Houston's Clear Thinkers

? October 2005 | Main | December 2005 ?

November 30, 2005

At least Wagner is consistently classless

This earlier post from yesterday noted the dubious decision of the New York Mets to pay former Stros closer Billy Wagner $43 million over the next three seasons with an option for a fourth season that could push the total compensation to over $50 million.

One thing that I forgot to mention in that earlier post was the classless way in which Wagner publicly criticized Stros owner Drayton McLane before and after McLane traded him to the Phillies. McLane has his faults, but Wagner's outburst blasting McLane was way over-the-top considering that McLane is by far the best owner that the Stros have ever had.

So, with that backdrop, I was not particularly surprised when I saw this Philadelphia Inquirer article regarding Wagner's comments on the way out of Philly:

On his first day as New York Mets closer, Billy Wagner came out throwing heat at his old team.

He trashed the Phillies' commitment to winning, wondered about their plan for this season, and said he'd likely still be with the club if it had been willing to give him a three-year, $24 million contract in July.

"There's a difference between winning and being competitive," Wagner said. "In the end, I thought [the Phillies] were more interested in being competitive than winning."

Wagner was not surprised that the Phillies weren't more aggressive.

"Not considering I gave them three for 24 [three years and $24 million] at the trade deadline and they laughed at me," he said.

Phillies assistant general manager Ruben Amaro took umbrage with that comment.

"That's untrue," he said by telephone from Philadelphia. "No one laughed. The reason we were taken aback was that his original asking price was two years and $16 million. When we offered that, the asking price changed to three years at $24 million."

The Phillies were unwilling to offer three years in July because Wagner turned 34 that month and the team had concerns about the long-term health of his left shoulder. Wagner had spent time on the disabled list with a strained shoulder in 2004.

Like his predecessor, Ed Wade, new general manager Pat Gillick made keeping Wagner a top priority. Gillick improved the Phillies' offer to three years and was willing to add a fourth-year option, but it wasn't enough.

"If Pat had gotten there earlier, I think he could have gotten something done," Wagner said. "He didn't have much time."

Gillick and Wagner had one face-to-face meeting and the pitcher, at the time, said he was impressed with the new GM's plan.

Yesterday, Wagner made an about-face.

"For me, the question I had all along was I wanted to know their plan for getting relief and starting pitching and they really didn't have answers because Pat just got there," Wagner said.

"While the Phillies were getting rid of one guy, the Mets were buying up talent, and that's hard to overlook."

The "talent" Wagner referred to is slugger Carlos Delgado, whom the Mets picked up the same day the Phillies traded Jim Thome to the White Sox last week.

[Wagner's] legacy in Philadelphia may end up being the left-field wall at Citizens Bank Park. He frequently complained about it being too close. This week, construction crews will begin moving the wall back.

Wagner, at times, also complained about how close fans were allowed to get to the bullpens in Philadelphia, and how they would deride relievers during the game.

My bet is that, in a year or so, the Phillies will look at this deal as a good one that they elected not to make, just as the Stros have realized with regard to the Beltran deal.

Posted by Tom at 8:07 AM | Comments (2) | TrackBack (0)

Strained relations?

Does anyone else get the impression that negotiations regarding Rice University head football coach Ken Hatfield's future with the program don't seem to be going all that well?

First, this ESPN.com article reports on the rather defiant press conference that Coach Hatfield called yesterday in which he denied that he is going to resign and talked about the upcoming 2006 season.

This morning, the Chronicle is reporting that Coach Hatfield and Rice are finalizing arrangements for the coach's resignation.

In comparison, Texas A&M's head coach Dennis Franchione handled the shakeup of his staff via an email press release.

You know things are changing in the world of college football when Texas A&M handles the firing of a football coach better than Rice.

Posted by Tom at 7:01 AM | Comments (0) | TrackBack (0)

Icahn bears down on Time-Warner

Carl Icahn has provided this blog with some interesting fodder for posts over the past couple of years, and it looks as if the hedge fund investor is primed to do it again with his announcement yesterday that he intends to field a slate of directors to seek a majority on Time-Warner's 14-member board while hiring Bruce Wasserstein and Lazard Ltd. to help him win the proxy fight.

Icahn and a group of supportive investors have accumulated nearly 3% of the $85 billion media company in recent months amidst a publicity campaign that has highlighted the mistakes of current Time Warner management, including selling Warner Music Group and a big stake in the Comedy Central cable channel at what Icahn called "fire sale prices" and failing to remove the directors who approved Time Warner's disastrous merger with America Online in 2001. Ironically, Wasserstein lobbied to be named an adviser to the old Time Warner after the company hatched its ill-fated $140 billion deal with America Online Inc. in 2000.

The relationship between Icahn -- who usually acts on his own -- and Wasserstein and Lazard reflects the changing dynamics of such big deals, where hedge fund activists such as Icahn are taking increasingly aggressvie positions in public companies and investment banks are being attracted to serve the hedge fund's interests as opposed to the traditional role of advising the target company. Keep an eye on this battle as Icahn's activism will force Time Warner's management to provide a clear vision for the company's future, which is never a bad thing for investors.

Posted by Tom at 6:32 AM | Comments (0) | TrackBack (0)

Calpine on the brink?

This Reuters/NY Times article reports that Peter Cartwright, the 75-year-old founder and chief executive of Calpine Corp., and Robert Kelly, the company's CFO, resigned under pressure from the Calpine board amidst widespread speculation that the company is going to commence a corporate reorganization under chapter 11 a week after an adverse Delaware court ruling restricted the company's ability to use cash from some of its asset sales. Calpine stock -- which traded as high as $56 a share in 2001 -- was down 71 cents to 54 cents a share as of the close of New York Stock Exchange composite trading yesterday.

Mr. Cartwright's departure is widely viewed as the end of his goal to create a massive national power wholesaler in deregulated markets that could sell electricity without being limited to serving a specific territory or utility. Cartwright began the strategy in the mid-1990s and racked up $17 billion in debt as the company built a huge fleet of gas-fired plants in an effort to become the biggest power generator to wholesale power markets that had been deregulated and utilities that were leaving plant development to others. However, the company's strategy has been under pressure over the past several years from increasing natural-gas prices (which ratchet up the fuel cost of the company's power plants) and lackluster profit margins on the sale of wholesale electricity. That set the stage for the company's sale of assets and the shut-down of money-losing power plants, which in turn led to last week's adverse court decision. That decision concluded that Calpine had improperly spent $313 million on fuel for its power plants that came from $852 million in proceeds from the sale of assets that were collateral for corporate notes.

Interestingly, a few years back, with Calpine's stock trading around $40 a share, Cartwright refused to have the company sell shares to raise capital because he did not want the dilution that would result from the stock issues. So instead, he took on the $17 billion in debt. Now, natural gas prices have tripled, Calpine has lost almost $700 million so far this year, the company can't pay interest on its debt, bankruptcy looms, Cartwright is gone and the stock is at 20 cents.

What was that about not wanting dilution?

Posted by Tom at 5:43 AM | Comments (2) | TrackBack (1)

Thinking about energy prices

This earlier post noted that even the Washington Post editors now understand the folly of Congress considering a windfall profits tax against oil companies as a result of the price spikes that resulted from temporary supply disruptions. The last time that Congress imposed such a tax (late in the Carter Administration), domestic oil production actually decreased by about 5%, which resulted in higher gas prices, and U.S. reliance on foreign oil inceased by about 10%.

Reflecting that markets tend to take care of supply problems if Congress just stays out of the way, this Wall Street Journal ($)/Russell Gold article (free version here) notes that the recent surge in natural gas prices has prompted major exploration companies to make huge investments in recovery of natural gas from unconventional fields located in the contintental United States. The unconventional gas fields contain natural gas that is locked in giant swaths of coal, sandstone or shale from which extraction is expensive and difficult. However, the increase in natural gas prices, coupled with new technologies that crack open these rocks and extract large quantities of gas, is touching off an exploration boom in such fields throughout the Rocky Mountains and in Texas.

Meanwhile, not to be outdone by the fruits of such boring capitalism, the world's favorite socialist of the moment -- Venezuela's Hugo Chavez -- has hooked up with the Kennedy Family and other northeastern U.S. anti-capitalists to supply some oil to U.S. consumers in the northeast at 40% below current market prices. This Opinion Journal piece scours the political motives of Chavez's "charity," but there is an even simpler problem with this dubious arrangement -- it does not make any sense for Chavez to sell oil at a 40% discount to people in the U.S. who are far richer than his constituents in Venezuela. Not exactly what I would call looking out for the interests of the little guy.

Posted by Tom at 5:00 AM | Comments (0) | TrackBack (0)

Toyota has a hybrid deal for you

The Wall Street Journal's Holman Jenkins has this clever column ($) today in the form of a fictional letter from Toyota to owners of its popular hybrid vehicle, the Prius. The main point of Jenkins' column is that hybrid technology is not really "green" technology at all. Rather, it's really just an expensive option that generates large markups for Toyota and its dealers. In so doing, Jenkins notes the following about the notion that a hybrid's supposed fuel efficiency makes up for its higher cost:

Let us assure you that the Prius remains one of the most fuel-efficient cars on the road. Toyota applauds your willingness to spend $9,500 over the price of any comparable vehicle for the privilege of saving, at current gasoline prices, approximately $580 a year.

And should the price of gasoline rise to $5, after 10 years and/or 130,000 miles of driving, you might even come close to breaking even on your investment in hybrid technology.

Posted by Tom at 4:36 AM | Comments (14) | TrackBack (1)

November 29, 2005

A great Houstonian

Samuel Ward Casscells, III is a 53 year old M.D. and professor of biotechnology at the University of Texas Health Science Center at Houston in Houston's amazing Texas Medical Center. He is also an Army medical corps reservist, and recently was awarded both the General Maxwell Thurman Award and the Army Meritorious Service Medal for his service during Operation Iraqi Freedom. In this Houston Chronicle op-ed, Dr. Casscells writes about the reason that he joined the military and the surprising experience that followed:

I had joined the Army Reserve for what seemed good reasons at the time: to help a hard-working medical corps, to live up to the examples of some of my heroes (Drs. Denton Cooley, James "Red" Duke, Michael DeBakey, and my father, surgical giants who wore Army green), and to set an example for my children.

It proved to be more than that: gripping, inspiring and filled with surprises. As only one in 200 Americans is in uniform today, most do not know any soldiers; hence this report.

One month after being commissioned, I received a phone call from Army Surgeon General Kevin Kiley: "Col. Casscells, welcome aboard. I want to be ready in case of a flu pandemic. You have some experience. We may even have some fun. Stand by for orders."

In a few months, I felt like a member of a big family. I would not say a team because there was so little rah-rah, and — to my surprise — no bragging, no macho, no arguing and very little politics. Even in the sand, with all the surgeons from Operation Iraqi Freedom, the focus was the mission: how to prevent and treat injuries and illness.

All suggestions were welcome. All are addressed by rank, but the general speaks as respectfully to the sergeant as to a colonel. And there is lots of laughing and gentle teasing (a perennial: the Air Force, always ready, will go anywhere — as long as there is a dry golf course, and cocktails).

[snip]

Equally wondrous to me: There was not a shred of racial awareness, much less tension. I finally had to ask. The answer is that, since President Truman integrated the Army Officer Corps in 1948, there have been several generations of advancement based on merit (which means hard work, smart work, but especially teamwork). Thus there are thousands of black officers who command with quiet confidence.

Read the entire piece. Hat tip to Clear Thinkers reader Byron Hood for the link to Dr. Casscells' inspiring op-ed.

Posted by Tom at 7:40 AM | Comments (0) | TrackBack (0)

Comparing bad off-season deals

Inasmuch as Roger Clemens still has not let the Stros know whether he is going to play next season, the Stros have been twiddling their thumbs so far this off-season considering silly notions such as re-signing Brad Ausmus rather than going out and competing for a couple of free agent hitters that the club really needs.

However, it helps me to remain optimistic about the Stros' management when I read that former Stros closer Billy Wagner has just taken the Mets to the cleaners for $43 million over the next three years with an option for a fourth season that could push the total compensation over $50 million. Now, don't get me wrong. Wagner is a very good closer and a lefty to boot. However, $50 million over four years for a 34 year old pitcher who had season-ending arm problems as recently as the season before last? Although Wagner's runs saved against average ("RSAA," explained here) was a very good 26 last season, he has had RCAA's of 10, 13 and 15 in three of the past five seasons. That's decent production, but not $12.50 - $14.3 million per year-type of production. The Stros will likely sign the more effective Brad Lidge for an annual salary probably around a third of what the Mets are paying Wagner.

With Jeff Bagwell's deal, the Stros are closing the book on their final long-term, overpriced contract. Inasmuch as those contracts limit the flexibility of a mid-market club such as the Stros to make the type of "tweaking" acquisitions necessary to remain competitive, I am glad that Stros management is not overbidding for high-priced stars (remember Carlos Beltran?). Nevertheless, the Stros need to be careful at overpaying -- albeit at a far lesser rate -- unproductive players such as Ausmus. Throw a couple of million at Ausmus, plus another million or so at an equally unproductive player such as Vizcaino, and -- after awhile -- you're talking about some real money.

Posted by Tom at 6:28 AM | Comments (1) | TrackBack (0)

Checking in on Krispy Kreme

I haven't checked in on beleaguered doughnut franchisor Krispy Kreme Doughnuts, Inc. in awhile, so I noticed the company's regulatory filing a week or so ago in which the North Carolina-based company announced that it is "highly unlikely" that it would be able to deliver its financial statements to lenders by a December 15 deadline. Although a publicly-owned company, Krispy Kreme has not filed a financial statement since September 2004 and is facing a January, 2006 deadline for having its stock delisted by the New York Stock Exchange. As the company continues the process of restating earnings by over $20 million for its first four fiscal years, the company's stock -- which traded at around $50 per share in 2003 -- is trading closer to $5.50 per share now.

So, can this trendy maker of delicious doughnuts stay out of tank? Probably not, but this Business Week Online article surveys the company's landscape and sets forth CEO Stephen F. Cooper's turnaround strategy, which is essentially to operate smaller stores and expand into foreign markets while selling more high-margin coffee. I've got my doubts about whether that's a winning strategy, at least without a formal reorganization under chapter 11, but who knows? Mr. Cooper agreed to a success fee based on 1.7 million warrants that are convertible into shares at $7.75, so he is clearly betting on the company's success. And the company still makes a good doughnut. However, as one commentator in the article notes, "the lines are no longer out the door."

Posted by Tom at 5:31 AM | Comments (0) | TrackBack (0)

November 28, 2005

The gift of a good book

If you are looking for a holiday gift idea, check out The New York Times Book Review's 100 Notable Books of the Year 2005, along with its lists for 2004 and 2003. For a time, you can review the Times' notable book lists from 1997 through 2002 here.

Posted by Tom at 5:58 AM | Comments (1) | TrackBack (0)

Aspirin as Vioxx?

In one of my earlier posts about the Merck/Vioxx case, I observed somewhat facetiously that the risks associated with aspirin would probably deter any pharmaceutical company today from making the investment necessary to bring the drug to market. In this Medical Progress Today piece, pharmaceutical expert Derek Lowe confirms that my speculation is almost certainly correct:

[I]f you were somehow able to change history so that aspirin had never been discovered until this year, I can guarantee you that it would have died in the lab. No modern drug development organization would touch it.

Thanks in part to advertisements for competing drugs, people know that there are some stomach problems associated with aspirin. Actually, its use more or less doubles the risk of a severe gastrointestinal event, which in most cases means bleeding seriously enough to require hospitalization. Lower doses such as those prescribed for cardiovascular patients and various formulation improvements (coatings and the like) only seem to improve these numbers by a small amount. Such incidents, along with others brought on by other oral anti-inflammatory drugs, are the most common severe drug side effects seen in medical practice.

It doesn't take too long to see these effects in a research program. Aspirin causes gastric lesions in rats and dogs, which are the standard small and large animal models for drug toxicity. This side effect occurs at levels which would raise red flags for any new compound. What would a present-day research organization do about it? If we stipulate that they could determine that aspirin worked by inhibiting cyclooxegenase enzymes, they would surely try to break the vascular effects of the drug apart from its anti-inflammatory effects. They would try to find new compounds that selectively inhibited only one of the enzyme subtypes. They would, in other words, produce Vioxx, and Celebrex, and the other COX-2 inhibitors, and this is just why these drugs were developed.

Read the entire piece. By the way, the third Vioxx trial against Merck cranks up this week in Houston federal court. And Ted Frank wonders why Mark Lanier has still not moved for entry of a judgment on the $253 million jury verdict in the Ernst case?

Posted by Tom at 5:22 AM | Comments (0) | TrackBack (0)

A lot about Alito

The ever-alert Tom Mighell passes along this handy AskSam database of over 350 of Supreme Court nominee Samuel Alito's published opinions, which can be viewed either online or after a download. Between this database and this previously-noted University of Michigan Law Library site, there is not much that you cannot find out about Judge Alito, whose confirmation hearing is scheduled to take place in January, 2006.

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

November 27, 2005

2005 Weekly local football review

Texas Longhorns 40 Texas A&M Aggies 29

The 5-6 Ags came up with an unexpectedly spirited performance for me behind redshirt freshman QB Stephen McGee (pictured) and true freshman RB Jovorskie Lane before the 11-0 Horns put the clamps on late to stay on course for their long-awaited BCS National Championship showdown with Southern Cal.

McGee and Lane were incredible, literally throwing the dispirited Aggie team on their shoulders and having the Ags in position to tie the score with just over 8 minutes left in the game. But Texas promptly tacked on another field goal, the Horns' defense didn't allow A&M another first down for the remainder of the game, and UT heaved a huge sign of relief as they pulled out the victory. The Horns finish their regular season on Saturday in the Big 12 Championship game at Reliant Stadium against overmatched Colorado and then it's on to the Rose Bowl in early January against USC.

Much has been made about the Aggies' disappointing season, but my sense is that it's too early for the Ags to banish Coach Fran from Aggieland. Coach Fran and his staff have been responsible for the past two recruiting classes (2004 and 2005), partially responsible for the 2003 class (with former coach R.C. Slocum's staff) and not responsible at all for the 2002 class. The Aggies basic problem is that they do not have enough good players in the junior and senior classes because, by my count, at least 17 of the 47 recruits in the 2003 and 2002 classes are no longer in the program. Losing a third of those older and more mature players left this particular Aggie team with little quality depth, and a bad spate of injuries -- particularly at the wide receiver and defensive back positions -- undermined that poor depth further. With a much more favorable schedule next season, along with another solid recruiting class and maturation of the previous two recruiting classes, Texas A&M's program should turnaround solidly next season and trend upward over the next several seasons. What is unclear, however, is whether Coach Fran has what it takes to compete against Mack Brown of Texas and Bob Stoops of Oklahoma at the top echelon of the rugged Big 12 South Division. That issue will ultimately be the pressure point for Franchione's success or failure at Texas A&M.

Houston 35 Rice 18

The 6-5 Cougars quixotic march to a bowl berth continued on Saturday as they allowed Rice to take a 10 point lead (nearly a 17 point lead) to start the game, and then reeled off 28 straight points as the 1-10 Owls coughed up the ball on four of their next six possessions after scoring on their first two series of the game. Although they do not draw well at home, the Coogs are actually an attractive prospect in the strange world of college post-season bowl games -- although frustrating, the team does play an exciting brand of ball and the team has always generated solid television ratings generally, and in the Houston area in particular, for past bowl games.

On the other hand, the Rice football program is at a crossroads. Coach Hatfield is a wonderful fellow, but he is running a throwback offensive system without the quality of athletes necessary to win with it and overseeing an Owls defense that has contributed greatly to the program's 18 losses in the past 22 games. As Richard Justice points out in this column, there are no easy answers for a program that has minimal support on campus and generates revenue for the athletic program primarily by playing the sacrificial lamb in early season games for programs such as Texas, UCLA and Florida State. Rice's football program is being propped up by a relatively small group of alumni who remember the glory years of Rice competing in the Southwest Conference and who realize that maintaining the Owls' elite baseball program would be difficult -- if not impossible -- if the Owls downgrade the football program to Division I-AA or lower. Rice needs to establish a new paradigm for its football program quickly or the program risks death by its own considerable weight.

Rams 33 Texans 27

The 1-10 Texans lost this one in a manner that even grizzled veterans of bad Houston professional football teams could not imagine. After going up by 21 points at halftime, the Texans scored only 3 points the rest of the game against a Rams secondary that was without its starting safety and both of its starting cornerbacks. Then, as if realizing that they were screwing up their place in the Reggie Bush sweepstakes, the Texans allowed the Rams' third-string rookie quarterback from that football factory Harvard to lead the Rams to 10 points in the final 27 seconds of the game to force overtime. Then, in a remarkable coup de grâce, the hapless Texans defense allowed the Rams to score from 56 yards out on a hitch pass to seal the loss in overtime.

How on earth does a 1-10 team get so overconfident during a game that they lose it?

The Texans go on the road to play bad teams at Baltimore and Tennessee over the next two Sundays, but those teams would really have to mail it in to lose to the Texans. 1-15 is looking like a distinct possibility.

Broncos 24 Cowboys 21

The 7-4 Pokes saved the turkey on Thanksgiving Day for overtime as their typically stout defense allowed journeyman Bronco RB Ron Dayne to take off for 50 yards to set up the winning field goal in overtime. The Cowboys most recent placekicker missed what would have been the game winning field goal in regulation, which means that the Big Tuna will probably go out this week and retain the Cowboys tenth placekicker of the season. Amazingly, however, with the Redskins and Eagles fading like cheap suits, the Pokes can take command of the NFC East this Sunday by beating the Giants in New York. The Pokes' four losses this season have been by a total of 13 points.

Posted by Tom at 4:05 PM | Comments (10) | TrackBack (0)

November 26, 2005

Joseph Nocera on the Grasso lawsuit

You have to hand it to New York Times business columnist Joseph Nocera -- he has certainly come up with a reason that most folks would not have thought of for why New York Aspiring Governor Eliot Spitzer should drop his propaganda campaign, . . . er, I mean, excessive compensation lawsuit against former New York Stock Exchange chairman Richard Grasso and the former chairman of the NYSE board's compensation committee, Kenneth Langone.

In this NY Times Select ($) column written in the form of a memo to Spitzer, Nocera starts off by snarking Clear Thinkers favorite Larry Ribstein for "gloating" over Spitzer's decision earlier in the week to drop fraud and larceny charges against Paul Flynn, the former Canadian Imperial Bank of Commerce executive who Spitzer had accused of aiding hedge funds in improper mutual-fund trading. Then, without ever mentioning the substance of Professor Ribstein's well-grounded criticism of Spitzer's dubious regulatory tactics, Nocera proceeds to urge the Lord of Regulation to drop the Grasso lawsuit not because it lacks merit, but because the lawsuit will probably not lead to the type of salutory business reforms that earlier Spitzer lawsuits have prompted -- "the Grasso suit doesn't meet the lofty standard you've set for yourself."

Are you kidding me? The phrase "lofty standard" being associated with Eliot Spitzer?

Does Nocera mean that lofty standard of indulging public envy and resentment of wealthy businesspeople by defaming Maurice "Hank" Greenberg (here and here)?

Or does he mean the lofty standard of criminalizing those who would take the risk of creating a market for home ownership for those who most need it?

Or is Nocera referring to that lofty standard of Spitzer creating employment opportunities for his chums?

Or maybe he means the lofty standard of Spitzer not coordinating his investigations with other agencies?

Or perhaps Nocera is contemplating the lofty standard of Spitzer interfering with the regulatory role of other governmental agencies (here and here and here)?

Or maybe he is simply referring to the lofty standard of Spitzer's not insubstantial contribution to the drive of U.S. governmental officials to criminalize everything?

Nocera is right that Spitzer should drop the Grasso lawsuit, but for the wrong reason. Spitzer should drop it because it's a cheap publicity stunt, which is hardly a "lofty standard."

Update: Professor Bainbridge does an even better job than the examples above in fisking Spitzer's "lofty principles."

Posted by Tom at 8:43 AM | Comments (3) | TrackBack (2)

November 25, 2005

Spitzer backs off criminal charges against Hank Greenberg

On my way out the door to College Station, I note that the Lord of Regulation simply cannot stay out of the news.

After publicly flogging former American International Group, Inc. CEO Maurice "Hank" Greenberg for months (note earlier posts here and here), New York Attorney General Eliot Spitzer has decided not to pursue criminal charges against Mr. Greenberg in his probe of the giant insurer's structured finance transactions, according to this Wall Street Journal ($) article. The WSJ reports that Spitzer has decided to focus on the civil-fraud allegations that he has already filed against Greenberg and AIG and leave any possible criminal fraud charges against Greenberg to federal prosecutors, who currently have ongoing criminal investigations over AIG in New York and D.C. Here is a Reuters article on the WSJ piece, and here are previous posts chronicling Spitzer's investigation into AIG and Greenberg.

The Aspiring Governor Spitzer certainly has been charitable to his subjects involved in his criminal investigations recently. Over the past several weeks, he has announced his decision not to re-try William Sihpol and dropped criminal charges against another executive in connection with his investigation into mutual-fund trading. Spitzer's decision not to prosecute Greenberg comes after public comments that led most folks to the conclusion that Spitzer had already decided to pursue criminal charges. Oh well, Spitzer should be complimented for finally making the right decision not to criminalize Greenberg's business calls -- if only Arthur Andersen had been so lucky.

In the meantime, AIG shares -- which lost about a third of their value during Spitzer's reign of terror against the company and Greenberg earlier this year -- have rebounded over the past several months. The shares currently trade at about 90% of their value as of the time that Spitzer took aim at AIG and Greenberg despite the company's lagging financial performance since Greenberg's departure as CEO. That raises the interesting question of just who does Spitzer think he is protecting in continuing to pursue his civil litigation against AIG and Greenberg?

Posted by Tom at 5:21 AM | Comments (0) | TrackBack (2)

November 24, 2005

Happy Thanksgiving!

Light blogging will be the norm over the next several days as I enjoy the holiday with my family and, on Friday, travel to College Station for the annual rivalry game between the Longhorns and the Aggies.

The 10-0 Horns are an uncharacteristic 27.5 favorite in that annual grudge match and are 9-1 against the spread during this magical season that appears to be heading to a Rose Bowl matchup with USC for the BCS National Championship. The 5-5 Aggies are only 3-7 against the spread this season, which reflects that this particular Aggie team has not met the expectations of the betting public, much less its rabid faithful. So, this one could definitely be a blowout, but the sociological implications of Texas v. Texas A&M are always entertaining to experience regardless of the score.

As you enjoy the holiday with friends and family, take a moment to read this heartwarming story by Clear Thinkers favorite Mickey Herskowitz, who has been the best Houston sportswriter over the past generation. Mickey is one of the wonderful people that makes Houston such a special place.

Have a joyous and restful holiday, and thanks for reading Houston's Clear Thinkers.

Posted by Tom at 7:01 AM | Comments (1) | TrackBack (0)

November 23, 2005

Dan Jenkins on Vince Young

As regular readers of my blog know, Dan Jenkins of Ft. Worth is my favorite sportswriter, bar none (previous posts on Jenkins are here, here, here, here and here). In this interesting David Barron article that explores where the 2005 edition of the Texas Longhorn team fits among the great teams of the past in the Horns' legendary football program, Jenkins makes the following hilarious observation about the 2005 Texas team and its star quarterback, Vince Young:

"Even if this team wins it all, the whole deal, in my mind it won't be the best Longhorn team of all time. That's because this team is led by an alien, not a human, and its biggest threat is a busted play where the alien goes back to pass, can't find a receiver, then runs over everybody for a touchdown."

"If Vince Young carried the ball on every play, Texas would win games 85-0. But that's not a team, it's a group of undistinguished guys led by a monster from outer space. Nobody outside of Austin can name another player on the 2005 team, other than, maybe, Jammal Charles. Nobody."

My vote for the best Horns team was the 1968 team, which lost and tied a game before Coach Darrell Royal said "what the hell" and switched to the Wishbone offense. After that key move, the '68 Longhorns dominated the remainder of their opponents in a manner unequaled by any of the Horns' national championship teams.

Posted by Tom at 8:23 AM | Comments (5) | TrackBack (0)

Spitzer spins his payola investigation

Apparently disturbed with the adverse publicity earlier this week emanating from the decision not to pursue this case, New York's Aspiring Governor fought back yesterday by announcing that he is continuing to protect all of us from that sordid business practice of payola -- i.e., radio stations owners accepting money from promoters to pay certain types of noise -- er, I mean, music -- over the airwaves. this NY Times article reports that Mr. Spitzer has reached a $5 million settlement with Warner Music Group Corp. for offering trips, gifts and agreements to cover operating costs in exchange for increased airplay for certain songs. Here is an earlier post on Mr. Spitzer's payola investigation.

By the way, the Wall Street Journal ($) article on the settlement included the following quote from Mr. Spitzer: "I never like to presume what an investigation will show or conclude." Oh, really?

Although certainly an effective vehicle for his gubernatorial campaign, Spitzer's payola investigation is simply another example of his misguided approach to regulating business (Larry Ribstein has been at the forefront of making this point). As with his many other forays, Spitzer has used the leverage of a criminal investigation to force the type of business regulations that he deems appropriate. But Spitzer's regulations are not developed under any legislative process and are not even reviewable under the normal administrative process for business regulations. In short, Spitzer's approach is regulation through force rather than the rule of law, without regard to whether the regulations that he is imposing are more costly to the public than the supposed wrongs that the regulations are supposed to correct.

Posted by Tom at 5:41 AM | Comments (2) | TrackBack (2)

The Times mudslings at the Texas Genco deal

You can't slip a deal past the New York Times in which too much money is being made.

In this article that is clearly intended to decry capitalists taking advantage of deregulated markets, the Times compares the sellers in the pending Texas Genco deal (more accurately described in earlier posts here and here) with the societal pariah Enron and then mischaracterizes the true risk that the sellers took on the deal.

I was going to criticize the Times' one-sided analysis of the Texas Genco deal, but then it occurred to me that such puerile analysis is utterly consistent with a news outfit that -- in the face of the public's increasing access to free online news sources -- responds to its sagging subscription sales by charging for its web content. For a more astute analysis of the transaction, note Dale Oesterle's observations on the deal over at the Business Law Prof Blog.

Posted by Tom at 4:50 AM | Comments (2) | TrackBack (0)

How does the Enron Task Force really feel about Arthur Andersen?

This earlier post noted the 180 that the Enron Task Force has recently taken in regard to defunct accounting firm Arthur Andersen. After demonizing the firm, gutting it with a misguided prosecution, and alleging that a number of the firm's former partners were co-conspirators in several Enron-related prosecutions, the Task Force is now embracing several former Andersen partners as prosecution witnesses in its upcoming legacy trial against former key Enron executives Ken Lay, Jeff Skilling, and Richard Causey. In short, after putting Andersen out of business as an accomplice of the evil Enron, the Task Force is now contending that Enron duped Andersen just like everyone else.

On the heels of that development, David Duncan, the former Andersen partner-in-charge of the Enron account at the time of the company's demise, earlier this week requested -- without opposition from the Enron Task Force -- that U.S. District Judge Melinda Harmon allow him to withdraw his previous guilty plea under this cooperation agreement for allegedly obstructing the federal investigation of Enron. Duncan had testified -- albeit ineffectively -- during the Andersen trial in 2002 as a Task Force witness against Andersen, and has been awaiting sentencing ever since.

Meanwhile, the Task Force also requested dismissal of its criminal case against Andersen after publicly stating that it was prepared to retry the case just a couple of weeks ago. As a result, the Task Force will not be providing an "Andersen annuity" for Andersen defense attorney Rusty Hardin after all.

The Task Force's decision to drop the misguided Andersen prosecution is at least somewhat consistent with the Supreme Court decision overturning the Andersen conviction and the Task Force's recent change of heart toward Andersen. However, the Task Force's decision not to oppose Duncan's motion to withdraw his acceptance of his plea deal with the Task Force is another clear sign of desperation in the Task Force as it prepares to go to trial in less than two months in its legacy case against Messrs. Lay, Skilling and Causey. My bet is that the Task Force is playing nice with Duncan to send him a signal that if he elects not to testify in the Lay-Skilling-Causey trial, then the Task Force will quietly back off the criminal case against him after conclusion of that trial. Such an approach with Duncan would be consistent with Task Force's tactic of trying to avoid having all relevant testimony and evidence considered during the Lay-Skilling-Causey trial.

Stepping back for a moment from the details of trial tactics, however, the Task Force's recent change of heart toward Arthur Andersen simply highlights the dubious nature of the Task Force's decision to prosecute Andersen out of business in the first place, depriving over a dozen communities of thousands of jobs in the process. Is there any adult supervision whatsoever within the Bush Administration's Justice Department? Ellen Podgor has more cogent thoughts here.

Update: The best mainstream media article that I have read on this development in the Enron-related criminal cases is this Carrie Johnson/Washington Post article, which includes the following quote from Clear Thinkers favorite, Larry Ribstein:

"There was an initial outbreak of moral condemnation after Enron and the bubble burst," said Larry E. Ribstein, a corporate law professor at the University of Illinois at Urbana-Champaign. "That was a time for people to take a deep breath. Instead, a lot of these things were rushed into prosecution, and now we're seeing the fallout."

Update II: Peter Henning agrees with me regarding the Task Force's purpose in not opposing Duncan's request to withdraw his plea bargain.

Posted by Tom at 4:00 AM | Comments (7) | TrackBack (0)

November 22, 2005

Phil Gramm, comedian

This CNN article reports that former Texas senator and presidential candidate (for about 15 minutes) Phil Gramm cut the crowd up yesterday while testifying as a witness in the public corruption trial of former Illinois Governor, George Ryan.

While running for President in 1996, the Gramm campaign paid a rather large "fee" to a Chicago-based "consultant" who turned around and funneled the money to Ryan's daughters and two aides while Mr. Ryan was serving as Illinois Secretary of State. Prosecutors allege that the consulting fee was Mr. Ryan's requirement for endorsing Mr. Gramm in the Illinois Presidential Primary that year. Asked by prosecutors whether he would have approved of the payments to the Ryan daughters and aides if he had known about them, Mr. Gramm replied that he would not have approved of them, explaining:

"It's sort of like the difference between love and prostitution," the folksy former Texas senator testified, drawing gasps and laughter from spectators at a hearing with the jury out of the room. "You don't pay people to like you."

By the way, a Gramm aide also testifed that, when questioning a Ryan aide about the unusually large size of the proposed "consulting fee," the Ryan aide told him:

"That's the way we do things in Chicago."

Hat tip to the ever-alert Ellen Podgor for the link to the CNN article.

Posted by Tom at 7:42 AM | Comments (2) | TrackBack (0)

Case against former Duke Energy traders goes to the jury

This Bloomberg News article reports that the criminal case against former Duke Energy traders Timothy Kramer and Todd Reid went to the jury yesterday in Houston federal court. Messrs. Kramer and Reid are charged with racketeering, conspiracy, wire and mail fraud, money laundering and falsifying corporate books in connection with an alleged scheme to book phony electricity and natural-gas trades to boost trading volumes and inflate profits in a trading book that was the basis of their annual bonuses (you can download a copy of the indictment here). A third former Duke Energy trader defendant -- Brian Lavielle -- previously copped a plea and testified against Messrs. Kramer and Reid during the trial.

This case is particularly interesting because it involves senior-level executives being accused of devising schemes to generate profits in a trading book by using "mark-to-market" accounting in calculating bonuses, on one hand, and entering losses in an "accrual book" that had no bearing on bonuses, on the other. Duke Energy and most other energy traders -- including Enron -- used mark-to-market accounting to record profit and loss for energy contracts that might not settle for years into the future. However, the mark-to-market accounting method has come under intense scrutiny since the demise of Enron Corp. in late 2001 because of the latitude that the method allegedly allows in recording profitable results in trading operations. From the report on the closing arguments in the case, it's unclear whether the defense made a big issue over the legality of mark-to-market accounting, but the result in this case is nevertheless being watched closely by defense lawyers who are defending white collar prosecutions that involve mark-to-market accounting issues.

Posted by Tom at 6:33 AM | Comments (2) | TrackBack (0)

Sony BMG's bad idea

Sony BMG's decision to implement a copyright-protection plan without telling anybody is shaping up to be one of the costliest decisions that the company has ever made.

Earlier this month, a computer-security researcher publicly revealed that some of Sony BMG's CDs secretly install a program known as a "rootkit," which is difficult to detect or remove from a computer and which can act as a back door for a malicious programmer to take remote control of a computer. Just to make matters worse, researchers shortly thereafter identified at least two viruses that were designed to take advantage of holes created by the code for the rootkit. Scrambling to respond to the developing disaster, Sony BMG last week announced that it was recalling and replacing the 4.7 million discs containing the program and that it stopped using the controversial software.

Yesterday, Texas Attorney General Greg Abbott hammered the reeling music company with a civil complaint over the software that the company included on 52 of its recently released recordings. The lawsuit filed in Travis County (Austin) District Court alleges that Sony BMG's XCP software violates Texas' recently enacted antispyware law, the Consumer Protection Against Computer Spyware Act. Mr. Abbott called Sony BMG's software -- the purpose of which is to make it harder to copy compact discs -- "a direct violation, almost word for word," of the antispyware law, which provides for penalties of $100,000 per violation, or each computer on which a Sony BMG CD installed its software. The Chronicle article on the lawsuit is here, and Chronicle technology expert Dwight Silverman comments on Sony BMB's bungle and the resulting Texas lawsuit here.

Finally, just to put a punctuation mark on Sony BMG's very bad day, a third lawsuit seeking class-action status of claims relating to the copy-protection software was filed yesterday in Los Angeles.

Again, who made that decision to include that software on those CD's? ;^)

Posted by Tom at 6:00 AM | Comments (1) | TrackBack (0)

Attempting to pin down Atta in Prague

Edward Jay Epstein (previous post here) is the author of a new book on Hollywood, The Big Picture (Random House, 2005), and is in the process of writing a book on the 9/11 Commission. In this fascinating Opinion Journal piece, Mr. Epstein explains the maddening difficulties of tracking down the truth of whether 9/11 hijacker Mohamed Atta met with an Iraqi intelligence agent in Prague during April, 2001. Particularly interesting is the following excerpt, which describes Czech intelligence agent Jiri Ruzek's troubling experience in dealing with the American intelligence community:

On Sept. 11, Mohamed Atta's picture was shown on Czech television, and the next day the BIS's [the Czech intelligence agency] source in the Iraqi Embassy dropped a bombshell. He told his BIS case officer that he recognized Atta as the Arab who got in the car with [Iraqi intelligence agent] al-Ani on April 9. Mr. Ruzek immediately relayed the secret information to Washington through the CIA liaison. The FBI sent an interrogation team to Prague, which, after questioning and testing the source, concluded that there was a 70% likelihood that he was not intentionally lying and sincerely believed that he saw Atta with al-Ani. The issue remained whether he had mistaken someone who resembled Atta for the 9/11 hijacker. Meanwhile, records were found showing that Atta had applied for a Czech visa in Germany in 2000, and made at least one previous trip to Prague (from Bonn, by bus, on June 2, 2000, flying to Newark, N.J., the next day).

Less than a week after Mr. Ruzek shared the BIS's confidential information with American intelligence, it was leaked. The Associated Press reported, "A U.S. official, speaking on condition of anonymity, said the United States has received information from a foreign intelligence service that Mohamed Atta, a hijacker aboard one of the planes that slammed into the World Trade Center, met earlier this year in Europe with an Iraqi intelligence agent." CBS named al-Ani as the person meeting with Atta in Prague.

Mr. Ruzek was furious. He considered what he had passed on to the FBI to be unevaluated raw intelligence, and its disclosure not only risked compromising the BIS's penetration in the Iraqi Embassy but also greatly reduced the chances of confirming the intelligence in the first place.

Read the entire piece.

Posted by Tom at 5:22 AM | Comments (0) | TrackBack (0)

Spitzer drops another misguided prosecution

Following the decision to drop his dubious prosecution (or was that persecution) of Theodore Siphol in regard to alleged improper trading of mutual funds (here, here, here and here), New York Attorney General Eliot Spitzer dropped similar fraud and larceny charges against Paul Flynn, a former executive at Canadian Imperial Bank of Commerce who had been accused of aiding hedge funds in improper mutual-fund trading.

Interestingly, spokespersons in Mr. Spitzer's office defended the decision to drop the charges against Mr. Flynn on the grounds that his indictment on criminal charges was merely a small part of the better good -- i.e., the Lord of Regulation's campaign to overhaul the mutual fund industry and extract over $3 billion in fines, restitution and fee cuts from those evil capitalist roaders. Besides, nine of the 11 people facing criminal charges from Spitzer's office related to the improper trading had pleaded guilty, so that's a pretty good batting average. Don't need to get greedy in chocking up another one against Mr. Flynn.

H'mm. Sounds to me as if Mr. Spitzer is using the criminal justice system to extort settlements from companies and individual defendants through headline-grabbing threats of business destruction and prison time. Plus, the publicity from these public crusades is cheap advertising for the "Spitzer for Governor" campaign.

Isn't such conduct more deserving of a criminal investigation than many of the matters that Spitzer pursues?

By the way, this Peter Elkind puff piece in the current edition of Fortune magazine at least provides some interesting personal background on Mr. Spitzer. Mr. Elkind is a co-author of Smartest Guys in the Room about the Enron scandal. Hat tip to Adam Shpeen for the link to the Spitzer article.

Posted by Tom at 4:38 AM | Comments (0) | TrackBack (0)

November 21, 2005

A Big Ad

My two teenage boys recommended the link for this Carlton Draught (an Australian beer) commercial, I think because they want an easy link to it for their friends. Maybe the friends will read a few other posts while they here, so what the heck. Besides, the commercial is pretty darn impressive. Hat tip to Adrianne Truett for the link.

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

USA Today scoops the majors in analyzing the Enron Task Force's legacy case

Is it just me or does anyone else find it odd that this USA Today article is doing a better job of covering the prosecutorial abuse that is taking place in the Enron-related criminal cases than supposedly more thorough national newspapers such as The New York Times and The Wall Street Journal?

Following up on this post from over the weekend, the USA Today article notes the utterly absurd and abusive tactic of the Task Force in fingering about 100 unindicted co-conspirators in its legacy case against former key Enron executives Ken Lay, Jeff Skilling and Richard Causey. The transparent purpose of the tactic is twofold:

First, to suppress exculpatory testimony in favor of the defendants from the unindicted co-conspirators, all or whom have declined to testify under their Fifth Amendment privilege out of fear of being indicted; and

Second, to have the testimony of the Task Force's own witnesses about the alleged hearsay statements of the unindicted co-conspirators introduced into evidence as an exception to the hearsay rule. Not surprisingly, most of the Task Force's witnesses are "cooperating witnesses" -- i.e., former Enron executives who attempting to reduce their prison time by testifying against the defendants pursuant to plea bargains with the Task Force.

Of this tactic, the USA Today article notes the comments of Stanley Twardy, a former U.S. attorney who is now a defense lawyer in Connecticut, that "'extremely rare' for a case to have as many unindicted co-conspirators as [the Lay-Skilling-Causey] case does. It's unusual to have them at all outside of drug and Mafia cases."

As noted in this other post from over the weekend, the Task Force's tactic has already resulted in a grave injustice in the Nigerian Barge case, where four Merrill Lynch executives are now serving prison terms because large amounts of exculpatory testimony for the defendants never came into evidence at trial. To avoid the same injustice from occurring in the Lay-Skilling-Causey trial, Judge Sim Lake should give the Task Force a deadline in which to indict any of the unindicted co-conspirators against whom the Task Force has a viable case, and then grant immunity from prosecution for all of the remaining unindicted co-conspirators. Only with such key testimony will the jury be able to sort out the truth of the Task Force's allegations that the defendants engaged in criminal wrongdoing at Enron. Without such testimony, the jury will be deliberating on nothing more than the Task Force's fictional screenplay of the defendants' role in Enron's demise.

Posted by Tom at 6:00 AM | Comments (10) | TrackBack (0)

Repairing the MARS platform

This earlier post noted the extensive damage that Hurricane Katrina caused to the MARS floating production platform in the Gulf of Mexico, which generates about 220,000 barrels of oil and 220 million cubic feet of natural gas daily when operational. Following up on that story, this Tom Fowler/Chronicle article reports on the delicate repair operation that will be taking place this week on the MARS platform. Essentially, the process involves removing a damaged rig from the platform, but the damaged rig is so ensnared with other equipment on the platform that removing it could cause even more damage to the equipment on the platform. Another story on the repair operation from the Baton Rouge Advocate is here. It's this type of cost of doing business in the oil and gas industry that tends to get overlooked amidst the bright lights that shine on this grandstanding.

Posted by Tom at 5:19 AM | Comments (0) | TrackBack (0)

Disassembling the case against DeLay

This earlier post noted the weak nature of the indictment against former House Speaker Tom DeLay, although the Republican outrage over the indictment rings somewhat hollow. But following up on the thought about the dubious basis of the indictment, former chairman of the Federal Election Commission, Bradley A. Smith, does the best job that I have seen to date of disassembling the case against DeLay in this Wall Street Journal ($) op-ed:

To summarize, the theory against Mr. DeLay goes something like this: Corporations made legal contributions to TRMPAC; and then TRMPAC made a legal contribution of this soft money to the RNSEC, which, as required by federal law, kept the funds in a separate account. The RNSEC then used an account containing individual contributions (hard money) to make otherwise legal contributions to 42 candidates for state or local office in Texas, including seven who may have been specifically recommended to them by Mr. DeLay and others. Somehow this series of legal transactions constitutes money laundering.

Two questions result. First, is it "laundering" when the law specifically allows corporate contributions to be used for administrative costs, and a party or PAC uses individual contributions thereby freed up to make increased candidate contributions? Second, even if so, in light of the unprosecuted and public ubiquity of the practice, on both state and federal levels, is it consistent with basic due process to now charge Mr. DeLay and his associates with a crime for which the possible penalties include life imprisonment?

Read the entire piece, which does an excellent job of explaining how politicians from both major parties routinely took advantage of loopholes in state and federal campaign finance law to engage in precisely the same conduct for which DeLay now stands indicted. This is the flipside of the same coin that reflects the increasing criminalization of merely questionable business transactions in the post-Enron era, a trend that has already resulted in grave injustices and daunting prosecutorial misconduct. If litigation over such issues is justified at all, these matters are best left for civil cases, where responsibility for any wrongdoing can be sorted out among multiple parties, the prejudicial effect of such litigation on future beneficial risk-taking can be minimized, and citizens going about their jobs are not in fear that, but by the grace of God, the government is not turning its overwhelming prosecutorial power in their direction.

Posted by Tom at 4:23 AM | Comments (0) | TrackBack (0)

2005 Weekly local football review

Chiefs 45 Texans 17

After beating the spread in the past three games, the 1-9 Texans took a dive in front of a national television audience in the ESPN Sunday night game as their nightmare season continued. This one was over in the second quarter as the Chiefs sliced and diced the Texans defense to take a 24-7 lead before Texans QB David Carr iced it for the Chiefs by throwing an interception TD in the waning moments of the first half to give the Chiefs an insurmountable 31-7 lead. Although the Texans' defense was non-existent, Carr was particularly bad, as was star WR Andre Johnson, who looked like a petulant jerk for most the game. The Rams come in next week for their confidence-building session against the Texans, and then its off to Baltimore and Tennessee for back-to-back road games. My oh my, this is a really bad football team, every bit as awful as the horrifying Oilers teams of the Bill Peterson era. The Texans sure could use Sid Gillman and Mike Holovak.

Cowboys 20 Lions 7

The 7-3 Pokes continued their impressive mid-season run with a workmanlike victory over the Lions at Texas Stadium. I still have my doubts whether the Cowboys' mediocre offense can score enough points to win against the NFL elite teams, but there is no question that the Cowboys' defense is developing into a devastatingly fast and hard-hitting unit. By the way, the Lions were penalized an incredible 17 times for 130 yards in the game. Got that resume updated, Coach Mariucci?

SMU 29 Houston Cougars 24

The 5-5 Cougars maddening season continued as they blew a 14-10 halftime lead to the 4-6 Mustangs despite dominating the statistical battle. Inasmuch as the loss probably dealt a fatal blow to the Cougars' bowl hopes, the Cougars are ripe for an upset in their closing game against cross-town rival Rice in their final game on Saturday afternoon.

Central Florida 31 Rice 28

The 1-9 Owls almost pulled off the upset, but lost two fourth quarter leads in falling to one of C-USA's top teams. However, the performance should give the Owls confidence going into their season-ending game on Saturday against Houston, which looks like a prime candidate for an upset.

The Texas Longhorns and Texas Aggies were off this weekend in preparation for their annual rivalry game on Friday in College Station. The betting line in this one is currently Texas minus 26.5, which is the largest line in this game that I can recall. Even at that elevated level, I don't know of many Aggies placing money on their team.

Posted by Tom at 3:20 AM | Comments (6) | TrackBack (0)

November 20, 2005

Why I oppose the death penalty

I oppose the death penalty, but not on philosophical grounds. Rather, I do not believe that the state can implement the death penalty without making mistakes such as the one described in this haunting Sunday Houston Chronicle/Lise Olsen article. Until a system is developed that reduces as much as humanly possible the risk of mistakes such as this one from happening, I remain opposed to the death penalty.

By the way, we are not close to having such a system in place in Texas.

Posted by Tom at 9:23 AM | Comments (5) | TrackBack (2)

NY Times on the sad case of Dan Bayly

Landon Thomas, Jr. of the New York Times has written this major Sunday Times article about the sad case of Daniel Bayly, the former head of Merrill Lynch's global investment banking division who is presently serving a two and a half year prison sentence as a result of his conviction on corporate fraud charges in connection with the controversial Enron-related Nigerian Barge case. Although this blog's search engine will generate a large number of posts that refer to that case, an extensive analysis of the Nigerian Barge case can be found in a series of posts here, here and here.

Mr. Thomas' article is an excellent portrayal of the extraordinary personal damage that is resulting from the Justice Department's dubious criminalization of business in the post-Enron era. Mr. Thomas points out how that the implementation of that policy has moved beyond catching big fish such as Ivan Boesky or Bernard Ebbers and is now ensnaring relatively unknown business executives such as Mr. Bayly, who really had limited involvement in the underlying transaction involved in the Nigerian Barge case. Moreover, Mr. Thomas delves extensively into the troubling conduct of Merrill Lynch's management, which offered up Mr. Bayly and his three Merrill colleagues to the Justice Department as sacrifical lambs in an effort to avoid an indictment of the firm that might have prompted an Arthur Andersen-type meltdown. The disturbing nature of such corporate sacrificial lamb offerings has been a frequent topic on this blog.

Mr. Thomas' article is a refreshing change from the more common demonization of business executives that usually takes place in the mainstream media. However, beyond the scope of Mr. Thomas' piece is the distressing conduct of the Enron Task Force prosecutors in the Nigerian Barge case and the other Enron-related criminal cases. Regardless of what one thinks about the issue of whether the Nigerian Barge case should have been made into a criminal case in the first place, no reasonable analysis of the case can justify the Task Force's suppression of the truth during the trial of case.

In short, the Task Force took a reasonably complex finance transaction between Enron and Merrill Lynch and criminalized it through a brazen web of distortion, suppression of key testimony, inadmissible hearsay, opposition to the defense's jury instruction on the key issue in the case and prosecutorial misconduct. Rather than charging Mr. Bayly and his colleagues and then allowing the jury to sort through all relevant testimony and evidence in determining the truth, the Task Force presented to the jury a fictional screenplay of the underlying transaction and then effectively prevented Mr. Bayly and the other defendants from presenting the mountains of testimony and evidence that contradicted the Task Force's fictional account. To make matters worse, the Task Force is deploying precisely the same deplorable tactics in its legacy case against former key Enron executives Ken Lay, Jeff Skilling and Richard Causey.

Thus, despite the enormous personal tragedies that each of the families of the four Merrill Lynch executives involved in Nigerian Barge case are enduring, the even greater tragedy of this case is the damage done to our system of justice and the Rule of Law. For as Sir Thomas More reminds us, if we do not require the state to adhere to justice and the Rule of Law in even cases against the unpopular business executives of the moment, then "do you really think you could stand upright in the winds [of abusive state power] that would blow then?" The Enron Task Force's suppression of the truth in the Nigerian case is showing us precisely what happens when such ill winds blow, and the resulting emotional trauma that the Merrill Lynch executives and their families are experiencing cannot reasonably be dismissed as merely a trade-off of an imperfect system.

Posted by Tom at 6:12 AM | Comments (1) | TrackBack (2)

November 19, 2005

Is the Lord of Regulation also the Lord of Compensation?

Following on the theme from this earlier post, this Kimberly Strassel/Wall Street Journal ($) op-ed examines the deposition testimony that is emanating from New York Attorney General Eliot Spitzer's lawsuit to recover alleged overcompensation paid by the New York Stock Exchange to former NYSE CEO Richard Grasso in connection with Mr. Grasso's $140 million pay and retirement package. Ms. Strassel reports that the deposition testimony from the NYSE directors is contradicting Spitzer's theory of the case, which is that the directors were given incomplete information regarding Grasso's pay package and that they shirked their duty to evaluate the compensation arrangement fully. Noting Ms. Strassel's piece, Larry Ribstein points out the transparent nature of the legal issue and the political purpose of the Grasso lawsuit, and provides the following "money" observation:

Spitzer is attempting to collect the rent on this litigation for his gubernatorial campaign. . . .

An imponderable here is where Spitzer gets off second-guessing a compensation decision. Shouldn’t this be subject to the business judgment rule which, after all, gave the Disney board considerable coverage in the Ovitz affair? Well, the NYSE is a non-profit, and so gets Spitzer’s solicitous stewardship under an arguably stricter rule. But one wonders why the business judgment rule wouldn't apply here, since non-profits have to operate under the same conditions in hiring executives that the for-profits do, and courts aren't any better able to review compensation in a non-profit.

Posted by Tom at 12:04 PM | Comments (0) | TrackBack (0)

Fifth Circuit schedules return to New Orleans

The Fifth Circuit Court of Appeals, which relocated temporarily to Houston in the aftermath of Hurricane Katrina (earlier posts here and here), issued this press release yesterday in which it made public its plans for returning to New Orleans next month. The court will begin moving back Dec. 16 and will be closed until Jan. 8, during which time only emergency matters will be handled. The court originally had planned to move to Baton Rouge as an intermediate step before returning to its longtime home in New Orleans' John Minor Wisdom Court of Appeals Building. However, conditions in New Orleans are stable enough to allow the 135 employees of the Court to return home. The Court has been using makeshift work spaces in the Bob Casey U.S. Courthouse in downtown Houston over the past couple of months.

Posted by Tom at 9:43 AM | Comments (0) | TrackBack (0)

Lay-Skilling-Causey witness intimidation allegations scheduled for hearing

This Mary Flood/Chronicle article reports that U.S. District Judge Sim Lake has scheduled a hearing in the Enron Task Force's legacy case against former key Enron executives Ken Lay, Jeff Skilling and Richard Causey over the defendants' allegations that the Task Force has engaged in wide-ranging witness intimidation in an effort to suppress exculpatory testimony in favor of the defendants, whose criminal trial is scheduled to commence in less than two months.

Ms. Flood reports that Judge Lake has ordered two Houston criminal defense attorneys and four of their clients to testify in the hearing. The two attorneys are Bob Sussman and Wendell Odom, and one of the client that will be called is Larry Lawyer, a former mid-level Enron executive who previously pled guilty under a cooperation agreement to a tax-related charge arising from a payment that he received in connection with one of former Enron CFO Andy Fastow's infamous deals in which Fastow and several of his Enron associates enriched themselves.

The witness intimidation issue has been festering throughout both of the prior Enron-related criminal trials. It first arose in connection with the trial of the Nigerian Barge case in which the Task Force effectively suppressed exculpatory testimony for the defendants in that case by fingering as unindicted co-conspirators dozens of former Enron and Merrill Lynch executives who were involved in the transaction that was the basis of the prosecution. Every one of the unindicted co-conspirators declined to testify in the Nigerian Barge trial on the basis of their Fifth Amendment privilege against self-incrimination. Consequently, four Merrill Lynch executives are serving prison sentences without having had the opportunity to present substantial amounts of exculpatory testimony and related evidence to the jury.

Then, as noted in this earlier post, the witness intimidation issue boiled over in public during the trial of the Enron Broadband case when former Enron Broadband engineer Lawrence Ciscon dramatically testified that Enron Task Force prosecutors had repeatedly threatened him and had fingered him as a target of an indictment in attempting to dissuade him from testifying on behalf of the five Enron Broadband defendants. That dramatic testimony came on the heels of the Task Force eliciting false testimony from former Enron Broadband co-CEO Ken Rice during that trial, which was then followed by the Task Force threatening another witness in connection with her testimony regarding Rice's false testimony. As noted in this post, The Enron Broadband jury ultimately acquitted the defendants on some of the charges and could not reach a decision on the balance of the charges, resulting in re-trials of the defendants next year.

The Task Force then deployed the same tactic earlier in the Lay-Skilling-Causey case by taking the extraordinary step of naming 114 unindicted co-conspirators, which they have subsequently "reduced" to a number just under 100. That tactic -- coupled with the Task Force's control over the communications of any Enron-related defendant who has entered into a plea bargain with the Task Force -- has effectively prevented defense counsel for Lay, Skilling and Causey to develop exculpatory testimony on behalf the three men. The Task Force's control of plea bargainers' communications and its fingering of the unprecedented number of unindicted co-conspirators prompted prominent law professor Michael Tigarto comment in connection with the Lay-Skilling-Causey motion to dismiss that "this level of silence is not normal" from witnesses and that "I have never seen defendants in a major public trial, especially a white-collar trial, so completely ostracized by witnesses with pertinent information."

Finally, Ms. Flood also passes along that the Lay-Skilling-Causey defense team has informed the Fifth Circuit Court of Appeals that it should not jump to conclusions despite the pervasive presumption of guilt against all things related to Enron. In a letter to the Court, attorneys for Lay, Skilling and Causey asked the Fifth Circuit to delete a reference to Enron in its recent opinion reversing the long sentence in the sad case of Jamie Olis:

"It is the defendants' position, and they believe the evidence will show at their soon-to-begin criminal trial, that the books were not cooked at Enron, that its stock was not inflated through fraudulent means, and that the company's collapse was not caused by the alleged fraud."

Stay tuned, for this is shaping up to be a very interesting trial.

Posted by Tom at 7:15 AM | Comments (0) | TrackBack (0)

November 18, 2005

The judge said what?

New York Bankruptcy Judge Prudence Carter Beatty -- who is overseeing the Delta Airlines chapter 11 case -- is apparently somewhat of a live-wire on the bench. The airline pilots union has already asked her to recuse herself over remarks she made from the bench regarding the pilots' compensation, and this Wall Street Journal ($) article reports on several barbs that the judge has tossed from the bench during hearings in the Delta chapter 11 case, including the following:

Yesterday, when Delta's labor attorney asked the company's chief financial officer, on the witness stand, what Delta did when it found itself falling behind in meeting financial targets, the judge interjected, "They did what everyone else did: engage in creative accounting." Amid laughter, the judge continued, "It's what Enron did, what WorldCom did." The executive replied, "That's absolutely not the case."

Posted by Tom at 4:53 AM | Comments (2) | TrackBack (1)

Take this auditing job and shove it

So, how would you like being an auditor?

First, Arthur Andersen was prosecuted out of business by the Justice Department in an ill-advised prosecution.

Next, KPMG almost melted down in the face of a criminal investigation into its promotion of tax shelters, and still might not be out of the woods, yet.

Meanwhile, the other largest US accounting firms -- PriceWaterhouseCoopers, Deloitte Touche, Ernst & Young and Grant Thornton -- all have had problems of their own.

In such an intensely adverse environment, one can only speculate on how many of these firms have been propped up with the infusion of revenue that has been generated over the past couple of years from the gravy train of the Sarbones-Oxley legislation.

But even the benefits of Sarbones-Oxley are not without another swift kick in the rear. The Public Company Accounting Oversight Board -- created under Sarbones-Oxley "to oversee the auditors of public companies in order to protect the interests of investors" -- has been issuing inspection reports this year in which it has been evaluating the Big Four and other auditing firms' audits of several undisclosed publicly-traded companies.

In the PCAOB's most recent reports, PricewaterhouseCoopers and Ernst & Young were criticized for their audits of several public companies, and those findings come on the heels of similar reports earlier in the year in which the PCAOB levied similar criticism toward several public company audits of KPMG and Deloitte & Touche. The PCAOB used identical language as it used in the earlier reports in concluding that, in some cases, the audits it inspected at PricewaterhouseCoopers and Ernst were marked by deficiencies "of such significance that it appeared to the inspection team that the firm had not, at the time it issued its audit report, obtained sufficient competent evidential matter to support its opinion on the issuer's financial statements."

And just for good measure, the PCOAB also issued its inspection report on BDO Seidman LLP, one of the larger US accounting firms outside of the Big Four. The conclusion? The same as for the other firms.

Swallowing hard, PricewaterhouseCoopers responded publicly by stating that the firm took the PCAOB's findings "seriously" and "will incorporate these findings into our ongoing audit quality-improvement efforts." Similarly, Ernst announced that the PCAOB's inspections "assist us in identifying areas where we can continue to improve our performance." In chorus, BDO also announced that it takes the findings seriously and that "we are committed to improving our performance wherever possible."

In the meantime, plaintiffs' lawyers are busily taking note of the PCOAB's inspection reports and the firms' sheepish replies.

Does anyone else get the impression that a career in auditing is a tough sell these days?

Posted by Tom at 4:05 AM | Comments (2) | TrackBack (0)

The Lords of Regulation go after Lord Black

Fraud trials have come a long ways in Chicago since the days of Al Capone as federal prosecutors in the Windy City announced the indictment on Thursday of newspaper entrepreneur Conrad Black and three of his former associates in connection with an alleged fraud scheme that took place while Mr. Black controlled the giant newspaper company, Hollinger International Inc. Charged along with Mr. Black were Jack Boultbee and Peter Atkinson, who were both former vice presidents of Hollinger, Mark Kipnis, the company's former corporate counsel, and Ravelston Corp., a Canadian company that Mr. Black used to gain control of Hollinger. Mr. Kipnis was charged with fraud in August along with former Hollinger chief operating officer David Radler, who has already copped a plea under which he will serve 2.5 years in the pokey in return for cooperating with prosecutors. The Justice Department's unusually long press release on the indictment is here.

The indictment contends that the fruits of the fraud were a couple of Park Avenue apartments, a corporate jet, a trip to the South Pacific and over $50 million in allegedly unauthorized payments to executives. Mr. Black and the others are accused of diverting more than $32 million from Hollinger through a byzantine series of transactions that the indictment frankly does not describe well. The indictment also alleges that Mr. Black was involved in the fraudulent diversion of an additional $51.8 million in 2000 from Hollinger's sale of assets to CanWestGlobal Communications Corp.

Although the indictment is an unwieldly 60 pages, it is at least narrower than the internal Hollinger probe of last year, which concluded that Mr. Black and the others diverted more than $400 million from the company. After that report, the Securities and Exchange Commission filed civil fraud charges against Mr. Black and Mr. Radler regarding $85 million that they allegedly diverted from the company.

Mr. Black was ousted in a shareholder revolt a couple of years ago as chairman and CEO of Hollinger, which is a newspaper publishing company that at one time owned, among other interests, hundreds of North American community newspapers, London's Telegraph Group, the Jerusalem Post and the Chicago Sun-Times. After Mr. Black's ouster, a Hollinger board committee report concluded that Mr. Black and and others had taken $32 million in payments that the board had not authorized, which spawned numerous civil lawsuits and the SEC lawsuit. Inasmuch as discovery in certain of the cases has indicated that Hollinger's board actually approved a substantial amount of the payments that the plaintiffs contend were improperly diverted by Mr. Black, Mr. Black's defense in the criminal case is likely to be that most, if not all, of the payments were approved by the Hollinger board, and that receiving the benefits of generous (or sloppy, depending upon your point of view) corporate governance is not a criminal act.

Posted by Tom at 4:00 AM | Comments (0) | TrackBack (0)

November 17, 2005

SEC shoe drops on former Patterson-UTI CFO

Following on the revelations of late last week, the Securities and Exchange Commission commenced a civil action yesterday to freeze the assets of former Patterson-UTI Energy, Inc. chief financial officer, Jonathan Dwane "Jody" Nelson, who the SEC accuses of masterminding the embezzlement of $70 million from the Snyder, Texas-based contract drilling company (a copy of the complaint is here. In addition to the freeze order, the SEC obtained the appointment of a temporary receiver over Mr. Nelson's assets. The SEC's press release on the lawsuit provides more information regarding the alleged scheme than has been made public to date:

In its emergency lawsuit, the SEC alleged that Nelson, who resides in Dallas, Texas, orchestrated a massive phony-invoice scheme to embezzle more than $69 million from Patterson-UTI over five years. The SEC also named as relief defendants five Nelson-controlled companies alleged to have received proceeds from the scheme: XIT Land & Energy, Inc. ("XIT"), Chisum Travel Center, Ltd., Z8 Properties, Ltd., Three Stars Aviation, LLC, and Chisum Coach, Ltd.

The SEC's complaint alleges that Nelson created false invoices that caused Patterson-UTI to pay millions of dollars to XIT, a company he secretly controlled that was not a legitimate Patterson-UTI vendor. To accomplish his scheme, Nelson circumvented Patterson-UTI internal controls by, among other things, forging another company official's initials on payment documents. According to the complaint, Nelson finally confessed to Patterson-UTI on November 9 that he embezzled approximately $29 million, but company records show that he actually stole $69,434,342 from January 2001 through October 2005. To hide his scheme, Nelson, among other things, made false written representations to Patterson-UTI's independent auditor about the accuracy of the company's financial statements and signed false public certifications attesting to the truthfulness of the company's quarterly and annual SEC reports.

As the complaint alleges, Nelson transferred the embezzled funds from an XIT bank account to other entities he controlled, including Chisum Travel, Z8 Properties, Three Stars Aviation and Chisum Coach. The SEC contends that Nelson used these funds to purchase an airplane, an airfield, a cattle ranch, homes, vehicles and a full-service truck stop, among other things. The SEC named XIT and these other entities as relief defendants solely to secure equitable relief to prevent them from dissipating or hiding the fruits of Nelson's wrongdoing.

As Peter Henning notes, the SEC lawsuit is an almost certain precursor of a criminal indictment of Nelson, who may attempt to implicate others in the scheme as a bargaining chip over the length of his prison sentence. Stay tuned.

Posted by Tom at 6:42 AM | Comments (0) | TrackBack (0)

Cleveland businessman who bribed Brown Administration officials gets 15 years

The Chronicle's Dan Feldstein has been doing a good job over the past couple of years of keeping track of the federal corruption investigation that has been going on in Houston and Cleveland, Ohio. In this article from today's Chronicle, Mr. Feldstein reports that Nate Gray, the Cleveland businessman who was convicted earlier this year of bribing two former City of Houston officials from the administration of former Houston Mayor Lee Brown, was sentenced yesterday to 15 years in prison and ordered to pay $1.5 million to the Internal Revenue Service. Mr. Feldstein also notes that testimony of an FBI agent during the Gray trial indicates that the corruption probe involving former Brown Administration officials is continuing in Houston.

The two former Brown Administration officials who took the bribes from Gray -- chief of staff Oliver Spellman and building services director Monique McGilbra -- previously copped pleas in agreeing to testify against Gray and were sentenced to far lesser sentences earlier this year. The Justice Department news release on the Gray sentencing and the corruption probe is here, and the previous posts on this bribery scandal are here.

Posted by Tom at 5:35 AM | Comments (0) | TrackBack (0)

"Coach, did you see that guy's tattoo?'

Do you recall me telling you that some folks in Texas take high school football very seriously? In the "you can't make this stuff up" category, the following is from this article in today's Chronicle:

Bigger. Faster. Better beards.

Looking back now, it should have been obvious that something was amiss about the adult football team that Texas Christian School fielded three weeks ago in Austin.

Not to mention the tattoos.

"Some of the guys had tattoos and full beards and looked like they were like 25," Not Your Ordinary School senior running back David Johnson said of his opponents that Oct. 28 afternoon. "At the time, we thought they were just sort of big.

"Now we see why they looked so old."

It turns out Johnson and his team unwittingly played a six-man team made up of college-age players, coached by Texas Christian [High School]'s Herc Palmquist. The Texas Christian varsity team was told the game had been canceled and they had the night off.

Instead, Palmquist brought eight college-age players to play what he called a "pickup game," which NYOS won 28-18.

Now, Palmquist is serving a five-game suspension leveled by the Texas Association of Private and Parochial Schools, which governs Texas Christian athletics.

Read the entire article. If Coach Palmquist gets canned over this, perhaps he could scout for the Texans? On the other hand, given that Texas Christian lost the game even while using college-age players, maybe not.

Posted by Tom at 5:14 AM | Comments (5) | TrackBack (0)

Checking in on GM's Enronesque experience

Following up on posts here and here from last week, General Motors' seemingly relentless descent into a formal reorganization under chapter 11 continued yesterday as its share price fell to its lowest closing since December, 1991. Previous posts on GM's developing problems are here.

Probably the best indication of the risk of a GM bankruptcy is in the credit markets. Over the past week, the price of a GM bond maturing in 2033 has fallen about four points (i.e., about $40 per $1,000 face value) to yield 12.9%. On the other hand, the price of protection against a GM default in the market for credit derivatives is increasingly expensive. As of yesterday, the price of protection -- essentially insurance against a default -- on $10 million in GM bonds had risen to above $2 million up front plus $500,000 per year. That compares with a $1.6 million up front payment for such price protection just last week.

Interestingly, GM remains reasonably liquid, with around $19 billion in cash or other cash equivalents, and that liquidity is often touted by the company in media releases as proof that it is not contemplating a bankruptcy case. However, as folks who are familiar with reorganizations know, a company that needs to go through a chapter 11 case is far better advised to do so when it is flush with cash than to wait until its cash reserves have been depleted. A company in need of a reorganization never should wait until it can't afford to go bankrupt.

Posted by Tom at 4:18 AM | Comments (0) | TrackBack (0)

November 16, 2005

What half a million bucks buys you

The house on the left above is an example of what half a million bucks will buy you in the Village of Alden Bridge, a nice area of The Woodlands in suburban north Houston -- a 3,600 square foot decorator's home on a big, tree-filled lot, flagstone covered patio, 4 bedrooms, 4 bathrooms, gameroom, media, 2 staircases, dynamic kitchen, and a paneled study.

The house on the right is an example of what half a million bucks will buy you in Los Angeles -- a 1,200 square foot, two-bedroom Craftsman-style house with a "sizable" frontyard in a neighborhood that is "on its way up."

Read more about the crazy Southern California real estate market here. Hat tip to Craig Newmark for the link to the LA Times article.

Posted by Tom at 7:34 AM | Comments (4) | TrackBack (1)

Examining the train wreck that is the Texans

Recent posts here, here and here have noted the lack of research and insight in recent articles by Chronicle NFL beat writer John McClain and columnist Richard Justice on the subject of the woeful Houston Texans. Into that vacuum of analysis, Chronicle sportswriter John Lopez stepped up with this excellent column on the questionable personnel moves of Texans' General Manager Charlie Casserly, and he follows up on that effort with this interesting column today in which he questions Texans head coach Dom Capers' management of the team's coaching staff.

Regardless of whether you agree with Lopez's views, his last two columns on the Texans contain the type of research and analysis that provides the reader with a grounded position to think about in evaluating the Texans' surprising downturn this season. That's far more satisfying than off-the-cuff observations that have little or no factual basis and sound more like water cooler banter than the insightful analysis that readers really want with regard to the Texans' baffling situation that few people predicted (Clear Thinkers reader Don Mynack excepted) before the season.

Posted by Tom at 6:30 AM | Comments (2) | TrackBack (0)

The troubling case of the NatWest Three

The NatWest Three are the three former National Westminster Bank PLC bankers based in London -- David Bermingham, Giles Darby and Gary Mulgrew -- who are charged in Houston with bilking their former employer of $7.3 million in one of the schemes allegedly engineered by former Enron CFO Andrew Fastow and his right hand man, Michael Kopper (previous posts are here).

However, NatWest never sought to recover the funds from the three men, never pursued criminal charges against them in England, and neither the Crown Prosecution Service, the Financial Services Authority nor the Serious Fraud Office in the UK found sufficient evidence to prosecute. If a trial had taken place in the UK, then the three men could not be extradited to the US because of the principle of double jeopardy. But since no British trial has taken place, the British Home Secretary has granted the US extradition request under the Extradition Act of 2003, which was passed to facilitate extradition of suspected terrorists to the US. Under that legislation, the Home Secretary can extradite British citizens without the US authorities having to make a prima facie case -- they need only set forth a statement of the facts that they hope to prove. To make matters even murkier, the Extradition Act is a one-way street -- to extradite an American citizen from the US, the British still need to provide evidence that the American citizen has committed an extraditable offense.

Well, the three bankers are continuing to fight extradition to the United States to face the charges by seeking a judicial review of the Serious Fraud Office's decision not to investigate them in the UK for the alleged fraud. In that connection, this Times Online article raises the troubling prosecutorial conduct that has been involved in the NatWest Three case:

It seems unlikely that the FBI has incriminating evidence that has never been seen by the British authorities, although it is possible, as Mr Kopper and other former Enron executives have been busy shopping colleagues in return for shorter sentences. If there is no extra evidence, extradition looks unfair. If there is additional evidence, the British Government should surely request it, in order to decide whether to bring charges here.

One of the worst aspects of the case is the way that it has been used to stoke anti-Americanism. America has been portrayed as a wild frontier with no respect for due process. It is not. But British law has created a strange version of justice, a one-way street. A reciprocal treaty should be reciprocal. Right or wrong, the case of the NatWest three suggests that justice is not being seen to be done.

Just another example of how prosecutorial misconduct has become de jure in the Enron-related cases because of the pervasive perception of guilt that the prosecution and mainstream media have promoted to the public in those cases.

Posted by Tom at 5:26 AM | Comments (1) | TrackBack (0)

Charged with a crime in California? Just settle

Two California doctors who were charged with criminal fraud in performing unnecessary heart surgeries at a hospital formerly owned by Tenet Healthcare Corp. have agreed to an unusual settlement that resolves the criminal charges and includes a settlement of related civil litigation that provides $32.5 million in payments to patients and federal insurance programs. The investigation included a highly publicized raid of the hospital, which Tenet eventually sold under the threat of losing access to the Medicare program.

As a part of the unusual deal, the doctors who were charged agreed to pay $1.4 million each and consented never to perform any cardiology procedures or surgeries on any patient covered by various government insurance programs, including Medicare. Nevertheless, neither of the docs admitted liability and one of them commented that the reason he settled was that he could not "continue to fight a system that is not interested in the truth."

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

November 15, 2005

Settled again, with an assist from Dow Jones

Last time we checked in with University of Texas at El Paso head football coach Mike Price, the former University of Alabama head coach (for about five minutes) was settling his $20 million libel lawsuit against Time, Inc.

Well, as you might have heard, Time backed off of that settlement a few days after its announcement. Time contended indignantly that Coach Price and his attorney had breached the settlement agreement by making public comments about the settlement and the litigation. Coach Price and his lawyer denied that any of their statements breached the agreement, Time went ahead and filed a motion with the Alabama state court requesting that the settlement be set aside, anyway.

Enter Dow Jones, Inc., venerable publisher of The Wall Street Journal. Dow Jones filed a motion with the court in the Price v. Time lawsuit requesting that the court unseal the terms of the defunct settlement and other records in the case, which included information regarding the identity of Time's sources for what went on in Coach Price's hotel room that summer evening in Pensacola. Time apparently said "Oops!" and promptly opposed Dow Jones' request.

Regaining its senses, Time announced today that it had once again settled with Coach Price, which apparently moots the Dow Jones motion in the court's view. This time, Coach Price and his attorney could not be reached for comment on the settlement, thank goodness.

However, Coach Price has arranged for a several sideline passes to UTEP's next game to be held at the will-call window for Dow Jones. ;^)

Posted by Tom at 3:56 PM | Comments (0) | TrackBack (0)

J&J and Guidant settle

Johnson & Johnson and Guidant Corp. announced a revised acquisition deal this morning that values Guidant at $21.5 billion, about $4 billion lower than the original price, and settles the companies' lawsuit over J&J's decision to walk away from the previous deal because of a material adverse effect on Guidant's financial condition.

No word yet on how much of that $4 billion will make it into the "Spitzer for Governor" campaign war chest. ;^)

Posted by Tom at 6:49 AM | Comments (0) | TrackBack (0)

The best defense is a good offense

Thomas H. Lee Partners, Ltd is the private equity firm that bought a big stake in Refco, Inc. last year and held a 38% equity stake in the company after Refco went public in August of this year. With Refco's recent descent into bankruptcy, that equity stake is now worthless.

Notwithstanding that rather disappointing investment, Thomas H. Lee Partners is a defendant along with former Refco CEO Phillip Bennett and several other Refco executives and consulting firms in several civil lawsuits by investors seeking substantial damages that have been filed since the revelations about Mr. Bennett's short-term lending arrangement between Refco and one of his personal investment companies. More lawsuits over its involvement with Refco and Mr. Bennett are almost a certainly for Thomas H. Lee Partners.

So, having made this stupendously bad investment and getting sued out the gazoo to boot, what should Thomas H Lee Partners do to defend itself? Well, how about go on the offensive?

By the way, in lining up other prospective defendants in Refco-related civil litigation, it was noted earlier that Grant Thornton was Refco's auditor and that law firm Mayer, Brown advised a third party that was involved in the lending arrangement with Refco. The Thomas H Lee Partners lawsuit reveals some additional defendant prospects:

Over more than 10 months, Lee executives spent more than $10 million employing a number of firms - including the accounting firm KPMG and the law firm Weil, Gotshal & Manges - to evaluate Refco before it invested.

The private equity firm also hired the consulting firm McKinsey & Company to conduct customer surveys and to assess growth in the futures business; the insurance broker Marsh & McLennan to study risk management and the adequacy of insurance; Mercer Human Resource Consulting to look at human resource issues; and a private investigative firm to do background checks on Mr. Bennett and some of the company's other top officials.

Thomas Lee executives also worked closely with a number of leading investment banks, including J. P. Morgan Chase, HSBC, Harris Bank and Goldman Sachs, all of whom had lent Refco money in the past, according to the suit, and Credit Suisse First Boston which represented Lee Partners in its acquisition of Refco. Goldman Sachs and Credit Suisse First Boston underwrote the company's 2005 initial public offering.

Is there any mess in which KPMG is not involved these days?

Posted by Tom at 5:38 AM | Comments (6) | TrackBack (0)

Life after Hank

Couldn't help but notice that American International Group Inc. announced yesterday that its third-quarter net income fell 36% to $1.72 billion (65 cents a share) as a result of recent large catastrophe losses. This comes on the heels of the announcement from last week that AIG would restate its results dating to 2002 to correct errors in the way it accounted for certain types of derivatives contracts, which restatement came only six months after AIG had completed an earlier restatement for the same periods. Just to make matters as murky as possible, AIG also also announced yesterday that it had revised its results for 2000 and 2001.

Inasmuch as yesterday's earnings announcements were in line with forecasts and came after the close of trading, they did not have much of an impact on trading. AIG's shares increased 26 cents to $67.50 in regular trading yesterday and, in after-hours trading, the shares dropped 30 cents to $67.20. The stock hit a 52-week low of $49.91 this past spring during the period in which the company restated five years of results and cut shareholder's equity by $2.26 billion as New York AG Eliot Spitzer sparred with former AIG CEO, Maurice "Hank" Greenberg. For the first nine months of this year, AIG's profits were $10.02 billion ($3.82 a share), which is up from its restated (twice) profit of $8.3 billion ($3.14 a share) for the first nine months of 2004.

Meanwhile, AIG also announced that a group of its unidentified current and former employees had received Wells notices from the Securities and Exchange Commission, which is a formal notice that the SEC has made the preliminary decision to bring enforcement actions against the current and former employees in connection with the agency's investigation into AIG's accounting practices. A Wells notice gives prospective defendants an opportunity to respond directly to the SEC's administrators regarding the SEC staff's findings before the staff makes formal recommendations to the administrators on whether the agency should pursue civil regulatory actions against the defendants.

Welcome to life after Hank Greenberg, AIG investors. Tread carefully, because this type of uncertainty will be the norm for AIG for quite some time.

Posted by Tom at 4:28 AM | Comments (0) | TrackBack (0)

November 14, 2005

The Rumsfeld Reorganization

Don't miss this important David Von Drehle/Washington Post article that provides a decent overview of the reorganization of the Defense Department under Secretary of Defense Donald Rumsfeld during preparations for the Iraq War. This is an important issue that has been festering since the Reagan Administration and has major domestic and foreign policy implications (previous posts on the issue are here). However, the issue tends to fly somewhat beneath the radar screen for various reasons, not the least of which is the depth of the issue and the overshadowing effect of related issues, such as detainee policy.

Into this mini-vacuum of analysis, Mr. Von Drehle does a good job of framing the issue:

Diving in, he found his marching orders in a speech given by candidate Bush at the Citadel in 1999, calling for a "transformation" of the great but lumbering U.S. military. The Cold War force was built around big foreign bases and heavy weapons "platforms," such as tank columns and aircraft carriers. With the Cold War over, Bush said, America should use the chance to "skip a generation" of weaponry and tactics to seize the future of warfare ahead of everyone else. A transformed military would be lightly armored, rapidly deployable, invisible to radar, guided by satellites. It would fight with Special Operations troops and futuristic "systems" of weaponry, robots alongside soldiers, all linked by computers. This force would be unmatchable in combat, Bush predicted, but it should not be used for the sort of "nation-building" that characterized Pentagon deployments to Haiti and the Balkans under Clinton.

Little of this was entirely new. Since Vietnam, Pentagon leaders -- including the younger Rumsfeld -- had been searching for more efficient, less entangling, ways to project U.S. power. Even the Army, perhaps the most hidebound of the services, had begun a complete reorganization to make itself easier to deploy. "Some things had been done since the end of the Cold War," Rumsfeld conceded in the interview.

But the Pentagon is the world's biggest, richest bureaucracy, with an annual budget larger than the entire economies of all but about a dozen nations -- bigger than Switzerland or Sweden. The leviathan managed to shrug off most deep and lasting changes. Thus, when Rumsfeld took office in 2001, he recalled, "we were located pretty much where we had been located, geographically, around the world. We still had the same processes and systems and approaches."

Some of the most important changes on Rumsfeld's menu were also the toughest, because of the entrenched interests involved. Weapons programs and bases provide jobs in nearly every congressional district. Republican or Democrat doesn't matter when it comes time to protect those jobs, so the programs and the bases endure even after the strategy behind them has expired. Some defense secretaries quail before this status quo, but not Rumsfeld. Shortly after taking office, he began questioning continued funding for the Crusader supercannon, an artillery piece designed to destroy Soviet tank columns that no longer existed, and the Comanche helicopter, another Cold War relic. Such efforts made him a hero in the military think tanks but earned him a lot of enemies on the Hill. By late summer 2001, Washington was buzzing with rumors that Rumsfeld would soon resign.

Then came September 11.

Read the entire article, which Mr. Von Drehle will be discussing today on washingtonpost.com/liveonline at noon, Houston time.

The Pentagon is a notoriously tradition-bound organization where new ideas that do not come through the normal chain of command are viewed by Pentagon generals with skepticism. Nevertheless, over the past 25 years, the Pentagon has increasingly embraced intellectual ideas from non-conventional sources. For example, Andrew Marshall in the late 1970's and early 80's argued from an obscure Pentagon office that wars could be revolutionized by precision bombs, unmanned planes and wireless communications that would allow the American military to destroy enemies from a distance. Similarly, the work of the late Pentagon iconoclast John Boyd and his acolytes in revolutioning the way in which the American military approaches war in the late 20th and early 21st century has been well-chronicled in Robert Coram's book, Boyd: The Fighter Pilot Who Changed the Art of War (Little, Brown 2002).

Consequently, it is important to remember that things are not always as they seem on the surface in regard to the American military. For example, the Pentagon brass often fought tooth and nail against the innovative ideas of people such as Boyd, Marshall, and now Rumsfeld, primarily because their ideas often ran contrary to the sacred cow military appropriations that the Pentagon hierarchy aggressively protect. On the other hand, you will not learn from the superficial media accounts that it took leaders such as Donald Rumsfeld, Dick Cheney, and Colin Powell over the past two decades to open up and accept recommendations from lower Pentagon sources such as Boyd and Marshall that have revolutionized and dramatically improved America's ability to conduct war in places such as Afghanistan and Iraq. But for the willingness of leaders such as Messrs. Rumsfeld, Cheney and Powell to listen to these unconventional sources of information, the traditional Pentagon brass would have squelched those innovative ideas before they would have ever seen the light of day.

For an interesting discussion of the WaPo article and these issues, check out this Gregory Djerejian post and related comments over at The Belgravia Dispatch. For another interesting strategic view of Rumsfeld's conduct of the war against Islamic fascism, check out this TigerHawk post.

Posted by Tom at 7:22 AM | Comments (2) | TrackBack (0)

Richard Justice said what?

Chronicle sportswriter Richard Justice says some of the darndest things. Take the following quotes from today's column on the current state of the hapless Houston Texans:

"The Texans are respectable. They're coming close. They've got four 2-7 teams left on their schedule. They almost won in Jacksonville, and they made a run at the Indianapolis Colts before losing 31-17 Sunday."

The Texans are respectable? In nine games this season, the Texans have been in only three games that they had a reasonable chance to win, albeit two of those have been in the last three games. As for making "a run" against the Colts, when the Texans closed to 21-14 in the third quarter, Peyton Manning and the Colts offense reeled off a five play, 75 yard march for a touchdown that made the Texans defense look as if it would have a difficult time stopping a hard-chargin' marching band. If that's respectable, then I would hate to see what Justice considers just plain bad.

"The Texans are a better offensive team since [offensive coordinator Joe] Pendry took over [for the fired Chris Palmer]. David Carr looks like he's on his way to becoming a first-rate quarterback. He's quicker and more accurate in his throws, less likely to take a sack."

H'mm. The Texans are a better offensive team since Pendry took over? The Texans are averaging 215.9 yards per game, which is 31st among the 32 NFL teams, and 13.9 points per game, which is 30th. Last season under Offensive Coordinator Palmer, pretty much the same Texans offensive personnel generated 320.5 yards per game (19th in the league) and 19.3 points per game (21st in the league). Meanwhile, last season, Carr was sacked a total of 49 times during the entire 16 game season, while he has already been sacked 46 times this season in only nine games, 33 of which have been while Pendry has been offensive coordinator. At the same time, Carr continues to have passes batted down at the line of scrimmage due to his sidearm delivery, gets flushed easily from the pocket, and continues to be poor at picking up secondary receivers. That's improvement?

"McNair has made mistakes, too. After spending more than $700 million on the franchise, he gave Capers a limited budget to hire a coaching staff."

Justice has been floating this theory in several of his recent columns, but he has not done any analysis of how the Texans' assistant coaching salaries stack up against the salaries of other NFL staffs. Without such an objective analysis, this criticism looks like Justice is passing along the sour grapes of either the head coach or the general manager.

Just what is the deal with Chronicle sportswriters shooting from the hip?

Posted by Tom at 6:07 AM | Comments (0) | TrackBack (0)

Rationalizing a bad system

Being independent politically, I tend to look for political issues where the right position is so clear that advocacy of the opposing view is an indication of a politician who is interested in something other than improving government. This Chronicle article addresses one such issue -- Texas' utterly unsupportable system of electing judges. This earlier Daily Texan article does the same.

Texas' system of judicial elections is, at best, not a good way to choose judges and, at its worst, a corrupt one. Along with former Texas Attorney General and state Supreme Court Justice John Hill, former state Supreme Court Justice Tom Phillips and many others, I have been supporting for over 20 years a new system for appointing judges in the Texas state courts similar to the appointment process that is used in the federal judicial system. This is not to say that the system in which federal judges is selected is perfect and does not generate a bad judge from time to time. But the risk of a bad judge reaching the bench in the federal system is far less than it currently is under the Texas system of judicial selection.

Although a growing number of Texans agree that elections are not the best way to choose judges, the tendency in Texas politics is for the party in control of the statehouse to support the current system because most of the elected judges are from that party. Inasmuch as the Republicans are now solidly in control of Texas state government, the GOP state leaders are in no hurry to change even a flawed system so long as it produces judges mainly from their party.

That is unfortunate. Virtually no Texas citizen knows all of the best candidates for the various judicial positions. For example, even though I have an active civil trial practice in both Harris and Montgomery Counties, I rely on the opinions of friends who practice criminal law to advise me regarding the best candidates for the criminal judgeships because I do not practice much in the criminal courts. Moreover, most lawyers are not trial lawyers, so even they have no or little experience on which to base an informed judgment about the best judicial candidates. Generally, lay people do not have the foggiest notion of who to select in Texas judicial races. Most folks simply look for a familiar name or two, sigh, and just make the best guess possible under the circumstances. Not exactly a sterling example of democracy at work.

Finally -- and perhaps most telling -- few of the best state court judges in Texas support the system. Few, if any, of the good judges enjoy the tedious and unbecoming process of soliciting campaign funds from the lawyers and law firms who practice in their courts. Moreover, the bad judges often favor attorneys who contribute to their campaigns and build huge campaign war chests that creates a disincentive for any good challenger to mount a campaign. Finally, as we have seen during the recusal motions in the Tom DeLay prosecution, the political affiliations of the judges often undermines not only the efficient administration of justice, but the public's perception of the integrity of the judicial system altogether.

Thus, this is one of those issues where -- regardless of your political affiliation -- the right answer is clear. Only a politician who is more interested in maintaining power than in improving the administration of justice would support the current flawed system. In that connection, please take note from the Chronicle article the position of Texas Governor Rick Perry regarding the issue -- he supports the current system.

Posted by Tom at 5:09 AM | Comments (4) | TrackBack (2)

November 13, 2005

2005 Weekly local football review

Rice 42 Tulane 34

The Owls (1-8) get the top spot on the local football review this week as they finally broke their 14 game losing streak (the longest in major college football) in beating Tulane at Rice Stadium. The win was a relief for the Rice program, which could attract a "crowd" of less than 10,000 for homecoming on a mild Texas autumn afternoon. Rumors continue to swirl that this will be head coach Ken Hatfield's last season, and -- despite the problems that the program has endured over the past two seasons -- he is going to be a tough act to replace. While Rice's new affiliation with Conference USA renews its traditional rivalries with Houston, SMU, and Tulane, it's reasonably clear that those rivalries will not be enough to revive the lagging Owl football program. The Owls have a tough game next Saturday at Central Florida before ending the season on the Saturday after Thanksgiving against Houston.

Colts 31 Texans 17

Let's see now. Total yards: Colts 420; Texans 210. Score with 9.5 minutes to go in the 2nd quarter: Colts 21 Texans 0. But for a couple of muffed punts by the Colts, this one would have been even uglier, which is a daunting thought. Meanwhile, the Texans' offensive line -- already the worst in the NFL -- has lost three regular players due to injury, which will probably prompt Coach Dom Capers to rearrange the deck chairs on this version of the Titanic once again (he has already done it a couple of times, described here and here). The Texans (1-8) -- which increasingly resemble those perfectly awful early 1970's Oilers teams -- now have home games the next two Sundays against the Chiefs and the Rams, both of which are likely to lace the Texans' porous defense in the same manner as the Colts did.

Texas Longhorns 66 Kansas 14

Key tip to Kansas head coach Mark Mangino -- don't declare in a post-game press conference that a close Texas victory over your team (last season's, as a matter of fact) is the result of referees throwing the game so that the Longhorns will be eligible for a BCS bowl game. Vince Young might hear about it. After leading this one 28-0 after the first quarter and 52-0 at halftime, the Horns (10-0) now get to rest for their rivalry game with the Aggies in College Station the day after Thanksgiving and the Big 12 Championship game the following Saturday at Reliant Stadium against probably Colorado. If the Horns take care of business in those two games, the Rose Bowl matchup with Southern Cal shapes up to be the most important game for the Texas football program since the classic 1969 "Game of the Century" victory over Arkansas that prompted President Nixon to declare the Horns national champions.

Oklahoma 36 Texas Aggies 30

The 5-5 Aggies are now falling back on moral victories, as they beat the spread for only the third time this season in this one, a sure sign of unfulfilled expectations. After getting blown out 28-7 in the first quarter of this game, the Aggies battled back and made a game of it, only to blow the opportunity to win the game by giving up a 3rd and long pass play with a little over two minutes to go after backing up the Sooners deep in their own part of the field. To make matters worse for the Aggies, QB Reggie McNeal endured what looked like a seriously sprained ankle, so he is questionable at best for the Texas game on the Friday after Thanksgiving. My sense is that the Aggies will get hammered by at least 30 by Texas, which will leave the Aggie faithful a long time before next season to grouse about Coach Fran and the $10 million buyout under his contract. Oh well, although not a national power anymore in football, the Ags are a winner in at least one fall sport.

Houston Cougars 27 Southern Miss 24

The 5-4 Coogs continue to irritate and amaze simultaneously. Although they dominated the line of scrimmage and the statistical battle, the Cougars fell behind 10-0 in this one before coming back to take 20-10 and 27-17 leads in the 4th quarter. Then, the always exciting hometown team coughed up two of their three fumbles -- including a fumble and a flubbed onside kick in the final 2:40 of the game -- to give Southern Miss an opportunity to pull the game out until the very end. Nevertheless, with wins in home games against SMU and Rice in their final two games, the Cougars will be 7-4 and a rather attractive team for a minor bowl game. You gotta love college football.

The Cowboys play the Eagles in the Monday Night game this week before playing Detroit the following Sunday and Denver on Thanksgiving Day. This is the key stretch of the season for the Pokes, who could take control of their division over the next 11 days.

Posted by Tom at 6:51 PM | Comments (5) | TrackBack (0)

November 12, 2005

NYT versus WaPo on the Windfall Profits Tax

A couple of days ago, this NY Times editorial dusted off about every archaic economic theory of the Carter Administration to promote a windfall profits tax on energy companies. So, I was thinking about doing an Econ 101 post pointing out how the Times' position would actually make things much worse than they already are, which is really not all that bad (have you noticed what's been happening to the price of oil and natural gas over the past week or so?).

Then, somewhat surprisingly to me, I came across this Washington Post editorial that does the job for me.

I don't know about you, but I find it quite refreshing that the Washington Post editorial page has come to understand that the market is much more effective than government in dealing with energy supply reductions.

Posted by Tom at 9:55 AM | Comments (0) | TrackBack (0)

Troubles at Patterson-UTI

Snyder, Texas (between Abilene and Lubbock)-based Patterson-UTI Energy, Inc., one of the largest land-based drilling contractors in the U.S., raised a few eyebrows on Friday with the announcement that it is investigating the possible embezzlement of $70 million by a former undisclosed official who apparently arranged for payments to a shell company for assets that were never delivered over a five year period (Chronicle story is here). Although it is not known whether he is the Patterson employee under investigation, Patterson's chief financial officer, Jonathan D. "Jody" Nelson, resigned on Nov. 3 for "personal reasons" and, a day later, he made a regulatory filing of his intent to unload about $13 million of Patterson stock.

Patterson-UTI was was formed in 2001 when the independent exploration and production company Patterson Energy acquired UTI Energy. The company operates about 400 drilling rigs, which is the second-largest land-based fleet in North America behind that of Nabors Industries, and employs about 7,000 employees. The news of the possible embezzlement comes at an otherwise robust time for Patterson and the rest of the oilfield service sector. Rising demand for rigs has driven up utilization rates and the lease cost of rigs to their highest levels since the period of the late 1970's and early 80's. Last year, Patterson-UTI reported profit of $108.7 million on sales of over $1 billion and, for the first nine months of this year, the company reported $247.5 million of earnings on revenue of $1.2 billion. However, after the announcement yesterday, shares of Patterson fell almost 9% on the Nasdaq to close at $30. Options on Patterson's stock also were heavily traded after the news, resulting in wide price swings.

By the way, Patterson-UTI's auditors are PriceWaterhouseCoopers, LLP. I knew you'd want to know.

Posted by Tom at 7:08 AM | Comments (0) | TrackBack (0)

November 11, 2005

Getting up for the OU-A&M game

As we hope that the next installment of Texas A&M football coach Dennis Franchione's Friday with Fran will be as entertaining as last week's installment, the following are ways in which more than a few Aggie fans are getting up for this Saturday's clash in Norman, Oklahoma between the Aggies and the Oklahoma Sooners:

FireDennisFranchione.com

FireFranPetition.com

FranUnderFire.com, which includes this handy list of embarrassments.

Posted by Tom at 8:42 AM | Comments (0) | TrackBack (4)

Are the WaPo editors reading Clear Thinkers?

On the heels of yesterday's post regarding General Motors' Enronesque experience, the Washington Post business section leads with this article today that links General Motors and the "b word" in the same headline, and includes the following tidbit of information:

In a research note yesterday, Ronald A. Tadross, an auto analyst at Banc of America Securities LLC, called a bankruptcy filing "inevitable" and put the risk over the next two years at 40 percent, an increase from a previous estimate of 30 percent. Tadross said he thought GM management could be held responsible for the accounting errors and, if the management team is shaken up, the option of a bankruptcy reorganization would become more likely.

The London Daily Telegraph chimes in with the bankruptcy theme, too.

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

The David Carr dilemma

The Houston Texans face a vexing decision with regard to quarterback David Carr, the team's first draft pick in its existence -- whether to pick up an $8 million option to retain Carr's services over the next four seasons?

In what has become his typically superficial manner, the Chronicle's main NFL beat writer, John McClain (previous posts on McClain here), weighs in with this column in which he contends that the Texans will and should pick up the option to retain Carr's services. McClain reasons that the Texans should retain Carr because "every team in the NFL that needed a quarterback would line up to give him a signing bonus of a lot more than $8 million," although McClain provides no supporting analysis for that conclusion.

Well, McClain may be correct and it may be true that the market for experienced QB's in the NFL mitigates in favor of the Texans picking up Carr's option. However, as with McClain's recent criticism of the Texans' personnel moves, it would be nice if McClain could provide some support for his views. Although Carr's development as a QB has been stunted by the Texans' atrocious offensive line, Carr has not shown many signs that he has the potential to be a top notch NFL QB. He has a sidearm delivery that results in a high number of tipped passes. He does not step up in the pocket well, and his ability to pick up secondary receivers is mediocre, at best. Moreover, just looking at the QB's on other teams in the Texans' division, it's far from clear that Carr would be a hot commodity in the NFL's QB market:

Indianapolis -- Peyton Manning. No way they are in the market for Carr.

Cincinnati -- Carson Palmer. Ditto.

Jacksonville -- Bryan Leftwich. Ditto.

Tennessee -- Steve McNair. Maybe, although owner Bud Adams is notoriously tight and would he view Carr as much of an upgrade over McNair's cheap and servicible backup, Billy Volek? That's certainly far from clear.

Similarly, taking a quick look around the NFL, there does not appear to be a large number of teams who would be competing for Carr's services -- my guesses of potential candidates would be Arizona, Baltimore, Buffalo, Cleveland, Miami, New York Jets, and Tampa Bay, but even most of those teams have viable alternatives who would be far cheaper and not clearly inferior to Carr.

So, McClain may be right about the Texans and Carr. But just as with his recent discovery that the Texans' personnel is deficient, McClain ought to present supporting evidence for his view. Otherwise, his off-the-cuff opinions end up sounding like those of a cheerleader for Carr, just as his similarly sanguine views of Charley Casserly made him appear to be a shill for the Texans' front office before this disastrous season.

Posted by Tom at 6:21 AM | Comments (2) | TrackBack (0)

Need a job? Try New Orleans

Two and a half months after Hurricane Katrina and the resulting flood hammered New Orleans, this NY Times article notes that the rebuilding of the city is being hampered by a scarcity of labor, a condition that was noted in this earlier post.

Given the massive exodus of people from New Orleans and the relunctance of many former residents to return, my sense is that we are experiencing uncharted waters with regard to the rebuilding of New Orleans. The tremendous loss of jobs almost overnight -- particularly from small businesses that were destroyed by the damage from the flood -- is unprecedented in the modern United States for an area this large. Inasmuch as most of the jobs that are arising as a result of the reconstruction effort are of a different nature from the ones that were lost, many of the people who left New Orleans are not attracted to return by those new jobs. Consequently, my sense is that the key to real rebirth in the area is the re-creation of small businesses, which is a tricky and slow task.

Posted by Tom at 5:31 AM | Comments (0) | TrackBack (0)

Refco's Phillip Bennett indicted

On a lively Thursday in New York, Phillip R. Bennett, the former CEO of the big commodities broker Refco Inc., was indicted on multiple counts of securities fraud, wire fraud and of making false regulatory filings with the SEC at the same time as creditors in Refco's pending chapter 11 case fought over the price to be paid for the company's key regulated futures business. Previous posts about Mr. Bennett and the Refco saga are here and a copy of the indictment is here.

Refco filed a chapter 11 case on Oct. 17 a week after the company announced that a $430 million debt owed to the company by a firm controlled by Mr. Bennett had been concealed and then repaid by Mr. Bennett. Refco's board placed Mr. Bennett on indefinite leave Oct. 10 and he was arrested on federal securities fraud charges shortly thereafter.

However, the indictment -- as with the previous complaint that was the basis of Mr. Bennett's arrest -- is not particularly persuasive in its description of the alleged criminal conduct. The indictment alleges that, in the late 1990's, Refco suffered hundreds of millions of dollars in bad debts as a result of customer trading losses. The customers were unable to make good on the losses, so Refco was left on the hook because it had extended credit to the customers. Rather than making Refco's financial condition look less healthy by writing off the losses, Mr. Bennett allegedly had the losses assumed by a company that he owned and controlled -- Refco Group Holdings, Inc. ("RGHI") -- and then hid that fact from auditors and investors on multiple occasions by arranging the following series of transactions:

A Refco subsidiary -- Refco Capital Markets, Ltd. -- would make a short term loan (usually, about a two week term) in various amounts ranging from $325 million to $720 million to an unidentified third party, but which was earlier identified as Liberty Corner Capital Strategies;

Liberty Corner would simultaneously make a short term loan to Mr. Bennett's company, RGHI, in the same amount and with the same maturity of its borrowing from Refco Capital (but at a slightly higher interest rate), and Refco the parent would guarantee RGHI's payment of the loan to Liberty Corner;

RGHI would use the loan proceeds from Liberty Corner to pay Refco the amount of its related party indebtedness at the time shortly before the end of an upcoming Refco reporting period. Inasmuch as the debt was paid prior to the end of the reporting period, Refco's auditors did not report the amount of RGHI's previous indebtedness to Refco as related party indebtedness; and

Upon maturity of the two short term loans -- which was timed to occur after the end of Refco's reporting period -- the loans were "unwound" (apparently without telling Refco's auditors) so that RGHI was put back in the position of owing the same amount of related party indebtedness to Refco that it owed before it borrowed the money from Liberty Corner.

Among other questions, the following issues are raised by the indictment:

If RGHI's indebtedness to Refco was truly based upon assumption of third party debts to Refco, then why did the amount fluctuate from time to time?

How, precisely, was the arrangement "unwound" each time? The indictment is silent on that key allegation.

Was Refco's guaranty of RGHI's loan from Liberty Corner disclosed in Refco's regulatory filings?

In essence, the indictment alleges that Mr. Bennett used Refco's creditworthiness to arrange a third party loan to RGHI that was used to pay RGHI's debt to Refco. Putting aside for a moment the disclosure issues raised by securities laws, is there really anything wrong with Mr. Bennett using Refco's credit for that purpose?

Inquiring minds want to know.

Posted by Tom at 3:50 AM | Comments (13) | TrackBack (0)

November 10, 2005

Roping in the hedge funds

As the regulators and financial media wait on pins and needles for the next Enronesque experience in business, much attention has recently been focused on the generally unregulated -- at least until now -- world of hedge funds.

David Skeel recently published this Legal Affairs article (and this follow up discussion with Business Law Prof blogger Dale Oesterle) in which he argues for more regulation of hedge funds because the pressure that hedge funds face to take unreasonable risks and to show over-the-top returns undermines the integrity of the markets, which will hurt the little guy investor. Meanwhile, in anticipation of the new SEC regulations due to take effect in February that require hedge funds managing more than $25 million to register with the SEC, submit to periodic audits and provide detailed information about their trading, the Wall Street Journal reports today that many funds will not be registering with the Securities and Exchange Commission due to loopholes provided by the agency. The entire thrust of the article is "what are these guys hiding?"

Into this fray enters the indomitable Larry Ribstein with this timely post in which he proposes that everyone back off and think about whether the proposed regulations are really a solution to the supposed problem for which they are intended:

[I]t is important to distinguish between two types of problems that are often melded together in the commentary on hedge funds: the damage that these funds supposedly do to others, and the damage that hedge fund managers do to their investors. Pro-regulatory hedge fund critics often play a kind of shell game, obfuscating the goals of the regulation by sliding between these very different objectives. Regulatory prescriptions for one problem may even exacerbate the other (e.g., the two-year lockup rule).

The basic problem with focusing on the damage hedge funds do to others is that this is often covered, or should be covered, by rules that directly address the supposedly bad behavior. But regulators often find enacting such rules inconvenient, because then they would have to actually identify the bad behavior and show how it is harmful. It’s easier to deal with this problem by tarring the people that are doing it, and putting them out of business – the same strategy that worked with Mike Milken and takeovers. This is not only a poor way to address the supposedly bad behavior, but it risks reducing the clearly legal and socially productive behavior that these same supposedly bad guys engage in – e.g., disciplining unproductive corporate managers.

As noted earlier here, regulators took a quite similar approach in the wake of Enron to hammer and ultimately constrict a highly productive means for businesses to hedge risk -- i.e., structured finance transactions, particularly in the gas trading industry. Professor Ribstein goes on to specify examples of where regulators, on the murkiest of grounds, seek to rein in what they perceive as improper behavior of hedge funds, and then concludes with the following wise advice:

It may be that the real problem with hedge funds, and the real reason they are in the regulatory crosshairs, is that they, like Milken and his ilk, are a potential mechanism for reshaping corporate control. Before we continue down this regulatory path, we ought to better understand why we’re going there, and the potential costs of doing so.

Update: Professor Bainbridge chimes in with this insightful post,, in which he observes the following:

One of the strongest arguments against hedge fund registration was that investors in them are typically institutions (pension funds and so on) and wealthy individuals. In other words, folks for whom caveat emptor arguably is all the protection they need. As with any principal-agent context, liquidity provided one of the principal protections for hedge fund investors. If the manager shirked or otherwise misbehaved, or even just had a run of bad luck, investors could exit. The risk that investors would bail, in turn, provided a substantial incentive for hedge fund managers.

The problem with the SEC's rule should now be apparent: It's reducing liquidity by increasing lock up periods during which hedge fund investors can't run for the exits. (Imagine being in a theater that's on fire but the doors are locked.) The SEC thus has created a situation in which it is forcing hedge fund investors to go on protecting themselves, while simultaneously disarming investors by depriving them of their most effective weapon.

I'd call that a bad rule. A very bad rule.

Posted by Tom at 9:21 AM | Comments (1) | TrackBack (0)

Charlie Casserly said what?

Chronicle sportswriter John Lopez has a good column today regarding the poor personnel moves of Texans' general manager Charlie Casserly that have been primarily responsible for the Texans' disastrous season this year. Included in the article was the following quote from Casserly:

"We're 1-7, but we're not a 1-7 team," Casserly said. "This isn't a sinking ship deal. I'm not trying to blame coaching or anything like that. Sometimes these things just happen. If we make a couple of good moves, boom, we're back to where we should be next year."

H'mm. Of their eight games this season, the Texans have been competitive in precisely three. QB David Carr continues to be sacked more than any other quarterback in the NFL, and the defense is one of the worst in the league in terms of stopping the run and in sacking the opposing team's quarterback. Sounds precisely like a 1-7 team to me.

Oh well, at least Casserly doesn't blog.

Posted by Tom at 8:00 AM | Comments (4) | TrackBack (0)

Where it first does not succeed, the Enron Task Force tries, tries again

The Chronicle's Mary Flood reports in this article that the Enron Task Force has obtained three "streamlined" indictments against the five former Enron Broadband executives who were the subject of the previous failed Task Force prosecution over the same subject matter. As is the Task Force's policy, they leaked a copy of the superceding indictments to the media before they were filed on the electronic docket of the case, so a copy of the indictment is not yet available. I will post a copy of each indictment when they become available.

As Ms. Flood's article notes, the five former executives will not be tried together this time around. Kevin Howard, former EBS CFO, and Michael Krautz, former EBS senior accounting director, will be tried together in a trial currently scheduled for May, 2006 on four counts that they conspired to commit wire fraud and falsify books and records relating to the Task Force's allegation that they created a phony sale of video-on-demand profits in order to inflate EBS earnings. Next, former EBS executive Scott Yeager will be tried later that summer on a total of 13 counts of insider trading and money laundering. Finally, former co-CEO of EBS, Joe Hirko, and Rex Shelby, former senior vice president of engineering and operations, will be tried in September, 2006 on conspiracy to commit wire and securities fraud, as well as multiple counts of securities fraud, wire fraud and insider trading.

Of course, all of these trials will be anticlimactic compared with the trial of the Task Force's legacy case against former Enron executives Ken Lay, Jeff Skilling, and Richard Causey, which will crank up in mid-January, 2006.

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

Sleep apnea and strokes linked

A Yale University study of 1,022 patients over the age of 50 published in this week's New England Journal of Medicine concludes that obstructive sleep apnea more than doubles the risk of a stroke or death and that severe cases of sleep apnea more than triple the risk, even after even adjustment for other stroke-risk factors such as diabetes, hypertension and obesity. A number of previous studies have found links between sleep apnea and serious cardiovascular disease, but a link between sleep apnea and strokes had not yet been established. Strokes are the third leading cause of death in the U.S. after heart disease and cancer.

About 20% of American adults suffer from at least some form of sleep apnea, although physicians generally do not recommend treatment unless the condition involves five or more pauses in breathing per hour of sleep along with other symptoms, such as daytime drowsiness. Although only about a fifth of sleep apnea cases are considered severe, researchers and physicians estimate that more than half of the severest cases in the United States still go undiagnosed. Obstructive sleep apnea involves the muscles in the throat becoming so relaxed that the airway becomes all or partially closed, and with regard to the rarer central sleep apnea, the body temporarily stops making any effort to breathe. Common symptoms include daytime drowsiness and loud snoring, choking or gasping during sleep, although the episodes often fail to wake the person suffering from the condition.

Interestingly, one question that the Yale study does not answer is whether treating sleep apnea will reduce the incidence of strokes. In the Yale study, of the 72 sleep apnea patients who died of strokes, many of these patients were undergoing various forms of treatment for the condition. However, even with treatment, the group still had an elevated risk of stroke and death, which raises the question of whether treating sleep apnea will actually decrease the stroke risk measurably.

Posted by Tom at 5:45 AM | Comments (0) | TrackBack (0)

Meanwhile, with regard to Shell's Enronesque experience . . .

Remember Royal Dutch/Shell's Enronesque experience relating to overstatement of reserves from last year?

Well, the British equivalent of the SEC -- the Financial Services Authority, or FSA -- announced yesterday that it had concluded its investigation of former senior Shell executives Philip Watts and Walter van de Vijver and found no wrongdoing relating to the executives' involvement in the company's overstatement of energy reserves last year. The SEC and the Justice Department are still conducting investigations of the two former executives.

Funny how the FSA's announcement of yesterday did not get quite as much play in the media as the ouster of the two executives from Shell last year as the company's overstatement came to light.

Posted by Tom at 5:12 AM | Comments (2) | TrackBack (0)

GM's Enronesque experience continues

Already under the pressure of an SEC investigation into its accounting, beleagured automaker General Motors Corp. announced late yesterday -- after the close of New York Stock Exchange trading -- that it will restate financial results for 2001 by reducing income generated from accelerated booking of credits from suppliers. The amount of the write-down will be between $300 to $400 million, which represents about 50% of GM's profit reported at the time. Although the announcement came after the close of trading, GM's shares yesterday fell to their lowest level in almost 15 years (GM shares are down almost 40% this year) as GM attempts to endure the financial punches that are inevitably associated with losing almost $3 billion this year. Earlier posts on GM's increasing problems are here.

GM did not disclose yesterday whether its restatement involved transactions with its former parts subsidiary, Delphi Corp. Earlier this year, Delphi disclosed it would need to restate results for several years after an internal investigation revealed improper booking of revenue from technology contracts and rebates that should have been spread over the life of contracts. The issue of how to book rebates and other credits from suppliers has tripped up several troubled businesses, including supermarket chain Royal Ahold NV and retailer Kmart Corp. Demanding credits from suppliers is a common practice in many industries, but if those credits are rebates related to larger orders from suppliers, they are supposed to be booked as income over time and not immediately.

In another ominous sign, GM disclosed in an SEC filing yesterday that it has withdrawn about $2 billion this year from a fund earmarked for paying hourly-wage and retiree employee health benefits to cover ongoing health-care costs as it continues "evaluating the need for additional withdrawals as the cost of health care continues to adversely affect GM's liquidity."

Sounding absolutely Enronesque, don't you think?

Posted by Tom at 4:37 AM | Comments (0) | TrackBack (2)

November 9, 2005

Catching up with the NBA

As noted in earlier posts here and here, I find it difficult to generate much enthusiasm for the local professional basketball team, the Houston Rockets. This year's club is mildly interesting, with one of the best perimeter players in the league -- Tracy McGrady -- teamed with one of the best big men -- Yao Ming. They are both in the prime of their respective careers, so you would think that the team would be a title contender. However, as has been often the case for the Rockets throughout their existence, the team has not found the point guard who can push all the right buttons (remember Matt Maloney?) and propel the team into the NBA's elite teams. This year, the Rockets are trying Rafer Alston at the point, but it remains to be seen whether he is the answer.

Despite my lack of enthusiasm for the Rockets, I did notice during the last NBA season that the games were much more interesting than in the previous three seasons or so. A number of really special young players had arrived on the scene -- notably Cleveland's LeBron James and Miami's Dwayne Wade -- and the pace and intensity of the play made NBA games enjoyable to watch again. Along those lines, Patrick Hruby of ESPN.com notes in this article that many of the complaints that one commonly hears about the NBA are myths. One of the more interesting observations is what really distracts players while they are shooting free throws:

As it turns out, Thunderstix and wiggling balloons have little effect because the brain simply blocks out random motion, like white noise on a television screen. According to [a] Slate.com article, fans behind the baseline would be better off moving side-to-side in unison.

Why? Confronted with a field of background motion, observers tend to believe that they are moving while the background remains still -- think of sitting on a stopped subway train while an adjacent train passes. David Whitney, a visual scientist at the University of California-Davis, has demonstrated that a field of background motion can influence hand motions, such as the flick of the wrist on a free throw.

[Former NBA player Steve] Kerr concurs.

"The most effective one I've seen might have been at Duke, or maybe Kansas," he says. "As soon as the guy was about to shoot, the fans would all move from the right side to the left. It would create this visual of everything moving."

In short, the Rockets need to crank up the Aggie War Hymn during the opposing team's free throws.

Meanwhile, addressing the true reason for the NBA's absurdly long 82 game regular season, this Eye on Gambling post provides a quick and dirty way to handicap -- or as Malcolm Gladwell would put it, to "thin slice" -- NBA games.

Posted by Tom at 7:20 AM | Comments (2) | TrackBack (0)

The anti-obesity industry

Coming off his Texas barbeque excursion, Marginal Revolution's Tyler Cowen notes that J. Eric Oliver, a political science professor at the University of Chicago, has entered the debate a new book called Fat Politics (Oxford 2005), in which Professor Oliver argues that a handful of doctors, government bureaucrats and health researchers -- funded by the drug and weight-loss industry -- have campaigned to classify more than sixty million Americans as "overweight," to inflate the health risks of being fat, and to promote the idea that obesity is a killer disease. The Publishers Weekly review of the book notes the following:

It's not obesity, but the panic over obesity, that's the real health problem, argues this scintillating contrarian study of the evergreen subject of American gluttony and sloth. Political scientist Oliver condemns what he feels is a self-interested "public health establishment" -- obesity researchers seeking federal funding, pharmaceutical and weight-loss companies peddling diet drugs and regimens, bariatric surgeons and other health-care providers angling for insurance reimbursement -- for spuriously characterizing fatness as a disease. He debunks the dubious science and alarmist PR that fuels their campaign, taking on arbitrary Body-Mass Index standards that slot even Michael Jordan in the overweight category, state-by-state maps of obesity rates that make fatness look like a contagion spreading over the countryside, and flimsy research studies that vastly exaggerate the danger and costs of weight gain. Oliver also examines American attitudes towards obesity, probing the abhorrence of fatness implicit in the Protestant ethic and, less plausibly, tying our contemporary feminine ideal of the emaciated supermodel to a confluence of sociobiology and the economics of the urban sexual marketplace. Arguing that fatness is perfectly compatible with fitness, he contends that scapegoating obesity drives Americans to experiment with dangerous crash diets, appetite suppressants and weight-loss surgeries, while distracting us from underlying harmful changes in the American lifestyle -- mainly our incessant snacking on junk food and shunning of exercise and physical activity, of which weight gain is perhaps merely a "benign symptom." Oliver provides a lucid, engaging critique of obesity research and a shrewd analysis of the socioeconomic and cultural forces behind it. The result is a compelling challenge to the conventional wisdom about our bulging waistlines.

Here is also an LA Times review of the book and several prior posts that have examined the issues relating to the increasingly obese nature of America's population.

As several of the earlier posts note, Professor Oliver's thesis has a ring of truth to it, although most of us are conflicted by our anecdotal experiences in which we notice large numbers of overweight and out-of-shape people in the course of our daily lives. In many respects, the core problem is widespread ignorance about nutrition, the difference between exercise and recreation, and the fact that exercise is a poor means of weight-control, at least in the short term. My late father used to comment that, if you are riding a stationary bike for an hour to lose weight, then you could achieve the same benefit in terms of reducing calories for a lot less effort by simply eating one less helping of mashed potatoes at dinner.

Posted by Tom at 6:31 AM | Comments (4) | TrackBack (0)

Beating a dead Andersen

The Chronicle's Mary Flood, back from a well-deserved vacation, is again writing on Enron matters and, in this article, notes that the Fifth Circuit has asked the attorneys involved in the Arthur Andersen criminal case to advise the Court on whether the case should be remanded to District Court for re-trial or simply dismissed altogether after the Supreme Court's decisive opinion overturning the firm's conviction. Using prediction skills that have become well-honed from dealing with the Enron Task Force over the past several years, Ms. Flood speculates that the Task Force will request that the Fifth Circuit remand the case to the District Court for a new trial.

Other than providing an annuity for Andersen defense attorney Rusty Hardin, what possible benefit could be derived from a re-trial of a dead accounting firm? The fact that such a re-trial is even being considered reflects that the misguided criminal investigation into Enron has officially gone from being merely abusive and desperate to truly absurd.

Posted by Tom at 5:11 AM | Comments (0) | TrackBack (0)

November 8, 2005

Coach Queeg at A&M?

Some people simply should not blog. Let me put this in context.

Two weekends ago, Iowa State hammered Texas A&M 42-14 in front of the fifth largest crowd in the history of Kyle Field. Then, last Saturday night, Texas Tech blistered the Aggies 56-17 in Lubbock.

In between those two debacles, Texas A&M head coach Dennis Franchione published this post on his Coach Fran website, which included the following:

From appearances at a press luncheon, and a Big 12 phone conference, and at the local Quarterback Club, and at our radio show, the most-asked question of the past week about our game was, "Why didn't you run Jorvorskie Lane on third-and-one?"

Some people asked that question and really didn't care about the answer. In fact, some people right now don't care about anything we say, which is why in our camp we are working hard on doing instead of talking. Other than a few coaches who look at recruiting news, our staff does not spend time on the Internet and this week we didn't spend time with emails or letters, either.

And if that was not sufficiently patronizing for you, try this:

In case you are interested in understanding why we do or don't run a certain play at any given time, the best way to help is to tell you how we design our offense and the game plan. The easiest thing in the world is to sit in the stands or in a press box and have a simple take on what's happening on the field. If it was easy as walking in here and saying, "OK, let's hand the ball off to this guy 25 times and we'll win," we could save a lot of time and effort and get more sleep.

Which is followed by the following pearl of football wisdom:

[F]rom an ancient Asian religion there is a saying, "Wise people seek solutions. Others only cast blame."

The entire piece is not as defiant and condescending as the above excerpts, but you get the idea. As you might expect, more than a few Aggie fans are not pleased with Coach Fran's piece. Meanwhile, the Aggies are 13 point underdogs this Saturday at Oklahoma, where the Aggies lost 77-0 two years ago during Coach Fran's first season. And second-ranked Texas looms after that game.

Can Coach Fran survive four straight blowouts to end his third season at A&M, two of which have been losing seasons? My sense is that he's got one more season, but you never know. For us old-timers who recall the two week meltdown of Emory Bellard as A&M's head coach back in 1978, stranger things than an unexpected firing have happened to coaches in the passionate culture that is Texas A&M football.

Posted by Tom at 12:05 PM | Comments (2) | TrackBack (0)

Certain KPMG tax shelter civil suits stayed

In an interesting development, U.S. District Judge Vaughn R. Walker in San Francisco stayed a series of civil lawsuits over the legality of some KPMG LLP tax shelters pending the outcome of parallel criminal proceedings against certain of the individual defendants in New York. Prior posts on the KPMG tax shelter cases are here.

Normally, it's the defendants who are facing criminal charges in parallel criminal proceedings who seek a stay of the civil lawsuit over the same subject matter. The argument in favor of a stay is that a defendant should not be required to choose between asserting the privilege against self-incrimination, on one hand, and effectively defending a civil lawsuit, on the other, while a criminal investigation of the subject matter involved in the civil lawsuit is ongoing.

However, in these particular cases, Presidio Growth LLC, an advisory firm that had been set up to help KPMG market some of the tax strategies at issue in the criminal case, had filed the civil lawsuits requesting a declaratory judgment that certain of the tax shelters at issue in the criminal cases were legitimate. A victory for Presidio in the civil cases would have given the defendants in the criminal proceedings ammunition to argue that the civil court ruling establishes that reasonable doubt exists over the illegality of the tax shelters that are at the core of the criminal indictment. As a result, the Justice Department -- rather than the individual defendants facing the parallel criminal proceedings -- asked Judge Walker to stay the civil lawsuits pending the outcome of the criminal proceedings, and he granted the prosecution's request.

Posted by Tom at 6:16 AM | Comments (3) | TrackBack (0)

Keeping up with Merck's Vioxx cases

Well, it's only two down and about 6,500 to go, but last week's take nothing verdict in the latest Merck/Vioxx trial evened Merck's record in the Vioxx cases at 1-1 (earlier posts on Merck and Vioxx are here). Since that verdict, I have been meaning to pass along that Ted Frank and Walter Olson over at PointofLaw.com have created this handy Vioxx case page where you can keep up with developments in the Merck/Vioxx cases. Check it out.

Posted by Tom at 5:51 AM | Comments (0) | TrackBack (0)

The effect of failed urban economics on the French riots

Joel Kotkin is an Irvine Senior Fellow at the New America Foundation, the author of The City: A Global History (Modern Library, 2005) and a friend of Houston Strategies' Tory Gattis. Mr. Kotkin came to my attention recently for his insightful writings on urban planning (here and here) during the aftermath of Hurricane Katrina.

In this OpinionJournal op-ed, Mr. Kotkin addresses the unintended consequences in France of governmental policies such as high taxation, the welfare state and the economic barriers to entry caused by excessive regulation:

The French political response to the continuing riots has focused most on the need for more multicultural "understanding" of, and public spending on, the disenchanted mass in the country's grim banlieues (suburbs). What has been largely ignored has been the role of France's economic system in contributing to the current crisis. State-directed capitalism may seem ideal for such American admirers such as Jeremy Rifkin, author of "The European Dream," and others on the left. Yet it is precisely this highly structured and increasingly infracted economic system that has so limited opportunities for immigrants and their children. In a country where short workweeks and early retirement are sacred, there is little emphasis on creating new jobs and even less on grass-roots entrepreneurial activity.

Read the entire piece.

Posted by Tom at 5:09 AM | Comments (2) | TrackBack (0)

Guidant: "Spitzer is no stinking MAE"

Undeterred by the Lord of Regulation's entry into the dispute, troubled medical-device maker Guidant Corp. filed a lawsuit yesterday in New York City against disenchanted merger partner, Johnson & Johnson. Guidant is attempting to persuade the court to overrule J&J's stance that Guidant's recent troubles constitute a "material adverse effect" on Guidant's business that allows J&J to walk away from its proposed $25.4 billion merger ($76 per share) with Guidant that the companies announced last December.

In the meantime, J&J's MAE argument would appear to be improving by the day. Coming on the heels of the Spitzer lawsuit last week, Guidant announced yesterday that it is the subject of civil investigations by attorneys general in Arizona, Oregon and Illinois on behalf of a total 34 states and the District of Columbia. Moreover, the company announced that its third-quarter net income declined to $65.4 million (20 cents a share) from $153.6 million (48 cents a share) from a year ago, and that sales fell almost 15% to under $800 million from $924.5 million a year ago. Finally, just for good measure, Guidant disclosed in its quarterly filing that the Securities and Exchange Commission has begun a formal inquiry into issues relating to the product-malfunction disclosures and trading in Guidant stock. Johnson & Johnson asserts in this press release that it isn't required to go through with the deal because Guidant's recent recalls and warnings regarding its medical devices -- not to speak of the Spitzer lawsuit -- are "serious matters affecting both Guidant's short-term results and long-term outlook." J&J contends that the malfunctions, combined and the resulting sales drop, represent a "material adverse effect" on Guidant's business that allows J&J to walk the deal.

On the other hand, Guidant's lawsuit contends that the damage from its recent spate of malfunction announcements is a temporary blip on its otherwise bullish business radar screen. Inasmuch as J&J was banking on anticipated explosive growth in Guidant's heart-device business in making the deal and there is no change of circumstances regarding that anticipated growth, Guidant contends that the court should specifically enforce -- i.e., require J&J to consummate -- the deal.

William K. Sjostrom, Jr. and Dale Oesterle over at the Business Law Prof Blog have been following developments in the unwinding of the Guidant/J&J merger closely and this update post contains links to their prior posts on the saga.

Posted by Tom at 4:24 AM | Comments (0) | TrackBack (0)

November 7, 2005

More on the talented Mr. Munitz

Former University of Houston chancellor and current J. Paul Getty Trust president Barry Munitz probably didn't even notice this earlier post regarding his mercurial career in public life.

But I bet even the talented Mr. Munitz notices when the New York Sunday Times dedicates a long article to the current troubles of the Getty Trust.

Posted by Tom at 9:04 AM | Comments (0) | TrackBack (0)

Final PGA Tour Money List

With Brad Bryant's surprisingly easy win in the season-ending Tour Championship yesterday, the PGA Tour's all-important money list is final for the 2005 season. Some interesting notes:

Tiger Woods won again with over $10.6 million in winnings, which works out to be over half a million per tournament that he enteded in 2005.

It took a cool $626,736 in winnings to make the top 125, which is a coveted position because the 125 top money-winners from the 2005 season are exempt from qualifying for most PGA Tour events during the upcoming 2006 season.

Three 2004 Nationwide Tour graduates made the top 125, but ten 2004 Q-School graduates made the list and two Q-school grads (Sean O'Hair and Lucas Glover) finished in the top 30.

Apart from Gatesville's Bryant at no. 9 with almost $3.25 million in winnings, Justin Leonard of Dallas was the top Texan money-winner at no. 12 with over $2.6 million in winnings, followed by Chad Campbell of Andrews at no. 20 with almost $2.4 million. The Woodlands resident K.J. Choi came in at no. 37 with over $1.7 million in earnings, while Steve Elkington of Houston's Champions Golf Club had a comfortable bounce back year at no. 54 with over $1.4 million.

54 year old Tom Kite's plan to play the regular PGA Tour in 2005 resulted in just 11 tournaments and a bit over $100,000 in winnings, placing him 217th on the list.

The sad golfing saga of David Duval continues, as the former no. 1 golfer in the world came in 260th on the money list with just a bit over $7,500, which works out to be a Tour-low $381.50 per tournament.

Mr. Duval -- who continues to have an exemption into most tournaments because of his 2001 British Open and 2000 Players' Championship victories -- may be carrying his own bag in future tournaments at that earning level.

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

Another one bites the dust

Flyi Inc., which spun off a year ago into the low-fare independent airline called "Independence Air" after beginning as a contract carrier for United Airlines and Delta Air Lines Inc., filed a chapter 11 case early Monday morning, joining a good part of the American airline industry in keeping the bankruptcy bar fat and happy.

Meanwhile, just to remind you that markets often work in mysterious ways, airline stocks are rebounding.

Posted by Tom at 7:10 AM | Comments (0) | TrackBack (0)

Willy Taveras should not be the NL ROY

I understand that the Stros' public relations department wants centerfielder Willy Taveras to be the National League Rookie of the Year, but why does the Chronicle lap up such nonsense with unqualified support?

As noted in this previous post, Taveras did reasonably well this season jumping from Double A ball to the Major Leagues, but he remains a decidedly below-average player in the most important aspect of baseball, which is creating runs so that your team can score more than the opposition and win games. Taveras generated 13 fewer runs this season than an average National League hitter would have generated in the same number of plate appearances ("RCAA").

Moreover, in almost every key offensive category -- on-base average, slugging percentage, OPS, etc. -- Taveras is not only below average, but far below average. Batting lead off for much of the season, Taveras drew only 25 walks (an average NL centerfielder would have had over twice that many) in about 625 plate appearances (Lance Berkman, in comparison, drew 91 in about 560 plate appearances), and had only 20 extra base hits (an average NL centerfielder would have had 49). Although Taveras' defense improved during the second half of the season, the runs that he saves by his defense is less than 5 per season and, thus, not close to offsetting the deficit that he generates in run-scoring. Only because of his batting average (.290) -- which happens to be among the most misleading of hitting statistics -- is Taveras considered by superficial observers to be a good player. Taveras' on-base percentage -- a much better indicator of run-scoring potential than batting average -- was .324, well below the National League average of .339. In short, being fast and beating out bunts and infield grounders does not equate necessarily to being a good ballplayer.

Taveras is only 23 and made the difficult jump from Double A ball to the Majors this season, so he still may improve over the next several seasons. If he can improve his walk rate to raise his on-base average to around .380 or so, and improve his power to an average or just below-average slugging percentage, then Taveras can be a reasonably effective National League centerfielder. But Taveras remains a well below-average National League player at this point, and lapping up the Stros' propaganda that he should be the Rookie of the Year Award is not a particularly good way to be objective about the fact that he needs to improve in order to become even an average National League player, much less an award-winning one.

By the way, the Phillies' Ryan Howard should be the NL Rookie of the Year.

Posted by Tom at 5:56 AM | Comments (2) | TrackBack (0)

Thinking about the source of the French riots

Rioting across France hit a new peak during the 11th night of rioting last night, as the violence -- initially centered in the Paris suburbs -- worsened elsewhere in France. From the original outburst of violence in suburban Paris housing projects, the violence has expanded into a widespread show of disdain for French authority from youths, mostly the children of Arabs and black Africans who are the products of high unemployment, poor housing and discrimination in French society. This Opinion.Telegraph piece provides a British perspective on the current situation.

Interestingly, Theodore Dalrymple -- the pen name of British psychiatrist and author, Anthony Daniels -- predicted all of this back in 2002 in this City Journal piece on the developing European underclass:

Whether France was wise to have permitted the mass immigration of people culturally very different from its own population to solve a temporary labor shortage and to assuage its own abstract liberal conscience is disputable . . . Indisputably, however, France has handled the resultant situation in the worst possible way. Unless it assimilates these millions successfully, its future will be grim. But it has separated and isolated immigrants and their descendants geographically into dehumanizing ghettos; it has pursued economic policies to promote unemployment and create dependence among them, with all the inevitable psychological consequences; it has flattered the repellent and worthless culture that they have developed; and it has withdrawn the protection of the law from them, allowing them to create their own lawless order.

No one should underestimate the danger that this failure poses, not only for France but also for the world. The inhabitants of the cités are exceptionally well armed. When the professional robbers among them raid a bank or an armored car delivering cash, they do so with bazookas and rocket launchers, and dress in paramilitary uniforms. From time to time, the police discover whole arsenals of Kalashnikovs in the cités. There is a vigorous informal trade between France and post-communist Eastern Europe: workshops in underground garages in the cités change the serial numbers of stolen luxury cars prior to export to the East, in exchange for sophisticated weaponry.

A profoundly alienated population is thus armed with serious firepower; and in conditions of violent social upheaval, such as France is in the habit of experiencing every few decades, it could prove difficult to control. The French state is caught in a dilemma between honoring its commitments to the more privileged section of the population, many of whom earn their livelihoods from administering the dirigiste economy, and freeing the labor market sufficiently to give the hope of a normal life to the inhabitants of the cités. Most likely, the state will solve the dilemma by attempts to buy off the disaffected with more benefits and rights, at the cost of higher taxes that will further stifle the job creation that would most help the cité dwellers. If that fails, as in the long run it will, harsh repression will follow.

Following up on one of those themes, Dalrymple writes today in this Wall Street Journal ($) op-ed that France's economic policies that end up encouraging unemployment have much to do with the current situtation:

A French employee works 30% fewer hours than a British worker, and a much smaller percentage of the French population than the British works at all, yet total French output is very nearly equal in value to British. In other words, the French are much more efficient economically than the British. But their relative efficiency has been bought at a price: the creation of a large caste of people more or less permanently unintegrated into the rest of society.

A Martian observing France dispassionately, without ideological preconceptions, would come to the conclusion that the French had accepted with equanimity a kind of social settlement in which all those with jobs would enjoy various legally sanctioned perks and protections, while those without jobs would remain unemployed forever, though they would be tossed enough state charity to keep body and cellphone together. And since there are many more employed people than unemployed people in France, this is a settlement that suits most people, who will vote for it forever. It is therefore politically unassailable, either by the left or the right, which explains the paralysis of the French state in the present impasse.

The only fly in the ointment (apart from the fact that the rest of the economies of the world won't leave the French economy in peace) is that the portion of the population whom the interior minister, Nicolas Sarkozy, so tactlessly, but in the secret opinion of most Frenchmen so accurately, referred to as the "racaille" -- scum -- is not very happy with the settlement as it stands. It wants to be left alone to commit crimes uninterrupted by the police, as is its inalienable right.

Unfortunately, to economic division is added ethnic and cultural division: For the fact is that most of Mr. Sarkozy's racaille are of North African or African descent, predominantly Muslim. And the French state has adopted, whether by policy or inadvertence, the South African solution to the problem of social disaffection (in the days of Apartheid): It has concentrated the great majority of the disaffected paupers geographically in townships whose architecture would have pleased that great Francophone (actually Swiss) modernist architect, Le Corbusier, who -- be it remembered -- wanted to raze the whole of Paris and rebuild it along the lines of Clichy-sous-Bois (known now as Clichy-sur-Jungle).

If you wanted to create and run a battery farm for young delinquents, you could hardly do better. But as one "community leader" put it when asked whether he thought that better architecture might help, there's no point in turning 15-story chicken coops into three-story chicken coops.

Meanwhile, Victor Davis Hanson reminds us in this City Journal piece that the core problem remains radical Islamic fascism, the importation of which America remains strangely tolerant:

Some say, reassuringly, that Islamic extremism has little appeal to America’s growing Muslim population. America prides itself on being unlike Europe in its powers of assimilation. Thanks to the melting pot and a vigorous economy, this argument goes, we have no Marseilles-like Muslim ghettos or Rotterdam-style “dish cities,” blighted Islamic suburbs where assimilation remains rare and terrorist sympathies widespread even after generations of living in the West. We certainly don’t have the difficulties in assimilating Muslims that England experiences. A chilling Daily Telegraph poll, for example, found that one in four British Muslims sympathized with the motives of July’s subway killers, about one in five voiced little loyalty toward Britain, and a third felt that Western culture was “decadent” and that they should help “to bring it to an end.”

Yet U.S. self-congratulation is premature. Before we condemn Britain as hopelessly retrograde, we need to recognize that we have no idea how much some American Muslims support jihadist causes—comprehensive polls don’t exist. Of the few surveys taken, the results aren’t encouraging. The Hamilton College Muslim America poll of April 2003 revealed that 44 percent of U.S. Muslims had no opinion on whether Usama bin Ladin was involved with the September 11 attacks. Only one out of three blamed al-Qaida. . . .

If we really are in a war against Muslim terror, our enemies and those who support or appease them pose a quandary on the home front unlike anything we have faced in past struggles. . .

Yet immigration control—as the Dutch and French have learned—may be the most powerful tool in the war against the jihadists. Not only does it help keep terrorists out, it also carries symbolic weight. In the Middle East, America is worshipped even as it is hated—constantly slurred even as it proves the Number One destination for thousands upon thousands of would-be immigrants from the Islamic world. Once we have deported the Islamists, and Middle Easterners and other Muslims find it much harder to enter the U.S. because of their governments’ tolerance for radical anti-Americanism, the message will resound all the more loudly in the Muslim world itself that terrorism is intolerable.

Such toughness opposes the current orthodoxy, which holds that curtailing immigration from the Arab and Muslim world will cost us a key opportunity to inculcate moderates and eventually send back emissaries of goodwill. Maybe; but so far, the profile of the Islamic terrorist is someone who has paid back our magnanimity with deadly contempt. Just as bin Ladin, Dr. Zawahiri, and the Pakistanis suspected of bombing the London subways were not poor, uneducated, or unfamiliar with the West, so too we find that those arrested for terrorist activities on our shores seem to hate us all the more because of our liberality.

Perhaps if the message does begin to be heard that America is as unpredictable as it is merciless toward the advocates and supporters of radical Islam, then the much praised but rarely heard moderates of the Muslim world will at last step forward and keep the few from ruining things for the many. Meantime, we should stop allowing illiberals into the United States—illiberals who either wish to undermine Western tolerance or won’t worry too much when others in their midst try.

Posted by Tom at 4:34 AM | Comments (0) | TrackBack (0)

November 6, 2005

2005 Weekly local football review

Texas Longhorns 62 Baylor 0.

The Longhorns (9-0; 6-0 Big 12) relentless march to the BCS National Championship Game against USC continued on Saturday as the Horns barely broke a sweat in racing past undermanned Baylor and Miami took care of Virginia Tech's dream of sneaking past the Horns in the BCS standings. The Horns face a scrimmage against Kansas at home, a rivalry game against a demoralized Aggie team in College Station, and a reasonably competitive game against Colorado in the Big 12 Championship game in in early December at Reliant Stadium. But make no mistake about it -- this Texas team is making its reservations for Pasadena in the first week of January and only a huge upset could scuttle those plans.

Texas Tech 56 Texas Aggies 17.

The Aggies (5-4; 3-3 Big 12) officially packed this season in on Saturday night as the Red Raiders (8-1; 5-1 Big 12) beat the Aggies for the sixth straight time in Lubbock. As predicted earlier, the 16.5 point spread in favor of Tech was the lock bet of the year, and with upcoming games at improving Oklahoma and at home against Texas, the Aggies are facing an almost certain second losing season in the first three seasons of the Coach Fran era. A&M's football program is now clearly among the most underachieving programs in major college football.

Jaguars 21 Texans 14.

The Texans (1-7) continued their march to the number one choice in the 2006 NFL Draft by gift-wrapping a win to a listless Jaguars team Sunday afternoon in Jacksonville. After the Texan defense shut out the Jaguars in the first half and stopped them again on their first series in the second half, Texans QB David Carr fumbled deep in Texan territory while being sacked. The Jags recovered and took in for a score and then tacked on scoring drives of 80 and 82 yards in the fourth quarter to seal the win, prompting Carr and defensive lineman Gary Walker to get into a shouting match as they walked off the field. The Texans go to Indianapolis next week to be served as sacrificial lambs to Peyton Manning and Co., and then return for two straight home games against Kansas City and St. Louis.

Central Florida 31 Houston Cougars 29.

Sigh. Watching the Cougars (4-4; 3-2 CUSA) is just plain frustrating. Penalties, missed tackles, turnovers, tipped passes, and questionable playcalling interspaced with a few big plays that keep the Coogs in the game. Alas, it's hard to beat a team when you give up 500 yards of total offense. Amazingly, the Coogs can still become bowl eligible by winning at least two out of their three remaining home games against Southern Mississippi, S.M.U., and Rice.

SMU 27 Rice 0.

The Owls (0-8; 0-3 CUSA) now have lost 14 straight, the longest losing streak in Division 1A football. After mustering only 230 yards total offense against a bad SMU team (3-6; 2-3 CUSA), the prospects for a win in their remaining games against Tulane, Central Florida and Houston do not appear to be particularly good. The Ken Hatfield firing watch continues.

The Cowboys (5-3) were idle this week, but play three games in 11 days starting next Sunday at Philly, and then at home against Detroit and Denver.

Posted by Tom at 7:15 PM | Comments (2) | TrackBack (0)

November 5, 2005

Daniel Drezner lands on his feet

The University of Chicago's loss is Tufts University's gain.

Hearty congratulations are in order for Professor Drezner, who is one of the pioneers of the blogosphere.

Posted by Tom at 10:18 AM | Comments (2) | TrackBack (0)

Tyler Cowen discovers Texas barbeque

Marginal Revolution's Tyler Cowen has been eating Texas barbeque this week in Lockhart and he is finding it to be a very satisfying experience. Indeed, one of the many pleasures of living in Texas is taking a day to visit several of the charming small towns in the triangle formed by the cities of Houston, Austin and San Antonio, and sampling the local barbeque. One of my fondest memories from years ago is accompanying a client to several of these towns as we took a day to meet witnesses in a lawsuit I was defending for him. Each meeting took place in each town's best local barbeque restaurant and, of course, we sampled the barbeque at every spot. To this day, I have not come up with a better way to prepare for a trial.

Posted by Tom at 9:54 AM | Comments (0) | TrackBack (1)

A snarky week in Strosland

Kevin Whited and I have been shaking our heads this week over the barbs that have been being flying to and from the Stros' front office. The Stros' front office hasn't been involved in this kind of flame war since the days when the late Stros owner John McMullen teed off on former Stros general manager Tal Smith and Mr. Smith responded with a defamation lawsuit against Mr. McMullen.

This all started when former Stros General Manager Gerry Hunsicker was passed over earlier this week for the Philadelphia Phillies general manager position. Mr. Hunsicker grew up in the Philadelphia area and his tenure with the Stros coincided with the club becoming one of the most successful teams in Major League Baseball over the past decade, so he was thought to be the favorite for the Phillie job. Thus, it definitely raised some eyebrows that he was passed over for the job, particularly in favor of a 68 year old.

Well, it didn't take long for the salvos to blast forth from the Stros' front office after the Phillies' announcement. As noted in this earlier post, the Chronicle's Stros beat reporter -- Jose de Jesus Ortiz -- wrote this article entitled "Hunsicker Must Prove That He's Trustworthy" in which he relates how Stros owner Drayton McLane and current Stros GM Tim Purpura became disenchanted with Hunsicker's alleged behind-the-scenes backstabbing and self-promotion in the media.

It didn't take long after that for Mr. Hunsicker to fire back with his own salvo. In this blog post, Chronicle sportswriter Richard Justice -- who has long been one of Hunsicker's media conduits and, not coincidentally, a frequent harsh critic of Stros owner McLane -- criticized the Stros' front office for its handling of the firing of a longtime Stros scout and later, in response to a reader's question, relates how Hunsicker was furious that then Director of Player Personnel Purpura misevaluated the Stros Chris Burke as having the potential to play shortstop at the Major League level. That latter barb -- as well as the bombs tossed in Mr. de Jesus Ortiz's piece on Mr. Hunsicker -- are all the more surprising because Hunsicker was supposed to have been Purpura's mentor during Mr. Hunsicker's tenure as Stros GM.

Finally, the public sniping concluded -- at least for the time being -- with Hunsicker leaving town with his tail between his legs by accepting the no. 2 position behind 28 year old Andrew Friedman in the notoriously poor Tampa Bay Devils organization, a substantial step down for a baseball executive with as successful a track record as Hunsicker. His professional demise was accentuated by the fact that he took the Devil Rays job at a time when several much more appealing general manager positions -- the Red Sox and the Dodgers, just to name two -- remain unfilled.

So, what to make of all this? Well, for one thing, despite his squeaky-clean public persona, McLane is certainly capable of getting down and dirty with the best of them when he believes that his reputation is being sullied. It also appears reasonably certain that Hunsicker did not leave with many friends in the Stros front office and that his reputation for self-promotion may have cost him dearly in terms of snaring one of the better GM positions in Major League Baseball. If that is true, then hopefully Hunsicker can dispense with that attribute and become an effective mentor to Mr. Friedman in Tampa Bay. Although Hunsicker reportedly was Purpura's mentor with the Stros, it's worth noting that Purpura was one of the least-known, up-and-coming front office executives in Major League Baseball before McLane selected him to replace Hunsicker as Stros GM. Unless Hunsicker's mentoring relationship with Friedman turns out better than his similar relationship with Purpura did, then a very talented baseball executive may soon find himself without a Major League job.

Posted by Tom at 7:41 AM | Comments (1) | TrackBack (0)

Signs of desperation at the Enron Task Force?

Already having engaged in intimidation of witnesses and dubious plea-bargaining tactics, the Enron Task Force is showing signs of becoming desperate regarding its legacy case.

As noted in this post from earlier in the week, the Enron Task Force has done a 180 in regard to its position toward Arthur Andersen and its former partners in connection with its legacy case against former Enron executives Ken Lay, Jeff Skilling and Richard Causey. After having demonized the firm, prosecuted it out of business, and alleged that its partners were co-conspirators in a number of Enron-related prosecutions, the Task Force is now embracing several former Andersen partners as prosecution witnesses in the Lay, Skilling, Causey case and justifying that reliance on the Task Force's apparently recent realization that Enron duped Andersen just like everyone else. For Andersen, the Task Force's revisionist position regarding the firm falls squarely in the "better late than never" department.

Now, this John Emshwiller/Wall Street Journal ($) article and this Chronicle/John Roper article reveal further signs of strain in the Task Force's case against Mr. Lay. Although the Task Force's filing has not yet been uploaded on the public docket of the case (the Task Force, as a part of its propaganda campaign in Enron-related prosecutions, often leaks its filings to reporters before they are filed publicly), Mr. Emshwiller reports that the Task Force filing advises the court and the parties that it intends to go into Mr. Lay's knowledge of potential losses relating to a trading scandal in the late 1980's that could have brought the much-smaller Enron down at the time. Inasmuch as the indictment against Mr. Lay contends that he tried in the latter part of 2001 to cover up Enron's growing financial problems, the Task Force is contending that Mr. Lay's alleged similar conduct in regard to the trading scandal 14 years earlier is probative evidence of his guilt. U.S. District Judge Sim Lake has not yet ruled whether he is going to allow the Task Force to go down that bunny trail during the trial.

Meanwhile, a perusal of the case docket reflects that the Lay-Skilling-Causey team is preparing to present an impressive array of expert witnesses in defense of the Task Force's amorphous allegations of wrongdoing in regard to Enron's accounting, structured finance transactions, earnings management and related matters that form the basis of the Task Force's indictment against Messrs. Lay, Skilling and Causey. On the other hand, other than an SEC representative and the Andersen partners who the Task Force demonized earlier, there is little indication from the docket on how the Task Force plans to establish its core theory that Enron's legitimate business operations were a sham that Messrs. Lay, Skilling and Causey misrepresented to the investing public.

Messrs. Lay, Skilling and Causey will never win their criminal case in the court of public opinion that has been polluted by the slanted public statements of the Task Force and the mostly one-sided mainstream media accounts of the Enron scandal. However, assuming that a fair jury panel can be found, the foregoing developments represent clear signals that these men have a much better chance of winning their case in the courtroom.

Posted by Tom at 5:38 AM | Comments (3) | TrackBack (0)

November 4, 2005

Is the Lord of Regulation angling for J&J's support?

Let's see now. Johnson & Johnson has contracted to buy medical-device maker Guidant Corporation in a deal worth nearly $24 billion. However, J&J included in the deal some fairly sophisticated provisions that allow it to walk away in the event of a material adverse effect on Guidant's financial condition. J&J has given strong indications recently that it is wanting to walk on the deal, and Guidant has responded that it does not believe an MAE exists and that it expects J&J to consummate the deal.

So, so if you're J&J, how exactly do you come up with a sure-fire material adverse effect?

Well, how about New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot Spitzer? Yesterday, the Lord of Regulation filed a lawsuit against Guidant alleging the the company concealed from the public a design flaw in one of its surgically implanted heart defibrillators.

No word yet on where and when the J&J-sponsored "Spitzer for Governor Rally" will be held. ;^)

Posted by Tom at 8:40 AM | Comments (3) | TrackBack (0)

Piling on Arthur Andersen

It's looking as if the Texas State Board of Accountancy needs to catch up with the government's investigation into Enron. In this Chronicle article, John Roper and Purva Patel report that the Texas state accounting board is seeking disciplinary action against seven former Arthur Andersen accountants for allegedly failing to scrutinize and report financial events that led to the collapse of Enron. The state board's press release is here and a copy of the complaint is here.

But wait a minute. Hasn't the state board staff checked in with the Enron Task Force recently? The board's complaint is rather dated -- indeed, it is based on many of the same allegations that the Enron Task Force made in 2002 when it demonized Arthur Andersen and its partners and improperly prosecuted the firm out of business. But now, faced with the realization that it actually will have to attempt to prove its amorphous charges against former Enron executives Ken Lay, Jeff Skilling and Richard Causey, the Task Force has done a 180 degree turn and is contending that the Arthur Andersen partners were duped by Enron just like everyone else (sorry about the prior misunderstanding, Andersen). Wouldn't it be the ultimate irony if the former Andersen partners call as witnesses in defending themselves against the board's complaint members of the same prosecution team that prosecuted their firm out of business?

By the way, the best reflection of the absurdity of the Board's complaint is that former Andersen partner Carl Bass was included as a defendant. As anyone with even a passing understanding of the Enron case knows, Mr. Bass was a sometimes lone voice of skepticism and reason regarding aggressive accounting positions that Enron management sought to take in regard to various transactions.

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

Steffy on the sad case of Jamie Olis

Chronicle business columnist Loren Steffy -- who blogs over at Full Disclosure -- does not generally share my view that government has gone overboard in the post-Enron era of criminalizing merely questionable business transactions. However, when it comes to the sad case of Jamie Olis, Mr. Steffy in his column today says enough is enough:

Olis' boss, Gene Foster, and a co-worker pleaded guilty to one count of fraud in exchange for a maximum sentence of five years. Olis fought the charges, lost, and bore the burden of the entire stock loss, which resulted in a sentence almost fives times longer than what his former boss faces.

His sentence is only one year less than WorldCom's Bernie Ebbers, who oversaw the biggest accounting scam in U.S. history, a fraud of more than $11 billion.

Olis may have helped commit a crime, but it was far from Ebbersian in its proportion. After all, Olis didn't directly profit from Project Alpha. He didn't enrich himself at shareholders' expense.

The Supreme Court earlier this year ruled that the strict guidelines that Lake used are not mandatory, that judges should have latitude for judicial prudence.

That gives Lake an opportunity to restore rationality to Olis' sentence.

[snip]

A jury found Olis guilty, and for that he should pay a price. He has. Olis, who was ordered to report to prison in May 2004, has already served 18 months. Lake hasn't scheduled a hearing on a new sentence, and by the time the process is done, Olis will be closing in on two years. Lake should consider time served and set Olis free.

Justice holds a sword, but she also holds a scale. And the scale is supposed to be balanced.

Amen. And here's hoping that Judge Lake takes note that the position on market loss that the government promoted to him at Mr. Olis' previous sentencing hearing -- and that led to the imposition of the draconian 24 year sentence -- was directly contradicted by the position that the government was taking at the same time before the Supreme Court in Dura Pharmaceuticals v. Broudo (see earlier post here).

By the way, in regard to the market loss issue, Mr. Steffy quotes Clear Thinkers favorite Larry Ribstein, who has been one of the academic bloggers at the forefront of publicizing the injustice of the Olis case.

Posted by Tom at 5:36 AM | Comments (1) | TrackBack (0)

Riots spreading in suburban France

This story has been flying a big under the radar screen (at least outside the blogosphere) over the past week, but France's government is coming under increasing political pressure to find a solution for civil unrest in suburban France that has unfolded over the past week. Over the past couple of nights, rioting youths in the the Seine-Saint-Denis region north of Paris have shot at police and firemen as they battled youths who torched car dealerships, public buses and a school.

The triggering event of the rioting occured last Thursday in the northeastern Paris suburb of Clichy-sous-Bois after the accidental deaths of two teenagers who were electrocuted while hiding from police in a power substation. However, the unrest is really the outgrowth of French society's failure to integrate millions of immigrants who have come to France over the past generation, many of whom are unemployed immigrants from the Middle East and North Africa who live in poverty in low-cost, suburban housing projects. The riots are focusing attention on the differences between France's generally affluent big cities and their poor suburbs, where the North African and Muslim immigrants and their French-born children struggle with high unemployment, crime, poverty and a lack of opportunities. As with such ghetto areas anywhere, crime-ridden gangs dealing drugs and stolen goods control many of the more decrepit housing projects and are benefitting from the chaos of the current riots.

As we saw in the chaotic aftermath of Hurricane Katrina in New Orleans, the line between civil order and unrest is fragile, and not easily restored once crossed. Daniel Drezner has more along those lines in this post and related comments.

Posted by Tom at 4:31 AM | Comments (5) | TrackBack (0)

November 3, 2005

Business tidbits

I pass along the following tidbits of business information that caught my eye this morning:

The auto industry just recorded its worst October for U.S. sales in 13 years;

For most of October, the nearby price of a natural gas futures contract closed at a high of $14.34 per million British thermal units. That was more than twice what natural gas traded for at the beginning of the year. However, an Energy Information Agency inventory report last week revealed an unexpectedly large increase in natural-gas storage just as most of the U.S. was experiencing an unusually mild autumn. Accordingly, the price of a nearby natural gas contract closed yesterday at $11.60 per million BTUs, down almost 20% from last week's highs; and

Clear Thinkers favorite James Hamilton notes that, despite record profits, oil and gas companies are reinvesting a surprisingly low percentage of their profits and he is not sure why.

Posted by Tom at 8:10 AM | Comments (1) | TrackBack (0)

All about Alito

As it did with Harriett Miers, the University of Michigan Law Library has put together this top notch site that includes biographical information, downloadable opinions, and almost everything else you need to know about Supreme Court Justice nominee, Samuel A. Alito, Jr.. Check it out.

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

George Mitchell makes huge gift to A&M

Longtime Houston independent oil and gas entreprenuer, real estate developer and philanthropist George Mitchell announced jointly with Texas A&M University yesterday that he and his wife Cynthia are donating $35 million to A&M to help build two physics facilities at the university. Jennifer Radcliffe of the Chronicle reports on the donation, which is one of the largest in A&M history. Earlier posts on philanthropic donations of the Mitchells are here and here.

A&M is certainly appreciative of the Mitchells' generous gift, but what most Aggies want is for Mr. Mitchell to do something about the reeling Aggie football program, which Chronicle sportswriter and former Aggie John Lopez sizes up here and here. Similarly, this caustic San Antonio Express article on the A&M football situation pretty well reflects the Aggie sentiment around the Lone Star State at this particular moment.

The Aggies are currently 16.5 point underdogs in their game at Texas Tech on Saturday. Taking Tech and laying the points may be the lock bet of the year.

Posted by Tom at 6:26 AM | Comments (0) | TrackBack (0)

Ron Perelman continues to torture Morgan Stanley

You would think that hammering Morgan Stanley for $1.57 billion in damages would be enough for Ronald Perelman.

No way. This Wall Street Journal ($) article reports that Mr. Perelman has requested the same Florida state district judge who eviscerated Morgan Stanley's defense in his lawsuit to hold the investment banking firm in criminal contempt of court for allegedly lying to the court in connection with testimony over when company executives found out that certain electronic tapes at issue in the trial might have contained potentially relevant email.

Under normal circumstances, Morgan Stanley should not worry too much about Mr. Perelman's motion. Unless the contemptuous behavior takes place in the judge's presence, all the judge should be able to do is refer the matter to the local district attorney for prosecution if she concludes that Mr. Perelman has made a prima facie case of criminal contempt. Moreover, the judge should recuse herself from overseeing the criminal case because she would likely be a witness in that case.

Having said all that, the way this case has gone for Morgan Stanley, the firm would be well-advised to have bail money immediately available for use after the hearing.

Posted by Tom at 5:15 AM | Comments (0) | TrackBack (0)

The federal government's increasing equity stake in public companies

This Wall Street Journal ($) article picks up on a subject that I have previously addressed in regard to the legacy airline bankruptcies -- that is, the federal government's increasing equity stake in public companies resulting from the conversion of the Pension Benefit Guaranty Corp.'s debt to equity in the reorganized companies under their chapter 11 reorganization plans:

The U.S. government is on its way to becoming a big shareholder in the nation's airline industry and possibly in the auto industry.

The Pension Benefit Guarantee Corp., the federal agency that partially guarantees traditional pensions, recently was awarded 7% of US Airways Group Inc. by a federal bankruptcy court handling the company's Chapter 11 reorganization, according to the PBGC's recent filing with the Securities and Exchange Commission. The agency got the shares as compensation for the underfunded pension plans it assumed when the company filed for bankruptcy.

The agency is likely to get an even larger stake -- between 15% and 35% of new shares -- of UAL Corp.'s United Airlines when it emerges from Chapter 11 in February, after 38 months in court protection, according to a PBGC official. And it's likely to get sizable chunks of Northwest Airlines, Delta Air Lines and Delphi Corp. -- if, as expected, the companies ask the bankruptcy courts to dump their pension plans on the insurer.

The article relates that the PGBC's policy to date has been not to take an active role in corporate governance matters and that the agency generally assigns one of its 11 money managers (currently J.P. Morgan Chase & Co.)that invest its assets to manage individual equity holdings.

The PGBC is being forced to take these equity stakes at a time when it is experiencing a widening deficit. As of the end of 2004, the PBGC had over $62 billion in obligations and about $40 billion in assets and that deficit will widen this year Delta, Northwest and Delphi unload unfunded pension liabilities on the agency. In fact, the Congressional Budget Office -- never a bastion of conservative projections -- estimates that the deficit will more than triple over the next ten years to $86.7 billion by 2015.

Interestingly, the article puts a rather positive spin on the equity stake that the PGBC is taking in these companies by relating the government's successful 1980 Chrysler Corp bailout. In that case, the government guaranteed $1.2 billion in loans for Chrysler in return for warrants to buy 14.4 million Chrysler shares. Chrysler's turnaround resulted in the company repaying the loans three years later, Chrysler ended up buying the government's warrants at an suction for over a $300 million profit.

Unfortunately for the government, there is one big difference in the current scenario compared with the Chrysler bailout. The auto industry at least had a prior track record of being profitable. The same cannot be said of the airline industry, particularly over the past 20 years.

Posted by Tom at 4:35 AM | Comments (0) | TrackBack (1)

November 2, 2005

Thinking about the Enron legacy case

It is currently the calm before the storm that will be the trial of the legacy case of the Enron Task Force -- that is, the criminal trial of former Enron executives Ken Lay, Jeff Skilling, and Richard Causey that is scheduled to begin in mid-January, 2006.

In that connection, this Washington Post article discusses the extensive questionnaire that was recently sent to prospective jurors in the Lay-Skilling-Causey trial, which has taken on added importance because of the extensive evidence of jury pool bias against all things related to Enron that the Lay-Skilling-Causey defense team has submitted to U.S. District Judge Sim Lake. Judge Lake declined to grant the defense's motion to change the venue of the trial out of Houston, but he has supported the defense's desire to have a more extensive questionnaire than the Task Force desired.

Meanwhile, in this the Conglomerate blog post, David Zaring addresses the important question of how does one make a case as complex as the one against Messrs. Lay, Skilling and Causey understandable to a jury? The Task Force already stumbled badly on that score in the trial of Enron Broadband case, and recent indications are that the Task Force is having similar problems in the preparation of its case against Messrs. Lay, Skilling and Causey. A reflection of that is the recent change that the Task Force has taken in regard to Arthur Andersen. Not only did the Task Force previously demonize Andersen in connection with prosecuting the firm out of business, the Task Force named Andersen as a co-conspirator in connection with various Enron criminal cases. However, the Task Force is changing its tune toward Andersen in regard to the Lay-Skilling-Causey prosecution, as prosecutors now recognize that relying on the testimony of admitted criminals such as Andy Fastow and Ben Glisan may not be particularly persuasive to a jury. So, the Task Force is currently listing several former Andersen partners as prosecution witnesses and, in so doing, contending that Andersen was duped by Enron and not really a co-conspirator with Enron, after all. It remains to be seen whether the Task Force can explain to a jury why it prosecuted Andersen out of business at an earlier stage of the Enron case when it is now contending that the firm was simply duped by Enron like everyone else.

Posted by Tom at 10:13 AM | Comments (4) | TrackBack (0)

More on former Stros General Managers

Blogging is a big light today as I make some blog site upgrades, but I wanted to pass along a couple of interesting items on former Stros general managers.

In this remarkably frank article, Chronicle Stros beat reporter Jose de Jesus Ortiz uses the occasion of former Stros general manager Gerry Hunsicker losing out on the Phillies' GM job to take a serious whack at Mr. Hunsicker's credibility. Entitled "Hunsicker Must Prove That He's Trustworthy," the article relates how Stros owner Drayton McLane and current Stros GM Tim Purpura became disenchanted with Mr. Hunsicker's alleged manipulation of media accounts of various Stros transactions, including the following:

The first time I knew Hunsicker's days were numbered with the Astros was when he flirted with the New York Mets for their vacant general manager's job after the 2003 season. A report in the Newark Star-Ledger stated that Hunsicker wanted out of Houston because he had been overruled when he wanted to hire Tony Peña instead of Jimy Williams as manager after the 2001 season.

The morning that report ran, I was awoken by Astros brass furious because they believed Hunsicker was trying to take credit for discovering Peña.

For the record, Purpura, not Hunsicker, was the one pushing for Peña.

Asked about the report, Hunsicker declined to comment. I told him I was running something about it with or without his comments because folks in his front office were offended by the inference. Whether it was true or not, Astros officials distrusted Hunsicker and believed he was the biggest leak in the franchise.

Read the entire article, which is really quite biting in relation to the usual local reporting on the Stros. Meanwhile, Mr. Hunsicker's booby prize for losing out on the Phillies GM job is reportedly the Tampa Bay Devil Rays GM position, which is probably the most challenging job in Major League Baseball.

Meanwhile, take a moment to read this fascinating (and very long) Business of Baseball interview with former Stros GM and current director of baseball operations Tal Smith, who is the one common thread through the fabric of Houston's 43 years in Major League Baseball. The interview is filled with anecdotes about the Stros franchise, including the following tidbit regarding last season's failed negotiations for Carlos Beltran:

The Beltran negotiations, they really didn’t get to any meaningful dialogue until the final hour before the deadline that we faced. It’s just tough to do a deal of that magnitude in the final hour. Drayton asked on many occasions if we could go visit with Carlos in Puerto Rico—if we could talk to him. We were denied that opportunity and told that, if we did, that would foreclose any negotiation with Carlos and perhaps some others down the road. Again, when you have a situation like that, the agent and the player set ground rules of what we could do.

Some people have suggested, “Well, you should have issued an ultimatum.” That’s all well and good. That doesn’t appear to me to be the right thing to do to your fans … to just foreclose any possibility. I don’t think Scott Boras would have reacted to any ultimatum that we might have established as far as “This offer is good until December 1, or December 10….” I don’t think that would have worked. All we would have done at that point is, with absolute certainty, denied the Astros any opportunity. As it was, I’m not sure how great an opportunity we had. It didn’t work out for us. But I don’t think there’s anything, in retrospect, we could have really done other than perhaps close the doors earlier, write it off and go in another direction. We wanted to get Carlos, if at all possible, but that’s the course we chose.

My sense is that Scot Boras need not bother peddling any of his other clients with the Stros anytime soon.

Posted by Tom at 9:03 AM | Comments (5) | TrackBack (1)

November 1, 2005

Finally, some justice for Jamie Olis

The sad case of Jamie Olis has been a frequent topic on this blog as an egregious example of the injustice that has resulted from the government's increasing criminalization of business in American society. Last night, after many months of waiting, Mr. Olis finally received some relief from his ordeal.

Although the Fifth Circuit declined to overturn his conviction, the Court did in this long-awaited opinion vacated Mr. Olis' 24 year sentence and ordered U.S. District Judge Sim Lake to resentence Mr. Olis in accordance with Booker's overall standard of reasonableness, including a recalculation of the amount of loss for which Mr. Olis should truly be held responsible. Sentencing expert Doug Berman has more analysis of the Fifth Circuit's opinion here and business law expert Larry Ribstein comments here.

Writing for the Fifth Circuit panel, Judge Edith H. Jones -- who is one of the top appellate judges in the country on business issues -- zeroed in on the main flaw in Judge Lake's acceptance of the prosecution's dubious theory relating to Mr. Olis' sentencing. As noted in this previous post relating to the Enron-related Nigerian Barge trial, the prosecution in Mr. Olis' case misled Judge Lake regarding the proper method for calculating the market loss for purposes of Mr. Olis' sentencing. Indeed, at the time of Mr. Olis' sentencing, the Justice Department had already taken the position before the Supreme Court in Dura Pharmaceuticals v. Broudo that the market loss calculation method that it was using in Mr. Olis' case was not the proper method for calculating market loss.

Without noting that egregious contradiction, Judge Jones in the Olis opinion nonetheless criticizes Judge Lake's acceptance of the government's method of market loss calculation:

In this case, the district court, faced with a "cook the books" fraud, overemphasized his discretion as factfinder at the expense of economic analysis. Thus, the court elected to rely solely on the Heil testimony concerning the purchase and sale of UCRS stock as a measure of the loss caused by Olis's offense. When Heil's testimony was offered at trial to prove guilt, Olis's counsel was not placed on notice that the same evidence might later pertain to the guidelines loss calculation. For that reason, other significant extrinsic causes of the UCRS loss were not explored, much less quantified, at trial. UCRS bought most of its Dynegy holdings at the top of the market. As Olis pointed out at sentencing, however, two-thirds of the drop in Dynegy's price occurred either before the revelation of Project Alpha's problems or more than a week after the announcement of the restatement of earnings caused by Project Alpha. Taken on the court's own terms, a substantial portion of the entire loss on the UCRS investment in Dynegy, over $100 million, could not have been caused by Olis's work on Project Alpha.

During sentencing, moreover, Olis offered the expert report of a Rice University expert, Professor Bala Dharan, which explored numerous forces at work on the Dynegy stock price during the relevant periods. The court refused to consider the report, criticizing the expert's analysis of whether Olis could have "reasonably foreseen" the impact of his conduct on the stock market. As the court observed, the economist was arguably stretching his expertise into an improper legal conclusion, but his statements on this matter are separate from his economic analysis of price and market movements. Professor Dharan's report demonstrates that Dynegy stock declined during the period covering Project Alpha in tandem with the stocks of other publicly traded companies in the energy marketing and trading business. Further, Dynegy's stock was negatively affected, even before the restatement of Project Alpha's cash flow impact, by the company's failed bid to acquire the faltering Enron. These factors and others cited in the report suggested that attributing to Olis the entire stock market decline suffered by one large or multiple small shareholders of Dynegy would greatly overstate his personal criminal culpability.

Because the district court’s approach to the loss calculation did not take into account the impact of extrinsic factors on Dynegy's stock price decline, Olis is entitled to resentencing on this factor, subject to the principles just discussed.

If there has ever been a case in which the sentence should be reduced to time already served, this is the one. Stay tuned for further developments.

Posted by Tom at 7:18 AM | Comments (17) | TrackBack (1)

Criminalizing everything

George Melloan, the deputy editor, international, of The Wall Street Journal, has recently written two columns (here and here) in which he has addressed a common topic on this blog -- i.e., the increasing criminalization in American society of ordinary business practices. Following on those columns, Mr. Melloan notes in this WSJ ($) column that the equally dubious criminalization of politics that is evident in the Scooter Libby indictment is a likely precursor of an even greater threat to freedom in American society:

The prosecutorial tsunami that has swept through a land teeming with lawyers and litigants has now come lapping up on the shores of the First Amendment. Now that politics has been criminalized, can reporting on politics be far behind?

If that sounds far-fetched, think how far prosecutors and state attorneys general have managed to stretch the reach of the law, tolerated by judges and a gullible press. A huge accounting firm, Arthur Andersen, was wiped out by an indictment because it failed to uncover the Enron fraud, something accountants are ill-equipped to do. Sarbanes-Oxley makes it hazardous to manage a company or sit on a corporate board because of the new liabilities it imposes. . . And then there's Eliot Spitzer, an AG who specializes in extracting confessions to non-crimes.

The next big story will be the debate over Mr. Bush's new nominee for the Supreme Court, Appeals Court Judge Samuel Alito. Advance word is that he, like sitting Justice Antonin Scalia, is concerned about abuses of constitutional law. That won't save Scooter Libby from the ordeal he faces, but the high court is very much in need of such views.

Finally, as noted earlier here, having encouraged abuse of state power against unpopular business executives, the Bush Administration and Republican-controlled Congress are now in no position to rein in similar abuses toward the unpopular politician of the moment.

What a mess!

Posted by Tom at 6:50 AM | Comments (4) | TrackBack (0)

KPMG class action tax shelter settlement moves toward final approval

Following on this earlier post regarding the proposed settlement, U.S. District Judge Dennis Cavanaugh preliminarily approved a proposed $225 million class-action settlement by KPMG LLP and the Sidley Austin Brown & Wood LLP law firm over questionable tax shelters that KPMG promoted and sold to hundreds of wealthy clients. Here are posts over the past year or so that chronicle KPMG's multiple problems arising from its tax shelter venture.

Under the settlement, KPMG will pay about 80% of the settlement while Sidley Austin -- which had written legal opinions supporting many of the shelters -- will pick up the balance of the settlement amount. The settlement covers about 275 former KPMG tax-shelter clients. The preliminary settlement comes a couple of months after KPMG reached a $456 million settlement with the Justice Department over the same tax shelters under which KPMG avoided a criminal indictment but admitted criminal wrongdoing.

In granting preliminary approval, Judge Cavanaugh rejected objections to the settlement raised by several law firms that lead plaintiffs' firm Milberg Weiss Bershad & Schulman LLP, KPMG and Sidley Austin had engaged in collusive settlement negotiations and that Milberg should be disqualified as lead counsel because of an alleged conflict of interest involving a former client the firm previously represented in a separate 2003 lawsuit against KPMG.

Now that preliminary approval of the settlement has been obtained, Milberg Weiss will notify all members of the plaintiff class of the settlement and the hearing on final approval of the settlement, which will occur in a couple of months. It is rare for class action settlements that are preliminarily approved not to be approved on a final basis.

Posted by Tom at 3:34 AM | Comments (0) | TrackBack (0)