the end of last week, I wanted to pass along some further thoughts on the lively discussion that erupted between Vic Fleischer, Larry Ribstein, other commentators, and me last week in regard to my post on the four former Merrill Lynch executives who are appealing their convictions in the Enron-related Nigerian Barge case to the Fifth Circuit Court of Appeals. Given the importance of the issues addressed in this blog thread to businesspeople, the American economy and the rule of law, I appreciate everyone's interest in the thread and their contributions.
For those who want to read the prior posts in order:
Here is my original post on the former Merrill Lynch executives' appeal;Here is Larry's first post noting my post;
Here is Vic's first post responding to both Larry and my post;
Here is Larry's response to Vic's first post;
Here is my response to Vic's first post;
Here is Larry's post regarding my response to Vic's first post; and
Here is Vic's second post that replies to my response to his first post.
This post replies to Vic's latest post and attempts to circle the thread toward a coherent close.
In his post regarding my response to Vic's first post, Larry really asks the right questions and identifies the importance of the issues:
The question raised . . . is whether the criminal prosecution of this transaction, particularly in the way it has been done by the government, . . . was appropriate?If the existence of a promise is essential to criminal liability, does the evidence . . . look even close to enough to hang a substantial prison sentence on?
[W]e academics . . . have an obligation to get this right. This is about how the power of government is and should be used against business, and so is immensely important to this country's economic well-being. The newspapers and movies have slanted this issue, and the partisans either side will be discounted. We in the academy therefore have special influence.
So, really what we have is a narrower issue regarding whether Enron accounted properly for the Nigerian Barge transaction with Merrill Lynch -- an issue that Vic focuses on more than Larry and me -- and the broader issue of whether the government should be criminalizing such a transaction, which Larry and I tend to focus on more than Vic.
On the narrower issue, Vic is skeptical that the Nigerian Barge transaction constituted a true sale upon which Enron could book immediate earnings. He is suspicious of the deal's structure, but more substantively, believes that Fastow probably made an oral promise (albeit unenforceable) that Enron would backstop Merrill's investment either through an Enron repurchase of Merrill's interest or by brokering a sale of that interest to a third party. Vic reasons that the existence of this oral promise -- although neither Fastow nor anyone who heard the alleged promise testified during the trial -- means that no or inadequate risk was shifted from Enron to Merrill for the transaction to constitute a true sale.
On the larger issue, Vic concludes that Enron probably booked improper earnings intentionally. Apparently because each of the Merrill defendants was involved in the transaction in at least some small way, Vic reasons that the prosecution of the Merrill defendants was not particularly unreasonable, even though he concedes that it's probably not a particularly strong criminal case.
On the other hand, my position on the narrower issue is that transaction was a true sale. The structure may have been for expediency, to facilitate a future transaction, or simply because Enron liked doing structured finance transactions, as noted in this earlier post. However, there was nothing inherently wrong with the structure of the deal. Moreover, Merrill undertook plenty enough risk for the transaction to constitute a true sale, probably best reflected by the fact that Fastow's crime partner Kopper would not agree to have LJM2 buy the interest from Merrill until the risk of non-payment from the source of Merrill's dividend stream was hedged through the pledge of security from a third party. Consequently, my sense is that whatever unenforceable assurance that Fastow may have provided to Merrill -- and the evidence is reasonably clear that Fastow never promised that Enron itself would buy back the interest -- had a negligible effect on Merrill's considerable risk in the deal.
However, putting aside for a moment the competing arguments on the narrower "true sale" issue that could make for lively debate in a corporate accounting class or civil lawsuit, the more important issue is the one that Larry raises:
Is there evidence of criminality here in regard to the four former Merrill Lynch executives that even comes close to fulfilling the government's burden of establishing proof beyond a reasonable doubt?
The correct answer is a resounding "no," and my big difference with Vic is that I do not believe that this is even a close call. The question of whether Enron booked its earnings relating to the Nigerian Barge transaction correctly, improperly, or fraudulently is different from the issue of whether the Merrill defendants engaged in criminal conduct by carrying out their duties in connection with the transaction. Inasmuch as Enron and Merrill always viewed Merrill as a "bridge" owner of the interest, there was nothing wrong -- much less criminal -- with Merrill obtaining assurances from Fastow that Enron would assist in finding a buyer who would take Merrill out of the investment after a short hold. This is not much different than a banker seeking a business owner's personal assurance that a non-recourse loan to the owner's business will be repaid even if the company defaults and its security for the loan turns out to be inadequate. That's just part of the process in which businesspeople gain confidence in taking on risks.
Indeed, if Fastow's assurance to Merrill in the Nigerian Barge transaction was -- as Vic suggests -- the basis of a crime, then dozens of Merrill executives, lawyers, and accountants who reviewed and approved the transaction were also involved in that criminality. They all knew and agreed that having Dan Bayly obtain Fastow's assurance that Merrill would be taken out was a good idea. Why have they not been prosecuted? Why are the four former Merrill executives being singled out? Why on earth is William Fuhs -- who had nothing to do with structuring or approving the transaction, and handled only a few ministerial tasks in regard to the deal -- going to jail for over three years away from his wife and two young children when the other Merrill executives, lawyers, and accountants who structured and approved the deal get off scott free?
Don't get me wrong. I don't believe that either Merrill or its four former executives came even close to crossing the line of criminality in regard to this transaction. But if you accept Vic's analysis that they did, then you cannot logically stop with the four sacrificial lambs named Bayly, Furst, Brown and Fuhs. You must prosecute the company and everyone involved in the transaction, and then prepare to take shelter from the economic storms that would follow as implementation of such a dubious criminalization policy would inevitably lead to a raft of Arthur Andersen-type meltdowns. That is why corporate and individual responsibility in such matters -- as Larry has repeatedly pointed out on his blog -- is best sorted out in civil lawsuits.
Finally, Vic does not add much to the discussion by observing that the prosecution of the Merrill defendants has been fair because they have been afforded procedural due process. Although rather sad and humorous at the same time, it's a reflection of the post-Enron era of anti-business sentiment that "fairness" in regard to Enron-related criminal proceedings is being measured by the fact that at least procedural due process has not yet been suspended in regard to those proceedings.
But even where procedural due process is provided, justice and the rule of law are undermined when the government uses its daunting power to criminalize individual behavior that, as Chief Justice Rehnquist put it in Anderson, "is by itself innocuous." As the Chief Justice goes on to explain:
"We have traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress, Dowling v. United States, 473 U. S. 207 (1985) and out of concern that 'a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed.' McBoyle v. United States, 283 U. S. 25, 27 (1931)."
Thus, as with its Andersen prosecution, the Enron Task Force had to overreach badly -- distorted application of criminal statutes, suppression of evidence, intimidation of key witnesses, primary reliance on the "shoddy merchandise" of hearsay testimony, etc. -- to make a case against the Merrill defendants in the Nigerian Barge case (the specific circumstances of those abuses are described in my first post in this thread, the Merrill defendants' briefs, and this post). Similarly, as detailed in this earlier post, the list of Enron Task Force abuses in other Enron-related criminal cases is also getting quite lengthy. So, regardless of whether the prosecution of the Merrill defendants was a "witch hunt," it's clear that the government is exercising its formidable prosecutorial powers in the Enron-related cases in a highly troubling manner.
To a large degree, the overreaching nature of these prosecutions is a by-product of the vagaries of pursuing a policy of criminalizing corporate agency costs in the first place. In this excellent TCS Central op-ed, Stephen Bainbridge -- who, along with Professor Ribstein, is one of most cogent scholars on corporate law issues (and one of Vic's colleagues at U.C.L.A.) -- criticizes the type of prosecution of corporate agency costs that Vic views as reasonable in the prosecution of the Merrill defendants:
Few serious persons would deny that fraud and theft are appropriate subjects of the criminal law. When corporate executives loot the corporation, . . . they should go to jail.Unfortunately, however, ambitious prosecutors have not limited themselves to cases of fraud or theft. . .
Business decisions rarely involve black-and-white issues; instead, they typically involve prudential judgments among a number of plausible alternatives. Given the vagaries of business, moreover, even carefully made choices among such alternatives may turn out badly.
At this point, the well-known hindsight bias comes into play. Decisionmakers tend to assign an erroneously high probability of occurrence to a probabilistic event simply because it ended up occurring. If a jury knows that the plaintiff was injured, the jury will be biased in favor of imposing negligence liability even if, viewed ex ante, there was a very low probability that such an injury would occur and that taking precautions against such an injury was not cost effective.
Hence, there is a substantial risk that juries will be unable to distinguish between competent and negligent management because bad outcomes often will be regarded, ex post, as having been foreseeable and, therefore, preventable ex ante. If liability results from bad outcomes, without regard to the ex ante quality of the decision and/or the decisionmaking process, however, managers will be discouraged from taking risks. If it is true that lack of gumption is the single largest source of agency costs, as somebody once said, rational shareholders will disfavor liability rules discouraging risk-taking, as Judge Ralph Winter opined in Joy v. North:
[B]ecause potential profit often corresponds to the potential risk, it is very much in the interest of shareholders that the law not create incentives for overly cautious corporate decisions. . . . Shareholders can reduce the volatility of risk by diversifying their holdings. In the case of the diversified shareholder, the seemingly more risky alternatives may well be the best choice since great losses in some stocks will over time be offset by even greater gains in others. . . . A rule which penalizes the choice of seemingly riskier alternatives thus may not be in the interest of shareholders generally.Hence, when juries review the merits of even bad corporate governance, they run the risk of effectively penalizing "the choice of seemingly riskier alternatives."
In sum, shareholders deserve protection from theft, but not from risk taking, . . . Unfortunately, it's not clear that prosecutors know the difference -- or even care.
Yes, Vic, we can agree that this is not as bad as the Inquisition or the Holocaust. But it is still a gravely important issue when the state misuses its overwhelming power to prosecute and convict unpopular people for doing their job, which -- in Mr. Bayly's case -- he had been doing in an exemplary manner for the past 30 years. Even an appellate decision overturning the convictions of Mr. Bayly and the three other Merrill defendants cannot undo the emotional carnage that those men and their families have endured, just as the Supreme Court's decision in Andersen could not breath life back into the 30,000 jobs that were lost as a result of the government's overreach in that case.
However, as great as my compassion is for the Merrill defendants and their families, and as concerned as I am with the economic damage that is resulting from the government's dubious criminalization policy, my greater concern remains for the principles of justice and respect for the rule of law upon which the success of American society is largely based. It is impossible to reconcile the convictions of the Merrill defendants with the results in such cases as the Enron Broadband trial, the Richard Scrushy case, the Arthur Andersen case, the William Sihpol case, the Martha Stewart case, the sad case of Jamie Olis, the DOJ's handling of the Global Crossing case, the Tyco case, the Frank Quattrone case, the Bernie Ebbers case and many others. Accordingly, the roulette wheel-nature of the results in these cases is precisely what casts the public's respect for the rule of law into an ugly cauldron of cynicism, resentment, and tolerance for the abuse of the government's daunting power to prosecute the unpopular people of the moment. That's why when a bright law professor rationalizes a travesty such as the conviction of the Merrill defendants as merely an unfortunate result of an otherwise legitimate use of the state's prosecutorial power, I am concerned that we are well on our way to a time when, as Sir Thomas warns us, we will not be able to "stand upright in the winds" of abusive state power that will blow then.
Posted by Tom at 4:15 AM | Comments (2) | TrackBack (1)
August 7, 2005
Stros 2005 Review: Checking in on the Stros
Since last checking in on the Stros (60-51), the club has cooled off a bit, losing four of their last seven games. However, the Stros come home for their longest homestand of the season on the uptick, as Jason Lane's (-3 RCAA/.300 OBP/.479 SLG/.779 OPS) three run yak broke open a close game and notched a well-deserved 8-1 win for the Rocket over the Giants (48-62).
The Stros continue to lead in the race for the NL Wild Card playoff spot, and the competition in that race increasingly looks like it will come out of the NL East where the Phillies (58-54), Mets (57-54) and Marlins (57-52) all appear primed to remain in the race. My sense is that the Nationals (58-53) will continue to fade and will be out of the race by Labor Day. Both the Cubs (54-56) and the Brewers (56-56) should both be in the race. However, just like the 2004 season, it appears that Manager Dusty Baker is mismanaging the Cubs sufficiently to keep that club out of the race, and the Brew Crew -- although the most balanced club in the NL except for the Cardinals -- just can't seem to put the long winning streak together that is necessary to get a leg up in the race for the Wild Card playoff spot.
Inasmuch as combining each club's runs created against average ("RCAA", explained here) and its runs saved against average ("RSAA", explained here) is a good measure of each club's strength relative to the rest of the league, here is how the above-named clubs involved in the Wild Card race stacks up:
Marlins 75 RCAA/-13 RSAA = 62
Brewers 48/16 = 64
Stros -27/72 = 45
Mets 10/27 = 37
Cubs 34/-9 = 25
Phillies -36/58 = 22
Nationals -24/24 = 0
Thus, the Marlins remain the Stros strongest competition, but their pitching has been so below average this season that the club's strong hitting has simply not been able to carry the club through a long winning streak. Somewhat surprisingly, the Mets are a well-balanced competition and Carlos Beltran (-1/321/.437/.758) appears finally to be coming around, so keep an eye on that club. My sense is that the Phillies do not have enough firepower to hang in the race, but they have a similar makeup to the Stros (i.e., strong pitching, weak hitting), so who knows?
Here are the Stros hitters' individual RCAA through Saturday's games, courtesy of Lee Sinins:
Morgan Ensberg 32
Lance Berkman 20
Craig Biggio 11
Orlando Palmeiro 10
Jeff Bagwell 1
Eric Bruntlett -3
Jason Lane -3
Luke Scott -4
Todd Self -4
Humberto Quintero -5
Jose Vizcaino -5
Raul Chavez -10
Willy Taveras -10
Mike Lamb -11
Adam Everett -13
Chris Burke -16
Brad Ausmus -17
The Stros team RCAA of -27 remains 11th among the 16 National League clubs. The Stros hitters continue to be well under average as a group, although Ensberg (32/.385/.585/.971), Berkman (20/.407/.502/.909), Bidg (11/.336 /.478/.814), and Palmerio (10/380/.503/.883) continue to highly productive, and Lane has been showing steady improvement over the past month. On the downside, almost every other hitter on the club is terrible, and rookie starting outfielders Taveras (-10/.325/.353/.678) and Burke (-16/.291/.303/.594) have become big drags on the lineup. There is no good reason to play either Taveras or Burke in place of Palmeiro or Lane during a playoff race.
Meanwhile, here are the Stros pitchers' individual RSAA through Saturday's games:
Roger Clemens 46
Roy Oswalt 34
Andy Pettitte 26
Dan Wheeler 14
Brad Lidge 9
Mike Gallo 2
Chad Qualls 2
Mike Burns 1
Chad Harville -2
John Franco -5
Russ Springer -8
Ezequiel Astacio -10
Brandon Backe -10
Brandon Duckworth -12
Wandy Rodriguez -15
The Stros team RSAA of 72 is 2nd among the 16 National League teams. Clemens (1st in NL RSAA), Oswalt (3rd in NL RSAA), and Pettitte (tied for 5th in NL RSAA) remain the strongest three starting pitchers on one team in MLB, while Lidge and Wheeler are one of the strongest closing duos in the National League. Even Astacio has looked like a real MLB pitcher during his past three outings.
By the way, with Sunday's performance, Clemens set the Stros record for single season RSAA:
1 Roger Clemens 2005/ 49
2 Mike Scott 1986/ 47
3 Larry Dierker 1969/ 45
4 Mike Hampton 1999/ 40
5 Darryl Kile 1997/ 39
T6 Roy Oswalt 2002/ 33
T6 Joe Niekro 1982/ 33
T6 Roy Oswalt 2005/ 33
T9 Mike Cuellar 1966/ 32
T9 Roger Clemens 2004/ 32
And in less than 2 full years with the club, he is already 3rd on the Stros career RSAA list:
1 Roy Oswalt 138
2 Billy Wagner 99
3 Roger Clemens 81
4 Mike Hampton 76
5 Dave Smith 75
6 Octavio Dotel 67
7 Nolan Ryan 60
8 Wade Miller 56
9 Don Wilson 55
10 Joe Sambito 53
The Stros open a 13 game homestand on Tuesday against the Nationals, the Pirates (47-65), the Cubs, and the Brewers before making another West Coast swing on August 22. Looks like Houstonians are going to be enjoying yet another late summer pennant race, which has become a delightfully common occurrence during the Stros' Bidg-Bagwell era.
Posted by Tom at 8:58 PM | Comments (0) | TrackBack (0)
Update on the talented Mr. Munitz
Following on this post from earlier this summer on former University of Houston chancellor, Barry Munitz, this NY Times article indicates that the heat is being turned up on current Getty Trust executive director.
Reporting on a LA Times article from this past week, the Times reports that the California attorney general has opened an investigation into the finances of the Getty Trust, particularly the financial records relating to Mr. Munitz's eight-year tenure. The state is examining whether those expenditures had violated state laws governing its tax-exempt status, as well as a real estate deal between the Getty Trust and L.A. billionaire, Eli Broad, who happens to be one of Mr. Munitz's buddies.
Mr. Munitz is one of the best-paid executives of a nonprofit institution in the nation, with salary, benefits and perks totaling over $1 million annually over the last several years. It appears that everything that Mr. Munitz received was approved by the Getty Board, so it appears that the primary purpose of the investigation is to embarrass Mr. Munitz and the Getty board. My sense is that neither Mr. Munitz nor the Getty board really cares.
Posted by Tom at 4:29 PM | Comments (0) | TrackBack (0)
August 5, 2005
Another great English obituary
As noted in this earlier post, I am a big fan of the English tradition of writing lighthearted obituaries. This Daily Telegraph obit is another wonderful example of that tradition, as reflected by the opening description of the decedent, former English barrister, Peter Parkenham:
Patrick Pakenham, who has died aged 68, was a talented barrister and the second son of the 7th Earl and Countess of Longford; highly intelligent, articulate and possessed of an attractive and powerful voice, Pakenham could have attained great professional heights, but his boisterous nature and bouts of mental illness rendered it impossible for him to adhere to the routine required to sustain his position at the Bar, and he retired after 10 years' practice.
But that overview is nothing compared to this anecdote:
During his legal career, Pakenham became something of a legend, and, 25 years on, accounts of his exploits are still current. During his appearance before an irascible and unpopular judge in a drugs case, the evidence, a bag of cannabis, was produced.The judge, considering himself an expert on the subject, said to Pakenham, with whom he had clashed during the case: "Come on, hand the exhibit up to me quickly." Then he proceeded to open the package. Inserting the contents in his mouth, he chewed it and announced: "Yes, yes of course that is cannabis. Where was the substance found, Mr Pakenham?"
The reply came swiftly, if inaccurately: "In the defendant's anus, my Lord."
Read the entire piece, as it only gets better. Hat tip to Is that Legal for the link.
Posted by Tom at 6:31 AM | Comments (2) | TrackBack (0)
Roger Clemens, medical miracle
The Stros' Roger Clemens -- certainly one of the three greatest pitchers in Major League Baseball history -- turned 43 yesterday. His dominating performance this season at that advanced age for baseball pitchers prompted this Alan Schwarz/ESPN.com article on how medical advances made Clemens' long career possible and saved Clemens from suffering the same fate as one-season wonders from previous eras, such as Mark Fidrych:
[F]or most of baseball history, a "sore arm" was like a malevolent genie who visited pitchers in the night, entered their joints and corroded their futures from the inside with no explanation or recourse. Johnny Beazley, Karl Spooner, Mark Fidrych . . . they all faded into anonymity before medicine could fix them, medicine we now take for granted. When you consider that almost every top modern pitcher has gone under the knife at some point -- heck, some throw harder after ligament-transplant surgery -- you realize what a lucky era we're in.So lucky that most people forget that Roger Clemens could have been one of those pitchers we never heard from again. It was 20 years ago that he and his throbbing shoulder lay on the operating table -- before any 20-strikeout games, before any Cy Young awards and before arthroscopy was a sure thing. Before Dr. James Andrews was sure he could fix him.
Clemens was closer to the scrap heap than most -- particularly Clemens himself -- care to remember. In 1984, having established himself as one of the top pitching prospects in baseball, he complained about a sore shoulder soon after reaching the major leagues and was sent home to Texas early. The next year, he achingly creaked through several starts, his velocity down, while no one knew quite what was wrong (some Boston writers even questioned the kid's tolerance for pain).In June 1985, Clemens learned that a shoulder tendon and nerve were rubbing together, causing "the nerve to rise and get as big as shoelaces," Clemens said then. He tried to pitch through it but ultimately couldn't. On Aug. 23, he was told that he had a "flap tear" in his shoulder and was reportedly "devastated" by the news. The only good news was that the arthroscope, which originally had fixed knees in the 1970s, had come far enough that it could be used, instead of the more invasive scalpel, to shave down the damaged tissue.
"We had very little knowledge [about pitchers] -- they hurt and that's about all we knew," recalls Dr. Andrews, who performed the hour-long surgery on Clemens. "We began to arthroscope shoulders and started being able to see what was inside. Roger was one of the early ones."
In fact, Clemens has been such a machine for the past 20 years that many people can't (or don't want to) believe how close we were to losing him. I asked Andrews to consider what might have happened had Clemens been born just 10 years earlier and hurt his shoulder before the scalpel gave way to the arthroscope.
"We probably wouldn't have been able to fix it," Andrews says sadly. "He probably would have fallen by the wayside."
Posted by Tom at 6:01 AM | Comments (0) | TrackBack (0)
Lee Raymond announces retirement as ExxonMobil CEO
Exxon Mobil -- the world's largest company in terms of market capitalization -- announced yesterday that chairman and CEO Lee R. Raymond, who is 66, would retire at the end of the year after 12 years on the job. As is typical of ExxonMobil's conservative management style, the company also announced that Mr. Raymond will be repaced by native Texan, Rex W. Tillerson, who is 53 and, as ExxonMobil's president, has been a longtime company insider being groomed to replace Mr. Raymond. Here is the company's press release on the change, and here is an earlier post about an interesting interview with Mr. Raymond.
Mr. Tillerson -- who is from Wichita Falls and is a University of Texas at Austin alum with a degree in civil engineering -- has the quintessential tough act to follow. Mr. Raymond managed ExxonMobil into a more successful company in almost every respect, including the successful 1999 merger with rival Mobil Corp. Probably the biggest problem that Mr. Tillerson will face is the sheer size of the type of exploration projects in which ExxonMobil invests. Over the past decade or so, the cost of those projects -- often hundreds of millions -- has grown quickly as producers seek to tap formerly uneconomic reserves. As the increased price of oil justifies even larger investment, the price of those projects will likely grow into the several billions over the next decade. Laying off a large part of projects that size to hedge risk is no easy task.
Posted by Tom at 4:30 AM | Comments (2) | TrackBack (0)
August 4, 2005
A great dialogue on energy prices
Clear Thinkers favorite James D. Hamilton and Robert K. Kaufmann, professor in the Center for Energy & Environmental Studies at Boston University, are the participants this week in the Wall Street Journal's excellent Econoblog series (it's free!). The topic is the notion of "peak oil" and exploring the economic ramifications of a drop in oil production, and the discussion between these two experts is insightful and informative.
By the way, both men share a disdain for the recently-passed Energy Bill, to which Mr. Kaufman comments:
Policy is needed to help the entrepreneurial spirit anticipate the peak, but we don't need the type embodied in the current energy bill. No serious person can believe that it will help. The current bill demonstrates that Republicans and Democrats have the same view of policy, they just give tax dollars to different groups.Sound policy should establish an economic environment that increases the economic returns and reduces the risk to long-term research and development on alternative energies. Specifically, policy should impose a large energy tax that is phased in over a long period, perhaps 20 years. Furthermore, increases in the energy tax should be "offset" by reducing other taxes, such as payroll or corporate taxes. Economic studies show that such an approach can generate a "win-win" solution -- reduce energy use (and the environmental damages not paid by users), stimulate research and development on alternative energies, and speed economic growth. Phasing in an energy tax would send a signal to entrepreneurs that there will be a market for alternative energies. The tax does not pick technologies -- that will be left to the market, which is smarter than any Democrat, Republican, or even myself!
And Mr. Hamilton makes the following sharp observation regarding efficient allocation of resources:
It is precisely because I agree with Robert about the importance of this transition [from peak oil] that I think it's critical that we put all our resources to their best use. And I honestly believe that the best way to ensure that happens is to count primarily on the same system that has generated the fantastic improvements in global living standards over the last few centuries, namely, individuals choosing to direct the resources they personally control to those activities that yield the highest personal reward. Yes, the risks are great here, but so are the private rewards to those who best figure out how to navigate our way through them.In so saying, let me be clear that I distance myself from those who might say that there is nothing to worry about and markets will solve everything. I think there is plenty to worry about, and markets may or may not solve the problems. But what I am saying is that I see private incentives as our best hope. Notwithstanding, I enthusiastically endorse the kinds of active government assistance for those incentives that we've been discussing.
Posted by Tom at 12:34 PM | Comments (1) | TrackBack (0)
Brain dead woman gives birth
Don't miss Tom Mayo's interesting analysis of the difficulty that the mainstream media has in explaining the context under which Susan Torres, a brain dead Virginia woman, gave birth to a baby girl this past Tuesday. Tom observes about the headline for the AP/Yahoo story:
Once dead, a patient can't die again. But, amazingly, 37 years after the Ad Hoc Harvard Medical School report on "irreversible coma," the public's resistance to the notion of neurological criteria for death is curiously persistent.
Posted by Tom at 9:07 AM | Comments (0) | TrackBack (0)
"Busted for Yoga"
Ellen Podgor has the blog title of the day in this post on the extension of Martha Stewart's home confinement over at the White Collar Crime Law Prof blog. Money quote:
"We should all feel safer knowing that Martha will be spending an extra three weeks on house arrest."
As readers of this blog know, I believe that Martha was one of the victims of the government's dubious criminalization of business during the post-Enron era.
Posted by Tom at 7:54 AM | Comments (0) | TrackBack (0)
The legal cost of avoiding an Enronesque experience
Following on this earlier post that addressed the hard-nosed approach that Allied Capital Corporation has taken in attempting to avoid an Enronesque meltdown in the face of an ongoing criminal investigation, this Washington Post article notes that Allied Capital's approach is a financial boon to one sector of the economy that is near and dear to this blogger's heart:
Allied Capital Corp. executives yesterday said the company spent $25 million in legal expenses in the first half of the year on government investigations that have required it to produce "millions of pages" of company e-mails and documents. . .The [company's second quarter results] results would have been better were it not for $13.5 million in legal and other expenses associated with the investigations during the quarter, with much of the cost related to document production.
Nevertheless, the investment in legal fees appears to be paying off:
Allied Capital stock dropped 59 cents yesterday to close at $27.51. It is up more than $3 since the criminal investigation was disclosed Dec. 27.
Posted by Tom at 7:19 AM | Comments (0) | TrackBack (0)
The Greenberg White Paper
This post from awhile back noted that former AIG chairman and Spitzer target Maurice "Hank" Greenberg and his legal team are preparing a "white paper" defending Mr. Spitzer's charges of bad accounting at AIG. Here are the previous posts on the saga between AIG and Mr. Spitzer.
Well, the Wall Street Journal has obtained a copy of Mr. Greenberg's white paper, and in this editorial ($), asserts that the paper "makes a compelling case that AIG's new management took financial decisions detrimental to shareholders -- and for no other purpose than to shift blame to past management and kowtow to Mr. Spitzer." Here is the later NY Times article on the white paper. Moreover, Patrick over at Spitzer Watch is having some fun with this latest development, too.
After reviewing Mr. Greenberg's quite reasonable defenses to the litany of Mr. Spitzer's charges, the WSJ editorial concludes as follows:
There are other AIG accounting curiosities, . . . AIG blamed most of this on "former senior management," without any notable evidence. AIG holders might also want to know why the company's longtime auditor, PricewaterhouseCoopers, as well as AIG's audit committee were happy to sign off on many of these items and then change their minds. Or how some of the same people responsible for the previous accounting are now the ones taking credit for a "cleaned up" AIG.One possible answer is that AIG is the latest example of a company that felt compelled to play along with a prosecutor's attempt to apply new standards, on an ex post facto basis, to previous behavior. Threatened by Mr. Spitzer with the death sentence of a corporate indictment, directors first let Mr. Greenberg go. Then wanting to put the whole saga behind them, new management decided on the familiar strategy of conceding every Spitzer allegation and taking the biggest write-off possible.
What isn't at all clear is how AIG's shareholders have benefited from this. Mr. Spitzer is making up the rules as he goes along -- rather than leaving that job to the legislators and regulators who are charged with it -- and investors are footing the bill. AIG's share price has taken a beating, dropping from more than $73 a share in February to below $50 in April, and recently climbing back above $60. As it seems clear that this accounting flap bears little relevance to AIG's general financial health, the question is how much of the share price drop is therefore due to Mr. Spitzer alone.
Mr. Spitzer and his media friends portray him as a hero to shareholders. The AIG case offers powerful evidence of precisely the opposite.
Meanwhile, Mr. Spitzer continues to rake in the plea bargains.
Posted by Tom at 6:16 AM | Comments (1) | TrackBack (0)
Discussing the Merrill Lynch defendants' Nigerian Barge appeal
This post earlier in the week on the appeal of the Merrill Lynch defendants in the Enron-related Nigerian Barge case generated quite a bit of traffic and some interesting responses from around the blogosphere.
First, Larry Ribstein complimented the post as an example of how blogs provide a valuable Hayekian information source, a subject on which Larry has written extensively. Subsequently, Vic Fleischer over at the Conglomerate blog excoriated Larry for "fawning" over my post, and then goes on to criticize the post. That prompted Larry to post this response to Vic's post, then Vic commented on Larry's response, and others commented on both Vic and Larry's posts. I encourage everyone interested in the government's criminalization of business to read all of the above for a lively discussion of the issues relating to that policy. This type of give-and-take is one of the blessings of the blogosphere.
But what is particularly interesting to me is Vic's approach to the subject. I do not know Vic, but I have read his posts on Conglemerate and he is an insightful fellow, and his professional pedigree appears to be developing in a quite solid manner. So, Vic is a reasonably sophisticated fellow in regard to the financial and legal issues that are involved in Nigerian Barge case.
Despite that sophistication, Vic harshly criticizes my post based on a combination of misinformation and misinterpretation. Although this is partially explained by the fact that I have had more access to the detailed information relating to the Nigerian Barge case than Vic, I have nevertheless found over the past several years that Vic's reaction is not particularly unusual with regard to virtually anything having to do Enron. As perhaps best reflected by the mildly entertaining but shallow Enron documentary, even intelligent lawyers have a difficult time analyzing Enron-related matters dispassionately. This is unfortunate because Enron represents precisely the type of difficult case for which the legal profession has a special responsibility not to allow public animus toward merely unpopular people to overwhelm justice and the rule of law. Larry Ribstein notes in his response to Vic's post the similar circustances that surrounded the case of Michael Milken back in the late 1980's, and Daniel Fischel examines how public perceptions overwhelmed the rule of law in his fine book about the prosecution of Milken, Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution (HarperCollins 1995). The same dynamic is at play nowadays in regard to Enron.
Vic relies on misinformation from the beginning of his post:
The basic facts are that Enron "sold" some barges to Merrill Lynch. That is, Enron recognized a "sale" for accounting purposes. Enron could not formally guarantee that they would buy back the barges, but promised to find a third party buyer within six months. From an economic standpoint, the so-called sale starts to look like a loan.
First, Enron did not sell barges to Merrill Lynch. Rather, in a sophisticated transaction (regardless of whether one characterizes it as structured finance), Merrill acquired from Enron common stock in a company that was the parent company of another company that owned the barges. In so doing, Merrill acquired the right to a dividend stream, the source of which was revenue generated by unsecured contracts for the use of the barges.
Moreover, contrary to Vic's suggestion, the transaction was quite risky for Merrill. Heck, Fastow's buddy in crime, Michael Kopper, declined to allow the LJM2 partnership to enter into the transaction at the time that Merrill did because of the unsecured nature of the source of the revenue stream (Kopper subsequently allowed LJM2 to buy Merrill's interest when the deal was improved with security for those underlying contracts). The deal involved extensive documentation and common hedging characteristics, such as political risk and other types of insurance. Now, Vic could not be expected to know all of that because he has not had an opportunity to review the documentation on the deal. But despite that lack of rather basic information, Vic has no problem in characterizing a complicated and risky transaction as a rather simple deal, and then making the remarkable leap that "the so-called sale starts to look like a loan."
Vic goes on in his post to observe the following:
I agree that it's not a slam dunk criminal case. The appeal has a real shot at success, and I'm not at all sure the government made its case. But that's no reason to lionize the defendants.
Well, I'm not sure that characterizing the Merrill defendants as "decent men" is the same as lionizing them, but let's not quibble about that detail. The fact of the matter is that each of the Merrill defendants -- as reflected in the elaborate reports filed by both the government and the defendants in connection with their sentencings -- had never been in any type of trouble whatsoever before the Nigerian Barge case, and each of them had outstanding personal and professional reputations. Again, I don't expect Vic to know that because he does not have access to that information. But what is it about Enron -- resentment of wealth? Enron's hard-nosed business reputation? investment loss? high profile business failure? -- that would prompt an otherwise reasonable person to take offense at calling men decent who have never been in a lick of trouble?
Vic goes on:
The deal stinks. It reeks. In no way is this deal an "ordinary structured finance transaction," as Kirkendall claims.
He follows that up with the following observation contained in a comment to Larry's response to his post:
The transaction was not a typical or ordinary transaction, and calling it "bad finance" still understates the case. Fraud is fraud. Maybe they shouldn't go to jail over it, but it's not crazy to think maybe they should.
With nothing more than a flawed understanding of the deal, Vic now asserts that the Nigerian Barge transaction is a fraud. Was it a typical transaction that any number of public companies use to manage the timing of income? Absolutely, and Vic is much more naive than I think he is if he believes that such is not the case.
Was it a typical transaction for Merrill Lynch? No, and Merrill readily admitted that. But simply because a transaction is unusual for a firm does not make it questionable, much less criminal.
Was it a reasonable business decision for Merrill to invest and potentially lose $7 million in order to maintain and perhaps improve a relationship with the seventh largest public company in the United States, a relationship that was worth $40 million annually to Merrill? Absolutely, and anyone who suggests that such a decision is even close to criminal conduct risks indicting major sectors of the American economy. Shoot, many large law firms commonly write-off fees, cover expenses and make investments with clients in order to maintain or enhance relationships.
Despite all that, Vic deems the question of whether the Merrill defendants are guilty of a crime a close call. If that is the case, then every businessperson involved in reasonably complicated business transactions in the U.S. better add a criminal defense attorney to their personal legal staff immediately. In my over 25 years of specializing in defending complex business transactions, which includes advising dozens of criminal defense attorneys in regard to defending complex business transactions in white collar prosecutions, the Nigerian Barge case is the weakest white collar criminal prosecution that I have seen, and certainly the most egregious example of the government using "shoddy merchandise" and suppressing evidence to criminalize what, at worst, is a risky business deal. If the Nigerian Barge transaction had involved Merrill Lynch and -- rather than Enron -- a debtor-company that was unknown to the general public, the Justice Department would have never pursued this prosecution.
Vic continues:
In an ordinary structured finance transaction, substantial economic risk is shifted away from the seller. I don't think that happened here, and it's the shifting of economic risk that justifies the accounting treatment.
Again, without fully understanding the transaction, Vic blithely concludes that there was no substantial shifting of economic risk in the Nigerian Barge transaction. What would have happened if the barges would have sunk to the bottom of the Atlantic Ocean while Merrill owned them? Is that enough risk? Frankly, that Merrill took on the substantial risk of ownership is clear from the answer to the following simple question: What would Merrill have been legally entitled to recover from Enron if Enron had not fulfilled Fastow's alleged oral promise either to broker a sale of the interest to a third party or buy it back itself?
Answer: Zilch. Under the contract between the parties, both Merrill and Enron confirmed that any prior oral representations (i.e., Fastow's promises) not contained in the deal documents were null and void, and that neither party relied on them in entering into the transaction. This is a standard contractual provision in such deals. But Vic still concludes that Merrill took on no substantial economic risk in the transaction because of Fastow's unenforceable promise.
In a comment, Vic continues his disparagement of the deal:
The evidence suggests, to me, that Fastow promised to buy back the barges, that Merrill Lynch expected him to buy back the barges and did the deal based on that representation, and that Fastow (through LJM) in fact bought back the barges. The phone call is not the only piece of evidence.
Vic's downplaying of the Fastow conference call belies the fact that the call was the crux of the government's case during the trial and final arguments. Similarly, Vic's assertion that Fastow "promised to buy back the barges" and that "Fastow (through LJM) in fact bought back the barges" falls into the same blurring of the transaction that the government engaged in at trial and to which the Merrill defendants now object on appeal. Inasmuch as LJM2 was a third party, its purchase of Merrill's interest did not render Enron's accounting of the gain from the transaction improper, and the government conceded that during the case. However, as the Merrill defendants point out on appeal, that did not stop the government from suggesting to the jury repeatedly during the trial that LJM2's purchase of Merrill's interest was somehow compelling evidence that a crime occurred and that a criminal conspiracy existed.
Vic goes on in his comment:
I noticed, for example, that one of Merrill's memos noted "reputational risk" as a risk factor in the deal. You don't do that with a plain vanilla financing.Now, this may not add up to a criminal conviction. I have a lot of sympathy for the defendants here -- drawing the line between planning and fraud is hard. If I were on the jury, I might vote to acquit, and the 5th Circuit has a tough case. But we should not pretend that the transaction was perfectly legal or run of the mill. It wasn't, even in the pre-2001 era.
Although I'm glad Vic toned down his initial harsh comments toward the Merrill defendants in this comment, his off-hand reference to Merrill's acknowledgement of "reputational risk" as an indication of wrongdoing is a painful stretch. Reputational risk is an important consideration for any transaction that is done at year end, and management would be heavily criticized for not considering such a risk. Moreover, reputational risk was merely one of at least ten other risks that Merrill management identified and reviewed internally in considering whether to enter into the barge transaction. The existence of such risks -- and Merrill's consideration of them -- underscores the mistaken nature of Vic's contention that risk was not transferred from Enron to Merrill.
But Vic's biggest doozy is the following:
Kirkendall really goes over the top at the end of the post, explaining:For as Thomas More reminds us, if the courts do not stand up for justice and the rule of law in such cases, "do you really think you could stand upright in the winds [of abusive state power] that would blow then?"The implicit comparison of the Merrill defendants to a Man For All Seasons makes me want to barf.
My apologies for prompting that barfing reaction, Vic, but that barf was not the result of any "implicit comparison" that I made. Rather, it was the result of Vic's misinterpretion of the point that I made by using Sir Thomas' statement. Rather than comparing the barge defendants to Sir Thomas, my point was to contrast Sir Thomas' wisdom with the government's dubious decision to use its enormous power to bring a flimsy prosecution against four innocent men based on suppression of evidence and appealing to the jury's resentment of Enron.
The context of Sir Thomas' statement was a debate with several family members. Sir Thomas' wife, daughter, and future son-in-law (Will Roper) were urging Sir Thomas -- as England's Lord Chancellor -- to arrest and prosecute Sir Thomas' student, Richard Rich, who had decided to leave Sir Thomas' tutelage in a huff over Thomas' refusal to grant him a political appointment. Although Rich had not committed a crime, it was clear to everyone that the conniving Rich would betray Sir Thomas in the future. So, Sir Thomas' family beseeches him and Sir Thomas engages Roper in the following passage to make his point:
Wife: "Arrest him!"Sir Thomas: "For what?"
Wife: "He's dangerous!"
Roper: "For all we know he's a spy!"
Daughter: "Father, that man is bad!"
Sir Thomas: "There's no law against that!"
Roper: "But there is, God's law!"
Sir Thomas: "Then let God arrest him!"
Wife: "While you talk he's gone!"
Sir Thomas: "And go he should, if he were the Devil himself, until he broke the law!"
Roper: "So, now you give the Devil the benefit of law!"
Sir Thomas: "Yes! What would you do? Cut a great road through the law to get after the Devil?"
Roper: "Why, yes! I'd cut down every law in England to do that!"
Sir Thomas: "Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down -- and you're just the man to do it, Roper! -- do you really think you could stand upright in the winds that would blow then?"
"Yes," Sir Thomas concludes. "I'd give the Devil the benefit of law, for my own safety's sake!"
In short, even relatively wealthy business executives who had the misfortune of being involved in a business transaction with a societal pariah are entitled to the protection of the rule of law in the face of the overwhelming power of government. Not only for their protection, but for ours.
Update: As usual, Larry Ribstein has additional perceptive observations on these issues.
Update II: And Vic responds with a more thorough analysis here.
I want to digest Vic's post before deciding whether to extend this debate because the issues have already been well-defined and we all have day jobs.
But I do want to make one point regarding Vic's speculation that LJM2 was not a really a third party purchaser of Merrill's interest. As you would expect, the prosecution examined that issue thoroughly before trial because it would have made the prosecution's case easier in many respects against the Merrill defendants if it could have simply contended that LJM2's purchase of Merrill's interest was the same as an Enron buy back.
Despite that incentive, the government concluded that LJM2 was a seperate entity with different ownership from Enron, and the government conceded that fact well before trial. Thus, the government did not contend during the trial that Fastow's involvement with LJM2 made it one and the same as Enron or that LJM2's purchase of Merrill's interest was equivalent to an Enron buy back. However, that pre-trial concession did not stop the prosecution from blurring that very issue during the heat of trial, which is why the Merrill defendants are raising that as an issue on appeal.
Posted by Tom at 5:20 AM | Comments (5) | TrackBack (4)
August 3, 2005
You knew this was coming for KPMG
This Washington Post article reports that at least 20 former partners KPMG LLP -- including some who were members of its senior management team -- have been informed by the Justice Department that they are targets of the criminal investigation into their role in selling tax shelters over the past decade. Here are the previous posts on the ongoing sagas involving KPMG and other auditors.
As noted in this prior post, the DOJ has been turning up the heat for some time on KPMG, and it is still unclear in my mind whether the firm can survive or will fall into the same trap that enveloped Arthur Andersen. Although it would seem unlikely that the DOJ would pursue an indictment of KPMG after its Arthur Andersen fiasco, experience tells me that this bunch does not always make rational decisions in such matters. As Professor Ribstein noted awhile back, it would be ironic if a truly good criminal case against KPMG (still not established yet) would be undermined by the Justice Department's dubious handling of the prior case against Andersen.
Posted by Tom at 6:43 AM | Comments (0) | TrackBack (0)
Redstone's Tournament Course opens
Houston-based Redstone Companies' Tournament Golf Course -- the new home course for the PGA Tour's Shell Houston Open Golf Tournament -- opened for play this week, and the Chronicle's Doug Pike gives the 7,500 yard Rees Jones tract a stellar rating in this review. Inasmuch as the new course is central to the Houston Golf Association's plan to revive the Shell Houston Open, which had one of its weakest fields in years during this year's tournament -- I am hopeful that the course turns out to be popular among both Tour players and the golfing public. I am scheduled to play the Tournament Course later this month, after which I will post a review, so stay tuned.
A note to Redstone Golf -- the website for the Tournament Course is about as unimpressive as a website can be, with hyperlinks that do no work and a paucity of visuals of the product. Might want to spend a few bucks to upgrade that resource, which will be the first impression that many folks will have of the facility.
Posted by Tom at 6:24 AM | Comments (1) | TrackBack (1)
CNOOC folds on Unocal bid
The China National Offshore Oil Corp Ltd. announced yesterday that it is abandoning its effort to acquire second-tier U.S. exploration and production company Unocal Corp, paving the way for Unocal shareholders to accept Chevron's competing bid. Here are the previous posts on the battle over Unocal.
Chevron clearly overwhelmed CNOOC in the political arena of this takeover battle, which ended up discounting the value of CNOOC's superior all-cash bid because of concerns over whether CNOOC could close it anytime soon. Although there will likely be much hand-wringing over the impact to Sino-American economic relations as a result of CNOOC's failed bid, the reality is that CNOOC screwed the pooch on this one.
First, it's not as if CNOOC had not lined up the necessary political and financial resources to do battle with Chevron. CNOOC hired involved White House-connected lobbyists and the usual battalion of Wall Street investment bankers and public relations types. Moreover, CNOOC's CEO, Fu Chengyu, speaks fluent English and studied petroleum engineering at the University of Southern California. So, these folks knew what they were doing.
However, CNOOC allowed Chevron to get a leg up by failing to meet Unocal's March 30 deadline for submitting bids. CNOOC's board resisted Mr. Fu's attempt to meet that deadline, and did not come around until late June. By that time, CNOOC's bid had to overcome not only the Chevron deal, but also a half billion breakup fee in favor of Chevron. When Chevron sweetened its bid recently, many institutional investors were so concerned about CNOOC's ability to handle the federal approval process and close the deal, they began to lean toward taking the bird in the hand rather than the bigger one in the bush. That effectively sealed the fate of the CNOOC bid.
Posted by Tom at 5:23 AM | Comments (0) | TrackBack (0)
Dynegy continues restructuring plan with big asset sale
Houston-based Dynegy, Inc. announced yesterday that it had agreed to sell its natural-gas-processing business for $2.48 billion to Houston-based Targa Resources Inc., the energy company that private-equity firm Warburg Pincus LLC founded. As a part of the deal, Targa Resources will also acquire Dynegy's storage, transportation, distribution, fractionation and marketing assets.
With this sale, Dynegy becomes solely a power generator that would be a prime acquisition target of other energy companies. The sale is the latest move in a restructuring plan that Dynegy undertook after the company was nearly drawn into its own reorganization case in the the bankruptcy wake of its acquisition target Enron Corp. in late 2001. Last year, Dynegy sold its Illinois Power utility to St. Louis-based Ameren Corp. for $500 million in cash and $1.8 billion in assumed debt and preferred stock.
Posted by Tom at 5:04 AM | Comments (0) | TrackBack (0)
United Airlines continues to flounder in chapter 11
In a move that almost certainly means that its bankruptcy case filed in December, 2002 will extend well into 2006, United Airlines parent UAL Corp. announced Tuesday that it was delaying the filing its plan of reorganization with the U.S. Bankruptcy Court in Chicago after various interest groups in the case opposed the plan because of its overly aggressive timetable. It is symptomatic of the disheveled financial condition of the airline indurstry that a debtor-company's creditors -- as opposed to its management -- are afraid to push the company out of bankruptcy too quickly. Here are previous posts that comment on the United Airlines saga.
Interestingly, United's labor unions -- one of interest groups that bears a substantial amount of responsibility for United's bankruptcy in the first place -- is largely responsible for the delay in United filing is plan and might just tip the reorganization process in such a way to strap United when it emerges from bankruptcy. Over the past few months, a number of private-equity firms and hedge funds have expressed interest in participating in the airline's refinancing. However, the unions -- which are among United's largest unsecured creditors -- prefer not to give up the equity in a reorganized United necessary to attract such private capital. Rather, the unions support a plan that would leverage the reorganized company with debt that would be used to pay a portion of unsecured creditors' claims. Not surprisingly, United must overcome more than a little skepticism among institutional lenders that it is a prudent investment to risk loaning money to a highly-leveraged carrier coming out of bankruptcy and attempting to compete in the fiercely competitive airline industry.
Posted by Tom at 4:31 AM | Comments (0) | TrackBack (0)
August 2, 2005
CIBC puts Enron class action settlement amount over the WorldCom record
Canadian Imperial Bank of Commerce announced today that it has agreed to pay $2.4 billion to settle the class action securities litigation against the bank arising out of the demise of Enron Corp. in late 2001. The CIBC settlement is the largest settlement to date in connection with the Enron securities class action (previous settlements are here, here, here, here and here), and pushes the aggregate amount of such settlements a billion over the $6 billion benchmark established earlier this year in connection with the settlements in the WorldCom class action litigation. Here is the Chronicle article on the settlement.
William Lerach -- the lead plaintiffs' lawyer in the Enron class action -- publicly stated in connection with the CIBC settlement that his goal is to have each settling financial institution pay more than previous settlements. That piece of information could not have brought warm and fuzzy feelings to the remaining financial institution defendants in the Enron securities fraud class action, which include Credit Suisse First Boston, Merrill Lynch & Co., Barclays PLC, Toronto Dominion Bank, Royal Bank of Canada, Royal Bank of Scotland, and Deutsche Bank AG.
CIBC previously paid a paltry $80 million to settle SEC civil charges in a December 2003 settlement in which the SEC alleged that CIBC had aided and abetted fraud by entering into about 35 structured finance transactions with Enron between June 1998 and October 2001. Although the SEC alleged that the transactions allowed Enron to boost earnings and mask debt on its financial statements, that settlement was widely viewed in the legal community as a nuisance settlement. CIBC did not admit any wrongdoing in connection with that settlement.
The Enron securities fraud class action generally 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. Mr. Lerach has publicly stated that the plaintiffs are seeking more than $40 billion in damages in the case, but the pace and size of settlements to date indicates that the total amount recovered will be far south of that amount. Still, each additional settlement from here on out will increase the new record for the highest amount recovered in a U.S. securities fraud class action against financial institutions.
Posted by Tom at 4:58 PM | Comments (0) | TrackBack (0)
The Merrill Lynch defendants appeal in the Nigerian Barge case - criminalization of business run amok
The Enron-related Nigerian Barge case has been a frequent topic on this blog as a prime example of the Justice Department's dubious criminalization of common business practices in the post-Enron era. As a result of that questionable policy, four former Merrill Lynch executives -- Daniel Bayly, William Fuhs, James A. Brown, and Robert Furst -- are unjustly facing prison sentences of between 2.5 and almost four years.
Although the former Merrill executives are appealing their convictions, both the U.S. District Court and the Fifth Circuit Court of Appeals have rejected their motions to remain free on bond pending disposition of their appeals. Inasmuch as those motions had substantial merit (see previous posts here and here), and the Nigerian Barge trial was only the second Enron-related case (the Arthur Andersen case was the first) to be tried in the anti-business environment of Houston in the post-Enron era, the denial of those motions without so much as an explanation is highly troubling.
Nevertheless, the Fifth Circuit did at least put the former Merrill executives' appeal of their convictions on an accelerated track for a ruling on the merits. Consequently, the Merrill executives filed their initial briefs in the appeal late last week, and you can download each of the briefs here. To say that they make interesting reading is an understatement.
Inasmuch as the mainstream media has rendered Enron to social pariah status and condemned most anyone who did business with the former seventh-largest company in the United States, the conventional wisdom has blithely concluded that the Merrill Lynch executives must have been guilty of some crime in connection with the Nigerian Barge deal. However, the briefs of the Merrill Lynch executives in the Nigerian Barge appeal reveal a stunningly different picture. Rather than even a questionable transaction, the briefs compellingly portray a typical structured finance transaction that the Enron Task Force decided to criminalize through a brazen web of distortion, inadmissible hearsay, suppression of key testimony, opposition to a defense jury instruction on the key issue in the case, and prosecutorial misconduct. After reading the briefs, one is left with the unmistakable impression that the Justice Department's prosecution of the Merrill Lynch defendants had nothing to do with truth or justice, and everything to do with demonizing four decent men for their misfortune of having been involved in a rather ordinary structured finance transaction with Enron.
The Nigerian Barge case arose out of a now familiar deal in which Enron sold to Merrill Lynch a financial interest in power-generating barges moored off the coast of Nigeria. The sale took place in late in December 1999 so that Enron could book in 1999 the relatively small amount of $12 million of income generated by the sale. According to the government's theory of prosecution, Enron should not have recognized income because the sale of the barge interest was not a "true" sale because Enron -- through it's former CFO Andrew Fastow -- had orally guaranteed to the Merrill executives that, if Enron could not find a third party to "take Merrill Lynch out" of its investment, Enron would itself buy back Merrill Lynch's interest in the barges within six months. Due to this alleged guaranteed Enron "buyback," the prosecutors contended that Enron did not truly part with any interest in the barges and, thus, should not have recognized any income on the sale. Inasmuch as the former Merrill Lynch executives enabled Enron to book the income on the sale, the prosecution's theory is that the former Merrill Lynch executives were guilty of conspiracy and wire fraud.
In response to these draconian allegations, the Merrill Lynch executives had a simple reply -- they freely acknowledged that Merrill Lynch had not wanted to be a long-term holder of an interest in the barges, and admitted that Enron had therefore assured Merrill Lynch that it would be "taken out" of its investment. But the Merrill Lynch executives insisted that Enron had simply assured them that the "takeout" was to be through a sale to a third party and not through any guaranteed Enron buyback. Even the government acknowledged during the trial that Enron was entitled to recognize a sale -- and no crime was committed -- if Enron had simply assurred Merrill Lynch that it would arrange a third party to purchase Merrill Lynch's interest in the barges.
Thus, the entire case turned on the nature of the oral representations that Mr. Fastow made during a late December 1999 conference telephone call that had about a half dozen other participants from Enron and Merrill, including Messrs. Bayly and Furst. In a transparent effort to hide the weakness of its case, the government chose obfuscation over clarity in presenting its evidence on that key call. Incredibly -- and despite the fact that Mr. Fastow is a cooperating witness for the government -- the Enron Task Force prosecuted its entire case against the Merrill defendants without calling a witness who had any first-hand knowledge of what Mr. Fastow said during that key telephone conference. Rather, the prosecution relied on hearsay testimony and hearsay within hearsay regarding the call, and on witness accounts who testified as to their "understanding" of what Mr. Fastow had said, but who could not remember where that understanding had come from. In so doing, the government intentionally confused the critical distinction between a lawful promise to find a third-party purchaser, on one hand, and an unlawful promise of a buyback, on the other. As Mr. Bayly's brief notes on page 30 regarding the testimony of key prosecution witness Michael Kopper:
So which was it, according to Kopper, an Enron buyback or a third-party purchaser? Not even Kopper could keep the two accounts straight, at one point offering both versions in the same breath. Enron, he stated, had to "follow through" on its "promises" -- the promise to repay, to get them repaid[.]" But those are two very different "promises." A "promise to repay" suggests an Enron buyback. But a promise to "get them repaid" suggests a third-party purchase. It should give this Court pause, we respectfully submit, that a theory of prosecution might hang on a nuance in second-hand information so delicate that the witness himself cannot keep the "promises" straight.
To make matters worse, while presenting this "shoddy merchandise," as Mr. Furst's appellate counsel calls it, the prosecutors suppressed Mr. Fastow's pre-trial statements to the government in which he admitted that he indeed had not promised an Enron buyback, but had instead told the Merrill executives that they could have a high level of confidence that Enron could arrange a third party to buy the barges from Merrill. When the Merrill defendants attempted to introduce Mr. Fastow's inconsistent and exculpatory statements under Fed. R. Evid. 806 during the trial, the prosecution again vigorously opposed introduction of that evidence, and the trial court sustained the government's objection. Finally, when the Merrill defendants requested a theory-of-the-defense jury instruction stating that a promise to find a third-party purchaser would not be illegal, the government also opposed the proposed instruction on this crucial issue in the case, and the trial court again sustained that dubious objection.
Thus, despite the almost 400 pages of briefs, the former Merrill Lynch executives' argument is simple. The convictions were based almost entirely on inadmissible hearsay, and even that hearsay evidence was hopelessly confused. Similarly, the District Court's decision to sustain the prosecution's objections to the exculpatory Fastow out-of-court statement and the theory-of-defense jury instruction on the key issue in the case denied the jury from considering important information that was favorable to the Merrill defendants. Finally, the Task Force distorted -- similar to the Task Force's distortion of the obstruction of justice statute in the Arthur Andersen case -- the honest services, money or property, and books and records charges in criminalizing an ordinary structured finance business transaction. In regard to that latter point, Mr. Bayly's brief refers to Judge Easterbrook's classic passage on criminalization of ordinary behavior from his opinion in United States v. Walters, 997 F.2d 1219 (7th Cir. 1993):
According to the United States, neither an actual nor a potential transfer of property from the victim to the defendant is essential. It is enough that the victim lose; what (if anything) the schemer hopes to gain plays no role in the definition of the offense. We asked the prosecutor at oral argument whether on this rationale practical jokes violate 1341. A mails B an invitation to a surprise party for their mutual friend C. B drives his car to the place named in the invitation. But there is no party; the address is a vacant lot; B is the butt of a joke. The invitation came by post; the cost of gasoline means that B is out of pocket. The prosecutor said that this indeed violates 1341, but that his office pledges to use prosecutorial discretion wisely. Many people will find this position unnerving * * * . * * * [T]he idea that practical jokes are federal felonies would make a joke of the Supreme Court's assurance that 1341 does not cover the waterfront of deceit.
As the Enron Task Force's growing legacy of misconduct continues, it has become abundantly clear that its purpose is something other than to uncover the truth regarding Enron. This was brought home again this past Friday afternoon in a seemingly innocuous exchange during a status conference in the Task Force's legacy case against former Enron chaiman Ken Lay, former Enron CEO Jeff Skilling and former chief accountant, Richard Causey. U.S. District Judge Sim Lake asked the lawyers on each side of the case whether they would prefer to sit during the upcoming trial at the table in the courtroom that is closer to the jury box. Mike Ramsey, Mr. Lay's counsel, piped up and stated that the defendants preferred the table closer to the jury box because -- due to the way in which the tables in the courtroom are situated -- the other table would not require witnesses to look at the defendants (and vice versa) while they were testifying. Although giving no reason for wanting to deny the defendants this basic part of their right to confront witnesses against them at trial, the Task Force prosecutors opposed the defense's request for the table closer to the jury. Judge Lake has not yet decided which side will get the table, but the Task Force's knee-jerk response reflects that their true purpose is something other than to assure that the defendants receive a fair trial.
Accordingly, after fumbling the Arthur Andersen appeal, the Fifth Circuit now has two high profile opportunities -- the Nigerian Barge appeal and the Jamie Olis appeal -- to redeem itself and send the Justice Department a clear message that the federal judiciary will not countenance distortion of criminal statutes and evidence even when the defendant is an unpopular business executive. For as Thomas More reminds us, if the courts do not stand up for justice and the rule of law in such cases, "do you really think you could stand upright in the winds [of abusive state power] that would blow then?" In the Nigerian Barge case and the Enron Broadband case, the Enron Task Force is showing us precisely what happens when such winds blow, and the emotional carnage being experienced by the individuals involved and their families is not something that can easily be overlooked as a trade-off of an imperfect system.
Posted by Tom at 10:22 AM | Comments (2) | TrackBack (4)
Kinder Morgan's big Canadian deal
Houston-based pipeline operator Kinder Morgan Inc. announced a big bet Monday on the development of the Western Canadian oilfields -- the purchase of Vancouver-based Terasen Inc. for $3.1 billion in stock and cash and the assumption of $2.5 billion in debt.
Terasen is the largest natural-gas operator in British Columbia and operates pipelines that connect Alberta, Canada with the Midwestern part of the U.S. and the Canadian West Coast. Kinder Morgan is paying a premium price for the company, almost 24 times Terasen's estimated 2005 earnings.
Kinder Morgan is a huge pipeline operator, with about 35,000 miles of natural-gas and oil pipelines across North America and another 150 or so storage terminals. But this is its first foray into the quirky oil-sand deposits of Alberta, Canada that hold second-largest deposit of oil in the world. Producing and refining this type of crude oil is more expensive than producing and refining most other types of crude, but recent high oil prices suggest that the long-term price necessary for profitable extraction of the oil-sand deposits has finally been achieved.
The transaction reflects that a major player in the pipeline industry is betting that the current high prices will last long enough to sustain development of the fields. Kinder Morgan expects that oil-sands production will increase from one million barrels of oil a day to two million during the next decade, which in turn will generate a need for the midstream and pipelien infrastructure that Kinder Morgan plans to build. Midstream is the gathering and processing of oil and gas that takes place between production from rigs in the field and the large interstate pipelines that carry oil and gas to consumers.
The "Kinder" of Kinder-Morgan is Richard Kinder, the former president and chief operating officer of Enron Corp., who left in 1996 to establish Kinder Morgan after being passed over as Kenneth Lay's replacement as Enron's chief executive officer.
Posted by Tom at 4:30 AM | Comments (0) | TrackBack (1)
August 1, 2005
Why you should be skeptical of stock analysts
Most readers of this blog already have a healthy skepticism of the opinions of stock analysts. But for those who don't, please read this NY Times article on several bullish analyst opinions on that black hole of financial loss, the airline industry.
It takes a fairly fertile imagination to reconcile the following excerpt from the Times article with these recent items (here and here) on the airline industry:
[D]eep losses at Delta Air Lines do not deter Jamie Baker, an airline analyst at J. P. Morgan. He maintained an overweight rating even after Delta's shares were pummeled last week on a fresh warning from its chief executive, Gerald Grinstein, that the airline's cost-cutting plan was not enough to offset the impact of brutal competition. Delta lost $388 million during the second quarter, and has lost nearly $10 billion this decade.Without building cash, and without the passage of pension reform legislation now in Congress, Delta was virtually assured of a bankruptcy filing, Mr. Baker conceded in a research note.
Nevertheless, he wrote, "Our call remains that Delta will manage to pull some liquidity strings, make one last and perhaps final run at avoiding Chapter 11, and successfully limp into 2006 while hoping for lower oil prices and improved revenue trends."
Despite such speculation, stick with Warren Buffet's analysis of the airline industry. After a particularly unfulfilling investment experience in airline stocks several years ago, Mr. Buffett undertook a study of the airline industry. Taking into consideration the airline industry's cumulative finances since the day the Wright Brothers took off at Kitty Hawk in 1903, Mr. Buffet concluded that the industry has been, on the whole, utterly unprofitable. In hindsight, Mr. Buffett wryly observed that shooting down the Wright Brothers on that beach would have been a reasonable financial, if not moral, move.
Key tip on airline stocks -- wait for Professor Ribstein's proposed solution to occur before taking a flyer on any airline stock other than Southwest.
Posted by Tom at 5:04 AM | Comments (0) | TrackBack (0)