Houston's Clear Thinkers

? January 2006 | Main | March 2006 ?

February 28, 2006

Yahya v. Ribstein on short selling plaintiffs

In the law discussion equivalent of a high-caliber wrestling match, law professors Moin Yahya and Larry Ribstein square off in this Point of Law discussion over a subject addressed in this earlier post -- the increasingly common practice of short-sellers and class action securities fraud plaintiffs' attorneys banding together to drive the price of a company's stock down, and then -- after profiting from the short sale of the company's stock -- cashing in again on a class action lawsuit against the company.

Professor Yahya:

Plaintiffs are now given a double incentive to bring lawsuits – and God knows this is the last thing we need to be giving them. If this practice is legal, then plaintiffs and their lawyers can now profit by simply announcing a lawsuit. In the extreme, a lawyer can simply announce a suit, profit from the drop in price, and then withdraw the suit. Despite recent federal legislation aimed at managing class actions, many lawsuits can still be brought in state court, and in many states, the standards for what constitutes a frivolous suit are fairly low.

Professor Ribstein:

The better attack on dumping and suing is based, not on false assumptions or on incorrect statements of the law, but on the specific harms that we can show it causes. For example, one way to enhance the effect of the filing of a suit is to accompany it with false statements about the stock. This is already actionable under the federal securities laws. Also, a plaintiff who sells short the stock held by other class members is probably not an adequate class representative – his interests in prosecuting the suit are not aligned with the interests of the other class members.

Posted by Tom at 8:13 AM | Comments (1) | TrackBack (1)

Mike Mullane has the Right Stuff

Longtime NASA shuttle astronaut Mike Mullane has written a new book, Riding Rockets: The Outrageous Tales of a Space Shuttle Astronaut (Scribner 2006) and, based on this Keith Cowing/SpaceRef.com review, the book appears to be a rollicking good time:

This is not a kiss and tell book (although it gets close on several occasions). Mullane doesn't mince words and repeats what one person said to another (to the best of his recollection). This includes multiple times when Mullane said/did something dumb and regrettable. I suspect that the people depicted learned long ago what Mullane thought of them - so the tales contained in this book may not be a surprise to those folks - but they may find reading about these episodes to be a bit unsettling.

This book certainly shows a side of NASA that NASA Public Affairs Office would rather not have people read. NASA focuses (with some obsession) upon the positives, on the strength of the corps and its members. No flaws, no shortcomings - no weaknesses allowed. The net result is a homogeneous generic notion of what an astronaut is. While there may be a few people in the astronaut corps that come close to matching this image, Mullane smashes that generic notion. In more ways than outsiders might imagine, astronauts are just like the rest of us in more ways that NASA PAO would have you think.

Yes, there were juvenile delinquents in the astronaut corps (at least while Mullane was there). Indeed, he often groups this subset of the astronaut corps (with him as one of the prime practitioners) as having originated on "Planet Arrested Development" ("Planet AD"). Given that many of his fellow astronauts were also stuffed shirts, his description of his gang is as refreshing as it is irreverent. [snip] The culture Tom Wolfe described during Mercury program was still quite evident at NASA as Mullane's class showed up for work. But the Mercury/Gemini/Apollo "right stuff" culture was fading - transitioning - into a new configuration. This class represented the collision between post WW II fighter pilots and post Vietnam era baby boomers.

As mentioned before, this new class was not with out its pranksters and risk takers. Mullane notes one harrowing (and after the fact, enjoyable) flight in the back seat of a T-38 piloted by astronaut Fred Gregory. Mullane describes how Gregory took the jet "inside" the Grand Canyon. Gregory went on to become Deputy Administrator of NASA - but before that he was the Associate Administrator for Safety and Mission Assurance - an irony not lost on Mullane.
[snip]
Mike Mullane's book is a perfect intersection of the risks and fears, joys and fulfillment, strengths and weaknesses, and the human cost to family and friends of exploring space. It is not to be missed.

Check out the entire review.

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

What is the presumption in the Lay-Skilling trial?

Chronicle business columnist Loren Steffy responds to this weekend post on the high price of asserting innocence and hindsight bias in prosecutions of corporate agency costs by urging us to remember the supposed lies that Ken Lay and Jeff Skilling told in regard to Enron.

Steffy is a talented writer and has consistently pulled no punches in expressing his belief that Lay and Skilling are guilty, although his guilty verdict at this point in the trial is a bit difficult to square with this prior column. In fact, Steffy's blog post reminded me of this funny story about one of my experiences on jury duty. Still, I admire Steffy's honest stance more than the disingenuous positions taken by some in the media, who cloak an anti-Lay-Skilling bias with a transparent jacket of objectivity.

In the Lay-Skilling trial, the prosecution is only through about a third to 40% of its case in chief. Four out of the five substantive prosecution witnesses to date have testified under agreements with the prosecution in which they hedged the risk of a long prison sentence and loss of virtually all of their net worth in return for their testimony against Lay and Skilling. Moreover, the prosecution's case to date bears little resemblance to the highly-publicized indictment and related charge pleadings against Lay and Skilling, and the prosecution has gone to great lengths to chill witnesses from testifying who have potentially exculpatory testimony for Lay and Skilling. Meanwhile, Lay and Skilling patiently wait for the opportunity to tell their side of the story.

Against that backdrop, Steffy has already decided that Lay and Skilling are guilty. That's his perogative, but I prefer to view Lay and Skilling as innocent until the entire story is told and the prosecution has proven -- beyond a reasonable doubt -- that these men are guilty of a crime.

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

February 27, 2006

Canadian health care finance system implosion?

Following on this post from last week regarding the Veterans Administration as a model for a government-sponsored health care finance system, this NY Times article reports that the Canadian government-administered health care finance system -- which has been widely-heralded as a model for a similar U.S. system -- is showing signs of imploding as a result of a recent Canadian Supreme Court decision:

Canada remains the only industrialized country that outlaws privately financed purchases of core medical services. Prime Minister Stephen Harper and other politicians remain reluctant to openly propose sweeping changes even though costs for the national and provincial governments are exploding and some cancer patients are waiting months for diagnostic tests and treatment.

But a Supreme Court ruling last June — it found that a Quebec provincial ban on private health insurance was unconstitutional when patients were suffering and even dying on waiting lists — appears to have become a turning point for the entire country.

"The prohibition on obtaining private health insurance is not constitutional where the public system fails to deliver reasonable services," the court ruled.

The Times article goes on to report that the Canadian Supreme Court decision is spurring the markets to respond to the deficiencies in the Canadian government-administered system:

The country's publicly financed health insurance system — frequently described as the third rail of its political system and a core value of its national identity — is gradually breaking down. Private clinics are opening around the country by an estimated one a week, and private insurance companies are about to find a gold mine.

Posted by Tom at 7:23 AM | Comments (4) | TrackBack (0)

Hope for Jamie Olis?

This previous post highlighted the egregiously disingenuous approach that the Justice Department has taken on the market loss issue in order to promote an absurdly long prison sentence for former mid-level Dynegy executive, Jamie Olis. Now, the Third Circuit in In re Merck & Co. Sec. Litig., 432 F.3d 261 (3rd Cir. 2005) addresses the same market loss issue that is involved in the Olis case and undresses the same superficial reasoning that the DOJ has used to support its dubious sentencing campaign against Olis (hat tip to Lyle Roberts for the link to the Merck decision).

In the Olis case, Project Alpha -- the transaction on which Olis worked and was prosecuted -- was disclosed to the investing public in a Wall Street Journal article in early April 2002 that criticized Dynegy's accounting characterization of the transaction. However, despite the WSJ's criticism, Dynegy's stock price did not decline. Over three weeks later, Dynegy filed an 8-K with the SEC that formally disclosed the recharacterization of Project Alpha along with about a half-dozen other negative matters that were more significant than the disclosure on Project Alpha. Dynegy's stock price tumbled, and the Justice Department ultimately relied on the market loss resulting from that decline in promoting the draconian 24-year sentence of Olis under the then-mandatory federal sentencing guidelines.

In Merck, the Third Circuit addressed whether Merck's failure to disclose certain accounting practices of a wholly-owned subsidiary was a material omission. On April 17, 2002, in connection with the initial public offering of the subsidiary, Merck filed an S-1 with the SEC that disclosed for the first time that the subsidiary had recognized as revenue the co-payments that consumers had paid, but the S-1 did not disclose the total amount of co-payments recognized. Immediately after the filing of the S-1, Merck's stock price actually increased. Two months later, a Wall Street Journal article reported that the subsidiary had been recognizing the co-payments as revenue and estimated the total amount of this revenue in 2001 at over $4 billion. Merck's stock price dropped two dollars immediately after that WSJ article.

On appeal, the Third Circuit (with a panel that included new Supreme Court Justice Alito) concluded that, in an efficient market, the materiality of disclosed information is measurable by the movement of the company's stock price immediately following the disclosure. Inasmuch as Merck's stock price did not decline when the S-1 was filed on April 17, the Third Circuit concluded that the co-payment recognition information had an immaterial impact on Merck's stock price. In response to the plaintiffs' argument that the true disclosure took place two weeks later when the Wall Street Journal article publicized the estimated amount of the co-payment recognition, the court concluded that the "minimal, arithmetic complexity of the calculation" that the WSJ reporter made "hardly undermines faith in an efficient market." The court noted that this was especially true given how closely analysts followed a company such as Merck:

"[Plaintiff] is trying to have it both ways: the market understood all the good news that Merck said about its revenue but was not smart enough to understand the co-payment disclosure. An efficient market for good news is an efficient market for bad news. The Journal reporter simply did the math on June 21; the efficient market hypothesis suggests that the market made these basic calculations months earlier."

Applying Merck to the Olis case, the efficient market for Dynegy stock understood the bad news about Project Alpha when it was disclosed on April 3rd and no market loss resulted from the news. Thus, when Dynegy's stock price dropped weeks later after the company's disclosure of more bad news, the efficient market attributed that loss to the additional bad news items and not Project Alpha. In short, the Merck decision is strong support for the position that the Justice Department has failed to establish any causation between Project Alpha and the astronomical market loss figures that the DOJ has used in advocating lengthy prison sentences for Olis.

The new Third Circuit decision in Merck is not the only recent appellate authority that contradicts the Justice Department's market loss position in the Olis sentencing. Despite that, Jamie Olis remains in prison awaiting a re-sentencing hearing in which the government will almost assuredly seek a prison sentence longer than 15 years. Here's hoping that U.S. District Judge Sim Lake takes a page from his colleague Ewing Werlein's sentencing book and rejects the Justice Department's disingenuous market loss claims in the Olis case, and -- in so doing -- reins in a Justice Department that increasingly runs amok in its zeal to criminalize the unpopular business executive of the moment.

Posted by Tom at 4:55 AM | Comments (2) | TrackBack (0)

February 26, 2006

While the price of asserting innocence is high, pleading guilty is lucrative

Alexei Barrionuevo, who has been doing a fine job covering the day-to-day developments in the Lay-Skilling trial for the New York Times, and his Times colleague Kurt Eichenwald -- who has written the best overall book on the Enron scandal, Conspiracy of Fools (Broadway 2005) -- collaborated on this article in today's Sunday Times that addresses one of the more troubling aspects of the government policy of criminalizing corporate agency costs (see previous posts here, here and here, among others) -- the exorbitant cost of a defense to charges in such a case.

The article lucidly points out that Ken Lay -- who at one time was worth about half-a-billion dollars and now is almost broke -- has paid or dedicated about $10 million to his defense team, which is on top of another $20 million that his lawyers were paid from Enron's D&O insurance policies before the proceeds of those policies were locked up in connection with the directors' settlement in the Enron class action securities litigation last year. Inasmuch as Lay's co-defendant, Jeff Skilling, has reportedly paid over twice as much out of his pocket than Lay to his defense team and presumably received about as much of the insurance proceeds as Lay, an estimate of $70 million in defense costs for the case is certainly well within the ballpark of accuracy.

And as enormous as the defense expenditures have been, you can bet that the cost of the prosecution is much higher.

So, what are we to make of this extraordinary expenditure of resources? My sense is that it is a stark reflection of the folly of engaging in the the type of criminalization of corporate agency costs -- which is legalese for the prosecution of merely questionable business decisions -- that has been a large part of the Enron Task Force's largely ineffective trials to date in the Enron-related cases.

While the Task Force has properly obtained plea bargains from former Enron CFO Andrew Fastow and the relative few of his cohorts who effectively embezzled money from Enron, the Task Force prosecutors have not limited themselves to such clear cases of theft and fraud. Rather, the Task Force has spent an enormous amount of time and resources criminalizing business decisions that simply do not involve the black-and-white circumstances of theft. Indeed, these types of business decisions involve judgments over various possible alternatives, a number of which -- given the nature of business risk -- will turn out badly and result in a loss for the company.

As Stephen Bainbridge points out in this insightful TCS Daily column, hindsight bias of juries with regard to such bad outcomes results in penalizing beneficial risk-taking rather than punishing true criminal conduct. Many judges and most lay juries usually have only a minimal understanding of the nature of business risk-taking and, therefore, improperly conclude that a bad result from a business decision had a high probability of occurring (and, thus, should have been prevented by the decision-maker) simply because the bad result occurred. Consequently, juries are generally biased in favor of finding criminal liability against a business executive under such circumstances even if, at the time the business judgment was made, the probability of the bad result was reasonably low and hedging the risk of the bad result was too expensive. Professor Bainbridge explains the counterproductive effects of this syndrome:

[T]here is a substantial risk that juries will be unable to distinguish between competent and negligent management because bad outcomes often will be regarded, [viewed with 20-20 hindsight], as having been foreseeable and, therefore, preventable. . . . If liability results from bad outcomes, without regard to the [looking forward] quality of the decision and/or the decisionmaking process, however, managers will be discouraged from taking risks. If it is true that lack of gumption is the single largest source of agency costs, as somebody once said, rational shareholders will disfavor liability rules discouraging risk-taking, as Judge Ralph Winter opined in Joy v. North:

[B]ecause potential profit often corresponds to the potential risk, it is very much in the interest of shareholders that the law not create incentives for overly cautious corporate decisions. . . . Shareholders can reduce the volatility of risk by diversifying their holdings. In the case of the diversified shareholder, the seemingly more risky alternatives may well be the best choice since great losses in some stocks will over time be offset by even greater gains in others. . . . A rule which penalizes the choice of seemingly riskier alternatives thus may not be in the interest of shareholders generally.

Hence, when juries review the merits of even bad corporate governance, they run the risk of effectively penalizing "the choice of seemingly riskier alternatives."

In sum, shareholders deserve protection from theft, but not from risk taking, . . . Unfortunately, it's not clear that prosecutors know the difference -- or even care.

Meanwhile, the flipside of the high-cost of asserting innocence is the financial pressure to plead guilty, which is underscored by this motion that former Lay-Skilling co-defendant Richard Causey (plea deal posts here, here and here) filed late last week.

As a result of his plea deal, Causey in his motion requests (with the Enron Task Force's approval) that U.S. District Judge Sim Lake release several million dollars of property to Causey that the government had previously frozen and not allowed Causey to use (except to pay some living expenses) while he was defending himself from the government's charges.

Thus, as noted earlier here, the first three substantive prosecution witnesses in the Lay-Skilling trial were each able to preserve a significant net worth by copping a plea deal with the Task Force. While some continue to surmise that Causey's decision to plead guilty was the result of a personal revelation of wrongdoing, Causey's motion and other circumstantial evidence reflects that the true reasons for that decision are far more nuanced and troubling.

Posted by Tom at 5:14 AM | Comments (5) | TrackBack (1)

February 25, 2006

The criminalization of business mindset

Peter Lattman -- whose WSJ Law Blog has quickly become essential daily reading on business law matters -- points us to this Corporate Crime Reporter article on former Enron Task Force director Andrew Weissmann, who is leaving the Justice Department for a position in the white collar criminal defense section of Jenner & Block.

As this Mary Morrison article explains in detail, Weissmann's dubious decision to prosecute American accounting icon Arthur Andersen out of business over the firm's work for Enron was an egregious breach of prosecutorial discretion. In the Corporate Crime Reporter article, Weissman is asked about his decision to prosecute Andersen:

Weissmann defends the prosecution of Andersen against a growing consensus in the defense bar that the firm should not have been prosecuted.

"The company through its choices had given the Department of Justice an 'all or nothing' ultimatum," Weissmann said. "People need to remember that Andersen had been offered a deferred prosecution agreement and rejected it."

He believes that as a result of the Andersen prosecution, more and more corporations are jumping at deferred and non-prosecution agreements when offered.

"One of the fallouts from Andersen is that corporations are much more willing to say yes to deferred prosecution agreements, because they can see what happened to Andersen," Weissmann said. "What major corporation is now going to gamble that the Justice Department is going to go away and issue a declination? That's one of the reasons you are seeing a dramatic rise in deferred prosecution agreements and non-prosecution agreements."

H'mm, let's break this reasoning down. An improper prosecution that cost people and communities in the U.S. over 30,000 jobs was really Andersen's fault because the firm didn't agree to a deferred prosecution agreement in regard to crimes that the firm did not commit. Besides, despite the cost of thousands of jobs and millions of dollars in retirement benefits, the improper prosecution was still justified because it achieved the better good of scaring other companies into selling out their employees and copping deferred prosecution agreements.

That such appalling reasoning goes unchallenged in the article is a daunting sign of our times. Prosecution of business crimes has become a game of roulette for prosecutors such as Weissmann, who play on an ugly cauldron of public cynicism, resentment, and tolerance for abusive use of governmental power to prosecute the unpopular business executive of the moment. When the frightening loss of thousands of jobs and the destruction of careers and families is glibly rationalized by a former high governmental official as merely a tolerable cost of the use of the state's awesome prosecutorial power for the better good of society, we are well on our way to a time when, as Sir Thomas warns us, we will not be able to "stand upright in the winds" of abusive state power that will blow then.

And what about the criminalization of business mindset that Weissmann reflects? Ayn Rand summed it up well with regard to her observation about socialism (courtesy of Bryan Caplan):

[T]he truth about their souls is worse than the obscene excuse you have allowed them, the excuse that the end justifies the means and that the horrors they practice are means to nobler ends. The truth is that those horrors are their ends.

Posted by Tom at 6:23 AM | Comments (26) | TrackBack (2)

February 24, 2006

More on the Bagwell muddle

Chronicle sportswriter Richard Justice continues in this column with his illogical broadsides on Stros owner Drayton McLane over whether the best player in Stros history -- Jeff Bagwell -- is disabled from playing Major League Baseball (previous posts here, here and here).

Giving much credence to Bagwell's rather childish behavior toward McLane and McLane's quite reasonble assertion of a claim under a disability insurance contract that partially secures a portion of Bagwell's substantial contract, Justice reasons that McLane is a greedy capitalist who does not want to allow the best player in Stros history to play out his contract on his own terms. Such dubious reasoning with regard to McLane is quite common of Justice.

The reality of the situation is this. The Stros and Bagwell entered into a long-term contract that the Stros prudently secured partially with a disability insurance policy. Bagwell's arthritic shoulder may have disabled him from playing Major League Baseball and the Stros were under a January 31 deadline to make a claim under the disability policy, which they did. The Stros are giving Bagwell an opportunity to prove during Spring Training that he is not disabled and would gladly waive their disability insurance claim if Bags can throw a baseball effectively and generate numbers this season anywhere near the level that he has over his career. But it's far from clear that he can.

So, what exactly is the basis of Justice's animus toward McLane? Could it be this?

Posted by Tom at 7:06 AM | Comments (5) | TrackBack (0)

Lay-Skilling, Week Four

Long trials tend to settle into a rhythm, and the criminal trial against former key Enron executives Ken Lay and Jeff Skilling is no exception.

After four weeks of trial, the prosecution has put on three substantive witnesses. Each one has gone through a heavily-scripted direct examination in which they confidently accuse Lay and Skilling of making various misleading statements to the investing public and employees. Then, defense attorneys on cross-examination chip away at the prosecution witnesses' testimony on direct, and the witnesses gradually become far less decisive in their accusations than they were during their testimony on direct examination. Much of the testimony is quite boring, but -- as with a baseball game -- short bursts of really interesting activity breaks up the tedium. And U.S. District Judge Sim Lake provides a steady hand and a dry wit to the proceedings.

The testimony this week of former Enron investor relations executive Paula Rieker was a case in point. The prosecution rolled through direct examination of the business-like Ms. Rieker in a little less than a day, and the prosecution appeared to score some jury points when she testified on Tuesday afternoon that an Enron director characterized (how was this not excluded as inadmissible hearsay?) Lay's use of the line of credit component of his compensation package "as an ATM machine." Then, Bruce Collins, the member of the Lay defense team who handled cross-examination of Ms. Rieker, opened his cross-examination on a questionable note, suggesting in a question to Rieker that Lay's draw of about a million dollars on his company line of credit days before the company filed its chapter 11 case was just "a drop in the bucket" given the magnitude of the company's other matured liabilities at the time. Inasmuch as Rieker's "no, sir" response was probably what every juror would have answered if asked the same question, Tuesday concluded as a good day for the prosecution, particularly in its case against Lay, who had barely been mentioned by the first two witnesses, Mark Koenig and Ken Rice.

Collins steadied himself over the next day and a half of cross-examination and methodically took Rieker through each one of her accusations against Lay, and she conceded that Lay had never asked her to make any misleading statements or to do anything wrong, for that matter. However, Rieker was composed responding to questions from Collins and she often extrapolated on her answers despite Collins' attempts to cut off her off. Thus, a day and a half of initial cross-examination was rather dull in comparison to the relative excitement of Rieker's Tuesday afternoon testimony.

But that all changed quickly when Skilling lawyer Daniel Petrocelli began his cross-examination late yesterday morning.

In as effective cross-examination of a difficult prosecution witness that I have seen in awhile, Petrocelli immediately disassembled Rieker, catching her right off the bat in a lie about her duties at Enron ("I overstretched," conceded Rieker) and then took her through the extraordinary compensation that she had earned ($5 million combined in 2000 and 2001 alone) and the confidential $300,000 bonus that she had accepted from the company just three days before Enron declared bankruptcy (how on earth did the prosecution not attempt to diffuse that fact by bringing it out on direct?). You were being paid all this money and you never told Skilling or Lay that they were making misleading statements?, Petrocelli effectively asked Rieker repeatedly.

Almost instantaneously, the previously poised Rieker became tense and agitated, and her answers to Petrocelli's questions increasingly were evasive and often simply non-responsive. The prosecution's frequent objections (most of which were overruled) to Petrocelli's questioning only underscored how effective Petrocelli's cross-examination was in bringing the best prosecution witness in the trial to date back down to earth. By the time Petrocelli had Rieker admitting that neither Skilling nor Lay had ever asked her to do anything wrong and that she had not been involved in any criminal activity in her position at Enron other than the insider trade on which her plea deal is based, the Enron Task Force lawyers had to be asking themselves "what happened to that advantage we had after Tuesday?"

Consequently, as noted in this previous post and despite the enormous public relations advantage that the Enron Task Force enjoys in this case, my sense is that the Task Force continues to have big problems in making its case in court. Almost a month into the trial, each of the Task Force's substantive witnesses have initially lied to investigators for years until copping a plea in which they bargained for a reduced prison term and a substantial net worth in return for testifying against Lay and Skilling. Virtually none of the testimony has supported a key element of the prosecution's case -- the alleged huge conspiracy within Enron to cover up the wrongdoing at the company -- and Rieker admitted under questioning from Petrocelli that she had engaged in nothing of the sort while at Enron. Despite alleging now that Lay and Skilling were involved in lying about Enron to the investment community years ago, none of the witnesses have produced any corroborating documentary evidence that they had any reservations at the time about the statements that Lay and Skilling were making. Similarly, none of the witnesses have testified that Lay or Skilling at the time ever admitted that they thought they were making misleading statements.

Doesn't sound like much of a conspiracy, does it?

Meanwhile, a couple of behind-the-scenes developments also reflect disarray in the Task Force camp. Mirroring Rice's infamous false testimony in the Enron Broadband Trial and the Task Force's abysmal handling of that false testimony, it now appears that the prosecution had Rice testify, during the late stages of his testimony last week, regarding a dubious presentation document that the prosecution had failed to produce to the defense as required before trial, prompting the Lay-Skilling defense to consider bringing Rice back to testify regarding that suspicious document during the defense's case-in-chief. It's usually not a good sign for the prosecution when a key prosecution witness performs so badly that the defense wants to use the witness in the defense's case-in-chief.

But even more telling of the problems in the prosecution's case is how little it has to do with the indictment against Lay and Skilling. As earlier posts here and here pointed out, the prosecution does not want the jury to see the indictment and does not even want the Lay-Skilling defense team to be able to question witnesses about it. Based on the prosecution's presentation of its case to date, it's easy to see why -- a substantial amount of the testimony that the prosecution has elicited from its witnesses is simply not in either the indictment or the statements in compliance against Lay and Skilling.

While reading the transcripts from the trial, I keep a copy of the indictment and the statements in compliance handy so that I can refer to them when I read about something in the transcripts that I had not previously read about in those documents. I have counted at least three substantive areas that the prosecution has raised extensively during direct examination of its witnesses that are not in either the indictment or the statements in compliance -- disclosure issues relating to sales of the "Peaker plants" in 2001, the alleged "newfound" penny of earnings in the fourth quarter of 1999, and issues relating to warrants and monetizations on something called ResCo.

Apart from the Constitutional issue that defendants must be given fair notice of what the government intends to prove at trial -- particularly in regard to an indictment that paints as broad a brush as this one does -- the raising of new issues during trial is yet another indication that the Task Force is not confident in its case and is willing to take substantial trial risks in an attempt to make a case against Lay and Skilling. Such tactics are at least consistent with the Task Force's fingering of dozens of unindicted co-conspirators under its increasingly hollow conspiracy theory, which is a transparent tactic to induce former Enron executives who have exculpatory testimony for Lay and Skilling to assert their Fifth Amendment privilege and not testify out of fear of being indicted themselves.

After the typical three day weekend break, the trial cranks back up Monday as the prosecution calls former Enron trading unit accountant Wes Colwell, who cut a deal with SEC and who apparently has been cooperating with the Task Force under some sort of non-prosecution agreement. After Colwell, the order of witnesses is currently expected to be accountant Wanda Curry, former trader Timothy Belden (related post here) and former trading executive David Delainey.

Posted by Tom at 3:50 AM | Comments (4) | TrackBack (0)

February 23, 2006

The wit and wisdom of Sim Lake

U.S. District Judge Sim Lake is widely-considered to be one of the best jurists in Houston, and his no-nonsense handling so far of the criminal trial of former Enron executives Ken Lay and Jeff Skilling reflects why he is so well-thought of in local bar circles.

Time limitations have prevented me from sitting in on the Lay-Skilling trial as much as I would have liked to date, but I have access to the transcripts from the trial, so I'm able to keep up with what goes on in court each day. From reading the transcripts, I have found that Judge Lake's most interesting and witty observations often occur before and after the jury is in the courtroom, such as the following exchange that occurred yesterday afternoon after testimony had concluded for the day and the jurors had been excused:

COURT: Be seated, please. (To Bruce Collins, one of Lay's attorneys) How much more do you have left in your cross-examination?

MR. COLLINS: It's hard to estimate. I think I'll be done by lunch tomorrow.

THE COURT (to Skilling lawyer, Daniel Petrocelli): How much do you have, Mr. Petrocelli?

MR. PETROCELLI: I have less than a day.

THE COURT: So it's doubtful that we will finish (on Thursday)?

MR. PETROCELLI: I don't think so.

THE COURT: Okay. Is there anything else we need to go into this afternoon?

MR. (Prosecutor John) HUESTON: Your Honor, I'd like to suggest something, and just maybe hear that. I worked hard to keep my direct to less than a day. And I'd like to introduce the thought of some rule of reasonableness when we work to get directs confined and moving quickly, and cross just goes on for days. I think two times the amount, over two times the amount of the direct time for cross, should have been more than sufficient, and I was hoping we would be done with all of this by tomorrow.

THE COURT: Well, probably you're not the only one who hoped that, but the government covered a lot of discrete information in a very general way that opens the -- creates the need by defendants to explore in greater detail. And if you think cross-examination is beyond the scope or it's not relevant, you can make an objection and I'll sustain it. But it's not appropriate, I don't believe, to impose a timing order in a criminal case where there are liberty issues at stake and there's a Sixth Amendment right. I will say, in response to a lot of your objections today that I overruled, that cross-examination entitles the questioner to some leeway and to ask leading questions. So fewer objections by you might move things along a little bit.

MR. HUESTON: Yes, sir.

THE COURT: Do you need to respond?

MR. PETROCELLI and MR. COLLINS: No, sir.

THE COURT: Anything else we need to take up?

MR. PETROCELLI: No, Your Honor.

THE COURT (to Mr. Hueston): And I'm perfectly willing to cut off unreasonable and irrelevant questioning, but there hasn't been much today.

MR. PETROCELLI: Thank you, Judge.

THE COURT (to Mr. Petrocelli, I'm sure with a wry grin): But don't take that as an encouragement. We'll see you-all tomorrow morning.

Posted by Tom at 8:49 AM | Comments (0) | TrackBack (0)

The V.A. as a reform model for the health care finance system?

My late father had extensive experience in providing and administering medical care in the Veterans Administration system, which he used to characterize as a good example of an unnecessary governmental program that perpetuated itself because of the vested interests of those who administer and profit from the system. "It's a reasonably competent system for dispensing penicillen," he once observed to me. "But you wouldn't want to have gall bladder surgery over there."

Thus, imagine my surprise a few weeks ago when NY Times columnist Paul Krugman, in his generally informative series on America's broken health care finance system, authored this Times Select ($) column in which he touts the VA system as a model for a single-payor, government-administered health care finance system in the US:

American health care is desperately in need of reform. But what form should change take? Are there any useful examples we can turn to for guidance?

Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system's success provides a helpful corrective to anti-government ideology. For the government doesn't just pay the bills in this system -- it runs the hospitals and clinics.

No, I'm not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.

Krugman goes on to extol the virtues of the VA's integrated system, which includes the government's superior ability to "bargain hard with medical suppliers, and pay far less for drugs than most private insurers."

Clear Thinkers favorite Peter Gordon sums up what my father's opinion of Krugman's analysis almost certainly would be:

This is very cool. I imagine that nearly everything could be obtained cheaply if only the federal government were put in charge to "bargain hard."

Silly me. I fear that the government is an expensive middleman. I fear that it is a highly politicized middleman. And I fear that with enough hard bargaining, suppliers will leave the industry -- as many have ever since Medicare and Medicaid began to "bargain hard."

Think of the many readers of the NY Times op-ed page, many predisposed to this silliness, who get their public policy economics from Krugman.

Posted by Tom at 6:29 AM | Comments (3) | TrackBack (0)

A challenge to the NCAA's regulation of collegiate athletics

This post from about a year ago addressed the National Collegiate Athletic Association's longstanding and dubious regulation of intercollegiate athletics, and now a class action antitrust lawsuit is asserting a pretty hefty damage claim against the NCAA that directly challenges the organization's regulatory system.

This ESPN.com article reports on the antitrust suit that was filed last week in Los Angeles on the theory that the NCAA has illegally conspired to prohibit member institutions from offering athletic scholarships that cover the “full cost” of attending a college. The NCAA dictates a standard scholarship package in the form of a “grant-in-aid,” which covers tuition, room and board, books and a few other related expenses. However, it does not cover expenses such as phone bills and travel expenses, which many student-athletes from families with low incomes have a difficult time financing. As the ESPN.com article notes:

[A]thletes are the only students subject to aid restrictions imposed by an agreement among universities. Talented students in music, chemistry or any other area can be bid upon by individual colleges, without limits on the total value of their scholarship packages.

The lawsuit was filed on behalf of a proposed class of student-athletes in the graduating classes from 2002-2010 and requests damages covering the difference in scholarship costs and full costs for approximately 20,000 student-athletes. Incidentals such as phone bills and travel expenses may not seem like much, but the article estimates that the potential class damages would be approximately $120 million, which -- under antitrust damage rules -- would be trebled to $360 million. Anti-trust lawsuits are certainly nothing new for the NCAA, but $350 million in potential damages has a way of getting the attention of even university presidents who prefer to avoid addressing the messy hyprocrisy that major intercollegiate athletics has become.

The NCAA will likely defend the case on the grounds that the fixed scholarship rule is necessary to maintain “competitive balance” and promote amateurism. However, my sense is that the plaintiffs in the lawsuit will be able to draw on a growing body of academic research that will challenge those rationalizations for an obsolescent system that holds down the compensation for developing athletes while perpetuating lucrative public relations/athletic departments at a relatively few NCAA member institutions. This will definitely be an interesting lawsuit to follow, so stay tuned.

Update: Mike McCann has further analysis and helpful links in this Sports Law Blog post.

2.24.06 Update: Josh Center provides compelling thoughts of a true student-athlete in regard to the lawsuit and the NCAA's dubious promotion of minor league professional sports.

Posted by Tom at 5:40 AM | Comments (1) | TrackBack (0)

"Nine and eight"

The PGA Tour is in La Jolla, California for the Accenture Match Play Championship this week, and the special format of that tournament has already produced some sparks between the competitors.

For you non-golfers, match play is different from the usual PGA tournament medal play format where the golfers simply play four rounds and the winner is the player with the lowest aggregate score. Match play, on the other hand, is similar to the normal game that golfers play in which they take on one opponent over 18 holes and the player who wins the most holes -- regardless of the respective players' aggregate score -- wins the match. Inasmuch as match play involves two players playing against each other rather than against the entire field, the format often gets the competitive juices of the participants flowing more than a regular Tour event, particularly in matches between two players who do not care for one another.

Well, one of those matches occurred yesterday, and it happened to involve the world's no. 1-rated player, Tiger Woods. Stephen Ames, a journeyman Tour player who holds the distinction of being the only Tour pro ever to emerge from Trinidad and Tobago, was pitted against Woods in a first round match, and Woods and Ames -- as they say on the Tour -- have "some issues" with each other.

Six years ago during the Masters Tournament week, just as Woods was getting ready to kick off his streak of winning four straight major tournaments, Ames allegedly characterized Woods in a newspaper article as "a spoiled 24-year-old" who considered himself "bigger than the game" (Ames claimed he was misquoted; the reporter stuck by the story). At any rate, after no one had heard much from Ames since that time, he supplemented those comments earlier this week by observing to reporters that he thought he could beat Woods in their first round match, reasoning that "anything can happen — especially where [Woods is] hitting the ball." Fellow Tour player David Toms made the following prescient observation about Ames' latest comments: "I don't know if you give the best player in the world any incentive to want to beat you."

Woods' reaction to Ames' comments? He annihilated Ames in the match, winning 9 and 8, which means that Woods won 9 out of the 10 holes that the two played. In match play, such a match is concluded after those 10 holes because Ames could not possibly have won the match even if had won the remaining 8 holes. Thus, a 9 and 8 beating in match play is the equivalent of a 50-0 skunking in a football game where the loser quits early in the 3rd quarter.

In the post-match press conference, Woods was asked whether Ames' comments had lit a fire under him:

Q. Were you aware of Stephen's comments yesterday that you weren't striking . . .

Yes.

Q. I assumed you were.

Yes.

Q. What was your reaction when you saw that?

9 & 8.

Q. Obviously you like challenges, the idea of someone saying you're not driving the ball well. It must have lit a fire under you.

You might say that.

Q. It would be better if you said it.

As I said, 9 & 8.

Posted by Tom at 4:41 AM | Comments (0) | TrackBack (0)

February 22, 2006

Gene Elston -- the best Stros announcer, ever

As noted in this previous post on former Stros owner John McMullen, one of the biggest public relations blunders in Stros history was McMullen's decision in 1986 to fire Gene Elston, the first radio play-by-play announcer hired when the Stros club began as a Major League Baseball franchise in 1962.

Elston was the epitome of what a baseball announcer should be. His low-key, analytical, articulate and well-prepared approach resonated with Stros baseball fans, and McMullen's ill-advised decision to fire the hugely popular Elston helped to cement McMullen's fate as the second-most hated owner of a professional sports team in Houston (second only to the Oilers' Bud Adams). Elston was the antithesis of what is common among play-by-play announcers nowadays, who often substitute cheerleading for their employer over substance.

Inasmuch as Elston's style was to go unnoticed, he is not well-known outside of Houston. But thankfully, that's about to change as the 83 year-old Elston has been selected to receive the 2006 Ford C. Frick Award for broadcasting excellence from the National Baseball Hall of Fame (MLB.com article here). Elston will be honored during Hall of Fame induction weekend in late July in Cooperstown, N.Y.

Chronicle sportswriter John McClain -- who has never even met Elston -- contributes this fine column on how just listening to Elston strongly influenced his career, and provides the following insight into what made Elston's style so compelling:

For those of you who weren't fortunate enough to grow up with Gene Elston, here's what you missed: He was the consummate professional who was admired and respected by just about everyone.

He wasn't a homer. He could be critical without being mean. We knew we were getting an accurate and honest account of the game.

Elston wasn't a screamer. He didn't have a trademark phrase.

His style didn't intrude on the action on the field. Truthfully, you hardly knew he was there, and yet he described the action in a way that made you feel as if you were sitting right next to him.

And he did it night after night for 25 years. From 1962 through 1986, there was nobody better than Elston.

And no matter how many more years the Astros do business, he'll always be the best.

Posted by Tom at 5:27 AM | Comments (0) | TrackBack (0)

Baylor -- the Notre Dame of Protestants?

According to this Baptist Standard op-ed, Baylor University in Waco has a model for what type of university it should aspire to be, but I don't think the model is the one that Martin Luther had in mind -- the University of Notre Dame:

Since former university President Robert Sloan led the school to adopt its Baylor 2012 long-range plan and open its Institute for Faith & Learning, supporters have pointed to Notre Dame as an example of a religiously affiliated school that successfully integrates faith and learning.

They maintain Notre Dame generally has accomplished what Baylor wants to achieve—recognized status as a top-tier university without surrendering to secularism. . . .

Baylor could come become the kind of national university that the best and brightest Protestant students will dream of attending, said Doug Henry, director of Baylor’s Institute for Faith & Learning.

“Baylor can have the same sort of image for Protestants that Notre Dame has for Catholics" . . . Henry said. “It can become the most intellectually interesting place to be, and a place where serious, smart Protestant and Baptist students will want to come. . . . I’d say we’re about 30 years behind Notre Dame in terms of endowment, facilities, faculty and national prestige.”

Make that more like 75 years behind in terms of the football team, though.

Posted by Tom at 4:32 AM | Comments (2) | TrackBack (0)

Good news and bad news for Milberg Weiss

This NY Times article reports that Mel Weiss and Bill Lerach received good news and bad news earlier in the week regarding the longstanding criminal investigation against the two men and the Milberg Weiss Bershad & Schulman law firm over allegations of paying kickbacks in connection with class action lawsuits that the firm handled over the past decade.

The good news is that federal prosecutors have apparently informed Weiss and Lerach's individual counsel that they will not seek an indictment against the two men.

The bad news is that the prosecutors still may go Arthur Andersen on the Milberg Weiss firm.

According to the Times article, two top Milberg Weiss partners -- David Bershad and Steven Schulman -- appear to be the main targets of the investigation. The heat on Milberg Weiss and its current and former partners was turned up last year when prosecutors indicted 78 year-old Seymour Lazar, a retired Southern California Palm Springs lawyer who was a plaintiff in at least 50 Milberg Weiss securities cases, with fraud and conspiracy. Prosecutors alleged that Lazar was involved in an alleged scheme with Milberg Weiss in which the firm secretly funneled him about $2.5 million for being the class representative in class action lawsuits that the firm handled. Lazar and Milberg Weiss contend that the payments were legal referral fees and deny that there was any effort to conceal them.

As noted in my previous posts on this matter, despite the irony that Weiss and Lerach are embroiled in a criminal investigation that is strikingly similar to the prosecution of agency costs that Weiss and Lerach profit from in connection with a good number of their class action securities fraud cases, I have great reservations about the government criminalizing the plaintiff's lawyers' conduct in these cases. Larry Ribstein shares those concerns, and notes with his usual keen insight:

To the extent that a goal of the case is to curtail securities class actions, this is not the way to do it. . . . Lerach and company are just products of the system that has been created by current law. Real reform requires changing the game, not just the players. How about this solution: getting rid of the “fraud on the market” theory?

Meanwhile, Bruce Carton has more on the ubiquitous Lerach in this second excerpt from Joseph C. Goulden's new book, The Money Lawyers (previous excerpt here), which includes Lerach's description of how his first meeting with Weiss transformed him from a boring Pittsburgh defense lawyer into an exciting plaintiff's lawyer:

"Mel sat there like the complete master of the universe. He was barking orders right and left, saying which lawyer would do what, laying out the scenario for what would happen in court the next day. He was in complete charge, and all of us sat there saying, 'Yes, Mel, you're right, whatever you want. . . .' Man, I was impressed. Mel was the smartest lawyer I had ever seen. I was used to dealing with the uptight, stuffy defense lawyers. Now I was definitely on the other side of the spectrum."

Posted by Tom at 3:59 AM | Comments (1) | TrackBack (1)

February 21, 2006

NatWest Three prepare for a long trip to Houston

The downtown Federal Detention Facility is not normally the destination of choice for U.K. bankers traveling to Houston, but it is looking increasingly as if that's where three former U.K. bankers embroiled in a transaction devised by former Enron CFO Andy Fastow will be spending a considerable amount of time in the near future.

As this Forbes article reports, former NatWest bankers David Bermingham, Giles Darby and Gary Mulgrew lost their High Court appeal to avoid extradition to Houston to face charges that they bilked 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). After the High Court's decision was announced, the three ex-bankers said that they intend to appeal to the House of Lords, the U.K.'s highest court.

The case is particularly interesting because NatWest -- the institution that the Enron Task Force contends was bilked by the three former bankers -- never sought to recover the allegedly bilked 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. Had a trial taken place in the U.K., the three men could not be extradited to the U.S. because of the principle of double jeopardy, but since no British trial has taken place, the British Home Secretary has granted the Enron Task Force's request under the Extradition Act of 2003, which was passed to facilitate extradition of suspected terrorists to the U.S. Under that legislation, the Home Secretary can extradite British citizens without the U.S. authorities having to make a prima facie case -- they need only set forth a statement of the facts that they hope to prove. Moreover, the Extradition Act is not recipricol -- to extradite an American citizen from the U.S., the British still need to provide evidence that the American citizen has committed an extraditable offense.

Thus, if the bankers lose their appeal to the House of Lords and are extradited to Houston, they will be forced to prepare the defense of their case while imprisoned in Houston's Federal Detention Facility. Meanwhile, their main accusers -- Fastow and Kopper -- remain living comfortably in River Oaks and Montrose.

Chalk it up as another example of the high price of asserting innocence.

Posted by Tom at 7:28 AM | Comments (1) | TrackBack (0)

Meanwhile, over in the natural gas markets . . .

As oil prices reversed a downward trend and rose over the weekend on the news of more Nigerian political problems (James Hamilton explains why this is important), the roller coaster of emotions that is the natural gas market continued unabated.

Just over two months after prices hit an all-time high amid fears of shortages this winter, the natural gas market is flush with a record amount of gas and, as a result, natural gas prices are in full retreat. A U.S. government report last week reflected that natural gas supplies in underground storage facilities are almost 45% above what is normal for this time of year and now speculation is increasing that a record amount of gas will be left over from winter as the weather warms in the midwest and northeast U.S. this spring. As a result, prices for natural gas settled last Friday at $7.182 a million British thermal units, which compares with the $15.378 per million British thermal units closing price on December 13th. The drop in prices is allowing industrial buyers of gas to enter the long side of the market and hedge their risk of higher prices in the future.

No word yet from Bill O'Reilly on how the big oil and gas companies allowed such a situation to occur.

Posted by Tom at 6:29 AM | Comments (0) | TrackBack (0)

Didn't you have a feeling this was coming?

After a bad week, Ft. Worth-based RadioShack Corp. Chief Executive Dave Edmondson resigned yesterday by "mutual agreement" with the company's board under which Edmundson will receive a severance package valued at about $1.5 million.

Public disclosure early last week of Edmundson's resumé fluffing was bad enough, but the final straw in Edmundson's fate was RadioShack's announcement late last week that it is planning on closing as many as 700 stores and taking a large write-down. Although company revenue rose about 5% to $1.67 billion in the quarter ended Dec. 31, the company's profit for the quarter dropped 62% to just under $50 million (or 36 cents a share) from about $130 million (81 cents a share) in the same quarter a year ago. Its shares lost over 8% of their value after the annoucement and hit a 52-week low of $18.80 in trading on the New York Stock Exchange during this past day.

Despite the distraction of Edmundson's problems, his quick exit may actually help RadioShack. This is a company that is desperately in need of a new vision -- or at least a plan -- and it was clear that Edmundson no longer had the credibility with the board and employees to pull one together. It's hard for a company to distinguish itself in the marketplace when all it seems to be doing is selling cellphones.

Meanwhile, the Wired GC points out that the Edmundson/Radio Shack affair actually reflects a simple lesson -- effective leaders lead by example.

Posted by Tom at 3:35 AM | Comments (0) | TrackBack (0)

February 20, 2006

Has Chief Hurtt blown a fuse?

Anne Linehan and Charles Kuffner are two of Houston's best bloggers on local political matters, and they have been covering an emerging story that amazingly appears to be flying below the radar screen of most Houstonians -- i.e., Houston Police Chief Harold Hurtt's plan announced last week proposing to place surveillance cameras in apartment complexes, downtown streets, shopping malls and even private homes to fight crime during a shortage of police officers.

Building permits should require malls and large apartment complexes to install surveillance cameras, Hurtt said. And if a homeowner requires repeated police response, it is reasonable to require camera surveillance of the property, he said.

And the Chief's justification for surveillance cameras in private homes?:

"I know a lot of people are concerned about Big Brother, but my response to that is, if you are not doing anything wrong, why should you worry about it?"

H'mm. That is not the kind of reasoning that one would find in, say, The Federalist Papers, now is it?

Based on the above response, it appears that Chief Hurtt must have been asleep during the Constitutional Law course while earning his criminal justice degree. Except that, it turns out that the Chief doesn't have a criminal justice degree. Rather, he has a bachelor's degree in sociology from Arizona State University and a master's in something called "organizational management" from the University of Phoenix.

As you might expect, as this story filters through the media and blogosphere, people are scratching their heads and wondering exactly what is going on down here. The Spoof ran a story under the headline "President Bush taps Harold Hurtt to replace Michael Chertoff":

WASHINGTON, D.C. -- After hearing Houston Police Chief Harold Hurtt's remarks in one of the Police Chief's recent press conferences, President George W. Bush gave praise to Chief Hurtt.

"He wants cameras in people's homes. That is my kind of man," said President Bush. "This man is going to be my new Homeland Security czar."

When Chief Hurtt was asked by one reporter why people who aren't doing anything wrong should be surveilled, he responded: "Only al Qaeda sympathizers and terrorists would protest such a policy. Are you with bin Laden?"

"It was that response to the reporter's question that really got the President's attention," explained White House aide Emma Faker.

Seriously, I recognize that Mayor White is a competent fellow and has a reasonably good understanding of what makes Houston tick. But how is it that Chief Hurtt's outrageous public comments aren't grounds for termination of his employment in a position where he is supposed to be responsible for securing the rights of citizens?

Posted by Tom at 5:43 AM | Comments (5) | TrackBack (0)

Railing against the capitalist roaders

Most of the time, The New York Times does a reasonably good job of covering business matters, but there are still days when the paper resembles the People's Daily of New York.

Yesterday was one of those days. First, Times business columnist Gretchen Morgenstern -- who apparently believes that the model for corporate governance is Ben & Jerry's -- continued her campaign against excessive executive compensation with this Times Select ($) column in which she excoriates the compensation package paid to Analog Devices CEO, Jerald G. Fishman. While disassembling Morgenstern's article, Larry Ribstein asks a decidedly more compelling question than the one Morgenstern addresses, namely "[t]o what extent do stories like this shape misguided public policy like the SEC’s recent compensation disclosure rule? What is the social cost of the useless reshuffling firms must do to minimize damage from sensationalist stories like this?

Speaking of those social costs, this Business Week article notes a trend that is certainly consistent with my anecdotal experience -- a brain drain at public companies as top managers flee for jobs with private equity funds to hunt for deals and manage portfolio companies:

The attractions are twofold: money and freedom. The pay can be outrageously good even at the entry levels; for CEOs, it can be spectacular. The flexibility is alluring, too. In private equity there’s less annoyance from the Sarbanes-Oxley Act, the controversial regulations passed in 2002 to police publicly held companies. And many private CEOs will avoid the Securities & Exchange Commission’s new proposal that would require the highest-paid executives at public companies to disclose their compensation in excruciating detail. (These rules and proposals still apply to companies that issue registered public debt.)

Regulatory issues aside, the fundamental nature of private-equity work is different. CEOs have a freer hand to do the tough but necessary things to repair companies for the long term, with less focus on quarterly results and placating public shareholders and more on meeting the strategic yardsticks of a multiyear turnaround effort.

Meanwhile, along side Morgenstern's column on the front page of the Sunday Times business section, this Landon Thomas article reviews the NY Times Bestseller, John Perkins' Confessions of an Economic Hit Man (Berrett-Koehler 2004), the core message of which is described as follows:

American corporations and government agencies employ two types of operatives: "economic hit men," who bribe emerging economies, and "jackals," who may be used to overthrow or even murder heads of state in Latin America and the Middle East to serve the greater cause of American empire. During an earlier time, that message might have been mere fodder for conspiracy theorists and fringe publishers. But now, for all of Mr. Perkins's talk of fiery plane crashes and corporate intrigue, his book seems to have tapped into a larger vein of discontent and mistrust that Americans feel toward the ties that bind together corporations, large lending institutions and the government — a nexus that Mr. Perkins and others call the "corporatocracy."

Can Oliver Stone be far behind?

Posted by Tom at 4:28 AM | Comments (2) | TrackBack (0)

February 19, 2006

The Vegas monorail boondoggle

Tory Gattis of the smart Houston Strategies blog has been doing his typically excellent job of covering developments on the proposed expansion of the Houston Metro light rail line. Neither an over-the-top advocate nor a grizzled pessimist about urban rail systems, Tory takes a refreshingly measured view that such systems should attempt to maximize usefulness while being a part of an integrated urban mobility plan that doesn't place all urban mobility eggs in one transit-type's basket.

The wisdom of Tory's approach is reflected by what is currently playing out in Las Vegas, where Sin City's new $650 million, 4.4 mile monorail project just experienced the worst monthly ridership in the system's 18-month history (earlier post here). Although comparing Houston's light rail system to the Las Vegas monorail is bit akin to comparing apples and oranges, it is noteworthy that the poor performance of the Vegas monorail has contributed mightily to the junk bond rating of the Las Vegas Monorail Co. bonds that were used to finance the system. Now, the Vegas transit authority finds itself unable to sell bonds at a realistic price in order to finance construction of logical expansions of the system, such as an extension to McCarron Airport.

Read the entire article because it is a wonderful reminder to us of how financial logic and constraints are abandoned in the face of such governmental boondoggles. For example, what do you think the Vegas transit authority did in the face of a system that is generating less than half of the amount necessary to pay operating expenses and debt service, lost $20 million last year, and is generating far fewer riders than projected?

The transit authority increased its base one-way fare from $3 to $5.

But wait, pointed out a spokesperson for the transit authority, that cool move generated an almost 24% increase in monthly revenues from a year ago even though 18% fewer riders used the system. Thus, even though the system needs over a 50% increase in monthly revenues to approach break even status, the transit authority's spokesperson reasoned that an anecdotal month's worth of higher revenue indicates that a drastic ridership increase won't be needed to break even. According to the transit authority, all that is needed is a quadruple increase in the monorail's marketing budget in order to attract more riders, presumably high-rollers who enjoy moving from casino to casino. Often.

So, how long do you think it will take for the Vegas monorail to be converted into Vegas' newest rollercoaster attraction? ;^)

Posted by Tom at 7:42 AM | Comments (8) | TrackBack (0)

February 18, 2006

The remarkable Dick Harmon

Don't miss Chronicle golf writer Steve Campbell's fine article on the funeral yesterday for longtime Houston golf teaching professional, Dick Harmon, who died unexpectedly last week. As with the visitation on Thursday evening that I attended in an overflowing funeral home, the funeral was a bittersweet affair in which laughter mixed with tears as friends and family members grappled with the sudden loss of Dick's humanity, grace, dry wit and wonderful nature. He was truly a special man.

Best crack of the funeral came from brother Bill Harmon, who passed along during his eulogy a prediction that former PGA Tour pro and current CBS color commentator Lanny Wadkins made about Dick's first meeting in heaven with his late father Claude, who was a rather acerbic character at times, particularly with regard to his four sons. The subject of that predicted first meeting was brother Butch, who tutored Tiger Woods during college and his first several years on the Tour before Woods unceremoniously fired him. Inasmuch as I have had the pleasure of a personal relationship with each of Claude, Dick and Butch, I can vouch for the validity of Wadkins' prediction:

"[Wadkins] said he knew for a fact what my dad said to Dick when he saw him in heaven," Bill Harmon said. "The first thing out of his mouth was:

'How the hell did Butch screw up that Tiger deal?' "

Laughter and applause spread across the church. Butch Harmon . . . laughed as hard as anybody.

God Bless Dick Harmon and the entire Harmon Family.

Posted by Tom at 7:06 AM | Comments (0) | TrackBack (0)

February 17, 2006

Houston even has interesting traffic jams

This Eyewitness News article reports on a rather unusual reason for a big-city traffic jam:

Drivers on the city's south side found themselves caught up in a very unusual traffic tie up overnight.

Officers are used to pulling over drivers, but a bull on the Beltway proved a much greater challenge. Authorities did finally catch the bull, but not before the animal ran loose for about 30 minutes.

The bull originally got loose at about 11pm, and started blocking the Beltway for drivers. It was spotted first headed east on the South Belt near Sabo.

At one point, someone had a rope around the bull, but that person was dragged a little bit and the bull got loose again. The bull jumped the median and started heading west, finally exiting at the Pearland Parkway, and U-turning through the underpass.

Officers from the Houston Police Department and the Constable's office finally managed to round the bull up and tie him to a fence.

Posted by Tom at 8:03 AM | Comments (0) | TrackBack (0)

While Sheila Kahanek tells her story, William Fuhs sits in prison

During its four year existence, the Enron Task Force has always been better at bludgeoning plea bargains and villifying former executives in the media than actually obtaining convictions in court.

One of the former Enron executives who stood up to the Task Force is Sheila Kahanek, the former mid-level Enron accountant who was acquitted of fraud and conspiracy charges in the Task Force's controversial Nigerian Barge prosecution. That case resulted in the questionable convictions of four former Merrill Lynch executives on charges that they assisted Enron in manipulating its finances in connection with a sale of an interest in some power-producing barges off the Nigerian coast.

In this important U.S. News interview, Kahanek tells her compelling story about being falsely accused of a crime and the ordeal involved in defending herself with limited resources against a prosecution team that has no such limitations. The entire interview is a must-read, but Kahanek's answers to the following questions about the government tactic of preventing exculpatory testimony from coming to light and the high price of asserting innocence are particularly interesting:

The defense attorneys for Lay and Skilling have complained that the prosecution is scaring witnesses away from testifying for their clients. Did this happen to you?

It was extremely rare if you could get someone to return a call, much less answer your questions. Prosecutors have absolute power in deciding whom to indict, regardless of what the law says concerning the not-so-grand jury. It is an unfortunate reality that most people will not risk their freedom for that of another, particularly if they have a spouse or children.

So weren't you tempted to plead guilty and limit your losses?

Absolutely not. Dan [her defense attorney, Dan Cogdell] and I got that clear from the start. A plea deal was not an option. It wasn't an option. I had to know I fought for what was right. I had to be able to look myself in the mirror and know that I never compromised myself or the truth. Every day I had to dig into myself and find the strength to fight another day. I have asked a number of people with children: Would you stand up and fight if it meant you might not see your kids for 24 years, when you can take a deal for five years? No one has said absolutely that they would fight it. Someone told me: "When you have children it is not about you anymore."

Read the entire interview, and then give some thought to the plight of William Fuhs, the former mid-level Merrill Lynch executive who was convicted in the same trial in which Kahanek was acquitted and who had virtually the same level of involvement in the transaction that formed the basis of the prosecution as Kahanek (Fuhs was the ministerial scrivener of the transaction and had no involvement in either the structuring or the negotiation of the deal). Fuhs -- who is in his early 30's with a wife and two young children -- now sits in federal prison awaiting disposition of his appeal for merely having documented a legitimate transaction that the government criminalized because of matters in which Fuhs was not involved.

What our Justice Department has done to Kahanek, Fuhs and the other Merrill Lynch executives involved in the Nigerian Barge case -- and how the government is handling the Lay-Skilling prosecution -- is a radical abuse of our criminal justice system, and the extraordinary damage to the individuals and families involved cannot be responsibly dismissed as a trade-off of an imperfect system. As we watch principles of justice and the rule of law trampled upon in such cases, contemplate whether -- as Sir Thomas More asked Will Roper in A Man for All Seasons -- "you really think you could stand upright in the winds [of abusive state power] that would blow" if the government were to set its sights on you?

Posted by Tom at 5:39 AM | Comments (12) | TrackBack (0)

Lay-Skilling, Week Three

The glacial pace of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling quickened this week, as former Enron Broadband CEO Ken Rice finished his testimony after not quite three days on the stand. Although the mainstream media accounts of the trial continue to be generally favorable for the prosecution and, as such, the trial remains an extremely difficult one for the defense, my sense is that the biggest news after three weeks is that this trial is settling in to being a very difficult one for the prosecution.

The holes in the prosecution's case are apparent after just two witnesses. The Task Force inexplicably spent almost three times longer with its first witness -- Mark Koenig -- than it did with Rice, which put the trial on its initial glacial pace. Then, in an apparent reaction to that miscue, the prosecution seemingly hurried through Rice's testimony, who is arguably the more important witness of the first two.

Moreover, much of the substance of the testimony of both witnesses was rather odd. Koenig claimed that he believed that Skilling and Lay misled the investment community in various ways, but he didn't know the mechanics of how that was supposedly accomplished. On the other hand, Rice asserted that Skilling misled the investment community on the prospects of Enron's broadband unit, but he didn't implicate Lay in any alleged wrongdoing at all. Then, on cross-examination, Rice conceded that he believed Enron Broadband had great long-term potential, but that Skilling and he were involved in improperly hiding some of the unit's short-term problems.

To make matters worse for the Task Force, the testimony of both men barely touched on a key element of the prosecution's case -- the alleged huge conspiracy within Enron to cover up the wrongdoing at the company. Indeed, when the prosecution asked Rice on re-direct about whether he was involved in such a conspiracy, Rice replied unenthusiastically that "Mr. Skilling and I had misled investors on a number of occasions about the prospects of our business" at the broadband unit. So much for the biggest conspiracy of all time.

But perhaps most importantly, both Koenig and Rice admitted during cross-examination that, despite testifying now that they were involved in lying about Enron to the investment community years ago, neither of them made any statement to Skilling, Lay or anyone else at the time of the supposed lies about the wrongdoing. Similarly, neither of these key prosecution witnesses testified that either defendant ever once acknowledged telling a lie. That lack of evidence of fraudulent intent dovetails with the defense's theory that Koenig and Rice are only now claiming that they were involved in wrongdoing to hedge their risk of long prison sentences under their plea deals with the prosecution. That the prosecution had Rice dead to rights on illegal insider trading charges at the time he cut his plea deal also didn't help his credibility, either.

So, after filing and publicizing a lengthy indictment against Lay and Skilling that asserts a wide array of alleged corporate crimes, the Task Force doesn't want the jury to see that indictment (although the Lay-Skilling team does) and the Task Force's case appears to have come down to a plain "pump and dump" case -- Skilling and, to a lesser extent, Lay touted the failing company's shares while selling their own (that Lay's sales were forced under margin calls is a knawing problem with that theory that the Task Force has not even addressed, yet). As noted in this earlier post, that theory of the case plays on "the presumption" in such cases -- i.e., that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something for failing to announce to the investing public that Enron was really just a highly-volatile trading company rather than the more stable logistics company that they contended Enron had become. After three weeks of trial, it would not be surprising if some of the jurors are saying to themselves about that theory: "Is that all you've got?"

Finally, sometimes small things in big trials are the best indicators of problems. Throughout the trial, Judge Lake has ordered the prosecution to advise the defense of its next five witnesses. As late as yesterday evening, the prosecution still hadn't even decided on its next five witnesses, and at least one of those witnesses -- Koenig's former aide, Paula Rieker -- will likely be largely duplicative of Koenig's earlier testimony. That the prosecution is fumbling over the order of its witnesses at this early stage of the trial is a pretty darn good indication that this is not a prosecution team that is confident in its case.

Posted by Tom at 4:13 AM | Comments (6) | TrackBack (2)

February 16, 2006

The Money Lawyers

Bruce Carton over at the Securities Litigation Watch blog is excerpting portions of Joseph C. Goulden's new book called The Money Lawyers (Truman Talley 1995), and the first excerpt is a portion of the chapter in the book about controversial class action plaintiffs' lawyer, William Lerach. Goulden notes that Lerach disarmed him about Lerach's legendary reputation for combative behavior in their first meeting:

Stories of the [Lerach] temper are legion. An unfriendly adversary told me he once heard Lerach tell corporate executives during negotiations, "I don't give a f**k if I put your company into bankruptcy. I'm going to take away your beach house and your condo in Aspen by the time I'm finished with you." When he talks about high tech executives, he tosses around vitriol such as "scumbags" and "crime in the suites." He can be combative when dealing with other lawyers. One remembers hearing Lerach storm, "Your professional life is at an end. I am going to destroy you."

But he chose to open our talk with a grin. "So," he said, "some of those guys are saying nasty things about me, eh?"

Posted by Tom at 7:28 AM | Comments (1) | TrackBack (0)

UT football's newest recruiting tool

"Recruits, click on the picture. You could have one of these if you come to UT."

Posted by Tom at 6:59 AM | Comments (0) | TrackBack (0)

The power-law theory of homelessness

Malcolm Gladwell, he of Tipping Point fame, has authored this fascinating New Yorker article on homelessness, which includes a particularly interesting discussion of the health care costs for the chronically homeless. One example that Gladwell uses is the story of a Reno, Nevada homeless man nicknamed "Million Dollar Murray," who -- when all his health care and substance-abuse treatment costs were calculated for the ten years that he had been on the streets -- probably ran up a medical bill as large as anyone in the state of Nevada. As one sage Reno cop observed: “It cost us one million dollars not to do something about Murray.”

The entire article is a must read, and here is a snippet to give you a flavor for it:

In the nineteen-eighties, when homelessness first surfaced as a national issue, the assumption was that the problem fit a normal distribution: that the vast majority of the homeless were in the same state of semi-permanent distress. It was an assumption that bred despair: if there were so many homeless, with so many problems, what could be done to help them? Then, fifteen years ago, a young Boston College graduate student named Dennis Culhane lived in a shelter in Philadelphia for seven weeks as part of the research for his dissertation. A few months later he went back, and was surprised to discover that he couldn’t find any of the people he had recently spent so much time with. “It made me realize that most of these people were getting on with their own lives,” he said.

Culhane then put together a database—the first of its kind—to track who was coming in and out of the shelter system. What he discovered profoundly changed the way homelessness is understood. Homelessness doesn’t have a normal distribution, it turned out. It has a power-law distribution. “We found that eighty per cent of the homeless were in and out really quickly,” he said. "In Philadelphia, the most common length of time that someone is homeless is one day. And the second most common length is two days. And they never come back. Anyone who ever has to stay in a shelter involuntarily knows that all you think about is how to make sure you never come back."

The next ten per cent were what Culhane calls episodic users. They would come for three weeks at a time, and return periodically, particularly in the winter. They were quite young, and they were often heavy drug users. It was the last ten per cent—the group at the farthest edge of the curve—that interested Culhane the most. They were the chronically homeless, who lived in the shelters, sometimes for years at a time. They were older. Many were mentally ill or physically disabled, and when we think about homelessness as a social problem—the people sleeping on the sidewalk, aggressively panhandling, lying drunk in doorways, huddled on subway grates and under bridges—it’s this group that we have in mind. In the early nineteen-nineties, Culhane’s database suggested that New York City had a quarter of a million people who were homeless at some point in the previous half decade —which was a surprisingly high number. But only about twenty-five hundred were chronically homeless.

It turns out, furthermore, that this group costs the health-care and social-services systems far more than anyone had ever anticipated. Culhane estimates that in New York at least sixty-two million dollars was being spent annually to shelter just those twenty-five hundred hard-core homeless. “It costs twenty-four thousand dollars a year for one of these shelter beds,” Culhane said. “We’re talking about a cot eighteen inches away from the next cot.” Boston Health Care for the Homeless Program, a leading service group for the homeless in Boston, recently tracked the medical expenses of a hundred and nineteen chronically homeless people. In the course of five years, thirty-three people died and seven more were sent to nursing homes, and the group still accounted for 18,834 emergency-room visits—at a minimum cost of a thousand dollars a visit. The University of California, San Diego Medical Center followed fifteen chronically homeless inebriates and found that over eighteen months those fifteen people were treated at the hospital’s emergency room four hundred and seventeen times, and ran up bills that averaged a hundred thousand dollars each. One person—San Diego’s counterpart to Murray Barr—came to the emergency room eighty-seven times.

Hat tip to Tom Mayo for the link to Gladwell's article.

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

Have you noticed what's happening with oil prices?

Have you noticed that crude oil prices have declined by 12% this month?

Crude-oil futures dropped $2 on the New York Mercantile Exchange yesterday, falling to the lowest level in two months. Benchmark light, sweet crude-oil futures for March fell $1.92 to settle at $57.65 a barrel, which is the lowest front-month settlement since Dec. 19th. That makes four straight days of losses amounting to almost $5 a barrel. Meanwhile, government data reflects that U.S. petroleum inventories are above the higher end of the average range for this time of year, and oil stockpiles are now at their highest level since late June, 2005.

No word yet from Bill O'Reilly on how the big oil companies, with all their market power, could not prevent this large decline in crude oil prices.

Posted by Tom at 4:43 AM | Comments (1) | TrackBack (0)

February 15, 2006

Radio Shack CEO's resumé fluffing?

A rather bizarre story is unfolding in Ft. Worth with regard to Radio Shack chief executive officer, Dave Edmondson.

It appears that Star-Telegram reporter Helen Landy has caught some, ahem, inaccuracies on Edmondson's resumé and corporate biography. But Edmondson’s explanations for the errors are better than the best school child's explanation of missing homework. His diploma was lost in a fire? He didn’t monitor his Web site profile that claimed a psychology degree that his college -- Pacific Coast Baptist College in San Dimas, CA. a/k/a Heartland Baptist in Oklahoma City -- has never offered? The inaccuracy regarding the type of degree that he received doesn't make any difference because no one knows the difference between a "Thg" degree and a "BS" degree, anyway?

And then there is the little detail about the multiple DWI incidents.

The Radio Shack board's "no comment" reaction to all of this indicates that something may be brewing. Stay tuned.

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

IES finally tanks

As expected, Houston-based Integrated Electrical Services filed a chapter 11 case in Dallas yesterday and immediately submitted a debt-for-equity reorganization plan that is the culmination of months of pre-bankruptcy negotiations with the institutional debt holders of the highly-leveraged electrical contractor.

This is initial docket of the case, and the Houston Chronicle article on the filing is here. Dan Stewart of Vinson & Elkins' Dallas office is taking the lead as debtor-in-possession counsel, and Sanford R. Edlein of Glass & Associates, Inc. is the company's chief restructuring officer. The Creditors Committee has already been appointed and is comprised of institutional debt holders Tontine Capital Partners, L.P., Southpoint Capital Advisors, L.P., and Fidelity Management & Research Co., which were represented in pre-bankruptcy negotations by Marcia Goldstein of Weil, Gotshal & Manges' New York office. The IES case has been assigned to the Bankruptcy Judge who has the best nickname of any judge in the United States Judiciary, Judge Harlin "Cooter" Hale.

IES is a roll-up that was incorporated in 1997 and, since that time, has used debt to finance an expansion of its operations through the acquisition of other electrical contracting companies. As of the most recent fiscal year, the company had revenues of a little over a billion and employed around 8,900 employees in 140 locations around the world. IES had a net loss of about $129.5 million for last year ($3.31 per share), which followed a net loss of almost $125 million for the previous fiscal year. The bankruptcy filing has been widely-anticipated since mid-December when the company announced that it was contemplating a chapter 11 case with a prepackaged reorganization plan. The NYSE suspended trading of IES stock at that time.

The IES plan is essentially to clean up its balance sheet by swapping around $175 million of its approximate $225 million in senior subordinated debt for an 82% equity stake in the reorganized company. Holders of existing stock in the company will be diluted to 15% of the reorganized company and management and employees will receive 3%. Meanwhile, Bank of America is stepping up to provide about $80 million in debtor-in-possession financing during the chapter 11 case, which IES hopes to conclude on a fast track by mid-to-late April of this year.

Posted by Tom at 5:59 AM | Comments (0) | TrackBack (0)

Bainbridge on the SOX lawsuit

In this TCS Daily op-ed, the inimitable Professor Bainbridge takes up the lawsuit filed in Washington last week in which an activist think tank asserts that that the Sarbones-Oxley Act's Public Company Accounting Oversight Board (nicknamed the "Peekaboo board") is unconstitutional. The think tank's lawsuit is based on this John Berlau/Hans Bader white paper for the Competitive Enterprise Institute that analyzes the consititutional issues arising from the Peekaboo board's creation.

The core assertion in the lawsuit is that the Peekaboo board is vested with extensive governmental functions and powers, including the quasi-law enforcement investigatory power and a quasi-judicial power to impose substantial fines for violations of its rules. Inasmuch as the members of the Peekaboo board are appointed by the SEC rather than the President, the lawsuit contends that SOX's provision providing for creation of the Peekaboo board violates, inter alia, the appointments clause of the U.S. Constitution. Moreover, since SOX lacks a severability clause, the potential defect in a part of the Act may mean that the entire Act must be declared unconstitutional.

Professor Bainbridge thinks that the lawsuit has legs:

There is also little oversight [of the Peekaboo board]. The only way the SEC can undo any of the [Peekaboo board's] regulations is by proving that the rules are obviously inconsistent with the Sarbanes-Oxley statute -- a nearly impossible task given its vague wording. The [Peekaboo board] is even largely independent of Congressional oversight because its budget is financed from the fees it levies on the companies it regulates. The Justice Department may well argue in response that the Board simply doesn't rise to the level of a "real" agency. But that will surprise corporate America, given that the Peekaboo can fine accounting firms up to $2 million and individual accountants up to $100,000 for violations.

And, of course, familiar principles of agency capture by the industries it regulates suggest that interest group pressures and favoritism are potentially serious problems.

Read the entire piece, along with this analysis of the lawsuit by Constitutional scholar and Bainbridge colleague, Eugene Volokh.

As Professor Ribstein has long maintained, SOX is more than just a bad law:

SOX wasn't just a bad law, but a uniquely bad law, passed under uniquely bad conditions without any of the safeguards that normally accompany major legislation.

And even if repeal or drastic shrinkage is impossible, it's still necessary to make the case as a warning against future SOX's. One way to do that is to establish SOX as a paradigm of bad law. In other words, to make Sarbanes and Oxley the Edsel Fords of corporate governance regulation.

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

Give me a break

The Chronicle's Mary Flood reports that, upon completion of Mark Koenig's testimony earlier today in the Lay-Skilling trial, Koenig's lawyer released the following statement:

"Mark Koenig has completed his testimony, and he will have nothing more to say until this case is concluded. However, I would like to offer an observation."

"When a person makes wrongful choices and violates the law, that person confronts another choice. Mark Koenig chose to confront and admit his wrongdoing, and to undertake the most meaningful effort available to him to begin making up for his offense. Over the past year and a half, and especially over the past two weeks, that's exactly what he has done. He embraced responsibility for what he knew to be wrong, and spoke truth about what happened. And in doing that, he displayed a great deal of courage and strength of character."

H'mm, "displayed a great deal of courage and strength of character?"

While working for Enron, Koenig was operating under one of two circumstances. Either he was lying to the investment community about Enron or he did not intend to mislead anyone and was simply doing the best he could in the financial storm that ultimately cratered the company.

If it was the former, then Koenig continued to lie to investigators for years until he copped a plea in 2004 in which he bargained for a reduced prison term and a substantial net worth in return for testifying against Lay and Skilling. Moreover, Koenig didn't even cut that deal with prosecutors until after his assistant -- former Enron managing director of investor relations Paula Rieker -- had cut her plea deal with prosecutors and agreed to testify against Koenig, among others.

On the other hand, if it was the latter, then Koenig has sold his soul to prosecutors and lied on the witness stand in return for a lighter prison sentence and retention of a substantial net worth.

In short, Koenig is either a liar or a perjurer who cut a deal to hedge his risk of a long jail term and to save some money. Either way, Koenig is not trustworthy and certainly did not display "a great deal of courage and strength of character."

Posted by Tom at 3:57 AM | Comments (0) | TrackBack (0)

February 14, 2006

The talented Mr. Munitz's gal from Jammin' Salmon

As is often the case with tales of intrigue from California, this LA Times article reports that the final straw in the Getty Trust board's decision last week to require embattled Barry J. Munitz's resignation as Getty Trust president was the unauthorized $350,000 "severance payment" to his former chief of staff, Jill Murphy. As the LA Times story notes, Murphy became Munitz's protege' after Munitz hired her out of a Sacramento restaurant called Jammin' Salmon in the early 1990's when he was chancellor of the California State University system:

Munitz met Murphy while eating at the Jammin' Salmon, a Sacramento restaurant where she worked in the mid-1990s. Soon after, he hired her to work for him when he served as chancellor of the California State University system.

He brought her to the Getty shortly after he arrived, creating the position of chief of staff, a title more common in political circles. As the gatekeeper for Munitz, Murphy quickly became a powerful and feared figure among staff.

In her early 30s and with no background in the arts, she was perceived to have the power to make or break people's careers at the Getty. That power increased as Munitz spent more time away from Los Angeles on trust business.

Munitz has acknowledged Murphy has "sharp elbows" but defended her as brilliant and effective.

Three years ago on a board retreat in London, Getty trustees confronted Munitz about Murphy's increasingly divisive presence, [Getty trustee Ramon] Cortines said. Munitz promised to do something about it, but little changed, the trustee added.

Murphy announced in August she would leave the trust by the end of the year, saying she had been inspired by a book she had read about ending world poverty by 2025. "It is an inspiring goal, and I hope to find some way to contribute toward making it a reality," she said in a statement.

During far less glamorous times, Munitz was the president of the University of Houston.

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

Gas trader attempts to withdraw plea deal

Former Reliant Energy gas trader Jerry Futch -- who was arrested and charged under particularly heavy-handed circumstances -- has filed a motion to withdraw his prior plea deal with the Justice Department and a motion to dismiss his indictment on four counts of reporting false transaction data to publishers that produce indexes used to value natural gas contracts. Futch's surprising motions were the latest developments in a series of controversial criminal cases that the U.S. Attorney's office for the Southern District of Texas has been pursuing against former traders of natural gas who worked for various Houston-based companies. Previous posts on the cases may be reviewed here, here, here, here and here.

The case against Futch is one of about a dozen that the Justice Department has been pursuing in regard to alleged manipulation of natural gas trading indexes, which are used to value billions of dollars in gas contracts and derivatives. Industry publications such as Inside FERC Gas Market Report use data from traders to calculate the index price of natural gas, which affects the level of profits that traders can generate. In Futch's case and in the related trader cases, it remains unclear in what context the allegedly false information was transmitted or whether the publication even used any false information. However, the government's theory of criminal liability is that it needs only to prove that fake trades were reported to the publications and not that the trades were actually published or affected the markets. Eleven other former traders have been charged in similar cases, eight of whom (including Futch) have pled guilty. Four others others are currently awaiting trial, including former Dynegy trader Michelle Valencia and former El Paso trader Greg Singleton.

Futch's motions are particularly interesting in that they assert the argument that Reliant Energy and its Houston-based counsel, Baker & Botts, effectively threw Futch to the wolves in not making him aware that he was a target of the criminal investigation into the false data reporting and that his statements in a Commodities Futures Trading Commission civil investigation could be used against him in the criminal investigation. As has become typical in this era of the vanishing attorney-client privilege, Reliant Energy entered into a cooperation agreement with the CFTC in November 2003 in which the company agreed to give the government broad access to its employees such as Futch. Although Reliant Energy and Baker & Botts contend that Futch was advised that his statements in the civil investigation could be used against him, Reliant Energy did not provide Futch with independent counsel during the investigation.

Posted by Tom at 7:32 AM | Comments (1) | TrackBack (0)

"That you didn't really mean it is why we want to use it"

Even though most of the action is in the courtroom during the ongoing trial of former key Enron executives Ken Lay and Jeff Skilling, a few interesting tidbits still arise from time to time on the docket of the case.

You may recall this post from awhile back that focused on this rather odd Enron Task Force motion requesting that U.S. District Judge Sim Lake not allow the Lay-Skilling defense to use the Task Force's own indictment during cross-examination of the Task Force's witnesses in the trial because, among other things, to do so would risk "unfair prejudice, confusion of the issues [and] misleading the jury. . . "

Well, as you might expect, the Lay-Skilling is having a little fun with the Task Force's unusual request. In this opposition, the Lay-Skilling team notes that the Task Force's motion stands due process of law on its head:

Due process considerations may keep the indictment from going to the jury where publishing it would cause defendant prejudice. . . . Invoking defendants' right to keep the indictment from the jury where it contains "inflammatory or pejorative language," . . . and arguing that asking questions about the indictment may cause prejudice and confusion, the Task Force seeks to prevent defendants from showing the indictment to witnesses and questioning them about its allegations. . . The most efficient and effective means of cross-examining witnesses on certain topics includes asking them if specified allegations in the indictment are, in fact, true. To impose a blanket prohibition on such questions would interfere with defendants' constitutional rights to present a defense and fully and effectively cross-examine their accusers.

Then, for good measure, the Lay-Skilling team tweaks the Task Force about its sudden change of opinion regarding the quality of the prose in the indictment:

The Task Force argues defendants might cross-examine witnesses about portions of the indictment that are surplusage, thereby confusing the jury. . . [However, the Task Force] previously, and successfully, argued exactly the opposite -- that the indictment contained no surplusage -- in opposing defendants' motion to strike [portions of the indictment].

Meanwhile, down the hall from the relative levity of such motion sparring, the defense finished cross-examination of Mark Koenig (who may have unwittingly helped the defense) and the prosecution finished its re-direct on Monday afternoon. Judge Lake is going to allow a limited amount of re-cross of Koenig on Tuesday morning, then it's time for the next prosecution witness -- former Enron Broadband co-CEO, Ken Rice. Direct examination of Rice is expected to last at least the remainder of Tuesday, which means that cross-examination will likely take up the remainder of the week.

Posted by Tom at 3:35 AM | Comments (0) | TrackBack (0)

February 13, 2006

Week Three Lay-Skilling trial schedule

As second week of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling comes to a lumbering close, the beginning of the third week will bring a new witness and renewed interest in the trial.

My sense is that the remainder of cross and redirect examination of the prosecution's first witness -- former Enron investor relations chief, Mark Koenig -- will take the remainder of today and probably a part of Tuesday. Then, former Enron Broadband CEO Ken Rice will take the stand, and expect direct examination of Rice to take at least a day. Inasmuch as cross-examination of Rice will likely take longer than direct examination, expect Rice to remain on the stand for the remainder of this week.

Posted by Tom at 7:12 AM | Comments (0) | TrackBack (0)

Two interesting interviews

Economist Milton Friedman (previous posts here, here and here) and former General Electric CEO Jack Welch are the subject of a couple of recent interviews and, as usual, both of them have interesting observations to pass along. First, Friedman:

"The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences."

The US Treasury debt is held mainly by China, Japan and South Korea. Is the huge foreign balance of payments deficit a problem for the US and world economy?

"I don’t think so. It may well be a statistical mirage. If you look at the balance sheet, the US is heavily in debt. If you look at the income account—the amount of interest the US pays abroad—it is almost exactly equal to the amount of interest that it receives from abroad. American assets held abroad are earning a higher rate of return than foreign assets held here.

That is understandable because what is most attractive about the US to people and countries with wealth is that it can provide security, insurance really, against political instability. Nobody is afraid that the money they place in the US is at risk of expropriation or of in some other way being taken away. For this safety, the wealth holders of the world are willing to accept a lower rate of return. US assets abroad, in contrast, are riskier and thus yield a higher rate of return.

This explains why there is a rough balance in real terms. It is not clear there really is a debt. It looks like the imbalance concerns are misleading. It doesn’t worry me a bit that China and Japan hold so much US debt. In a way, it seems foolish for them to do it because they get lower returns than they might elsewhere. But that is their business."

Does the large US fiscal deficit worry you?

"Not at all. It is the spending that got us there that worries me. If the US government spends 40 percent of the nation’s income, as it does through either borrowing or taxes, that income is not available for people to spend. The deficit is an indirect method of taxation. Of course, politicians prefer to borrow instead of tax because then someone down the road has to deal with the consequences.

If anything, at the moment, the large deficit has a positive effect of holding down further spending. In that sense, it is a good thing. But it is not a good thing if produced by more spending."

And then Welch, who was interviewed by Wall Street Journal columnist, Holman Jenkins:

Mr. Welch seems frequently to get razzed about "rank and yank," a term popularized by Enron. But he tells audiences that GE's method of systematically evaluating and weeding out employees involved a lot more coaching, and never involved dropping the hammer unexpectedly. OK, but was he really comfortable having those conversations in which he had to tell the laggards they weren't making the grade? "Totally," he says emphatically -- "because I never surprised them."

[Welch] maintains that a real manager has to be comfortable having such conversation [about "rank and yank"], but too many aren't because of a misguided sensitivity to their underlings' feelings. "That's the cruelest form of management," he continues. "You carry these people along. They get to be 50 years old. You have a recession. You say let's cut costs 10%, and you walk down the hall, 'Holman, you're going home.' 'Why me?' 'Because you weren't very good, Holman.' And Holman's reaction is: 'I've been here 25 years. Why didn't you tell me?'"

[Welch] was 13 years into his own career at GE before he learned what he now preaches as the key lesson of leadership--it's no longer about your success, but about the success of others. He discovered this only when he gave up running GE Plastics to run a whole group of GE businesses.

"I realized I couldn't run those businesses myself. I didn't know anything about them. It was up to me to get great people. When I was running my own business, I was way too much of a meddler. I didn't get it," he says.

Now he got it. Seven years later, he was tapped to become [GE's] CEO.

Posted by Tom at 5:10 AM | Comments (0) | TrackBack (0)

Dick Harmon visitation and funeral schedule

The funeral arrangements in Houston for well-known local golf professional Dick Harmon, who died unexpectedly this past Friday, have been finalized.

A visitation for friends of Dick and the Harmon family will be held from 2:00-9:00 p.m. on Thursday, February 16 at Geo. H. Lewis & Sons (1010 Bering Drive) , and a Vigil service is scheduled to begin at 7 p.m. that evening in the Jasek Chapel of the funeral home. A funeral mass will be conducted at 10 A.M. on Friday, February 17 at St. Michael's Catholic Church, 1801 Sage Road. The Houston Chronicle's electronic guest book for the Harmon famly is here.

Posted by Tom at 4:15 AM | Comments (1) | TrackBack (0)

February 12, 2006

Thinking about GM

These posts over the past year have chronicled General Motors' Enronesque slide toward what is increasingly appearing to be an inevitable reorganization case under chapter 11 of the U.S. Bankruptcy Code. That probable fate was reinforced this past week when GM announced a band-aid restructuring plan that is akin to rearranging the deck chairs on the Titanic.

The newest GM plan really is pitiful under the circumstances. GM lost a staggering $8.6 billion last year, and that doesn't even count another $12 billion of bankrupt Delphi (a part of GM until 1999) losses that GM might have to make up. In the face of this flood of red ink, GM announced that it will cut dividends by $565 million and cut another $900 million in costs through reducing executive salaries and health benefits. The biggest news was that GM CEO Rick Wagoner will take a 50% pay cut to $1.1 million, but there was precious little word on how the company is planning on bridging the rest of its $6 billion or so in losses. Conan O'Brien characterized the plan pretty well when he commented in a monologue that, since General Motors is cutting the salaries of its top executives, the executives will now be earning so little they will be forced to drive GM cars.

Moreover, it's not as if GM has been a sterling investment over the years. As this Floyd Norris/NY Times article and accompanying chart notes, an investor who bought a share of GM stock at its price of $40.13 at the end of 1960 would have received $127.58 in dividends and received four distributions of stock worth $20.62 at the time those dividends were issued. If all of that had been reinvested in GM stock, then the investor would now own 11.6 shares, which is worth a bit more than $500. That amounts to a return of less than 6 percent compounded for those 45 years, which would be even less once brokerage fees and taxes are included in calculating a true net return.

So, who's to blame for the this hulking mess? The Wall Street Journal's Holman Jenkins thinks that Congress is to blame for the Wagner Act of 1935, which empowered the UAW to become the monopoly supplier of labor to the auto industry, which resulted in today's unfulfillable pension and health-care promises, and the notorious "jobs bank" security program that carries laid-off workers on the books at full pay and benefits no matter how few cars GM generates.

But in a truly remarkable series of posts (here, here, here and here), Larry Ribstein contends that GM's problems are a reflection of a far deeper problem -- that is, an American culture that encourages resentment toward business, which in turn discourages companies such as GM from taking the bold steps necessary to remain competitive in dynamic markets:

Contrary to popular belief, making failing industries inhospitable to top management talent is really not the way to revive them. Nor is this a useful governance model for the thriving industries. A couple of localities are trying to strangle a leader of the current economy, Wal-Mart, with the kind of employee benefits that are bringing GM down (latest developments here).

Populism is not good business. It's a destructive myth that everything would be ok if only there weren’t these troubling disparities, and if only we could repeal the laws of markets because they make some people unhappy.

Where does this popular belief come from? Of course, it's ingrained in human nature. But our popular culture contributes to it by legitimizing it. This includes journalists. Another source, as I’ve written, is film. Remember Roger and Me? The film lambasted a GM struggling to cope with the onslaught of world competition. If GM had been able to take even more aggressive steps then it might not be where it is today. . .

. . . [I]t’s fundamentally the political forces that inhibit the kind of sweeping changes that would focus firms on value creation rather than risk avoidance. These political forces are stirred up by populism that focuses attention on side issues like compensation, and heats up opposition to necessary structural changes because of the people who are hurt by the necessary destruction of excess capacity.

It’s sad to see these [former GM employees] hurt, and society should minimize their pain to the extent possible. But in our increasingly dynamic world, it’s not like we can avoid paying these bills forever, as we are now learning with GM . . .

So if we have to blame somebody for GM, my candidate is Michael Moore.

The flipside of that same populism coin that Professor Ribstein identifies has played a substantial role in the post-Enron criminalization of business, which has been reinforced by a media that is more interested in catering to that destructive populist passion (see also here and here) than presenting a balanced view of the enormous societal cost of discouraging creative risk-taking and destroying lives.

Posted by Tom at 7:05 AM | Comments (6) | TrackBack (0)

February 11, 2006

Dick Harmon, R.I.P.

The Houston and U.S. golfing communities are in shock this morning with the news that Dick Harmon -- one of the four brothers who are among the best golf instructors in the United States -- died unexpectedly on Friday morning from complications of pneumonia at Eisenhower Hospital in Palm Desert, California after he had been rushed to the hospital early Friday morning. Dick, who was 58 years old at the time of his death, was in Palm Springs working with current PGA Tour player, Lucas Glover.

Dick Harmon's name is synonomous with golf in Houston. His late father, Claude, was a famous teaching pro at New York's Winged Foot Golf Club and Florida's Seminole Golf Club, and Claude was the last teaching pro to win the Master's Golf Tournament (in 1948). My golf club in Houston -- Lochinvar Golf Club -- has always had a close relationship with the Harmon family and, in the final ten years of Claude's life, he was the pro emeritus at Lochinvar. Claude's green jacket from his Master's victory still hangs in a special display case in the Lochinvar clubhouse.

After Claude's death in 1991, Lochinvar attempted to hire Dick away from his longtime position at Houston's River Oaks Country Club, but when Dick declined, he recommended that the club hire his older brother, Butch Harmon. Lochinvar did so and, seemingly overnight, Butch was using the Lochinvar facilities to teach such phenomenal golfing talents as Tiger Woods (while he was still at Stanford), Greg Norman, Phil Mickelson and many other top professional golfers. Before moving west several years ago to establish a golf school at a Lake Las Vegas resort, Butch parleyed his position at Lochinvar to become Golf Digest's top-ranked golf instructor in the United States.

However, as good an instructor as Butch is, many golfing enthusiasts in Houston and elsewhere considered Dick Harmon to be an even better golf teacher. Dick was the revered golf pro at River Oaks for nearly a quarter-century before leaving in 2001 to establish his own golf school at Houston's Redstone Golf Club. During that time, he tutored such extraordinary talents as Fred Couples, Steve Elkington, Lanny Wadkins, Craig Stadler, Blaine McCallister, Billy Ray Brown and current PGA up-and-comer, Glover, to name just a few. For years, Dick's pro-member golf tournament at River Oaks -- held on the Monday after the Shell Houston Open -- would often attract more prominent professional golfers than the Houston Open.

As noted above, Dick and Butch are two of four Harmon brothers who are among the best golf teachers in the United States. Craig Harmon is the long-time head pro at Oak Hill Country Club in Rochester, N.Y., site of the 1956, 1968 and 1989 U.S. Opens, the 1995 Ryder Cub matches, and the 2003 PGA Championship. Moreover, youngest Harmon brother, Bill, is Director of Golf at Toscana Country Club in Palm Desert, California and the noted tutor of ageless PGA Tour veteran, Jay Haas.

A personal anecdote about Dick will give you a glimpse into his wonderful nature. About ten years ago, while Dick was still at River Oaks, a client of mine who was a River Oaks member asked Dick to fit me for a set of irons as an expression of gratitude for my work on a case. Not only did Dick fit me for the clubs personally, he had one of his assistant pros videotape my swing during the fitting process. Afterward, Dick pulled me into his office and analyzed my swing as we watched the video, and I still haven't recovered from the humiliation of watching my swing on video while Dick superimposed Elkington's perfect swing over mine.

But after the video-analysis, knowing that I am a big fan of the author Dan Jenkins, Dick proceeded to show me a videotape of a hilarious dinner roast of Jenkins in which a number of prominent Tour pros such as Ben Crenshaw, Tom Kite, and Peter Jacobsen provided salutations to Jenkins around the theme that "everything really was better in golf back when Hogan was playing." The highlight was Jenkins getting up and giving it right back to the pros by excoriating them for their sponsorship of golf courses built into housing subdivisions or, as Jenkins put it derisively, "those damn dirt deals." Dick and I were doubled over like a couple of school boys watching the video of Jenkins and the pros go at each other. From that time on, whenever Dick and I would see each other, we'd chuckle and inquire of each other whether there were any new "dirt deals" in the area.

Thus, Dick Harmon -- who leaves his beloved wife Nancy, four children and two grandchildren -- was truly a special man. Utilizing a gentle nature, dry wit and keen insight, his contributions to the Houston community were considerable. Nevertheless, he always felt as if his contributions were merely a small token of his appreciation for the tremendous opportunites that Houston provided to his family and him. Dick Harmon was the type of person that makes Houston such a special place. He will be sorely missed.

2 Feb. 2006 Update: The schedule for the visitation and funeral is here.

Posted by Tom at 6:31 AM | Comments (2) | TrackBack (0)

February 10, 2006

The trade deficit ruse

This WSJ ($) article reports ominously that the U.S. trade deficit widened by over $100 billion last year to $726 billion from $618 billion in 2004.

In this TCS Central article, Don Boudreaux lucidly explains why we shouldn't worry much about it.

A far greater problem than the trade deficit is the widespread misunderstanding of it that often results in demagogic appeals for counterproductive protectionist policies.

Posted by Tom at 6:16 AM | Comments (2) | TrackBack (0)

End of the line for the talented Mr. Munitz

Following on earlier posts here, here and here addressed the mercurial career and current troubles of former University of Houston president and current Getty Trust president Barry J. Munitz, this NY Times article (LA Times article here) reports that Munitz resigned under pressure yesterday amid growing questions about his personal use of the trust's money and resources.

As a part of his resignation deal with the trust, Munitz will not receive a severance package and he will be required to repay the trust $250,000, which is a ballpark estimate of the amount that the trust believes that Munitz improperly charged charged the trust for personal expenses during his eight-year tenure. However, Munitz's resignation has no direct impact on the California attorney general's investigation, which apparently is focusing on several instances in which Mr. Munitz used the trust's money without proper authorization on pet projects that had nothing to do with the trust's mission.

No word on whether Munitz will keep the lease on the Porsche Cayenne.

Posted by Tom at 5:20 AM | Comments (2) | TrackBack (0)

Third time a charm?

The criminal case against former Cendant Corp. Chairman Walter Forbes has now lasted eight years. Yesterday, the second trial against Forbes on charges of securities fraud, conspiracy and two counts of lying to the Securities and Exchange Commission ended in a mistrial (NY Times article here) with the jury deadlocked after 27 days of deliberations. The first trial of Forbes in 2004 also ended in a deadlocked jury.

After running a company that merged with another to form Cendant in 1997, Forbes became Cendant's chairman and heir apparent for the CEO position. But the accounting fraud came to light in 1998 and Cendant's market cap plummeted by $14 billion in one day, which prompted the indictment against Forbes. Mounting a similar defense to that of former HealthSouth CEO Richard Scrushy, Forbes contended that subordinates betrayed him and then concealed the scheme. One of Forbes' underlings -- Cosmo Corigliano, the chief financial officer of Forbes' company that was used to form Cendant -- copped a plea on conspiracy and fraud charges and was the main government witness against Forbes during the trial.

Posted by Tom at 4:33 AM | Comments (3) | TrackBack (0)

Lay-Skilling, Week Two

At the outset of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, the Enron Task Force prosecutors estimated that it would take nine weeks to put on its case-in-chief against the defendants. Inasmuch as that prediction assumed four days of trial time each week and that the defense would use the same amount of time on cross-examination of each witness as the prosecution used on direct, the prosecution's prediction effectively meant that the Task Force believed that it could put on its entire case against Lay and Skilling in 18 days of testimony.

Well, the Task Force's prediction has pretty well gone by the wayside with its first witness, former Enron investor relations chief, Mark Koenig. After the Task Force took two-and-a-half days on Koenig's direct examination, the defense has used the past three-and-a-half days for cross-examination, and it now looks as if Koenig's testimony will continue for at least another day-and-a-half, which means that the prosecution will not be in a position to present its second witness -- former Enron Broadband co-CEO Ken Rice -- until next Tuesday afternoon at the earliest. Next Tuesday marks the beginning of the third week of the trial.

Moreover, when Koenig is finally through testifying, the prosecution will have used over three days of its original 36-day prediction (over 16% of its case-in-chief) on examination of Koenig. There is no way that the testimony of Koenig -- who is primarily a background witness who was not involved in the mechanics of how Enron's earnings and finances were evaluated -- represents over 16% of the prosecution's case-in-chief.

This is shaping up to be one very long slog.

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

February 9, 2006

Mark Cuban's bucket boy

Don't you love it when wealthy, grown men get upset with each other over basketball?

In this corner, Dallas Mavericks owner Mark Cuban. And in the other corner, L.A. Lakers' coach, Phil Jackson.

I think Jackson needs to start his own blog. ;^)

Posted by Tom at 8:03 AM | Comments (0) | TrackBack (0)

Omnicon's nuclear waste dump

In addition to maintaining the Wall Street Journal's essential Law Blog, Peter Lattman continues to contribute interesting news articles for the WSJ, including this one from yesterday that he co-authored with Jesse Eisinger about something that is close to the heart of the Enron scandal -- a company's alleged use of special purpose entities to dump low-performing assets that would otherwise depress earnings if the company were to hold on to them (thus, the characterization of an SPE as a "nuclear waste dump").

Public revelations of former Enron CFO Andy Fastow's shenanigans with certain of Enron's SPE's in October, 2001 triggered the collapse of Enron into bankruptcy, and the same thing almost happened to Omnicon -- the world's largest ad holding company -- back in June 2002. At that time, the WSJ reported that an Omnicon SPE called Seneca Investments appeared to have been used by Omnicom to avoid an earnings charge of about $90 million in connection with its reporting of $246 million of earnings for the first half of 2001. Given the nearness of similar disclosures relating to Enron and Enron's subsequent December, 2001 bankruptcy, Omnicom's stock price dropped like a rock before stabilizing at about half of its pre-SPE disclosure price. Nevertheless, the company was able to stem an Enronesque collapse into bankruptcy.

But that happy story still does not resolve the knotty and inevitable civil securities fraud lawsuit over the matter, and discovery in that lawsuit is revealing precisely how Omnicon handled the favorable transaction with its SPE. The product of that discovery indicates that Omnicon set up Seneca in May 2001 with private equity firm Pegasus Capital for the purported purpose of reorganizing some struggling dot-com businesses. In return for the contribution of stakes in three public companies -- Agency.com, Organic and Razorfish -- along with interests in 13 nonpublic companies and some cash, Omnicom received preferred Seneca shares and accounted for the deal as an asset sale without reporting a gain or loss. Arthur Andersen orginally signed off on the accounting for Omnicon and then, after Andersen was prosecuted out of business partly for approving similar deals in regard to Enron, KPMG also approved the accounting for the transaction.

The kicker? Omnicon paid about $128.1 million for its interest in Agency.com, Organic and Razorfish, but the value of those interests at the time Omnicon contributed them to the Seneca SPE had dropped $89.5 million to $38.6 million.

In the meantime, Omnicon's stock has recovered and now trades at a higher price than it did before the revelation of the Seneca SPE. No Omnicon executives or auditors were charged with a crime. But in Houston, former Enron executives Ken Lay and Jeff Skilling await a jury's determination of whether they will spend most of the rest of their lives in jail in large part because of Enron's similar use of SPE's, which were also approved by outside auditors and attorneys.

Thus, as noted here, Enron's use of SPE's is criminal because Enron landed in bankruptcy. On the other hand, Omnicon's use of SPE's is not because it was able to avoid that fate. Meanwhile, other executives skate because of good timing in going bust. So it goes in the never-ending lottery of criminalizing corporate agency costs.

Peter Henning has more on the crime-fraud implications of the matter here, and Peter Lattman updates the story in this post on his blog.

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

February 8, 2006

Investigation ordered into the David Boies Copy Club

David Boies -- who champions himself as an advocate of honest corporate governance and disclosure -- was the Tyco board's outside counsel in connection with investigating corporate fraud. Consequently, during the trial of former Tyco executives Dennis Kozlowski and Mark Swartz last year, Boies was one of the prosecution's main witnesses in contending that the Tyco executives had failed to disclose their compensation adequately to the Tyco board.

Meanwhile, however, Boies resigned last year as special chapter 11 counsel at the request of his client, Adelphia Communications, for failing to disclose to the Adelphia Bankruptcy Court and creditors that members of the Boies family indirectly own a substantial interest in a document management services company that did between $5 and $10 million of business with Adelphia. Apparently, other clients of Mr. Boies' firm also have paid substantial sums to the document management company without knowing of the company's affiliation with the Boies law firm.

Now, after a hearing earlier this week, this Wall Street Journal ($) article reports that the Bankruptcy Judge in the Adelphia case has ordered an ethics investigation into whether Boies and his firm should have disclosed the firm's partners' ties to the company that Adelphia used for document management.

In the meantime, final Bankruptcy Court approval of the Boies firm's almost $30 million fee (most of which has already been paid) for doing legal work for Adelphia hangs in the balance. If any significant portion of that fee is disallowed, then that could prove to be one expensive non-disclosure for the champion of good corporate governance and disclosure.

Posted by Tom at 5:08 AM | Comments (0) | TrackBack (1)

The second Lay-Skilling prosecution witness

The NY Times Alexei Barrionuevo, who is writing some of the best background pieces in connection with the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, profiles former Enron Broadband CEO Ken Rice today, who is expected to be the prosecution's second witness in the trial if the parties ever get done with the first witness, former Enron investor relations chief, Mark Koenig.

In addition to noting Rice's disastrous testimony in the Enron Broadband trial last year, Barrionuevo's piece points out the little-reported fact (mentioned earlier here) that Rice copped his plea deal after prosecutors discovered circumstantial evidence that strongly indicated that Rice engaged in insider trading shortly before Skilling's resignation in August, 2001:

More than $9 million of [Rice's $40.3 million in profits from Enron stock trades] came from three trades on July 13, 2001, about a month before Mr. Skilling officially resigned from Enron, according to records from the Securities and Exchange Commission, and around the same time that Mr. Skilling privately told Mr. Lay of his intention to resign, according to earlier testimony by Mark E. Koenig, Enron's former investor relations chief.

Meanwhile, the prosecution's decision to spend an inordinate amount of time on direct examination with Koenig appears to be backfiring. The prosecution spent almost two and a half days on direct examination of Koenig, who has now admitted on cross-examination that he really does not have much knowledge of the underlying evaluation process upon which Lay and Skilling based their public statements regarding Enron's finances. Thus, Koenig is a quintessential witness whose knowledge is a mile wide and an inch deep, and the defense is now hammering his basis for asserting on direct that Lay and Skilling intentionally misled investors. To make matters worse for the Enron Task Force, the prosecution took so much time with Koenig on direct that it is really not in a position to object to the length of time that the defense is spending with Koenig on cross-examination.

Moreover, my old friend, Joel Androphy, blogging the Lay-Skilling trial over at KTRK-TV, observes the following about another prosecution mistake in dealing with Koenig:

The government allowed Koenig to keep $5 million to fight the civil cases and provide for his family, not the families of the victims. The plea bargain could have required Koenig to pay the maximum fine, and full restitution to the victims even if he provided influential testimony. That would have supported his credibility. Although the judge has the final say on restitution and fines, the government could have required mandatory surrender of funds. Now it looks like he could get reduced jail time and a large pension unlike most former employees. Koenig's attorney did a commendable job.

It now appears that Rice's testimony will not begin until Thursday of this week at the earliest, and may not even begin this week at all. Therefore, unless the prosecution pares down its case-in-chief dramatically on the fly, the prosecution's pre-trial prediction of completing its case-in-chief in nine weeks is looking more and more like a pipe dream.

Posted by Tom at 4:25 AM | Comments (2) | TrackBack (1)

Directors and the business judgment rule

Stephen Bainbridge and Larry Ribstein are two of the blawgosphere's most insightful thinkers on corporate governance issues, and their their blawgs have contributed more to the understanding and appreciation of those and many related business law issues over the past couple of years than virtually any other resources on the Web of which I am aware. These two academics continued their generous contributions over the past week with a couple of timely pieces in regard to director liability and the business judgment rule that should be required reading for any director of a public company or any advisor of a director.

First, Professor Bainbridge used the oral argument in the Delaware Supreme Court in the Disney-Ovitz case to provide this timely refresher (blog post here) on the business judgment rule and its importance to good corporate governance. He plainly states the rule as it relates to directors:

The business judgment rule is corporate law's central doctrine. It pervades every aspect of the state law of corporate governance; from negligence by directors, to self-dealing transactions, to termination of shareholder litigation and so on. Of particular relevance, it is the governing standard when shareholders complain that about allegedly excessive executive pay.

Corporate directors are subject to a fiduciary duty of care, which requires them to the sort of care that ordinarily careful and prudent people would use in similar circumstances. Because the corporate duty of care thus resembles the tort law concept of reasonable care, one might assume the duty of care is violated when directors act negligently. Yet, the one thing about the business judgment rule on which everyone agrees is that it insulates directors from liability for negligence.

Professor Bainbridge goes on to explain why this insulation from negligence liability is sound public policy, and then concludes:

Giving Michael Ovitz $140 million to go away after a mere 14 months on the job might not have been the smartest decision a board of directors made, but absent evidence that the board acted from conflicted interests, it is precisely the sort of decision that courts leave to the discretion of directors.

Which is precisely the principle around which Professor Ribstein crafted this remarkable post from last year that predicted the outcome of the Disney-Ovitz decision in the Delaware trial court.

Meanwhile, Professor Ribstein has recently co-authored a working paper with colleague Kelli A. Alces that addresses a troubling trend in business litigation over the past decade or so -- i.e., creditors attempting to foist upon directors of financially-troubled companies a duty to creditors once a company reaches the amorphous "zone of insolvency." The abstract of the paper addresses this trend head-on:

Despite many cases with seemingly contrary dicta, corporate directors of failing firms do not have special duties to creditors. This follows from the nature of fiduciary duties and of the business judgment rule. Under the business judgment rule, the directors have broad discretion to decide what to do and in whose interests to act. There is some authority for a limited creditor right to sue on behalf of the corporation to enforce this duty. However, any such right does not make the duty one owed to creditors. The creditors individually may sue the corporation for breach of specific contractual, tort and statutory duties, particularly on account of fraudulent conveyances. But the creditors are not owed general fiduciary protection even if they are subject to a special risk of abuse in failing firms.

Then, in this insightful post, Professor Ribstein applies the principles that he addresses in his paper to the insolvency and reorganization issues currently confronting GM's directors and -- in light of those difficult circumstances -- concludes that GM's directors need the benefit of the doubt provided by the business judgment rule more then ever:

It is to protect directors faced with such decisions [relating to GM's possible insolvency] that we have the business judgment rule. The fact that the decisions only get harder in the “zone” is a good reason for not suspending the rule by requiring the board to make particular tradeoffs at this point.

Thus, in a business climate in which many companies are having difficulty finding qualified independent board members, the message from these two corporate governance experts to directors and their advisors is clear -- embrace the tried-and-true business judgment rule. It remains not only the director's best protection from incurring liability under the law, it is also the core principle upon which companies can continue to encourage good and smart people to contribute their talents as directors.

Posted by Tom at 4:22 AM | Comments (0) | TrackBack (0)

February 7, 2006

Harvey Miller and high fees go together

This Wall Street Journal ($) article reports that Harvey Miller -- the New York attorney who built Weil, Gotshal & Manges' bankruptcy and corporate reorganization practice into a national dynamo before leaving the firm in 2002 to join Greenhill & Co. -- is being accused of overbilling his client Loral Space & Communications Ltd. of as much as $3.6 million in the company's recently concluded corporate reorganization case.

To add intrigue to the matter, Miller's chief accuser is the creditors' committee counsel in the Loral case, Akin, Gump, which incurred the wrath of Miller's opinion last year in the Vermont bankruptcy case of FiberMark Inc., in which Miller concluded that the firm should forfeit a "significant portion" of its fees in that case because Akin, Gump gave allegedly biased advice to the FiberMark creditors' committee. Akin, Gump is reportedly prepared to waive $1.5 million of its total remaining unpaid fee of $4.0 million in that case.

The challenge to Miller's fee-charging is particularly interesting in that Miller was at the forefront of the movement to attract top-notch legal talent to the U.S. bankruptcy and reorganization legal field over the past 30 years. One of the ways that was accomplished was through the incorporation into the U.S. Bankruptcy Code of provisions that provide for attorneys to be compensated at the market rate for providing professional services to debtors in bankruptcy cases. For many years while at Weil, Miller's hourly billing rate was among the highest of any attorney practicing bankruptcy law in the United States, and Weil's fees for representing corporate debtors in a number of reorganization cases have been among the highest ever approved and paid. Those high fees are the genesis of the nickname for Weil, Gotshal & Manges among some envious members of the bankruptcy bar -- "We'll, Getcha & Mangle Ya."

Update: The prescient Peter Lattman provides even more interesting background.

Posted by Tom at 5:51 AM | Comments (2) | TrackBack (0)

"You didn't think we really meant that, did you?"

During opening arguments last week in the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, Lay defense attorney Mike Ramsey made the following observation to the jury about the Enron Task Force's indictment against the two men:

"This is the indictment . . .[It] is 66 pages long. Someday you may be called upon -- God save you -- to have to read it. If you do, you'll find it is enormously complex. I don't blame the [prosecutors] at the table here; I think their predecessors wrote it. But with all the power and precision of the English language, it is a babbling kind of indictment [that makes it] very hard to pin down, very hard to determine what you are actually charged with. . ."

Well, it turns out that that the Task Force pretty much agrees with Ramsey's characterization of the indictment. In this motion that showed up on the docket of the case yesterday, the Task Force requests that U.S. District Judge Sim Lake not allow the Lay-Skilling defense to use the Task Force's indictment during cross-examination of the Task Force's witnesses in the trial because, among other things, to do so would risk "unfair prejudice, confusion of the issues [and] misleading the jury. . . "

Not exactly a sterling self-endorsement of the Task Force's writing skills, would you say? ;^)

Meanwhile, after the Task Force took almost all of Monday morning to complete direct examination of its first (and relatively minor) witness, Mark Koenig, cross-examination of Koenig continues today (Chronicle/Flood - Fowler; NY Times/Barrionuevo - Evans; WaPo/Carrie Johnson).

Posted by Tom at 3:15 AM | Comments (2) | TrackBack (1)

February 6, 2006

In case you missed it . . .

With the Super Bowl and all, it was easy to miss, but the PGA Tour's newest millionaire is J.B. Holmes, a 23-year-old Tour rookie who makes long John Daly look short in comparison. Playing in just his fourth tournament since winning the PGA Tour School tournament last fall, Holmes won the FBR Open in Scottsdale by seven strokes on Sunday.

Through the first four Tour tournaments this season, Holmes leads the Tour with 72% (128 out of 168) of his drives finishing over 300 yards. On the par five 15th on Sunday afternoon, Holmes reached the green easily in two with a 263-yard 4-iron shot over water, then sank a 15-foot putt for an eagle to go to 20 under.

A 263-yard 4-iron over water? On the back nine of the final day of a tournament while trying to win for the first time on the Tour?

Keep an eye on this guy.

Posted by Tom at 7:52 AM | Comments (1) | TrackBack (0)

What? A business scandal in The Woodlands?

The Woodlands is a dynamic suburban community on Houston's far northside, but it's not the type of place that one normally associates with business scandals.

However, late last week, it appears that The Woodlands had its own real business scandal. The revelations began unfolding on Thursday when Chicago Bridge & Iron -- the Netherlands-based engineering company that maintains its worldwide administrative office in The Woodlands -- filed an 8-K (i.e., the regulatory filing that advices the investing public of significant corporate events) that contained this agreement, under which CBI controller Tommy C. Rhodes will be paid a $1.8 million “stay bonus” so long as he remains with the company until the end of June. However, the more interesting part of the deal is that Rhodes must “withdraw and dismiss or close any and all complaints he previously has filed against the company.” This follows an earlier 8-K from the company on October 31, 2005 that disclosed that a senior member of CB&I’s accounting department had alleged accounting improprieties and that, as a result, third quarter 2005 numbers would be delayed.

All of that was followed on Friday with this announcement in which the company disclosed the termination of Gerald M. Glenn as Chairman, President and Chief Executive Officer, and Robert B. Jordan as Executive Vice President and Chief Operating Officer. Then, on Saturday, the Chronicle reported that Messrs. Glenn and Jordan's attorney was already taking the approach that a good offense is the best defense, asserting that the executives "are being targeted by a results-oriented process where the reputations of honest men have been unfairly called into question. These men are not going to hand over their good names for the sake of a misguided, biased and incomplete review."

Meanwhile, the company announced that "all previous earnings guidance issued by the company for 2005 is no longer operative. When given, the guidance will be subject to closing the books of the company for 2005 and completion of the audit committee's previously announced ongoing investigation."

Not exactly Enronesque, but pretty juicy nonetheless for The Woodlands.

Posted by Tom at 5:39 AM | Comments (4) | TrackBack (0)

Week Two Lay-Skilling trial schedule

After a slumbering close to Week One of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, the prosecution will almost certainly attempt to pick up the pace of the trial this week.

The prosecution will probably complete direct examination this morning of its first witness, former Enron investor relations chief Mark Koenig. Inasmuch as cross-examination of Koenig will likely take at least as long as direct (over two days), the prosecution's second witness -- former Enron Broadband co-CEO Ken Rice -- will probably not take the stand until Wednesday afternoon, at the earliest.

If you have been following the Enron cases, then you will remember Rice. He was on the witness stand when the prosecution's case began unraveling in the Enron Broadband trial last year. As noted at the time here, Rice testified falsely on direct examination during the Broadband trial about what he had seen at an analyst conference. After the Broadband defense team impeached Rice with his false testimony, the prosecution attempted to rehabilitate Rice's false testimony by putting former Enron video consultant Beth Stier on the stand, a move that backfired when Stier testified to the prosecution's intimidation tactics. Thus, in a case that looked like a layup for the prosecution at the outset, Rice and Stier's testimony began a downward spiral in the prosecution's case that ultimately resulted in a disastrous mix of acquittals and no verdicts on the charges in the Broadband case.

By the way, a little reported fact about Rice is that he entered into his plea deal with the Enron Task Force after the Task Force had discovered that he sold a substantial amount of Enron stock under rather suspicious circumstances. Shortly before Skilling announced his resignation as Enron CEO in August, 2001, Rice met with Skilling. After that meeting and before Skilling's resignation announcement, Rice unloaded a boatload of his Enron stock. Thus, regardless of what other crimes that Rice contends on the stand that he and others committed at Enron, it's pretty clear that he was guilty of illegal insider trading.

Posted by Tom at 4:52 AM | Comments (0) | TrackBack (0)

AIG deal near

As discussed in more detail here earlier, the settlement between American International Group and regulators over business fraud charges may be consummated as early as later this week, according to this Wall Street Journal ($) article (NY Times article here).

The expected amount of the regulatory extortion, er, I mean, "settlement": $1.6 billion.

9 Feb. 2006 Update: It's a done deal. NY Times article on the settlement is here.

Posted by Tom at 4:30 AM | Comments (0) | TrackBack (0)

February 5, 2006

How times change

As you ease into your favorite chair or couch to watch Super Bowl XL this evening (5:18 p.m., CST) and its featured entertainers, Aretha Franklin and the Rolling Stones, did you realize that it was only 13 years ago when Super Bowl XXVII in 1993 featured O.J. Simpson flipping the coin during the pre-game coin toss and Michael Jackson performing at halftime with "a choir of 3,500 local Los Angeles area children joining Jackson as he sang his single 'Heal The World'"?

My, how times change!

But if you really want a refresher on how times change, check out this Anthony Lewis/NY Times review of Taylor Branch's third segment of his fine trilogy about the social revolution that occurred in America during Martin Luther King's voting rights and desegregation movement in the late 1950's and 1960's, At Canaan's Edge: America in the King Years, 1965-68 (Simon & Schuster 2006). Lewis describes the simplicity of Dr. King's purpose in pursuing the movement:

In Alabama, Mississippi and large parts of other states in the Deep South [at that time], the [Constitutional right to vote without discrimination] was a myth for blacks. They were threatened, abused, even murdered if they tried to register or vote; they often lost their homes or their jobs. Armed white mobs menaced them.

King believed that if Americans outside the South were aware of its brutal racism — as few then were — they would want to end it. The violent response to nonviolent protest made the brutality plain. What Americans read in newspapers and saw on television shocked them, and jump-started the political process. Meaningful civil rights legislation made it past Senate filibusters at last.

But Branch's book also reminds us that King's movement revealed that racial discrimination was not confined to the South:

Chicago dramatized the reality of antiblack feelings in the North. Marches organized by King to protest segregated housing and unequal government benefits [in Chicago] were met with mob taunts and rocks. "Burn them like Jews!" one white group shouted at the marchers. Branch concludes that "the violence against Northern demonstrations cracked a beguiling, cultivated conceit that bigotry was the province of backward Southerners."

In 1965, he notes, Mary Travers of the trio Peter, Paul and Mary kissed Harry Belafonte on the cheek at a rally. CBS television, which was showing the rally, was besieged by protesting callers, and took the rally off the air for 90 minutes. In the border state of Kentucky, the famous basketball coach Adolph Rupp kept his University of Kentucky team all white. He complained of calls from the university president, "That son of a bitch wants me to get some niggers in here." A little-noted team from Texas Western, with five black players starting, upset Kentucky in the 1966 championship game — a story told just now in the movie "Glory Road." Only slowly, after that, did the bar on black athletes break down in the South. Many people watching college sports on television today would not have dreamed that such a policy ever existed.

As noted in this earlier post about that Texas Western team, those were very different times. America has come a long ways in its race relations since then, but we still have a long ways to go, and much of the impetus for continued progress is the memory of those different times not so very long ago.

Posted by Tom at 8:24 AM | Comments (0) | TrackBack (0)

February 4, 2006

Short selling, Enron and Jamie Olis

Now that title got your attention, didn't it? ;^)

Selling stocks short receives a bad rap generally because it generates profits from misfortune -- i.e., when the stock price goes down -- which is counter-intuitive to how most folks believe that one should make money in investments (i.e., holding stocks long-term as they appreciate in value). The most common method of shorting a stock is to borrow stock, sell it, and then cover the loan of the stock in the market by purchasing the stock later at a lower price. Other approaches to shorting involve buying a put option that holds the right to sell the stock for the next 30 to 60 days at current market prices, writing a call option granting another the right to buy a stock from you for the next 30 to 60 days at current prices, selling a stock future promising to deliver a stock 30 to 60 days in the future, or taking the selling position in a stock swap.

The issues relating to short selling arose in the news again this week as the prosecution in the Lay-Skilling trial played the tape of Jeff Skilling's infamous "asshole" comment in response to a short-seller's questions during an April, 2001 analyst conference call. Chronicle business columnist Loren Steffy followed that up with this timely column (related blog post here) in which he correctly points out that -- despite such negative aspersions -- the practice of short selling provides a valuable market purpose. Indeed, I suspect that Skilling would actually agree with Steffy that short selling is an important part of well-structured securities markets and that his "asshole" comment was not a condemnation of short-selling per se, but rather, a reaction to the short-seller's improper attempt to profit from creating a false impression about Enron.

Skilling's comment and Steffy's column were then followed by this interesting Wall Street Journal op-ed in which Moin A. Yahya condemns the common practice of short-sellers and class action securities fraud plaintiffs' attorneys banding together to drive the price of a company's stock down, and then -- after profiting from the short sale of the company's stock -- cashing in again on a class action lawsuit against the company. I don't agree entirely with Professor Yahya's position in that regard (more on that later), but the professor does provide some highly interesting background into the genesis of the sad case of Jamie Olis:

A few years ago, a Houston-based energy company called Dynegy was experiencing financial difficulties and resorted to some questionable financing activities in what was known as "Project Alpha." An employee named Ted Beatty learned about the project and informed a friend, who happened to work at a short-selling hedge fund. The fund subsequently took a short position against Dynegy's stock. Later Mr. Beatty resigned and contributed to a Wall Street Journal article that highlighted the problems with Project Alpha. Much to the hedge fund's surprise, however, the Dynegy stock price actually rose.

The hedge fund asked Mr. Beatty to help spread the bad news about Project Alpha, and hired a prominent plaintiff's lawyer to assist him. The fund kept its role secret while Mr. Beatty and the lawyer kept working to lower Dynegy's stock price. Mr. Beatty contacted various media outlets, government agencies, a credit rating agency and the local SEC office. The SEC announced an informal inquiry, which finally lowered the stock price. The lawyer's firm launched a shareholder suit against Dynegy for its fraudulent practices. The hedge fund netted around $150 million from the fall in the price of Dynegy stock.

Project Alpha, of course, is the series of transactions upon which Olis' conviction and over-the-top 24 year prison sentence are based.

As to Professor Yahya's condemnation of the practice of "dumping and suing," Larry Ribstein believes that he has missed the proper analytical framework for addressing the perceived abuses of the practice:

If a plaintiff or his lawyer (with the plaintiff’s permission, so no misappropriation) is short-selling based on the true information that a suit is forthcoming I don’t see how this is illegal under current law – it’s not fraud without a duty to disclose, and it’s probably not illegal insider trading or manipulation.

Yahya’s WSJ oped persists in his blanket claim of illegality despite this fairly elementary principle of securities law. As a result, he allows his polemic against the practice to obscure some real, and more important, issues.

To begin with, there is actually something to be said for using the markets to compensate people who bring in new information, such as the information underlying a lawsuit. Yahya calls this double-compensating class action lawyers. But the question is whether the fee the lawyer receives provides a socially optimal incentive to sue.

Now I can already hear the howls: how could I possibly be suggesting that securities class action lawyers are under-compensated? Well, I’m not saying that. I’m only positing the correct analytical approach. Assuming over-compensation is an incorrect way to analyze this issue. . . .

[C]onsider that a rule broadly characterizing undisclosed material information (in this case, about the intent to sue) as fraud could seriously extend the reach of the fraud laws. We have to remember that a rule intended to "catch" the people we don't like could end up "catching" those we do.

I know that trial lawyers aren't cool in some circles. But let's make sure the weapons we fashion against them don't circle back on the rest of us.

Read Professor Ribstein's entire piece. Although Professor Yahya's identification of the dumping and suing practice is interesting, Professor Ribstein is correct that more regulation is not the answer to controlling the perceived abuses that may arise from the practice.

Meanwhile, Jamie Olis remains in prison awaiting re-sentencing, a pawn of dynamic forces in the securities markets and the criminal justice system that are far stronger than any man could -- or should ever have to -- defend himself against.

Posted by Tom at 8:50 AM | Comments (5) | TrackBack (1)

February 3, 2006

Update on the Aggies' 12th Man trademark litigation

Earlier posts here and here reported on developments in Texas A&M University's lawsuit this week against the Super Bowl XL-bound Seattle Seahawks to enjoin the Seahawks from infringing on A&M's 12th Man trademark. The latest development is that the Seahawks have removed the lawsuit from the Aggies' homefield of Brazos County District Court to the reasonably neutral venue of federal court in Houston.

Not wanting to appear heavy-handed, A&M released the following statement to the media over the controversy:

"Texas A&M University certainly has no ill will towards the Seattle Seahawks; in fact we have Aggies on the team and coaching staff and we congratulate them on their splendid season leading up to Sunday's Super Bowl. However, we have the responsibility and legal obligation to protect the university's trademarks, which in this instance is the 12th Man. The 12th Man is one of our most treasured traditions, recognized by most as one of the most compelling in collegiate athletics. We have asked the Seahawks' management to cease and desist promoting use of the 12th Man trademark. Such letters were submitted in 2004 and 2005 requesting their compliance, but our requests have not been honored. . . "

"Texas A&M has done everything in its power over the last 2 years to bring quiet closure to this situation. Our hope is that the Seahawks' organization will recognize our federal trademark."

"Finally, just for the record, A&M sincerely hopes that the Steelers beat the hell out of the Seahawks in the Super Bowl on Sunday."

O.K., I confess. I added that last paragraph. ;^)

Posted by Tom at 12:57 PM | Comments (1) | TrackBack (1)

Double whammy for the Great White Hunter

Amidst the hubbub of the Lay-Skilling trial, it's a bit 1980's-esque to harken back to the days of the Savings & Loan debacle. Nevertheless, this interesting DOJ press release caught my eye earlier in the week because it deals with one of the more colorful characters of that bygone era, Edwin T. McBirney, III, the former chairman and CEO of Sunbelt Savings. Sunbelt bit the dust during the shakeout of the S&L's during the late 1980's and early 90's, and the federal government pegged the cost of Sunbelt's demise at about $1.2 billion.

At any rate, McBirney lived large during the go-go days of Sunbelt. Legend has it that, at one of McBirney's numerous parties, hundreds of Sunbelt's customers and friends feasted on lion, antelope and other exotic game while two obese disco singers "entertained" by serenading the guests with "Two Tons of Fun." At another affair with an African safari theme, McBirney dressed up as the Great White Hunter while guests ate water buffalo ribs and watched a magician make a live elephant vanish.

However, by 1990, the fun had ceased as McBirney pleaded guilty to stealing $7.5 million from Sunbelt in the years before its liquidation and, as part of his 15-year plea deal, McBirney agreed to pay the money back to the federal government. After chirping like a prosecution canary against another savings and loan executive, McBirney's sentence was eventually reduced to five years and, in 1996, he was released on five years' probation.

Alas, it seems as if McBirney had a difficult time reconciling his taste for living with his $7.5 million restitution obligation. While in prison, McBirney set up a trust to mask his post-prison earnings, so -- upon his release from prison -- McBirney was able to get by on as little as $50,000 a year despite the fact that he continued to enjoy a chauffeur-driven limousine, a $600,000 home in North Dallas and expensive meals in trendy restaurants. In short, McBirney never met an expense that couldn't be written off as a cost of doing trust business.

Well, unfortunately for McBirney, somebody with the federal government finally noticed and, this past Tuesday, the 53-year old McBirney was found guilty on 27 counts of fraud, money laundering and lying to federal authorities about his true income while on probation for his previous conviction. As a result, McBirney now faces another 20 years in the pokey and the forfeiture of $2 million in cash and assets from the trust.

I don't know about you, but I'm going to miss that guy. ;^)

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

The market for class action business fraud lawsuits

Although the market for earnings restatements is robust (over 1,200 last year alone), the NY Times Steve Labaton reports that the market for lawsuits based on those restatements is not:

For all of the handwringing in some corners of Washington and in corporate America about vexatious litigation, it turns out that you can count last year's number of investor class-action lawsuits against accounting firms on one hand.

A mere five cases were filed, according to the tally produced each year by Prof. Joseph A. Grundfest of Stanford Law School, a former commissioner at the Securities and Exchange Commission. The report found a sharp decline in the overall number of securities fraud class actions, as well as a marked reduction in the investor losses claimed by the suits. And it found that the Ninth Circuit, which includes California, a traditional haven for lawsuits because of the large number of technology start-ups, has been "losing its prominence."

What's going on?

Professor Grundfest, who has often been critical of what he sees as baseless shareholder litigation, has two explanations. The lawsuits related to the bursting of the market bubble beginning in 2000 are now largely over.

"The pig may have moved through the python," he said.

The article goes on to note other chilling effects on the class action business fraud lawsuit, such as increasingly pro-business jurists, SOX (not sure about that one), the PSLRA, and the Supreme Court's Dura decision.

Posted by Tom at 6:16 AM | Comments (1) | TrackBack (0)

Lay-Skilling, Week One

So, week one of the Lay-Skilling trial is in the books. Let's review what we've learned.

U.S. District Judge Sim Lake handles matters faster than the prosecutors and the defense attorneys do.

Opening arguments are too long.

The key evidentiary issue in the trial has not yet been addressed, but another court expressed interest in the issue.

Former Enron investor relations chief Mark Koenig thinks that he and Messrs. Lay and Skilling misled investors about Enron's financial condition, but -- over five years after doing so -- he still cannot explain why he did it.

Sheila Jackson Lee knows where the cameras are (don't miss Slampo's comments on SJL), and could one or more of the trial participants end up on What Not to Wear?

As is usually the case, it's difficult, if not downright impossible, to predict what effect all of this is having on the jurors. But the prosecution has to be concerned about the glacial pace of the trial. The prosecution lost a similar trial last year after putting the jury to sleep during long stretches of the Enron Broadband trial. Anticipating such problems in Lay-Skilling, the prosecution promised the jurors during opening argument that the trial would be about lying and not about boring financial matters. Then, with its first witness, the prosecution proceeded to take a good part of the first two days of testimony going over mind-numbingly boring financial matters, resulting in the prosecution failing to finish its direct examination of that first witness before the week concluded. That is not the way to win friends on a jury.

This is not meant as a criticism of the Task Force prosecutors. Indeed, I suspect that they are among the best in the Justice Department for handling such trials. Rather, this type of chloroforming slog is the inevitable result of criminalizing what amount to business judgments over which people can reasonably differ. Justice would be much better served with the prosecution taking a third of the time that it took with Koenig and, instead, bringing to the witness stand every top-level former Enron executive to testify about how Enron's management actually evaluated Enron's finances and reported them to the public. But if that were to occur, then the prosecution might lose the trial. So, the prosecution effectively prevents those potentially more truth-revealing witnesses from testifying and spends an inordinate amount of time with a witness such as Koenig, who wasn't even involved in the mechanics of how Enron's management evaluated its finances.

As a result, rather than being allowed to handle the messy process of sorting out the truth, the jury gets a prosecution script of what it thinks the truth should be. As we saw in the Enron Broadband trial, juries have a way of figuring such things out.

Posted by Tom at 3:56 AM | Comments (6) | TrackBack (0)

February 2, 2006

An Aggie Original Complaint

Kyle Field, Texas A&M University, College Station, Texas.

Qwest Field, Home of the Seattle Seahawks, Seattle, Washington.

Posted by Tom at 8:30 AM | Comments (4) | TrackBack (1)

The $138,000 oversight

Something tells me that this is not going to turn out well:

Texas Southern University President Priscilla Slade has reimbursed the university more than $138,000 for the cost of landscaping her new home, according to records released Wednesday.

Slade, who wrote the check Monday, is hoping to get back into the good graces of the university's board of regents before they meet Friday to discuss her future. She is also under scrutiny for charging roughly $87,000 to TSU for household furnishings, according to a source familiar with the inquiry.

Slade has declined to comment publicly. Instead, she has asked Bill Miller, an Austin-based political consultant, to help her address concerns raised by regents. None of the nine current regents, who are appointed by the governor, were on the TSU board when Slade was hired in 1999.

Slade has told regents that the university paid the landscaping bill for her 17,675-square-foot property by mistake.

My sense is that President Slade has hired the wrong professional.

By the way, the Chronicle article also notes that President Slade has an accounting degree from the University of Texas at Austin.

Posted by Tom at 5:50 AM | Comments (8) | TrackBack (0)

Shoe drops on former AIG and General Re execs

Almost lost amidst the publicity over the first day of testimony in the Enron-related Lay-Skilling trial was the news that a Virginia federal grand jury had issued indictments against former General Re Chief Executive Ronald Ferguson, former General Re Chief Financial Officer Elizabeth Monrad, General Re's former Assistant General Counsel Robert Graham, and the former AIG reinsurance executive Christian Milton on charges of conspiracy to commit fraud for their roles in a controversial five-year-old transaction that has been at the center of the governmental investigations into AIG and General Re over the past year. Of course, AIG is Maurice "Hank" Greenberg's old company and General Re is a division of Warren Buffett's Berkshire Hathaway.

Ferguson and Ms. Monrad are now the two highest-level former General Re executives to be charged with crimes in the General Re-AIG accounting investigation, and Mr. Milton is the only former AIG executive to have been charged in the probe. Last summer, two former General Re employees -- John Houldsworth and Richard Napier -- copped pleas on fraud charges and presumably will testify against the newly-charged executives.

Posted by Tom at 5:19 AM | Comments (0) | TrackBack (1)

The long slog begins

Former Enron investor relations chief Mark Koenig led off the prosecution's presentation of evidence yesterday in the criminal trial of his former bosses, Ken Lay and Jeff Skilling, and it quickly became clear that the Enron Task Force's boring approach to putting on a case that almost caused a jury uprising in the earlier Enron Broadband trial may also be a problem for the prosecution in the Lay-Skilling trial.

As the Mary Flood/Chronicle, Carrie Johnson/WaPo, and Alexei Barrionuevo/NY Times articles all report, Koenig testified about several instances in which he allegedly prepared reports and presentations at the direction of Skilling and Lay that misled investors and analysts about the performance of Enron's Broadband unit and Energy Services units. However, to get to the nuggets of relatively exciting testimony, the jury had to endure hours of mind-numbing and largely irrelevant testimony regarding Enron's structure, the company's bankruptcy and related matters. As a result, the prosecution could not finish its direct examination in an entire day of testimony and apparently is going to use a good part of today for further direct examination. If that schedule holds, cross-examination of Koenig will almost certainly take a couple of days, which means that the second witness in the case -- former Enron Broadband executive Ken Rice -- may not begin until Tuesday afternoon or Wednesday of next week.

So much for the prosecution's earlier prediction that it will take nine weeks to put on its case.

At any rate, one of the problems with Koenig's testimony -- which is being given under a plea deal with the government -- is that it is not based on any meaningful involvement in the mechanics of how Enron's executives evaluated its financial affairs and earnings. Stated another way, Koenig was involved in how Enron's financial matters were presented, but not in how they were determined. As a result, his knowledge of the company's financial affairs is a mile wide and an inch deep, a point that will almost certainly be hammered home by the defense on cross.

Meanwhile, the fact that the prosecution is relying so heavily on witnesses such as Koenig who have copped plea deals in return for favorable prosecution testimony will become an increasingly important issue as the the trial proceeds. Houston criminal defense attorney Kent Schaffer -- one of the half-dozen attorneys providing legal analysis for the Chronicle on the trial -- provides this excellent overview of why people such as Koenig enter into plea bargains. The sad fact is that people often do plead guilty to crimes that they do not think that they really committed, particularly when the defendant sees the draconian sentence that can result from protesting one's innocence. As Schaffer notes:

"Get ready to see grown men in Oxford suits and wingtip shoes rolling over, playing dead, and barking while on their hind legs; trying to earn a few extra biscuits."

Posted by Tom at 4:35 AM | Comments (5) | TrackBack (1)

February 1, 2006

Are you sure that's not for an apartment?

This article notes that the same amount of monthly rent that would get you a nice apartment in Houston would get you something nice in Manhattan, too -- a parking space!:

Keeping a car at Time Warner Center across from Central Park runs about $550 to $600 a month. One- bedroom rentals are available for $500 to $600 in Greensboro, North Carolina; Austin, Texas; Cincinnati; and Oklahoma City, . . . Space is at a premium in Manhattan, home to about 1.56 million people, as outdoor lots and garages are converted into housing and new construction eats up what little land is available.

That opens a door for some building owners to tout their parking services. At 170 East End Avenue, architect Peter Marino designed parking spots as "couture homes for your car," with each space planned and presented to the buyer in the building's sales office, . . .

At One Beacon Court across East 59th Street from Bloomingdale's, where available apartments sell for $5.9 million to $17 million, residents have access to valet parking at a nearby garage, with their cars delivered to the building's entrance.

Rates are $600 a month, $700 for an oversized vehicle.

And I thought that $7 charge at the Civic Center Parking Garage for a couple of hours of parking last week was stiff! ;^) Hat tip to Craig Newmark for the link.

Posted by Tom at 7:09 AM | Comments (1) | TrackBack (0)

John Keegan on the Iraq policy

John Keegan is England's foremost military historian and, for many years, was the Senior Lecturer at the Royal Military Academy at Sandhurst. His book -- The Second World War -- is arguably the best single volume book on World War II and his book The Face of Battle is essential reading for anyone seeking an understanding of the history of warfare. In short, when John Keegan writes about war, it is wise to take note.

In this London Telegraph op-ed, Mr. Keegan provides an overview of what the U.S. and Britain have accomplished in Iraq, and then makes a persuasive case for following through with what is an increasingly unpopular role in that country:

Critics should remember that, in nine tenths of Iraq, peace reigns. Thousands of Iraqi towns and villages are untroubled by insurrection and continue to regard the British and Americans as liberators. They cannot be abandoned to terrorists, fanatics and friends of the defunct dictatorship. To urge that we should go on as we are is an unpopular line of argument. That it is unpopular does not, however, mean it is wrong.

There is a final consideration. The Middle East is exceedingly complex, and one of its complexities is formed by Iran's determination to become a nuclear power. To withdraw the Western forces from Iraq now would in effect be to encourage Iran to persist in its nuclear challenge. Even if, as the Foreign Secretary insists, military action against Iran is unthinkable, it is at least prudent to retain the capacity for military action in the region.

Read the entire piece.

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

Lay-Skilling, Round One

Well, I wasn't able to put other pressing matters aside to attend opening arguments yesterday in the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, but I did score a transcript yesterday evening and was able to read it. In doing so, I was reminded of a point that a wise, old trial attorney-mentor made to me early in my legal career:

Most opening arguments are too long.

Now, Lay-Skilling is a complicated business case, so there is a lot of explaining to do. And when the prosecution takes an hour and a half in opening, the defense often feels that it is necessary at least to match that length in opening or the jury might presume that the defense doesn't really have an answer for everything that the prosecution alleged. So, there are valid reasons for long opening arguments.

Nevertheless, my experience is that, even during the most spellbinding opening arguments, the attention of jurors tends to begin wandering after 30 minutes or so. My wise old mentor also advised me: "Make all your important points in the first 20 minutes of your opening -- sort of like a sermon at church -- because those jurors tend to wander off after that -- just like in church." As I read the transcript last night, it occurred to me that, if jurors were allowed to ask a question of the attorneys during opening arguments, one of them would have almost certainly raised their hand and asked: "Could you go over that whole 'reserve account thing' again?"

At any rate, the first round of the trial is done and it's reasonably clear from the reading the transcript and the first hand accounts (Chronicle Enron team blog and Loren Steffy's blog) and the reports (NY Times/Alexei Barronuevo and WaPo/Carrie Johnson) that neither side scored any early knockdowns. As noted earlier here, opening arguments are for helping jurors establish a framework within which they can evaluate the evidence to come, so it's risky to try and land a haymaker that could put the other side on its back early. Neither side took that risk.

The Enron Task Force's John Hueston continued to push a theme in the prosecution's case that has become apparent since the Task Force's earlier failures in both the Arthur Andersen case and the Enron Broadband case -- i.e., that the case against Messrs. Lay and Skilling is really a simple case of non-disclosure about Enron's true financial condition. In a nutshell, Hueston contended that Enron was a formerly successful company that was having severe financial problems by 2001 that both Skilling and Lay covered up so that they could unload their company stock at higher prices than what they would have gotten had they disclosed the true financial condition of the company to the investing public.

From reading the transcript, Hueston's argument appeared to be competent and reasonably well-organized. However, I was left wondering whether the Task Force may have overdone its goal of simplicity. I mean, did Lay and Skilling really orchestrate this alleged massive fraud simply because they are greedy men? Indeed, as the defense attorneys proceeded to point out, there is certainly much in Lay and Skilling's life stories that indicates that they are not particularly greedy. After reading Hueston's opening, I could almost imagine a juror thinking: "Well, fine. But with all this hubbub, don't you have more of a story than that?"

Defense attorneys Dan Petrocelli (Skilling) and Mike Ramsey (Lay) clearly understood this dynamic, as both of them emphasized their respective client's humble backgrounds and continually pointed out the conflict between the prosecution's simple case theory and the wide-ranging and almost indecipherable allegations contained in the government's indictment against two defendants. In that connection, Mr. Ramsey pointed out what appeared to me to be the biggest oversight of the day -- the government's failure to mention the word "conspiracy" in its opening remarks even though the prosecution is banking a large part of its case on Lay and Skilling's alleged orchestration of one of the largest criminal conspiracies in history. Similarly, it also appeared that Hueston made a mistake in opening by failing to acknowledge that Lay's stock sales were pursuant to margin calls. How can the government accuse Lay of being greedy because of his stock sales when those sales were involuntary?, Ramsey reasoned.

By the way, as Mr. Steffy noted on his blog during the arguments yesterday, Ramsey's courtroom style really appeared to resonate with the jury. Here are just a few of Ramsey's gems:

"Now, there's a lot of talk about Andy Fastow and and the various thefts that he committed at Enron. [The money that] Andy stole [was] peanuts. Andy stole crumbs. What Andy stole [of importance] from Enron was its good name."

"[Fastow's] thefts themselves spread out over a three-year period probably wouldn't be coffee money and Coke money for Enron during that period of time. Nowhere near enough to sink a company the size of, and successful as, Enron. What happened was the odor of the wolf got into the flock and the flock stampeded."

"Bankruptcy is not a crime. If it were, we would have to turn Oklahoma back into a penal colony because there would be so many people to lock up. It might help [University of Texas] football, but it won't solve much else."

"The point of the matter is people will not accept risk if failure means you go to prison. And bankruptcy is not a crime. In order to commit a crime you have to specifically intend to do something the law forbids. And failure in and of itself is not a crime."

"This is the indictment . . .[It] is 66 pages long. Someday you may be called upon -- God save you -- to have to read it. If you do, you'll find it is enormously complex. I don't blame the [prosecutors] at the table here; I think their predecessors wrote it. But with all the power and precision of the English language, it is a babbling kind of indictment [that makes it] very hard to pin down, very hard to determine what you are actually charged with. . ."

"When you don't have a case, you talk about something else, and that's what [the prosecution is] doing when they are trying to make Ken Lay look greedy and when they start talking about him selling stock based on inside information."

Several months ago, I was attending a hearing in the Lay-Skilling case on a day in which Mr. Ramsey was not fairing particularly well with U.S. District Judge Lake. On multiple occasions, Judge Lake refused to do what Mr. Ramsey requested and then finally told him to sit down and stop arguing. A lawyer from the East Coast who was also attending the hearing leaned over and remarked to me: "Gee, it sure doesn't appear as if Ramsey is particularly effective in presenting matters to Judge Lake, does it?" I replied:

"Mike Ramsey is not on the defense team for his ability to persuade Judge Lake. But wait until you see him talk to a jury."

The trial cranks back up at 8:30 a.m. today with former Enron investor relations chief Mark Koenig expected to be the first prosecution witness.

Posted by Tom at 3:35 AM | Comments (2) | TrackBack (5)