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March 31, 2006

Randy Quaid's Brokeback lawsuit

Former Houstonian Randy Quaid, the fine character actor who is a product of Sidney Berger's outstanding theatre department at the University of Houston, is making news these days in the courtroom -- he is suing the producers of the recent hit movie Brokeback Mountain for $10 million in damages for misleading him to contribute his talent to the film in a supporting role. Here is the Variety article on the lawsuit.

According to Variety, Quaid -- the grizzled ranch boss character in the movie who brought the tragic lovers Jack and Ennis together -- alleges that the Brokeback producers misled him into thinking that the movie was just an "art" film with little chance of generating any profits:

Defendants were engaging in a 'movie laundering' scheme designed to obtain the services of talent such as Randy Quaid on economically unfavorable art film terms for a picture that, in reality, had studio backing and would be exploited using traditional studio marketing and distribution techniques," the lawsuit states. [...]

Quaid is asking to be awarded $10 million, the amount the lawsuit suggests he would have received had Focus been upfront about its intentions for "Brokeback," which has grossed nearly $160 million worldwide.

"Randy Quaid is an instantly recognizable household name and much-admired actor on the world's stage with a worldwide box office total of nearly $2 billion. His likeness, talent and name are worth millions of dollars and are solely his property," the lawsuit states. [...]

According to the suit, Lee told Quaid during a meeting that "we can't pay anything, we have very little money, everyone is making a sacrifice to make this film.

Meanwhile, the NY Times article reports that Quaid's lawsuit is focusing unwanted attention in certain Hollywood circles on how talent is being paid for working in features produced by the so-called "mini-majors" -- the arthouse divisions of huge studios that claims that low-budget films wouldn't be made without casts and crews drastically cutting their fees. Now, prominent actors such as Quaid are contending that they are being hoodwinked only to have the studios spend huge amounts on marketing in order to generate huge returns:

"It's a complicated question, and it is both the genius and the nefarious nature of these mini-majors," said Linda Lichter, a lawyer who sells films in the independent world. "The purpose of those mini-majors is to try to make movies that the major studios can't afford to make, for less money. But they don't make those movies unless they get big players who are willing to cut their price." [...]

"Good Night, and Good Luck," from Warner Independent, cost a mere $8 million to produce, with the actors earning the lowest permissible union fee, known as scale, an executive involved in the film said. Warner Brothers spent about $25 million to promote the film for the Oscars and in its general release, so while the movie took in $51 million around the world, there will be no profit to share in, the executive said. (Distributors share box office revenue with theater owners.)

Gee, imagine that. Who would have thought that Hollywood -- which regularly misrepresents and bashes business in films -- regularly misrepresents its business to others within its own industry? ;^)

Posted by Tom at 5:31 AM | Comments (3) | TrackBack (1)

The risk of being a baseball icon

As noted earlier here, objective research does not support the current conventional wisdom that widespread steroid use in Major League Baseball is largely responsible for the home run records that were set over the past decade. Nevertheless, while continuing to ignore or refine such research, Major League Baseball announced yesterday that former U.S. Senator George Mitchell will lead an investigation into alleged steroid use by Barry Bonds and other players.

The Chronicle's Richard Justice thinks that the investigation will put primarily Bonds in the crosshairs of investigators, but I'm not as sure that Bonds will end up being the only icon tarnished by the investigation. For quite some time now, some pundits on the steroid issue have alleged that the Stros and star slugger Jeff Bagwell were at the center of the steroid use in Major League Baseball and that Bagwell was even indirectly involved in Bonds' decision to take steroids. Accordingly, don't be surprised if the investigation implicates Bags and other Stros.

Given the conclusions to which generally uninformed people jump in regard to steroid use, it will be unfortunate if Bags' reputation is dragged through the mud in this process. Just remember that steroids did not make him the greatest slugger in Stros history or Bonds one of the greatest sluggers in Major League Baseball history.

Posted by Tom at 4:37 AM | Comments (6) | TrackBack (0)

Lay-Skilling, Week Nine

U.S. District Judge Sim Lake declared "Spring Break" at the conclusion of a short Week Nine of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling as the prosecution concluded its case-in-chief and the Lay-Skilling team made final preparations for putting on its case. The break was certainly appreciated by the participants in the energy-draining trial and allowed everyone else who is following the case to step back and evaluate where the trial stands.

My experience is that it is almost impossible to understand the dynamics of a particular trial fully unless one sits in the courtroom and watches the trial each day. Although I have read the entire trial transcript to date, I have only been able to sit in on the trial on a few occasions, so I certainly do not have as good a perch to view the trial proceedings as the primary beat reporters who are in the courtroom almost every day -- Alexei Barrionuevo of the NY Times, Mary Flood of the Houston Chronicle, John Emshwiller and Gary McWilliams of the Wall Street Journal, and Carrie Johnson of the Washington Post. Interestingly, although each has dutifully reported the presentation of the Enron Task Force's case against Lay and Skilling, none of these day-to-day reporters have indicated that they believe the trial is a slam dunk winner for the prosecution.

At the Week Nine pole, my sense is that the prosecution has competently presented a reasonably fast-paced version of a fundamentally weak case. That's not to suggest that the prosecution can't win it -- indeed, weak cases are won all the time and the Task Force still has the huge advantage of the presumption that someone must be guilty of some crime whenever a company melts down in the way Enron did. However, if the jurors have not already decided against Lay and Skilling based on that presumption, a quick glance of the Task Force's case over the past nine weeks reveals more than enough holes through which the Lay-Skilling team could well deliver a good dose of reasonable doubt to the jury.

The week nine testimony was a case in point. Former Enron treasurer Ben Glisan completed his testimony in which, on direct, he contended that he had been advising Lay and others of Enron's dire financial condition since mid-August of 2001 immediately after Skilling's resignation. However, Glisan had no meaningful documentary evidence to support his testimony on that issue, and Lay's attorneys on cross-examination introduced Glisan's own reports from September and October, 2001 detailing Enron's improving finances. In fact, on October 8, Glisan told Enron directors that the company was "on target" to meet its year-end liquidity goals and it would hold onto its investment-grade credit rating, calling a lowered outlook the "most likely worst-rating outcome" from its third-quarter earnings report. Glisan also transmitted an October 17 Deutsche Bank credit analysts' report to Mr. Lay and others that noted Enron's "liquidity remains solid."

But lack of documentary evidence to support testimony and contradictory documentary evidence in regard to such testimony are not the only problems for the prosecution. Virtually every material prosecution witness -- including Glisan -- testified that they initially lied to investigators when they denied that they did anything illegal at Enron. Now, however, those witnesses are claiming that they are telling the truth after cutting a deal with the Task Force in return for their favorable prosecution testimony. Is the jury really going to believe that the biggest corporate conspiracy in history was hidden from everyone except these relative few Enron executives who have copped pleas, struck deals while in prison or entered into non-prosecution agreements?

Moreover, virtually none of the testimony to date has supported a key element of the prosecution's case -- the alleged huge conspiracy within Enron to cover up the wrongdoing at the company. Despite alleging now that Lay and Skilling were involved in lying about Enron to the investment community years ago, none of the prosecution witnesses produced any corroborating documentary evidence that they had any reservations at the time about the statements that Lay and Skilling were making and none of the witnesses have testified that either Lay or Skilling at the time ever confided to them that they thought they were making misleading statements. Doesn't sound like much of a conspiracy, does it?

Meanwhile, the Task Force has several major problems with a number of its witnesses. Mirroring his 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 team had former Enron Broadband executive Ken Rice testify in Lay-Skilling regarding a dubious presentation document that the prosecution failed to produce to the defense as required before trial. It's usually not a good sign for the prosecution when a key prosecution witness performs so badly that the defense is considering calling the witness back to testify in the defense's case-in-chief.

Likewise, the Task Force's decision to go for a cheap score during the testimony of former Enron Broadband executive Kevin Hannon -- he of "they're on to us" fame -- has turned into a major can of worms for the prosecution. Understandably, the the Lay-Skilling defense is wondering why no other prosecution witness who attended that meeting testified regarding such a supposedly revealing statement by Skilling and, if they didn't hear the statement, why that exculpatory evidence was not disclosed to the defense prior to trial?

Finally, the testimony of key prosecution witness Andy Fastow on his negotiation of a plea deal at the expense of his wife and on the "Global Galactic" memo (also here) was so bizarre that the prosecution simply elected not to attempt to corroborate Fastow's testimony with either former Enron chief accountant Richard Causey or key Fastow henchman, Michael Kopper. Maybe the Task Force brings in Causey as a rebuttal witness later, but, if not, then what did Causey tell the Task Force about Global Galactic?

So, midway through the corporate criminal case of the decade, the Task Force has presented a "pump and dump" case that, to a large extent, relies on a complex mix of innuendo and opinion. According to the Task Force, Enron was so successful in making money in its trading operations that it allowed Lay and Skilling to soft-pedal to the markets the losses that Enron was incurring in a couple of less successful parts of the company's business. The Task Force does not contend that either Lay or Skilling was involved in approving fraudulent accounting, but rather that mainly Skilling engineered a reorganization of a poorly-performing Enron business unit in a manner that hid losses of that unit underneath the blanket of high profits of Enron's trading unit. The alleged hiding of these losses, along with over-reserving to hide excess profits of the trading unit, allowed Skilling and Lay to misrepresent Enron to the investing public as a stable logistics company rather than the more volatile trading company that prosecutors allege that Enron had become. As noted in this earlier post, that theory of the case plays heavily on "the presumption" in such cases -- i.e., that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something as a result of Enron's failure.

Come Monday, the Lay-Skilling team begins presenting its case-in-chief, which I expect to be spirited and entertaining. However, the defense is not without its own problems, the biggest of which is its inability to obtain exculpatory testimony from numerous former Enron executives who are declining to testify on the basis of their Fifth Amendment privilege after the Task Force fingered them as targets of the Enron criminal investigation and designated them as unindicted co-conspirators in the Lay-Skilling case.

That such witnesses will likely not be testifying is a terrible injustice to Lay and Skilling. Although reasonable people can differ over whether criminalizing corporate agency costs is sound public policy, there is no question that the government's effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious violation of the principles of justice and the rule of law upon which our criminal justice system is based. If the government believes that those important principles must be shoved aside to obtain successful prosecutions of questionable business judgments, then isn't that a blue ribbon reason to re-think the prosecution of such cases altogether?

Posted by Tom at 4:11 AM | Comments (3) | TrackBack (1)

March 30, 2006

Fifth Circuit orders William Fuhs released from prison

In an extraordinary development, the Fifth Circuit Court of Appeals this afternoon -- just three weeks after oral argument in the appeal by four Merrill Lynch executives of their convictions in the controversial Enron-related Nigerian Barge case -- ordered former Merrill Lynch executive William Fuhs released immediately on bond pending final disposition of his appeal. A copy of the Fifth Circuit's order is here and here are the NY Times and the Chronicle articles on the order.

From the Fifth Circuit docket of the appeal, it appears that Fuhs was the only one of the Merrill Four who filed a renewed motion for release pending disposition of the appeal after the March 6th oral argument. The Fifth Circuit's order came after both U.S. District Judge Ewing Werlein and the Fifth Circuit had previously denied Fuhs' motion for release pending appeal of his conviction. Fuhs will make an appearance on Friday at 2 p.m. before an U.S. Magistrate in Oklahoma City (where he was serving his sentence) to establish the terms and conditions of his release. The Fifth Circuit's unusual action is a strong signal that Fuhs has a winner on the merits of his appeal.

Fuhs is represented by David Spears of Richards Spears Kibbe & Orbe LLP of New York City and on appeal by Seth Waxman, Paul A. Engelmayer, and Anne K. Small of Wilmer Cutler Pickering Hale and Dorr, LLP's New York and Washington offices.

Posted by Tom at 3:15 PM | Comments (0) | TrackBack (3)

The Convertino case

Clear Thinkers favorite Peter Henning provides this cogent analysis of the important case of Richard Convertino, the former Assistant U.S. Attorney who was indicted yesterday on conspiracy, obstruction of justice, and perjury charges for his part as lead counsel in the extraordinary "Detroit Terrorism Trial," the case in which two defendants were convicted on terrorism charges only to have the prosecution request that the verdicts be thrown out because of prosecutorial misconduct. A copy of the indictment is here, the WaPo article on the indictment is here and the NY Times article is here.

As Professor Henning reports, this may be the first indictment based on a prosecutor's alleged failure to comply with the government's Brady obligation and the prosecution's duty to turnover to the defense potentially exculpatory evidence that the prosecution obtained in the course of its investigation. Given the Enron Task Force's use of similarly questionable tactics in connection with various Enron-related prosecutions -- including this recent alleged failure to comply with the Task Force's Brady obligation in the Lay-Skilling case -- you can bet that the defense attorneys involved in the Enron-related criminal cases will be following the Convertino case closely.

11/01/07 Update: Convertino was acquitted.

Posted by Tom at 7:06 AM | Comments (2) | TrackBack (0)

The New Face of Exxon

This NY Times article profiles new ExxonMobil CEO Rex W. Tillerson, who succeeded Lee Raymond three months ago.

Although Exxon's core strategy will not change under Tillerson's leadership, the article notes that Tillerson's style is definitely different from that of the notoriously serious Raymond. At a recent news conference, Tillerson was asked what he thought would happen to oil prices this year:

"If I knew," Tillerson quipped. "I'd be living on a Caribbean island with my flip-flops and a laptop, working just two hours a day."

Posted by Tom at 6:35 AM | Comments (0) | TrackBack (0)

Rockets choose a stathead as new GM

The moribund Houston Rockets -- clearly the least popular of Houston's three major professional sports franchises -- announced yesterday that longtime general manager Carroll Dawson will retire as GM after next season and that he will groom 32 year-old Boston Celtics executive Daryl Morey as the Rockets' new GM over the next year.

Morey is an interesting hire, to say the least. An MIT graduate, Morey has never been a player or a coach, and essentially has spent his entire professional life developing statistical models for analyzing various sports, most recently basketball for the Celtics. Bill James and the sabermatricians have used such statistical models in analyzing professional baseball over the past three decades, but such statistical modeling remains relatively new in professional basketball. Over the past several years, Morey has been an adjunct professor at MIT Solan in recent years, teaching "Analytical Sports Management" with Mr. James -- who is currently a consultant with the Red Sox -- contributing as a guest instructor.

Although an unusual hire, Rockets owner Les Alexander should be applauded for taking a flyer on Morey. As noted in earlier posts here and here, the Rockets have been mismanaged for the better part of a decade now and have essentially wasted all of the goodwill that the club had established as a result of their back-to-back NBA titles in the mid-1990's.

Once the toughest ticket in town, the Rockets now play to small and unenthusiastic crowds in the club's new, gleaming downtown arena and rarely are even a topic on the city's multiple sports-talk radio shows. Inasmuch as the team has not even been particularly competitive over the past several years with either of its Texas counterparts -- the San Antonio Spurs and the Dallas Mavericks -- this is an organization that desperately needs new blood and life. Here's hoping that Morey can provide it.

Posted by Tom at 5:04 AM | Comments (1) | TrackBack (0)

Tough client

Most of us lawyers have had difficult clients from time to time, but this WaPo article reports that would-be 9/11 bomber Zacarias Moussaoui redefines the concept of the difficult client.

As we all know, Moussaoui pled guilty to six counts arising from the 9/11 suicide bombing of the World Trade Center and now federal prosecutors are seeking the death penalty because Moussaoui could have supplied information that would have prevented the attacks. Moussaoui's defense contended that the defendant was a merely a fringe figure in al Qaeda. That led to the following testimony:

[Zacarias Moussaoui] had planned to fly a hijacked airliner into the White House, but he got arrested before the attack and had to sit it out. Yesterday, fighting the death penalty in an Alexandria courtroom, he took the stand -- over his lawyers' strenuous objections -- and pretty much destroyed the defense his team had built.

He readily agreed that he was part of the 9/11 plot. "I was supposed to pilot a plane to hit the White House," he said, and he knew of the World Trade Center attacks but lied to prevent authorities from stopping them.

"You rejoiced in the fact that Americans were killed?" the prosecutor asked.

"That is correct," Moussaoui said, matter-of-factly.

You called the collapse of the twin towers "gorgeous"?

"Indeed."

You asserted that "3,000 miscreant disbelievers" burned in a "hellfire"?

"That is correct."

Moussaoui's defense team proceeded to contend that he is insane and, thus, his testimony should be disregarded, while the prosecution contended that it would be unfair to deny Moussaoui the opportunity to testify. Moussaoui agreed with the prosecution. In fact, Moussaoui was more cooperative with prosecutors and became restless on the stand only when questioned by his own lawyers.

Tough client, indeed. Hat tip to Carolyn Elefant for the link to the WaPo article.

Posted by Tom at 4:37 AM | Comments (1) | TrackBack (0)

March 29, 2006

And I thought it was because of those two big guys down on the blocks

Alex Tabarrok of Marginal Revolution blog fame and colleague Peter Boettke author this Slate.com piece that places the unlikely NCAA Basketball Tournament Final Four appearance by George Mason University in the context of an overall renaissance that is occurring at the university as it copes with competition in the marketplace of ideas:

What's remarkable is that GMU's freewheeling basketball team and its free-market academic teams owe their successes to very similar, market-beating strategies. GMU has excelled on the court and in the classroom by daring to be different. . . .

GMU remains an underdog in both basketball and economics. But Coach Larranaga has a plan to succeed in the long term and so do GMU's professors. Click here to read about how GMU is seeking out different new kinds of undiscovered geniuses.

Are you listening, University of Houston?

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

Cap Weinberger, R.I.P.

Reagan Administration Secretary of Defense Casper Weinberger died Monday at the age of 88 after a short illness. Weinberger is best remembered for a combative style that likely had something to do with his indictment in the Iran-contra affair (for which he was later pardoned), but his impact on the American armed services is his far more important legacy.

At the time that Weinberger took over the Defense Department in 1980, the Pentagon was still in its post-Vietnam War funk that was exacerbated by the malaise of the Carter Administration. Although the Pentagon is a notoriously tradition-bound institution where new ideas that do not come through the normal chain of command are viewed by top Pentagon brass with skepticism, Weinberger developed a culture at the Defense Deparment that increasingly embraced intellectual ideas from non-conventional sources.

For example, Andrew Marshall in the late 1970's and early 80's argued from an obscure Pentagon office that wars could be revolutionized by precision bombs, unmanned planes and wireless communications that would allow the American military to destroy enemies from a distance. Similarly, the work of the late Pentagon iconoclast John Boyd and his acolytes in revolutioning the way in which the American military approaches war in the late 20th and early 21st century has been well-chronicled in Robert Coram's book, Boyd: The Fighter Pilot Who Changed the Art of War (Little, Brown 2002).

The Pentagon brass often fought tooth and nail against the innovative ideas of people such as Boyd and Marshall -- and continues to do so today with regard to Donald Rumsfeld's ongoing reorganization of the Defense Department -- primarily because those new ideas often ran contrary to the sacred cow military appropriations that the Pentagon brass traditionally protect. However, Weinberger was instrumental in instituting the cultural changes at the Pentagon that altered that institutional mentality, and leaders such as Rumsfeld, Dick Cheney, and Colin Powell over the past two decades opened up and accepted recommendations from non-traditional Pentagon sources that have revolutionized and dramatically improved America's ability to conduct war in places such as Afghanistan and Iraq.

But for Cap Weinberger's leadership, the traditional Pentagon brass would have likely squelched those innovative ideas before they would have ever seen the light of day. That is not what you will read about in the traditional obituaries of Weinberger, but it may be his most important contribution as a governmental servant.

Posted by Tom at 5:42 AM | Comments (0) | TrackBack (0)

GM's Enronesque slide continues

Geez, talk about a bad day at the office.

Embattled General Motors (prior posts here) conceded in its delayed regulatory filings filed yesterday that it had found "material weaknesses" or "significant deficiencies" in the company's accounting controls, and that the company's financial statements for 2002-2004 and for the first three quarters of 2005 "should no longer be relied upon" because of accounting errors. The company filed corrected statements for those periods with the SEC yesterday.

In addition, the company announced that it may have a bit of trouble peddling its valuable financing unit because of the complexity involved in arranging such a deal and, oh by the way, several years worth of results for that unit need to be restated, too. Then, this NY Times article questions whether GM current management has what it takes to pull the company out of its tailspin.

But to top it all off, GM announced that it had received a subpoena from a federal grand jury investigating its handling of payments or "credits" from suppliers, and that it had received a subpoena from the Securities and Exchange Commission in connection with a previously disclosed investigation of GM's transactions in precious-metal raw materials. That makes six subpoenas from the SEC and two subpoenas from federal grand over the past six months.

Despite its mounting problems, GM remains reasonably liquid and is in just the beginning stages of a large layoff plan. However, should GM's board continue to postpone what increasingly looks like an inevitable need for a reorganization under chapter 11 and risk that depletion of the company's liquidity levels during such a postponement will make such a reorganization even more difficult? Or would authorization of a chapter 11 case while the company still has decent liquidity reserves breach the board's fiduciary duties to GM shareholders?

The WSJ's Holman Jenkins chimes in today with this column ($) on what GM needs to do:

Getting rid of the Jobs Bank not only helps cure GM's rational incentive to underinvest -- it also helps cure its rational incentive to overproduce, churning out cars that command just enough of a market price to meet GM's fixed labor bill even if they fail to generate any profits.

Don't underestimate the importance of this factor. Dumping these cars on the market, especially through cheap fleet sales, undermined the pricing and image of all GM cars, then undermined it again when these fleet vehicles reappeared on used-car lots a year or two later. Optimizing production volume under GM's crazy labor guarantees was such a puzzle that an economist in the company's R&D department even published a research article on it in 1995. A year earlier, GM had actually found itself hiring temps and paying overtime to meet demand for hot cars even as it paid 8,300 UAW workers at other factories to stay home.

Much inveighing over Detroit's "addiction to incentives" over the years has missed this fundamental point. "Incentives" are just gimmicks for rationalizing the fact that GM was obliged to produce cars to generate cash flow regardless of whether they made any money for shareholders. As the company began to spell out in a briefing Monday, unwinding its jobs-for-life commitments would enable GM to alter this basic approach to the car business. Bluntly put, GM would be able to build fewer cars and charge more for them.

There are no easy answers these days for GM board members.

Posted by Tom at 4:49 AM | Comments (0) | TrackBack (0)

March 28, 2006

The state of talk radio political discourse

First, outspoken actor Alec Baldwin goes on a radio talk show.

Then, Fox News pundit Sean Hannity calls in.

The result?

A quintessential example of the state of political discourse on talk radio.

Demogoguery continues to sell well in America.

Hat tip to TigerHawk for the link to the story.

Posted by Tom at 9:05 AM | Comments (2) | TrackBack (0)

Bid high, then settle

Stephen Cooper, the fellow who oversaw Enron's liquidation for a couple of years, has backed off his request for a $25 million "success" fee (earlier post here) -- on top of his $1.3 million annual salary and tens of millions already paid to his company for its services in the Enron case -- after the U.S. Trustee examining his request pointed out some "billing issues" to the Bankruptcy Judge overseeing the Enron chapter 11 case. Mr. Cooper now is requesting "only" a $12.5 million success fee in the Enron case, where creditors holding unsecured claims will probably receive somewhere between a 15% - 25% dividend on their claims.

Something tells me that Lynn LoPucki is not pleased.

Posted by Tom at 7:44 AM | Comments (0) | TrackBack (1)

Criminalizing an executive's right to counsel

In the post-Enron era of criminalizing business, a business executive's attorney-client privilege with the company counsel of the executive has already become largely illusory (posts here, here here and here). Now, according to this Nathan Koppel/WSJ ($) article, the government is now threatening to go Arthur Andersen on a New Hampshire company unless the company breaches its contractual obligation to provide counsel to a company executive that is accused of a crime.

The fee-payment issue has become an issue over the past several years after the 2003 "Thompson Memo," former Deputy Attorney General Larry Thompson's dubious directive that advised prosecutors how to induce companies to cooperate with the government in order to avoid an indictment and an Arthur Andersen-type meltdown. The memo advises that a company's willingness to advance legal fees to "culpable employees" may signal a lack of cooperation. The nonpayment of legal fees has been a huge issue in the ongoing tax-shelter prosecution against former executives of KPMG LLP, where the accounting firm has not reimbursed its former executives since 2004.

In the New Hampshire case, five former executives of technology company Enterasys Networks Inc. are charged with accounting fraud. The case was scheduled to go to trial in Concord this month, but the defense received a three-month reprieve after federal prosecutors were accused of misconduct in pressuring the company to cut off legal fees to the defendants. At a March 7 hearing, U.S. District Judge Paul Barbadoro voiced concern over the prosecutors conduct, but he did not sanction the prosecutors and Enterasys reluctantly agreed to pay past-due fees and costs of defense counsel and to cover future costs.

The article notes that, over the past three years, federal prosecutors in New York, Alabama and now New Hampshire have placed companies at risk of being indicted out of business if they fail to cut off payments to an executive's defense counsel. Clear Thinkers favorite Ellen Podgor of the White Collar Criminal Prof blog comments in the article:

"If companies don't cooperate with the government, they can face a death penalty by being indicted," says Ellen Podgor, a professor at Stetson University College of Law. She adds that companies fear becoming the next Arthur Andersen LLP, which imploded shortly after its indictment in 2002 for allegedly obstructing the government's investigation of fraud at Enron Corp. (The accounting firm was later convicted of obstruction, but the Supreme Court overturned the verdict last year.) "Prosecutors can now force individuals to pay their own attorneys' fees," Prof. Podgor says, "and corporations have to go along."

Justice Department spokesman Brian Roehrkasse disingenuosly responded by suggesting that "the government does not force corporations to do anything." If a company declines to advance fees, "that is a business decision made after weighing all of the costs and benefits of cooperation."

Yeah, right. Let's see, here. Is the company better off with the cost attributable to breaching its obligation to pay the defense costs of an executive accused of a crime? Or of fulfilling that obligation, but being indicted out of business? Faced with that "choice," what company wouldn't elect the former?

So it goes with regard to the prosecutorial abuses (partial lists here, here, here and here) that are making a mockery of our criminal justice system in the post-Enron era of criminalizing business. As Larry Ribstein wryly notes:

Apparently the presumption of innocence isn't what it used to be. But then, as a law professor was recently was quoted as saying, letting defendants pay lots of money to defend themselves could "undermine the deterrence idea of white-collar crime prosecution."

Come to think of it, wouldn't we get more deterrence if we dispensed with those pesky trials?

Posted by Tom at 6:02 AM | Comments (0) | TrackBack (1)

Update on the Bagwell disability claim

The Chronicle's Stros beat writer, Jose de Jesus Ortiz, reports today that the insurer of the Stros disability insurance policy on slugger Jeff Bagwell has denied the Stros' claim that Bagwell's arthritic right shoulder has rendered him disabled under the terms of the policy. Previous posts on the Bagwell disability claim are here and the post from the past weekend on Bags' impending retirement is here.

The insurer's position is not particularly surprising. Although Bagwell cannot throw a baseball well enough to play Major League Baseball in the National League, he was in the same condition last September when the Stros activated him to pinch-hit in the final regular season games and the playoffs. Consequently, the insurer contends that nothing has changed since Bags was physically capable of playing last fall and, thus, he continues not to be disabled.

On the other hand, the Stros are contending that the fact that Bags was able to handle partial duties in the fall (i.e., bat, but not throw) fails to establish that he is not disabled now. The Stros contend that Bagwell's disability was not finally confirmed until January 12, 2006, when orthopedic expert Dr. James Andrews examined Bags, according to Stros' counsel, Wayne Fisher:

"He was throwing the ball at 35 mph at what distance he could throw. On Jan. 12, we know total disability began, because Dr. James Andrews, a world-renowned physician, told him. That was the first time any physician had ever said that to Jeff. If Connecticut General Insurance Co. can tell us what person in that insurance company knows more about whether Jeff Bagwell was totally disabled on Jan. 12 than Dr. James Andrews, I'll be very interested in cross-examining him."

Fisher is a first-rate plaintiffs lawyer and an old friend of Stros owner, Drayton McLane. The success or failure of these types of claims are notoriously dependent on the policy provisions, particularly those pertaining to the definition of disability and the litigation forum. If the policy requires arbitration of the claim, then my sense is that the Stros have a tough case. On the other hand, if Fisher can get the insurer into state district court in Harris County, then the home field advantage definitely favors the Stros.

Posted by Tom at 5:22 AM | Comments (1) | TrackBack (0)

March 27, 2006

Governmental intervention in oil and gas markets

This NY Times article reports on the successful lobbying effort by the oil and gas industry in the mid-1990's during a time of low energy prices to persuade Congress to create incentives for energy companies to explore for oil and gas in the Gulf of Mexico.

Congress passes legislation to create the incentives, but the legislators don't bother to read the legislation carefully.

During the current period of relatively high energy prices, the oil and gas companies take advantage of the legislation to make a lot more money through paying reduced royalties to the government than they would otherwise have made without the legislation.

Journalists point this out to legislators.

Hilarity ensues.

Posted by Tom at 7:14 AM | Comments (0) | TrackBack (0)

More on criminalizing those unpopular shorts and hedgies

This earlier post noted the dust-up over the SEC's dubious issuance of subpoenas to financial journalists over Overstock.com's accusation that a hedge fund and a stock-research firm manipulated the media and the market to drive down the price of Overstock.com's stock for the purpose of profiting through shorting the stock.

Now, this NY Times article reports that the SEC is seeking documents about communications that the stock research firm -- Gradient Analytics Inc. -- had with journalists and several hedge-fund advisers. The new subpoenas appear to be intended to gather information about Gradient's contacts with journalists without seeking the information directly from the journalists themselves. If you can't get the information one way, try another.

The NY Times story reports allegations that SAC, a big hedge fund, persuaded Gradient to generate a misleading and negative report on Biovail, a generic drug firm. Then, the allegation goes, SAC persuaded (bribed?) Gradient to delay publication of the negative report on Biovail so that SAC could profit by shorting Biovail stock. If true, then SAC and Gradient's scheme is sanctionable under existing securities laws.

Although Biovail stock hasn't been doing all that well anyway and it's unclear whether the negative reports had any effect on the company's stock price, the NY Times article rachets up the "more business regulation" demagogery, anyway:

Hedge funds operate with a fair amount of secrecy, which naturally shrouds them in mystery and, often, suspicion. Combine that with the veiled practice of shorting and the devaluation of stock research since the market collapse, and it becomes a recipe for concern — if not paranoia. . . If the Biovail lawsuit can show that hedge funds are persuading analysts to come to predetermined conclusions and then asking that the reports be held so they can make low-risk bets that stocks will fall on the negative news, then the case will open another ugly chapter of corruption and greed on Wall Street.

Uh, oh. "Another ugly chapter of corruption and greed on Wall Street" are buzz words justifying another NY Times exposé and Congressional hearings on those evil capitalist roaders.

As usual, Larry Ribstein provides common sense advice in response to the Times article:

The danger here is that this will be seen as part of a pattern of misconduct regarding trading negative information by hedge funds – leading to extensive and unnecessary regulation of honest funds and researchers and the relationship between the two. . . Hedge funds are doubly vulnerable because they are not only short-sellers, but also active in a market for control that carries its own perils for incumbent managers.

The bottom line is that we should be looking for ways to encourage the market efficiency role of hedge funds and short selling, . . .

For more, see Professor Ribstein's article that he co-authored with Bruce Kobayashi, Outsider Trading as an Incentive Device.

Look, scamming the market by timing the release of false negative information about a stock while shorting it can already get one in trouble under current securities and criminal laws. But attempting to control that type of scam through more regulation runs a much greater risk of curtailing useful market functions than preventing such already illegal market manipulation. Criminalizing statements made to the market in order to perpetuate a myth is rarely a good idea.

Posted by Tom at 5:29 AM | Comments (0) | TrackBack (0)

"Keep Up"

Stephen Ames -- you know, Tiger Woods' buddy -- won the Players Championship in a walkabout on Sunday, so the final round wasn't particularly interesting. Nevertheless, the golf tournament generated some highly entertaining moments, anyway.

During the first two rounds of the tournament, the PGA Tour paired Rory Sabbatini -- who is one of the hottest players on Tour this season -- and NBC golf color commentator and part-time Tour player, Nick Faldo.

As you may recall, Faldo and Sabbatini had a dust-up with each other last year. During the 2005 Booz Allen, Sabbatini was harshly criticized by television commentators Paul Azinger and Faldo on the air for leaving playing partner Ben Crane behind to finish the 17th hole. Sabbatini, who is one of the fastest players on Tour, was fed up with Crane’s pace of play, which is one of the slowest on Tour. Sabbatini reportedly was not pleased with Faldo and Azinger slamming him on the air, although he reportedly talked with Azinger about the incident later and made up with him. But not Faldo.

To make matters, Faldo is also a slow player himself. So, during the first round of the Players Championship, tournament officials put the Sabbatini-Faldo-Camilo Villegas group on the clock (i.e., gave them a warning before assessing a penalty to each of the players) for -- you guessed it -- slow play. The group sped up and no penalties were assessed.

Nonetheless, that incident prompted Sabbatini’s wife -- no shrinking violet herself -- to show up the next day for the second round sporting a tee shirt emblazoned with the words “Keep Up” as she followed the group around the course. Asked about Mrs. Sabbatini's t-shirt after the round, Faldo observed the following:

"I think it’s very embarrassing for them to bring their sexual problems to the golf course. Poor fellow. I thought he had enough problems as it is without her announcing them to the world."

Your serve, Mr. Sabbatini.

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

March 26, 2006

Thomas Sowell is a wise man

Thomas Sowell (previous post here) is the Rose and Milton Friedman Senior Fellow of The Hoover Institution at Stanford University, where he has written yet another book, On Classical Economics (Yale 2006).

Although Professor Sowell's preference for free markets and disdain for governmental planning has often resulted in him being labeled as a leading black conservative (whatever that means), this Jason L. Riley/weekend WSJ ($) interview of Professor Sowell provides an interesting insight regarding that label:

Free-market economics, a legacy of the classical school, is thought of as an old conservative doctrine. But Mr. Sowell explains that it was in fact one of the most revolutionary concepts to emerge in the history of ideas. Moreover, "the thinking of the classical economist was not only a radical break from landmark intellectual figures like Plato and Machiavelli, but also from mainstream thinking to this day." The notion of a self-equilibrating system -- the market economy -- meant a reduced role for intellectuals and politicians, [Sowell] says.

"And even today many still haven't accepted that their superior wisdom might be superfluous, if not damaging."

Update: Following on the Sowell interview, this NY Sunday Times op-ed by Orlando Patterson, John Cowles Professor of Sociology at Harvard University, is a thoughtful and timely piece on the plight of young black men in America. He argues that academicians have an affinity for socioeconomic explanations and too often dismiss cultural explanations. As he notes: "Too much is at stake for us to fail to understand the plight of these young men."

Posted by Tom at 12:00 PM | Comments (4) | TrackBack (0)

March 25, 2006

Bags to start season on DL

As predicted by this earlier post, first baseman Jeff Bagwell -- the greatest player in the 46-year history of the Houston Astros franchise -- announced today that he would begin the 2007 season the disabled list and that his arthritic right shoulder probably will not allow him to resume his certain Hall-of-Fame career.

While some consider it sad that Bags' baseball career is drawing to a close, I prefer to appreciate the opportunity that I had to watch this extraordinary player on a daily basis over the past 15 years. Fearsome slugger, superb defensive player, excellent baserunner -- Jeff Bagwell was the entire package. A job well done, sir.

This column from Chronicle sportswriter Richard Justice reviews Bags' career with the Stros, and here are Bags' career stats, courtesy of Lee Sinins:

Bags ranks 8th in National League history for career runs created against average ("RCAA," explained here) since 1900:

1 Barry Bonds 1502
2 Stan Musial 1204
3 Rogers Hornsby 1081
4 Hank Aaron 1039
5 Willie Mays 1008
6 Mel Ott 989
7 Honus Wagner 938
8 Jeff Bagwell 680
9 Joe Morgan 657
10 Eddie Mathews 652

Not a bad group of players, eh? Bags also holds the Astros RCAA record by a huge margin:

1 Jeff Bagwell 680
2 Craig Biggio 354
3 Lance Berkman 289
4 Jose Cruz 277
5 Cesar Cedeno 249
6 Jimmy Wynn 240
7 Bob Watson 216
8 Joe Morgan 170
9 Moises Alou 128
10 Terry Puhl 114

Barring injury, Berkman has a chance to catch Bags, but it's a testament to Bags' greatness that there is not another player in the entire Stros' system today that has a chance of topping him. He truly has been a once-in-a-generation type player.

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

March 24, 2006

Comparing Martin Frankel and Jamie Olis

Outside the glare of the trial of the corporate criminal case of the decade, a true corporate crook -- financier Martin Frankel -- was re-sentenced yesterday in a post-Booker hearing to 17 years in prison for pulling off one of the biggest insurance frauds in American history.

As this previous post explains in more detail, Frankel was a small-time New York money manager in the early 1990's who arranged for the acquisition of a group of financially-troubled insurance companies throughout the 1990's, which he then used to pull off a several hundred million dollar scam.

With investigators closing in on him in May, 1999, Frankel bought millions of dollars worth of diamonds, wired money to accounts all over the world, torched any remaining paper trail and fled the country for Germany under a blaze of publicity. He was apprehended in Germany several months later, spent a year and a half in a German prison, and then was extradicted to the US to face criminal charges here. The Wall Street Journal's Ellen Joan Pollock was a lead writer on the reporting team that covered the FBI's four-month international manhunt for Frankel, and she eventually wrote a good book about the affair called The Pretender (Free Press 2002).

Meanwhile, as Frankel returns to prison to serve the remainder of his 17 year sentence, Jamie Olis -- an honest, hard-working, American success story who did what his bosses told him to do in regard to a merely questionable business transaction -- continues to await resentencing after his previous 24-year sentence was overturned on appeal.

Comparing the sentences of Frankel and Olis provides a stark example of the injustice involved in the government criminalizing corporate agency costs to assuage public animus after a business meltdown such as Enron. As noted in my prior post on Frankel, if the government cannot tell the difference between Martin Frankel and Jamie Olis, then it is highly unlikely that it can tell the difference between Martin Frankel and you or me.

Posted by Tom at 8:45 AM | Comments (3) | TrackBack (0)

Five questions about the Stros

As Spring Training winds down, freelance writer and longtime Stros follower Bob Hulsey addresses five questions about the Stros upcoming season. Check it out.

By the way, word from Florida is that Jeff Bagwell will either begin the season on the disabled list or retire because of his inability at this point to throw a ball adequately to play slow pitch softball, much less Major League Baseball. From the looks of it this spring, Bags' damaged right shoulder has also sapped him of any remaining power that he once had as one of the most feared sluggers of the past decade and a half. Thus, my bet is that Bags hangs 'em up rather than linger on the Stros' bench for the season as the highest-paid singles hitter in the game.

With his retirement, Bags will immediately become the greatest former player in Stros history and will likely become the first Stros player to be named to Baseball's Hall of Fame. This post explains why.

Posted by Tom at 7:58 AM | Comments (1) | TrackBack (0)

Lay-Skilling, Week Eight

Week Eight (previous week summaries here) of the corporate criminal case of the decade drew to a close on Thursday with former Enron treasurer and Andy Fastow protégé Ben Glisan on the stand and with the Enron Task Force announcing that presentation of its case-in-chief was drawing to a close. That's entirely appropriate because, in many ways, Glisan's testimony has been a microcosm of the Task Force's case against former key Enron executives Ken Lay and Jeff Skilling.

During a heavily-scripted direct examination that took a little over a day, the Task Force had Glisan provide a 30,000 foot flyover of the various alleged misrepresentations that, somewhat surprisingly, mostly Lay and, to a lesser extent, Skilling made to the market and Enron employees about the company's finances. Then, during yesterday's cross-examination, defense attorneys began to chip away systematically at Glisan's allegations, focusing much more on the specific circumstances relating to Glisan's allegations of wrongdoing than the prosecution did on direct. Much of the testimony on both direct and cross-examination pertained to dizzying analysis of the financial details of the Raptor financial structures that involved certain of Enron's special purpose entities, a subject that clearly has become a snoozer for the jury and even the ever-patient Judge Lake, who continually encourages both sides to move things along.

Nevertheless, Glisan provided some of the most fascinating testimony to date in regard to the sledghammering manner that the Task Force has handled the biggest corporate criminal investigation in the United States since Rudy Guiliani's prosecution of Drexel Burnham and Michael Milken almost 20 years ago. First, as noted in this earlier post, Glisan disclosed that he had been successfully negotiating with Task Force prosecutors about a better prison deal almost from the beginning of his prison term in September 2003. That important fact was not revealed to the court and the jury during Glisan's key testimony in the earlier Enron-related Nigerian Barge trial in 2004 that resulted in four Merrill Lynch executives being sent to prison for the dubious "crime "of not sufficiently appreciating that Enron may not have accounted properly for an asset sale. The Task Force had presented Glisan in the barge trial as a witness whose testimony was particularly credible because he had not cut any deal with the government in regard to his testimony and was being compelled to testify under a grant of immunity. That presentation of Glisan in the barge trial was disingenuous, at best.

Then, during cross-examination yesterday, Glisan revealed even more sordid details of his negotiations with the government. Soon after Enron went into bankruptcy in early December, 2001, Glisan and his attorney went to prosecutors and the SEC and attempted to minimize his role at Enron while, at the same time, apparently hoping that prosecutors wouldn't discover Glisan's involvement in effectively embezzling about $1 million from Enron in connection with Fastow's Southhampton deal. When that approach didn't work and Glisan was indicted in April, 2003, Glisan changed his story and began singing like a canary about alleged wrongdoing at Enron, but entered into a plea deal with the Task Force that did not include a cooperation agreement so that he could begin serving his five-year prison term immediately at a minimum security prison camp, the best alternative in the bad choices that a prisoner confronts in the federal prison system.

Despite Glisan's turnabout, the Task Force apparently was still interested in extracting a better level of "cooperation" from Glisan. So, rather than sending him to the prison camp that the judge in Glisan's case recommended and for which Glisan qualified, the Task Force apparently arranged with the Bureau of Prisons to send him to a harsher minimum-security prison facility, where Glisan was shockingly thrown into solitary confinement for most of his first two weeks in prison and then forced to share an 8 by 12 ft. prison cell with two other prisoners over most of the following month.

That had the intended effect on Glisan, who immediately began bartering his testimony in other Enron-related cases for the Task Force's assistance in moving to the more-desirable prison camp and in lessening the length of his sentence. That led to arguably the most shocking revelation of all.

In February, 2004, the Task Force arranged to have Glisan brought to Houston so that he would be here during the time that Skilling was indicted. On the day after Skilling's indictment, when the Task Force put Skilling through his "perp walk" before his initial court appearance, the Task Force had Glisan -- in prison jump suit, leg shackles and handcuffs -- meet Skilling and ride with him in the same federal courthouse elevator. In one of the most dramatic exchanges of the trial, Skilling lawyer Daniel Petrocelli asked Glisan the following question about that incident:

"Did you believe for one second, sir, that [meeting Skilling in the elevator] was a coincidence?" asked Petrocelli.

"No, I didn't believe that," replied Glisan.

Although the Task Force's transparent purpose in exposing the defeated Glisan to Skilling in this heavy-handed manner was to shock Skilling into seeking his own plea deal, the Task Force badly miscalculated the strength of Skilling's backbone.

Glisan went on to testify on how he parlayed his testimony in the barge and Lay-Skilling trials into a Task Force-sponsored transfer to the more desirable mininum-security prison camp in Beaumont, liberal furloughs at home while working with the Task Force, and the Task Force's facilitation of a reduction of his prison sentence by over year through his participation in an alcohol-rehab program. As a result, Glisan -- who entered prison in September 2003 to serve a five-year sentence -- is scheduled to be released to home confinement in September of this year and will be released from custody entirely in January, 2007. Not bad for a "non-cooperating" witness, eh?

What effect all of this is having on the Lay-Skilling jury remains decidedly unclear. I was in the courtroom for most of the direct examination of Glisan and it is clear that most the jurors now check out when the testimony turns toward the boring details of Enron's complex financial transactions. On the other hand, reports from courtroom observers from yesterday indicate that most jurors were listening intently during Glisan's testimony about his solitary confinement and his arranged courthouse elevator meeting with Skilling. My sense is that the Task Force has done a competent job of presenting a generally weak case that has some gaping holes, and that the jury is anxious to begin hearing Lay and Skilling's side of the story.

So, at this point, it appears that Lay and Skilling will begin presenting their side of the case on Monday, April 3rd and that the defense's case-in-chief will take about a month to six weeks to put on. My bet is that it will be a vigorous and highly entertaining defense, so stay tuned as the corporate criminal case of the decade -- and arguably the purest attempt to criminalize corporate agency costs in recent memory -- turns toward home.

Posted by Tom at 4:12 AM | Comments (5) | TrackBack (1)

March 23, 2006

The Rawls Course at Texas Tech

The notoriously flat and dusty West Texas terrain is not normally associated with outstanding golf courses, but golf course architectural expert Jay Flemma gives a hearty thumbs-up to the Tom Doak-designed Rawls Course at Texas Tech University in Lubbock:

He may not be a cowboy in the real or allegorical sense of the word, but the wild wind that is Tom Doak’s design team blew into west Texas on top of the already legendary fierce howls that blow errant golf shots to New Mexico.

It was 2002. Doak and company had just conquered the world for the first time, fresh off the smash hit at Pacific Dunes. He was a bit of a cowboy in terms of golf course design. Unapologetic about his industry raking book The Confidential Guide to Golf Courses, Doak talked the talk, then walked the walk, proving that the success of a golf course lies not in the money or the marketing, but the golf course itself.

Doak wrote on his website, “After Pacific Dunes, it was inevitable that the next site we had to work with would be a letdown, so we went back all the way to square one – a flat cotton field on the north end of Texas Tech’s Lubbock campus, bounded by major streets, power lines and apartment houses.”

Flemma concludes:

There is no way to overstate Doak’s accomplishment here. The land use went from the outhouse to the penthouse.

It was a roar of dust and diesel. Now it’s a shining Lone Star.

And in case you forgot, it’s Doak . . . [for the eminently reasonable price of] $35-$42 a round.

By the way, check out Flemma's idea of a tournament bracket during NCAA Basketball Tournament season.

Posted by Tom at 6:21 AM | Comments (4) | TrackBack (0)

The Glisan Deal

When former Enron treasurer and Andy Fastow henchman Ben Glisan cut his plea deal with the Enron Task Force in September, 2003, he did not -- unlike most other Enron plea bargainers -- enter into a cooperation agreement that required him to cooperate with the Task Force in other Enron-related prosecutions.

Interestingly, in connection with Glisan's plea deal, U.S. District Judge Ken Hoyt recommended that Glisan be assigned to a more-favored minimum-security camp. However, the Bureau of Prisons assigned Glisan to the Bastrop, Texas prison facility, which was contrary to Judge Hoyt's recommendation that Glisan be assigned to the less-restrictive camp. Glisan reportedly was miffed with the BOP's assignment.

Nevertheless, during the previous Enron-related Nigerian Barge case in Sept.-Nov., 2004, Glisan was the key prosecution witness. Because he has no cooperation agreement, Glisan testified in that trial -- as he is currently doing in the Lay-Skilling trial -- under a grant of use immunity so that his testimony cannot be used against him in another prosecution. Accordingly, the Task Force presented Glisan during the Nigerian Barge trial as a witness who was being "forced" to testify under the immunity grant and who had no deal with the Task Force to get a lighter sentence in return for his testimony. Indeed, the prosecutors touted Glisan during the barge trial as a witness who was more credible than the typical prosecution witness who had cut a deal for a reduced sentence under a cooperation agreement with the prosecution.

Well, in a startlnig revelation during Glisan's direct examination in the Lay-Skilling trial yesterday, it appears that the Task Force's presentation of Glisan as a non-cooperating witness during the Nigerian Barge trial was a sham. This 30 September 2005 letter introduced into evidence yesterday sets forth the terms of the cooperation agreement between Glisan and the Task Force. In return for Glisan's cooperation in other Enron-related cases, the Task Force arranged Glisan's transfer to his favored Beaumont, Texas minimum-security camp (from the his disfavored Bastrop, Tx. prison facility) and helped Glisan shave a year off of his five-year prison sentence by facilitating his involvement in a prison alcohol-rehab program. As a result of the deal, Glisan is now scheduled to complete his five-year prison sentence in January, 2007 and is scheduled to be released to home confinement in September.

Moreover, although the letter between the Task Force and Glisan's suggests that Glisan's lawyer had proposed "the deal" in early 2005 after the completion of the Nigerian Barge case in November, 2004, it's clear that Glisan and the Task Force were negotiating the deal well before the trial of the Nigerian Barge case. The final paragraph of this 1 June 2004 letter from the Task Force to the defense counsel in the Nigerian Barge case contains the following statement about Glisan's negotiations with the Task Force:

In May, 2004, Glisan, through his counsel, requested that the government support his request to be transferred to a minimum security camp in Beaumont, Texas. The government responded to Glisan's attorney as follows: the government will not weigh in on BOP's decision to designate Glisan to a particular facility; that is a matter for BOP. However, if BOP inquired, the government would advise BOP of the government's assessment of Glisan's truthfulness in [the Nigerian Barge case].

Contrary to the foregoing statement, it now appears clear that the prosecution did weigh in on Glisan's transfer to the Beaumont facility, in addition to helping Glisan shave a year off of his sentence. Moreover, contrary to the suggestion in the June 1 letter that the BOP is independent of the Task Force, the September 30 Task Force letter exposes that the BOP is, in fact, a cooperating agency with the Task Force (the BOP's Houston office is on the same floor of the federal courthouse as the Task Force's offices).

Does anyone really believe that Glisan's original assignment to the more restrictive Bastrop prison facility was the result of "administrative necessity?" Or that the assignments of Nigerian Barge defendants Dan Bayly and William Fuhs to more-restrictive facilities far away from their families was not the product of Task Force intervention with the BOP? Remember, Task Force prosecutors were clearly upset with U.S. District Judge Ewing Werlein's refusal to accept their draconian recommendation regarding the length of the prison sentences for the four Merrill Lynch defendants convicted in the barge case.

Glisan's testimony helped place four Merrill Lynch executives in prison for doing their jobs in connection with the firm's purchase of a dividend stream for which Enron, not Merrill, may have improperly accounted, although even that issue was never proven during the barge trial. Now it appears that the true motivation for Glisan's testimony during that trial was not disclosed to either the defense or the jury. Chalk it up as yet another example of the lengths that prosecutors must go to justify the criminalization of the unpopular businesspersons of the moment in the post-Enron era.

Posted by Tom at 4:51 AM | Comments (3) | TrackBack (0)

March 22, 2006

Farewell, Ten Cups

For a number of years, my favorite driving range facility in Texas has been San Antonio's Ten Cups facility just down the road from the La Cantera Resort. Owner Dave Fineg hails Ten Cups as "maybe the finest third rate goat pasture in Bexar County" and has used the facility for years to promote his theory that golf should be an enjoyable form of recreation rather than a frustrating obsession.

Urban driving ranges such as Ten Cups are usually interim land uses, and urban encroachment is the reason for Ten Cups' demise. So, Fineg is taking his "Golf is Fun" seminars on the corporate roadshow circuit and -- if this absolutely hilarious spoof on golf club infomercials is any indication -- his new endeavor should be a big success.

Hat tip to Bogey McDuff for the links.

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

On federal deficits and debt ceilings

Clear Thinkers favorite James Hamilton points out in this post the seemingly non-partisan point that it is hypocritical for politicians in Washington to vote, on one hand, for spending and tax measures that generate the federal deficit while voting, on the other hand, against an increase in the debt ceiling necessary to service the deficit.

Then, commentators to Professor Hamilton's post promptly take his non-partisan point and turn it into a partisan issue.

Hilarity ensues.

Posted by Tom at 5:28 AM | Comments (0) | TrackBack (0)

The Murray Plan

In this intriguing WSJ Opinion Journal op-ed, American Enterprise Institute scholar Charles Murray -- author of the new book, In Our Hands (AEI Press 2006) -- takes dead aim at the American welfare state:

This much is certain: The welfare state as we know it cannot survive. No serious student of entitlements thinks that we can let federal spending on Social Security, Medicare and Medicaid rise from its current 9% of GDP to the 28% of GDP that it will consume in 2050 if past growth rates continue. The problems facing transfer programs for the poor are less dramatic but, in the long term, no less daunting; the falling value of a strong back and the rising value of brains will eventually create a class society making a mockery of America's ideals unless we come up with something more creative than anything that the current welfare system has to offer.

So major change is inevitable -- and Congress seems utterly unwilling to face up to it. Witness the Social Security debate of last year, a case study in political timidity. Like it or not, we have several years to think before Congress can no longer postpone action. Let's use it to start thinking outside the narrow proposals for benefit cuts and tax increases that will be Congress's path of least resistance.

Murray goes on to lay out his proposal, which he dubs as "the plan":

[The federal government] makes a $10,000 annual grant to all American citizens who are not incarcerated, beginning at age 21, of which $3,000 a year must be used for health care. Everyone gets a monthly check, deposited electronically to a bank account. If we implemented the Plan tomorrow, it would cost about $355 billion more than the current system. The projected costs of the Plan cross the projected costs of the current system in 2011. By 2020, the Plan would cost about half a trillion dollars less per year than conservative projections of the cost of the current system. By 2028, that difference would be a trillion dollars per year.

Murray concedes that there are many technical issues that need to be sorted out before implementing such a system, but addressing those is not the purpose of his piece. Rather, he addresses why such an alternative to the current system of federal entitlements is preferable from a policy standpoint:

[D]o we want a system in which the government divests itself of responsibility for the human needs that gave rise to the welfare state in the first place? I think the reasons for answering "yes" go far beyond the Plan's effects on poverty, retirement and health care. Those issues affect comparatively small minorities of the population. The more profound problem facing the world's most advanced societies is how their peoples are to live meaningful lives in an age of plenty and security. . .

If you believe . . . that the purpose of life is to while away the time as pleasantly as possible, . . . then it is reasonable to think that the purpose of government should be to enable people to do so with as little effort as possible. But if you agree with me that to live a human life can have transcendental meaning, then we need to think about how human existence acquires weight and consequence.

. . . Aristotle was right. Virtue is a habit. Virtue does not flourish in the next generation because we tell our children to be honest, compassionate and generous in the abstract. It flourishes because our children practice honesty, compassion and generosity in the same way that they practice a musical instrument or a sport. That happens best when children grow up in a society in which human needs are not consigned to bureaucracies downtown but are part of life around us, met by people around us.

Read the entire piece. Regardless of whether you agree with Murray's plan, his ideas on the underlying individual and societal qualities that American governmental policies should promote is the type of clear thinking that we need in addressing the inevitable reorganization of the American welfare state.

Posted by Tom at 5:00 AM | Comments (2) | TrackBack (0)

March 21, 2006

The costs of Quattrone

Ellen Podgor and Peter Henning do a great job of breaking down the issues and details of the Second Circuit's decision in overturning the conviction of Frank Quattrone yesterday, so I'm attempting to step back and assess the big picture. In so doing, one thing is becoming clear -- Quattrone is the new poster boy for the enormous costs involved in the dubious governmental policy of attempting to regulate business fraud through criminalization of corporate agency costs.

As with the government's case against Martha Stewart, the government did not prosecute Quattrone for alleged crimes related to his supposed mishandling of allocation of stock offerings during the technology boom. Rather, the government prosecuted him for allegedly attempting to cover up those purported crimes.

As a result, the prosecution's case was built upon mostly email messages between Quattrone and his CSFB employer's in-house counsel, all of which were innocuous in nature. Even the key email in the prosecution (as with Andersen, one relating to CSFB's document retention policy) was one that Quattrone forwarded with the comment that he agreed with the email as he was hurriedly getting ready to leave his office for the day. No one acted on Quattrone's email and, within days of it, CSFB's in-house counsel was advising him that it was "a big problem" because of the various ongoing investigations involving CSFB. Of course, once CSFB settled and waived its corporate attorney-client privilege, that email became evidence in the prosecution against Quattrone. Thus, the jury was allowed to see evidence that a lawyer who appeared to be working in concert with Quattrone thought that his seemingly innocuous email was "a big problem." Talk about being put on the defensive from the start.

Meanwhile, the prosecution figured that its case against Quattrone was not sexy enough without more, so it presented evidence that Quattrone was allegedly involved in illegal activity that was not a part of the indictment (the Second Circuit ruled that it was error for the District Court to allow that into evidence) and that his motive for allegedly obstructing the investigations was so that could greedily preserve his huge CSFB compensation package (which the Second Circuit said was OK).

So, where does this leave us? Well, it's clear that the costs of the government's criminalization of corporate agency costs are extraordinary. Based on Quattrone's experience, no executive can rely any longer on the executive's communications with company counsel remaining confidential or privileged. Thus, it would be far more prudent for an executive to say nothing to corporate counsel and to retain personal counsel immediately. Better yet, the executive should forsee such problems and require as a part of the executive's employment agreement that personal counsel be provided to the executive on the company's dime. Good for the legal business, but not a prescription for reducing a company's administrative costs or for facilitating open discourse regarding business or legal problems.

But should the executive even continue working for the employer after such investigations are commenced? Inasmuch as many of Quattrone's actions that were used to prosecute him were performed in the normal course of interacting with others within CSFB regarding the status of the investigations, a powerful argument can be made that virtually anything that Quattrone did at that point -- including simply sitting in his office and saying nothing -- would have been used against him in the subsequent cover-up prosecution (on a related issue, see Larry Ribstein's analysis of the vagaries between an executive's optimisitic and fraudulent statements). Indeed, even an immediate resignation would probably have been used by the prosecution as evidence of Quattrone's culpability. Are we prepared to endure the cost attributable to companies losing key personnel simply because someone in government has elected to commence an investigation of those companies?

Thus, as Professor Ribstein has coined it, the lottery of regulating business fraud through criminalization of corporate agency costs is having huge and largely unevaluated costs. If the government pursues bit players such as William Fuhs or Daniel Bayly in the Enron-related Nigerian Barge case and can come up with something particularly distasteful to the jury -- such as Merrill's involvement with the corporate pariah Enron -- then it wins and productive careers are destroyed. On the other hand, even if the government oversteps with regard to a big fish such as Quattrone, then the government may lose the battle, but it still wins the war because Quattrone is out of business. This is not a rational deployment of our justice system, and the economic costs -- not to mention the emotional carnage to the families of the executives who are caught in this troubling spiral -- simply cannot be responsibly dismissed as a "trade-off" of an imperfect system.

Update: Don't miss Christine Hurt's clever analysis of Quattrone's impact on the means for notification of a company's document retention policy.

Posted by Tom at 5:54 AM | Comments (0) | TrackBack (3)

Did Fastow forge Causey's initials on Global Galactic?

As noted on several occasions previously, the Lay-Skilling trial has settled into a rhythm during the Enron Task Force's case-in-chief in which long stretches of boring testimony regarding rather dry topics is interrupted intermittently with a tidbit that really appears to capture the jury's attention. The same routine took place yesterday and surprisingly, only the Chronicle's John Roper among the major news media reporters covering the trial appears to have picked up on the most riveting testimony for the jury.

For most of Monday, the jury and spectators endured testimony from a couple of former Arthur Andersen partners who worked on the Enron account and testified how they thought Enron violated various accounting rules. Most of it was pretty dry, but prosecutor Sean Berkowitz had the following exchange with Tom Bauer, one of the former Andersen accountants who worked closely with former Lay-Skilling defendant and former Enron chief accountant, Richard Causey, regarding the Global Galactic agreement between Causey and former Enron CFO, Andy Fastow:

Q: Do you recognize anybody's initials on this document, Mr. Bauer?

A: I recognize what appears to Mr. Causey's initials.

Q: And are you familiar with Mr. Causey's initials from having worked with -- having worked with him?

A: I'd seen Mr. Causey's initials on a number of documents that I have reviewed during the course of my work.

Q: And do the initials on each of these three pages appear, to the best as you can tell, to be Mr. Causey's initials, based on your -- your knowledge and recollection of his initials?

A: They appear to be.

During Fastow's testimony, the Lay-Skilling defense raised substantial questions regarding the validity and authenticity of the Global Galactic agreement, and those questions have become even more compelling by the revelation that the Task Force has chosen not to have Causey corroborate Fastow's testimony on Global Galactic, at least during the presentation of the prosecution's case-in-chief.

During cross-examination yesterday, Skilling lawyer Randy Oppenheimer displayed for Bauer and the jury a handy graphic that contained several examples of Causey and Fastow's initials, including Causey's alleged initials on Global Galactic. As the jury looked on with keen interest, Oppenheimer led Bauer through a review of the various initials, getting Bauer to admit that the alleged Causey initials on Global Galactic indeed looked different from Causey's initials from other documents and that certain characteristics of Fastow's writing appear similar to the alleged Causey initials on Global Galactic. Appearing somewhat dumbfounded, Bauer's final statement to the jury during his testimony yesterday was the following regarding Global Galactic:

"Sir, I can't say who authored this document. When I saw the initials on them, they appeared to me to be the initials of Mr. Causey, but I'm not a handwriting expert. I can't testify with regard to who authored this document."

Where is Waldo? er, I mean Causey?, indeed.

Posted by Tom at 4:59 AM | Comments (4) | TrackBack (0)

March 20, 2006

Quattrone conviction overturned

In a result that was anticipated by this earlier post, the ever-observant Peter Lattman reports this afternoon that the Second Circuit Court of Appeals in this 61-page opinion has overturned the conviction of former Credit Suisse First Boston investment banker Frank Quattrone on witness tampering and obstruction of justice charges. The Second Circuit remanded the case to the District Court for yet another trial (this will be the third) and, in an unusual move, ordered that U.S. District Judge Richard Owen -- the judge of Quattrone's first two trials -- be replaced for Quattrone's third trial.

The Second Circuit's opinion essentially concludes that there was sufficient evidence to convict Quattrone of the charges, but that the jury instructions that Judge Owen were fatally flawed. Here is the meat of the decision on that issue, which relies heavily on the U.S. Supreme Court's reasoning in its Arthur Andersen decision:

Quattrone claims that both charges incorrectly explained the nexus requirement in that each allowed the jury to convict without finding that Quattrone knew that the relevant subpoena or document request called for documents he sought to destroy. Quattrone also argues forcefully that the second portion of that section of the charge, presented in the alternative, is error. He argues that the instruction allowed the jury to find a nexus as a matter of law merely if it found that Quattrone “had reason to believe [the documents] were within the scope of the grand jury’s investigation.”

The paragraphs of the charge preceding the language in question accurately describes the “nexus” requirement. See Aguilar, 515 U.S. at 598-600. However, the charge then incorrectly instructs the jury how to determine if the nexus requirement has been met. The first portion of the “application” section told the jury in effect that if it found that Quattrone merely called for the destruction of documents that were within the scope of those sought by the subpoenas, that finding alone satisfied the nexus element. Clearly, that instruction is not a correct formulation of the law. Under the charge, as given, any defendant who urges the destruction of documents might run afoul of section 1503 (or 1505) without any proof that the defendant knew the documents were subject to a subpoena (or document request). More is required; a defendant must know that his corrupt actions “are likely to affect the . . . proceeding.” Id. at 599.25. . .

[snipped is a discussion of the proseuction's argument on the jury instruction]

However, [the government] argument overlooks a glaring deficiency in the court’s charge. When the court finally explained to the jury how to apply the law to the facts, it eviscerated the nexus requirement. It removed the defendant’s specific knowledge of the investigatory proceedings and the subpoenas/document requests from the obstruction equation. It left a bare-bones strict liability crime. Given the court’s instruction for the nexus determination, all that need be proven was that an investigation had called for certain documents and that the defendant had ordered the destruction of those documents. Although wrongful intent, corrupt intent, and the nexus requirement were correctly defined, the charge, as a whole, relieved the jury of having to make those findings in assessing criminal liability.

Quattrone’s theory of the case relied on several innocent explanations for his conduct and each has some basis in the record. Among these, Quattrone testified that he had no wrongful intent and that he was not aware that the investigations were focusing on IPO-allocation issues germane to Tech Group activity. J.A. 397-98 (Tr. 1787-90). While the government did offer proof that Quattrone knew that the grand jury and the SEC sought Tech IPO-allocation related documents, we cannot say that the proof convinces us beyond a reasonable doubt that the error was harmless. See Neder, 527 U.S. at 17. That conclusion finds strong support in the deficiency of the court’s charge. Under the charge, the jury was allowed to convict Quattrone of obstruction regardless of whether he intended such. Quattrone’s defense of lack of knowledge of the specific focus of the investigation of Tech Group IPO activities was eliminated from the jury’s consideration. Accordingly, the judgment of conviction with regard to Counts 1 and 2 must be vacated and the case remanded for retrial.

The following is the Second Circuit's reasoning in ordering a new judge for Quattrone's retrial:

This case has already endured two full trials before the same dedicated jurist. In our view, the contentions of the parties in this difficult and complex matter have taken a toll on all involved. We conclude that the better decision is that the case be reassigned to another judge upon remand. While we have considered the government’s arguments and do not find evidence that the trial judge made any inappropriate statements leading us to seriously doubt his impartiality, portions of the transcript raise the concern that certain comments could be viewed as rising beyond mere impatience or annoyance. Ultimately we believe that the interest and appearance of justice are better served by reassignment.

I am going to reflect on the Second Circuit opinion before commenting further on it (subsequent comments here). However, I encourage anyone involved in business or in defending businesspersons to read the opinion. In doing so, it is impossible not to be struck with the adverse effect that CSFB's waiver of the corporate attorney-client privilege had on Quattrone and the innocuous nature of the Quattrone email -- which was noticed immediately by CSFB attorneys and not acted on to anyone's detriment -- that formed the core of the government's case.

As businesspeople such as Martha Stewart, Sheila Kahanek, William Fuhs and the other Enron Nigerian Barge defendants have experienced, it is a dangerous business world out there in this era of criminalizing corporate agency costs.

Update: Ellen Podgor is asking all the right questions on the implications of the Second Circuit's Quattrone decision.

Posted by Tom at 2:45 PM | Comments (8) | TrackBack (1)

Has it really been 20 years?

In this LA Times article, (regis. req'd) Thomas Bonk reminds us that the upcoming Masters Tournament next month marks the 20th anniversary of Jack Nicklaus' stirring 1986 Masters victory at the age of 46. Bonk notes that much has changed in golf over those two decades:

When Nicklaus won the 1986 Masters, [Tiger] Woods was 10.

The 1986 Masters was not only his final victory at Augusta National, Nicklaus never won another PGA Tour event.

It was the end of an era, only nobody knew it yet. It's possible to view Nicklaus' monumental Masters of 20 years ago as a unique jumping-off place for professional golf, a final, startling, heart-warming salute to one generation and the start of something radically new.

Nicklaus won the 1986 Masters and nothing has been the same since. They're no longer playing the same game.

His winning check was $144,000. Woods made $1.26 million for winning the Masters last year.

In 1986, the total prize money available in PGA Tour events was $25.4 million, about $545,000 each tournament. This year, the pros are playing for a pool of $256.8 million, an average of about $5.4 million a tournament.

Greg Norman led the money list in 1986 with $653,296. That would have put him 121st on the money list in 2005, when 78 players made more than $1 million.

And Nicklaus' Masters victory in 1986 clearly represents the end of an era in more ways than money.

The two most important pieces of equipment in golf were going to take on a drastic new look.

It wasn't until 1991 that Callaway Golf revolutionized drivers with the large-headed Big Bertha, shoving into the back of the closet the flat-faced, unforgiving block of persimmon wood on a steel shaft.

And it was in 2003 when Titleist brought out its Pro V1 ball. A three-piece ball instead of a wound ball, and with a thinner cover, the Pro V1 was immediately hailed for its greater control, better feel, improved trajectory and longer flight.

The combination of driver and ball has altered golf's landscape, perhaps forever.

In 1986, Nicklaus averaged 266.4 yards off the tee. A 22-year-old Davis Love III led the driving statistics, averaging 285.7 yards and the PGA Tour average drive was 261.6 yards. The 190th and last-ranked player in driving distance this year is Brad Faxon at 260.7 yards. Love is ranked 27th in driving, averaging 299.3 yards, but 23 players are averaging more than 300 yards.

Woods, by the way, is eighth, with a 304.8-yard average. Bubba Watson is hitting it farther than anyone, averaging 320.9 yards, and the average PGA Tour pro drives the ball 289 yards — about 27 yards farther than the average pro in 1986. And Watson's lead over what Love averaged in 1986 is more than 38 yards.

Don't think these kind of numbers have been overlooked. Just check the numbers at Augusta National. In 1986 when Nicklaus won, it was listed on the scorecard he kept at 6,905 yards. In a couple of weeks, they're going to play a course that's 7,445 yards and has been lengthened for the third time in seven years.

At Whistling Straits for the 2004 PGA Championship, the layout measured 7,514 yards, the longest course ever played in a major.

Four years after Nicklaus' victory at the Masters, the U.S. Open returned to Medinah for the first time since 1975 and Hale Irwin won it, playing a course that measured 7,195 yards. It's going to play at 7,561 yards for the PGA Championship in August and the 14th hole is 605 yards. That shouldn't surprise anyone, because the 17th hole at Baltusrol for the PGA Championship last year topped out at 650 yards.

The debate will go on about whether the proper way to toughen courses because of better players and better equipment is to simply make them longer, but that's not the point here.

The fact is that they are longer because the game is very different than it was, not so long ago, about the time of Nicklaus' crowning achievement in 1986, when they were playing a different game.

Posted by Tom at 7:19 AM | Comments (2) | TrackBack (1)

The Odd Couple -- Ali and Cosell

In this NY Times article, Boxing author Budd Schulberg reviews Dave Kindred's new book about the fascinating relationship between Muhammad Ali and Howard Cosell, Sound and Fury : Two Powerful Lives, One Fateful Friendship (Free Press 2006). Schulberg gives the book a hearty thumbs up, and notes that Kindred opens by describing the Ali-Cosell relationship in the context of Edith Wharton's famous quotation about light:

"There are two sources of light, / The candle, / And the mirror that reflects it." The homely kid from Brooklyn and the black Adonis from Louisville alter-egoed each other so perfectly that each seems both candle and mirror to the other.

Schulberg also notes in his review two of best lines about Cosell:

[T]the gifted columnist Jimmy Cannon skewered Cosell as the only guy who ever "changed his name and put on a toupee to 'tell it like it is,' " and the boxing historian Bert Randolph Sugar said, "He demonstrated again and again that he knows very little about the game but is not afraid to describe it" . . .

Posted by Tom at 6:19 AM | Comments (0) | TrackBack (0)

More on the risk of going for the cheap score

Remember Kevin Hannon? He is the former Enron Broadband executive whose testimony was the subject of this earlier post on the risk for the Enron Task Force of attempting to score points with the jury by eliciting seemingly helpful testimony about a statement that Skilling allegedly made ("they're on to us") that, upon reflection, actually turns out to be contrary to the Task Force's case.

Well, based on this Lay-Skilling motion filed this past Friday, the Task Force's attempt at a cheap score may have an even more negative effect on the Enron Task Force's case against Lay and Skilling than first thought. According to the motion, the Task Force apparently has not turned over to the Lay-Skilling team other witness statements team regarding the "they're on to us" statement that Hannon contends that Skilling made.

Prior to Hannon's testimony, at least a couple of other prosecution witnesses previously testified that they were at the same meeting in which Hannon alleges that Skilling made the statement. However, no other prosecution witness has testified that Skilling made any such statement. Accordingly, the Lay-Skilling team points out that the prosecution witnesses' pre-trial statements that they did not remember such a statement from Skilling would be potentially exculpatory to Skilling and Lay, thus, should have been turned over by the prosecution to the defense. Moreover, given that the Task Force placed such emphasis on Hannon's allegation regarding the alleged Skilling statement, the Lay-Skilling team observes that it's highly unlikely that the Task Force didn't at least ask its other witnesses who attended the meeting about the alleged statement.

Meanwhile, as the Task Force's case winds down, the NY Times' Alexei Barrionuevo previews the upcoming week's testimony, which includes a couple of former Arthur Andersen accountants and former Enron treasurer and Andy Fastow protege, Ben Glisan.

Posted by Tom at 5:02 AM | Comments (0) | TrackBack (2)

March 19, 2006

"Taco Meat"

Anyone who has lived in Texas will appreciate the truth of this very clever commercial. Particularly after this past college football season.

You gotta love those Texas college rivalries!

By the way, LSU closed out the Aggies' most successful basketball season in a couple of decades on Saturday by beating the Ags with a buzzer-beater in their second-round NCAA Tournament game.

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

March 18, 2006

GM's Enronesque experience continues

This Floyd Norris/NY Times article reports that General Motors' descent toward what is increasingly looking like an inevitable reorganization is looking absolutely Enronesque:

There was a time when General Motors was seen as the paragon of financial quality. Its bonds were rated triple A, and it was known for the most conservative accounting. Let other companies use liberal accounting rules to make results look better; G.M. did not need such things.

The announcement late Thursday that General Motors would revise profit figures for every year of this decade, and would have to restate the 2005 earnings it had already reported, shows how far the icon has fallen. Less than a year after it lost its investment-grade bond rating, its bonds are viewed as middling even among junk bonds.

"You have to question what controls are in place," said Charles W. Mulford, an accounting professor at Georgia Tech. "When companies like G.M. are profitable, there is not a need to engage in aggressive accounting. What we are seeing now is a pattern of very aggressive accounting that took them well beyond the limits of generally accepted accounting principles."

The restatements indicate that G.M. used some highly questionable accounting techniques in 2000, when it seemed to be flying high, and a year later when profits fell sharply.

Funny how those "questionable accounting techniques" occurred both before and after Sarbanes-Oxley, isn't it?

Posted by Tom at 6:52 AM | Comments (5) | TrackBack (0)

Thinking about SOX

The Free Enterprise Fund's Mallory Factor observes in this WSJ ($) op-ed today that even notorious anti-business politicians such as House Democrat Nancy Pelosi and the Lord of Regulation are starting to question the over-reaction that is the Sarbanes-Oxley legislation.

Factor's piece is a good summary of the core defects of SOX, but Larry Ribstein has provided the more thorough and thought-provoking commentary as he has been traveling the country this week talking about SOX. In preparing for a talk at Berkeley, Professor Ribstein sums up the superficial nature of the only line of defense that he has heard defending SOX:

I'll be particularly interested to hear whether anybody has a cogent defense of SOX. All I've heard so far along these lines is this: "There was fraud; fraud is bad; SOX is against fraud; therefore SOX is good." This seems to assume that we should favor legislation that purports to restrict fraud regardless of cost, and regardless of effectiveness. And even this has been mainly from journalists, accountants, regulators and legislators -- i.e., those with a stake in the regulation. I'd really like to hear something more from disinterested parties.

Then, in regard to Peter Lattman's post regarding revelations of more alleged fraud at Refco, Professor Ribstein notes that SOX did not prevent the Refco frauds from occurring:

Significantly, all this is after SOX, and occurred after Refco had gone through the intensive scrutiny involved in an IPO.

Some might say that the lesson from all this is the need for still more regulation. I'd be interested in hearing about the regulation that could have prevented the problems indicated above. Requiring certification of internal controls isn't very effective when the fraud is by the certifying CEO, as may be the case here.

I would say, and have said, here and here, that the more realistic lesson is that no amount of regulation can prevent fraud by the most determined fraudsters. It can, though, catch law-abiding firms in a spiral of regulatory costs.

Posted by Tom at 6:09 AM | Comments (2) | TrackBack (0)

March 17, 2006

The ongoing Hamilton-Carey feud

The long-time feud between Stros' announcer Milo Hamilton and the late Cubs' announcer Harry Caray boiled over recently with the publication of Hamilton's autobiography, which includes a chapter lambasting Caray.

The Chronicle's sports television columnist David Barron reports that Caray's son, Atlanta Braves announcer Skip, recently passed along his congratulations to former Stros announcer Gene Elston, who was recently named to the broadcaster section of Baseball's Hall of Fame. In so doing, Caray couldn't pass up the opportunity to land a jab on Hamilton, who is also a member of the Hall of Fame:

Finally, an Atlanta Braves spokesman called recently to offer congratulations from Skip Caray regarding Gene Elston's selection for the Ford Frick Award from the Baseball Hall of Fame. The message comes with a twist for Caray's least favorite Houston broadcaster, Milo Hamilton.

"I'm so happy for Gene. He's such a nice man," Caray said. "It's good to see a Houston broadcaster who deserves to get in the Hall of Fame get there and one who didn't have to brown-nose in order to do it."

Posted by Tom at 6:57 AM | Comments (0) | TrackBack (0)

Lay-Skilling, Week Seven

As the seventh week (earlier week summaries here) of the epic corporate criminal trial of former key Enron executives Ken Lay and Jeff Skilling drew to a close, U.S. District Judge Sim Lake gave the lawyers and the jurors an extra day off to prepare for the closing witnesses of a slimmed-down prosecution case and the beginning of what will almost certainly be one of the most interesting defense presentations in recent memory.

In some ways, Week Seven of Lay-Skilling reflected the Enron Task Force's case to date -- long on hype, but short on substance. The week began with the Task Force's star witness, Andy Fastow, and closed with the self-promoted Enron media star, Sherron Watkins. However, my sense is that there is a method to the prosecution's approach to presenting its case. After the disastrous result in the Enron Broadband trial last year in which the jury was put to sleep during long stretches and a glacial opening pace to the Lay-Skilling trial, the Task Force prosecutors have quickened the pace of their presentation and are now on course to finish their case-in-chief in about another week or so. If that schedule holds, then not only will the Task Force have presented their case in substantially less time than prosecutors initially predicted, they will have avoided the trap of forcing jurors to endure long stretches of mind-numbingly boring testimony.

In fact, the trial has settled into a fairly standard routine with most witnesses. Each prosecution witness has gone through a heavily-scripted direct examination in which they confidently accuse Skilling, and to a lesser extent Lay, of making various misleading statements to the investing public and employees. Then, defense attorneys on cross-examination chip away at the prosecution witnesses' testimony and the witnesses generally become far less decisive in, or defensive about, their accusations. Much of the testimony is quite boring and technical, but there are usually enough short bursts of interesting exchanges to keep the jury engaged and Judge Lake moves things along with a steady hand and a dry wit.

So, after filing and publicizing a 66-page indictment (which the Task Force doesn't want the jury to see and the Lay-Skilling team does) that asserts a wide array of alleged corporate crimes, the Task Force has slimmed down its case to a plain "pump and dump" case -- i.e., Skilling and Lay touted the failing company's shares while selling their own. As noted in this earlier post, that theory of the case plays heavily on "the presumption" in corporate criminal cases -- 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 might collapse if something such as Fastow's effective embezzlement of funds using Enron's special purpose entities ever was revealed to the markets.

Although clearly a smart move from an appeal-to-jury standpoint, the Task Force's slimmed-down case is not without risks. To a large extent, the case still relies on a complex jumble of innuendo and opinion that requires the jury to connect the dots of amorphous points in finding a crime. For example, one Task Force theme has been that Enron was so successful in making money in its trading operations that it allowed Lay and Skilling to soft-pedal to the markets the losses that Enron was incurring in a couple of less successful parts of its business. The Task Force does not contend that either Lay or Skilling was involved in approving fraudulent accounting, but rather that mainly Skilling engineered a reorganization of a poorly-performing Enron business unit in a manner that hid losses of that unit underneath the blanket of high profits of Enron's trading unit. According to the Task Force, the hiding of these losses, along with over-reserving to hide excess profits of the trading unit, allowed Skilling and Lay to misrepresent Enron to the investing public as a stable logistics company rather than the more volatile trading company that prosecutors allege that it had become.

Another risk to the Task Force is whether the jury really even recalls much of that after the highly-publicized and sometimes bizarre testimony of Fastow. Although Fastow implicated Skilling in "secret side deals" and undisclosed "bear hug" guaranties, Fastow is such a despicable character that it remains decidedly unclear whether the prosecution gained much of anything with the jury from his testimony. Moreover, the prosecution's emphasis with Fastow on the Global Galactic memo certainly raises the question of why the Task Force is not corroborating Fastow's testimony on that key issue with the testimony of former Enron chief accountant, Richard Causey, who the Task Force has announced will not be called in its case-in-chief. Perhaps the Task Force is planning on saving Causey to testify as a rebuttal witness after the defense presents its case, but the Task Force's emphasis on Global Galactic during Fastow's testimony creates a huge hole in its case unless the more credible Causey corroborates Fastow's testimony at some point on that key issue.

Meanwhile, almost forgotten in the mainstream media reports on the trial to date is that virtually none of the testimony from prosecution witnesses and even less documentary evidence over seven weeks of trial has supported the prosecution's allegation of an alleged huge conspiracy within Enron to cover up wrongdoing at the company. As a result of the paucity of evidence on that key issue, the Lay-Skilling defense would seem to have a reasonably strong basis for seeking immunity grants from either the prosecution or Judge Lake in regard to the testimony of dozens of former Enron executives who are currently invoking the Fifth Amendment privilege in the face of the Task Force's designation of them as unindicted co-conspirators, but who could provide exculpatory testimony for Lay and Skilling during presentation of the defense's case-in-chief. Stay tuned on that issue.

As the prosecution's case winds down, the Task Force will call two former Arthur Andersen accountants as witnesses early next week, and then likely end the week with its final major witness, former Enron treasurer and Fastow confidant, Ben Glisan. Glisan was arguably the Task Force's most-effective witness in the 2004 trial of the Nigerian Barge case, which appears to be unraveling somewhat for the Task Force. As a result, Glisan's testimony in Lay-Skilling could turn out to be very interesting, indeed.

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

March 16, 2006

"Victoria, Victoria"

I count as friends a number of major college coaches, and so I have a special appreciation of the demands involved in being a big-time college football or basketball coach. Not only do such coaches have to deal with sometimes overbearing media, fans, and college administrations, they also have to oversee their athletes' off-the-field conduct, such as keeping the usually cash-deprived athletes away from the various sources of financial inducements that violate various NCAA rules that could lead to disastrous sanctions for the coach's program. Believe me, it's a full-time job.

Well, as difficult as their job already is, it now looks as if those college coaches are going to have to include review of their athletes' instant messenger habits in their oversight duties.

Posted by Tom at 7:53 AM | Comments (1) | TrackBack (1)

Inhibiting the production of vaccines

The ever-observant Walter Olson points us to this interesting Theodore Dalrymple review of the new book The Cutter Incident: How America’s First Polio Vaccine Led to the Growing Vaccine Crisis (Yale University Press 2005) by Paul Offit, a professor of pediatrics at the University of Pennsylvania.

Dr. Offit's book tells the story of how a heartbreaking disaster caused by mass immunization during research — a disaster that helped lead to the major medical and scientific breakthrough of virtually eliminating polio from much of the world -- led to a legal ruling that has subsequently inhibited pharmaceutical companies from developing and manufacturing vaccines. During the early stages of polio immunization, the Cutter Company followed the then-imperfect instructions regarding production of the vaccine to the letter, but those instructions -- together with the then-imperfect scientific knowledge regarding the vaccine -- proved inadequate to guarantee the vaccine’s safety. As a result, the live polio virus survived in some of the company's vaccine, which was distributed to a large number of people. Seventy thousand of those immunized by the faulty vaccine experienced the transient flu-like symptoms of mild polio, 200 wound up being paralyzed by polio, and 10 died from the disease.

Some of the victims then hired the most flamboyant plaintiffs’ lawyer of the time, Melvin Belli, who proceeded to sue the Cutter Company for all that it was worth. Although the trial was essentially a draw, the outcome nevertheless established a principle that would be nearly fatal to the production of vaccines in America:

The trial established beyond reasonable doubt that Cutter had not been negligent. But the judge stated—as a matter of law, so that the jury was powerless to disagree—that the company was liable for damages, even if it had done nothing wrong, simply because its product had harmed its recipients. This principle of absolute liability soon found itself defended in legal journals on the grounds that a large company was best able, via its insurance, to distribute the costs of risks among all the relevant parties, and society as a whole would benefit from the arrangement.

Quite apart from its repugnance to natural justice, this principle has been disastrous to the manufacture of vaccines. It opened the way for huge claims against the manufacturers. Since the courts are often cavalier in their complete disregard of scientific evidence, awarding huge damages against companies not only innocent of any negligence but whose products have done no objectively demonstrable harm, it is not surprising that pharmaceutical companies have largely withdrawn from the vaccine market. For them, the potential profits are small, and the risks great. SmithKlineGlaxo, for example, one of the world’s largest vaccine producers, withdrew its safe and effective vaccine against Lyme disease because of the expense of defending it against speculative tort actions of no merit. One almost wishes that an epidemic of Lyme disease would strike the whole tribe of tort lawyers.

Posted by Tom at 6:56 AM | Comments (1) | TrackBack (1)

The insufferable Sherron Watkins

Yesterday was Sherron Watkins day at the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, and despite her self-portrayal as a paragon of virtue amidst a cauldron of corruption at Enron, Watkins came off in person as an insufferable know-it-all. Even when it's not particularly in her interest to do so.

Everyone who follows the Enron saga knows Ms. Watkins. She is the former mid-level Enron executive who parleyed this mid-August 2001 warning memo to Mr. Lay into a lucrative talk show-pundit career of waxing eloquent on all things Enron. She testified to fawning Congressional subcommittees, co-authored an Enron book, was one of the primary Enron employees interviewed during the Enron movie, and has made a tidy living over the past several years on the rubber-chicken circuit portraying herself as a whistleblower with special expertise on the subject of leadership. Wherever there is a light and a camera, Ms. Watkins is ready to pontificate about Enron.

The fact that Ms. Watkins was not a whistleblower (she never alerted anyone outside of Enron or Arthur Andersen about alleged accounting improprieties) and that her memo to Lay characterized Enron's problems as primarily a public relations issue has gotten lost in the Enron milieu. In fact, the specific LJM transactions that she criticized in her memo had been approved by accountants and attorneys inside and outside of Enron. At the time of her memo, Lay listened courteously to her concerns, ordered an investigation, protected her from Mr. Fastow's threats to fire her for going around him to Lay, and ultimately ordered the unwinding of the Raptor financial vehicles that resulted in more than a $500 million charge to earnings in the third quarter of 2001. Nevertheless, Watkins insisted self-righteously yesterday that Lay committed fraud in connection with his handling of the matter, primarily because he did not follow each and every one of her recommendations to him.

Meanwhile, Watkins' testimony was downright bizarre regarding her $47,000 in insider trades of Enron stock that she made after delivering her memo to Lay and prior to the company's announcement of the charge to earnings. Despite having certified in a 2002 Enron employment agreement and sworn in Congressional testimony that she had not engaged in any illegal insider trading while at Enron, Watkins yesterday conceded on direct examination that the trades were not "proper" because "I had more information than the marketplace did."

But then, on cross-examination, Lay lawyer Chip Lewis curiously attempted to defend Watkins from a charge of insider trading by pointing out that, at the time of the trades, it was still unclear whether there was anything wrong about the accounting for the Raptor financial vehicles and, thus, she was not trading on material, non-public information.

In the ensuing exchange, Watkins proceeded to dispute Lewis' attempt to portray her trades as not illegal. Tip to Watkins -- keep that defense attorney on your payroll.

Also, Watkins is not going to be getting any holiday greeting cards from Houston-based Vinson & Elkins, which was Enron's primary outside counsel. After accusing V&E of engaging in criminal acts with regard to its handling of the Lay-ordered investigation of the matters raised in her memo, Watkins engaged in the following exchange with Lewis:

Q: Now, in talking about V&E, you would acknowledge with me that they're one of our country's most prominent legal institutions, wouldn't you?

A: Not anymore.

Finally, U.S. District Judge Sim Lake -- who has the patience of Job and administers the trial proceedings with a delightful combination of firmness and grace -- probably had the best observation about Watkins' testimony. After enduring Watkins' continual refusal to respond directly to the question asked on cross-examination, Judge Lake finally turned in exasperation to her and observed:

"You've got to respond to [Mr. Lewis'] questions. We'll be here through the weekend if this keeps up."

Posted by Tom at 4:28 AM | Comments (29) | TrackBack (0)

March 15, 2006

Spitzer's $18 million footnote theory

In this Aaron Lucchetti piece($), the Wall Street Journal continues its fine coverage (see Peter Lattman posts here, here and here) of the Lord of Regulation's ongoing lawsuit against Home Depot co-founder Kenneth Langone and former New York Stock Exchange chairman Richard Grasso over Grasso's supposedly excessive NYSE compensation package and Langone's support of it.

Lucchetti reports today that Spitzer and Langone are preparing for Langone's deposition next week (wouldn't you like to be a fly on the wall of that one), and notes that Spitzer's already dubious case against Langone is now boiling down to whether Langone misled fellow NYSE directors by including a part of Grasso's compensation plan in a footnote of a memo to directors rather than in the body of the memo:

"The footnote on this work sheet could be more clear, but I do believe the committee understood," [former NYSE human-resources director Frank] Ashen said in the deposition regarding the $18 million in bonus payments. Those payments were made in a "Capital Accumulation Plan" that was established for several NYSE executives in addition to Mr. Grasso.

Mr. Spitzer's complaint argues that the CAP awards never should have been put into a footnote but should have been included in the work sheet's "total compensation" column. The complaint specifically cites the compensation work sheet for 1999, saying it doesn't make clear that the CAP award for that year was paid in addition to the figure identified on the work sheet as Mr. Grasso's total compensation. . .

Mr. Spitzer's lawsuit calls for Mr. Langone to "make restitution" to the NYSE for the amount paid to Mr. Grasso that the suit alleges he didn't properly disclose -- in other words, the $18 million. Mr. Langone's response, in a statement yesterday: "He hasn't laid a glove on me."

The trial of the Grasso-Langone case is currently scheduled for late October, so stay tuned. Larry Ribstein comments here on the corporate governance implications of the lawsuit.

Posted by Tom at 6:44 AM | Comments (0) | TrackBack (0)

Futch gets five

Amidst a flurry of sealed pleadings and orders denying his attempt to withdraw his guilty plea, former Reliant Energy natural gas trader Jerry Futch was sentenced to almost five years in prison yesterday by U.S. District Judge David Hittner based on Futch's guilty plea on charges that he provided false information on natural gas trades to publications that produce indexes used to value natural gas contracts.

Here is an earlier post on Futch's case, which raises troubling questions regarding his employer and its counsel's derogation of Futch's self-incrimination and attorney-client privileges.

Posted by Tom at 5:53 AM | Comments (1) | TrackBack (0)

Where is Waldo?, er, I mean Causey?

The mainstream media covering the criminal trial of former key Enron executives Ken Lay and Jeff Skilling continues mostly to miss the point that the prosecution's case over almost seven weeks now has been extraordinarily weak for a case of this magnitude. Virtually all of the substantive testimony has come from prosecution witnesses testifying under draconian plea deals, most of the testimony alleging wrongdoing has been uncorroborated, and documentary evidence to back up claims of wrongdoing has been almost non-existent. Of course, no one knows what effect any of this is having on the jurors, some of whom may already have been swayed to convict simply by the overwhelming media bias against Lay and Skilling.

Yesterday's testimony was a case in point. Three witnesses testified and not one of them came close to implicating either Lay or Skilling in a crime. Vince Kaminski, a former high-level Enron risk analyst, testified that he warned that some of Enron's special purpose entity structures were inherently risky, but that management went ahead with the deals, anyway. Johnnie Nelson, a colorful former Enron pipeline worker who was offered by the prosecution for the transparent purpose of entertaining the jury, testified that he was angry with Lay because he, like Lay, invested virtually all of his personal savings in Enron stock that turned out to be worthless. Finally, Chris Loehr, a seemingly nice young man who worked for one of the special purpose entities that Fastow managed, confirmed that Fastow told him about Fastow's secret "Global Galactic" agreement that supposedly guaranteed that the SPE's would not lose money on a number of their deals with Enron, but could not corroborate Fastow's testimony that Skilling knew about it.

Now, as noted earlier here, there is a prosecution witness who could corroborate Fastow's testimony about the Global Galactic agreement -- former Enron CFO and former Lay-Skilling co-defendant, Richard Causey. Fastow claimed that he worked out the terms of the Global Galactic deal with Causey, who Fastow claimed disclosed it to Skilling. Causey entered into a plea deal with the Enron Task Force on the eve of trial and, thus, is readily available to testify.

But in a stunning development that has gone largely unreported in the media covering the trial, it now appears that the Enron Task Force will not call Causey as a witness to corroborate Fastow's testimony. The NY Times' Alexei Barrionuevo -- Kurt Eichenwald's colleague who is one of the few reporters covering the trial expressing increasing skepticism regarding the prosecution's case -- reports on this development in his latest dispatch on the trial:

A looming question is when, or if, Richard A. Causey, Enron's former chief accounting officer, will testify in the case. He could be crucial to supporting Mr. Fastow's claims that Mr. Skilling was shown a list of side deals that Mr. Fastow kept track of.

Mr. Causey is not on the government's witness list. But prosecutors say that does not preclude them from calling him in a rebuttal that would follow the expected testimony of Mr. Skilling and Mr. Lay. Mr. Causey pleaded guilty to fraud in December, just one month before the trial started.

Mr. Fastow testified for four days about the partnerships and about secret side deals he said he made with Mr. Skilling that guaranteed the partnerships would profit from purchasing distressed Enron assets. But during three days of cross-examination by defense lawyers, Mr. Fastow admitted to stealing tens of millions of dollars from Enron while deceiving his bosses and even his own wife about much of his illicit activity.

The government knew that calling Mr. Fastow brought inherent risks, but chose to call him anyway.

Barrionuevo is spot on. If the Task Force does not call Causey, then that means he cannot corroborate the key testimony of the primary prosecution witness in the trial to date. That would blow a huge hole in what is already a shaky prosecution case and -- if the jurors have not already made up their minds to convict -- could well be the basis of reasonable doubt about the prosecution's entire case.

Where is Waldo?, indeed.

Posted by Tom at 4:20 AM | Comments (5) | TrackBack (1)

March 14, 2006

Fukuyama's pivot on Iraq

Francis Fukuyama is a professor at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins, an award-winning author and a former neoconservative supporter of the Bush Administration's Iraq policy (previous post here).

As a result, Fukuyama's new book -- America at the Crossroads (Yale 2006) -- that summarizes Fukuyama's views on neoconservatism, why he parted ways with other neocons on the Iraq war, and where we go from here is causing quite a stir in foreign policy circles. The NY Times' Michiko Kakutani has this favorable review of Fukuyama's book while the Wall Street Journal's Bret Stephens weighs in with this critical one. Finally, in this NPO piece, Victor Davis Hanson makes the case for holding the line in Iraq.

Posted by Tom at 5:47 AM | Comments (6) | TrackBack (0)

Don't tell Metro about this

This NY Sunday Times article (hat tip to Peter Lattman) reports on the efforts of the wealthy Long Island enclave of North Hills' efforts to use the power of eminent domain -- following last year's controversial U.S. Supreme Court decision in Kelo v. New London (related posts here) -- to condemn the exclusive (and private) Deepdale Golf Club and turn it into a public golf course for the village.

Inasmuch as Deepdale is one of the best golf courses on Long Island, we're not talking about a blighted piece of property. Nevertheless, the village mayor's reasoning for the possible eminent domain action is a truly amazing expression of governmental power:

[Village Mayor Marvin] Natiss has said that a village golf course would be a wonderful amenity for residents. Mr. Lentini once said that making Deepdale a village club would "make North Hills that much more desirable, which would make the properties that much more valuable, which will bring in that many more affluent people."

Left unsaid is that such transparent reasoning could be used to justify the governmental taking of virtually any property.

At any rate, it appears that a part of the village's purpose in going after the club property is that Deepdale is so exclusive that only one of North Hills' 1,800 wealthy residents is a member and, according to Mayor Natiss, "my residents could not get in if they applied" even if they could afford the six-figure initiation fee and annual dues of about ten grand. And, just to make matters more complicated, the land on which the Deepdale course sits is actually owned by a private company that leases the land to the the club at a below-market rate. Inasmuch as at least one of the minority shareholders in the private company wants the private company to sell the land to cash in on his interest, the minority shareholder is supporting the village's effort to acquire the club.

Let's hope that this department is not getting any ideas from North Hills' plans for Deepdale.

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

March 13, 2006

The Bush Administration's pro-business ruse

Earlier posts here, here, and here -- among others -- question the conventional wisdom that the Bush Administration is particularly pro-business in its orientation.

Consistent with that theme, Larry Ribstein notes that the Bush Administration's stance on Sarbanes-Oxley has reflected an appalling lack of leadership in regard to business issues:

The Democrats' position on [modification of] SOX doesn't go far enough, but at least it goes somewhere. It's not that I'm ready to conclude that the Democrats can be trusted as the party of business. But somebody has to defend business's interest, and on the critical issues concerning SOX, it hasn't so far been the Republicans.

Professor Ribstein follows up that post with this one that summarizes his presentation to the American Enterprise Institute on Sarbanes-Oxley.

Meanwhile, Professor Ribstein's skepticism of the Bush Administration's true orientation toward business is mirrored in Bruce Bartlett's new book on Bush Administration fiscal policy, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday 2006), which Publisher's Weekly describes as follows:

Bartlett's attack boils down to one key premise: Bush is a shallow opportunist who has cast aside the principles of the "Reagan Revolution" for short-term political gains that may wind up hurting the American economy as badly as, if not worse than, Nixon's did. As part of a simple, point-by-point critique of Bush's "finger-in-the-wind" approach to economic leadership, Bartlett singles out the Medicare prescription drug bill of 2003— "the worst piece of legislation ever enacted"—as a particularly egregious example of the increases in government spending that will, he says, make tax hikes inevitable. Bush has further weakened the Republican Party by failing to establish a successor who can run in the next election, Bartlett says. If the Reaganites want to restore the party's tradition of fiscal conservatism and small government, he worries, let alone keep the Democrats out of the White House, they will have their work cut out for them.

Interestingly, the Bush Administration does not appear particularly enthusiastic to challenge Bartlett on this thesis.

Posted by Tom at 7:43 AM | Comments (0) | TrackBack (0)

A different kind of favorites list

The ever-observant Ellen Podgor points us to this interesting Paul Wenske/Kansas City Star article that reports on the increasing role of advisors to indicted business executives providing advice on the preferred location for the executives to serve their prison sentence. According to the article, the following are the top five-preferred locations for serving a white collar prison sentence in the federal system:

Yankton, S.D. A stand-alone federal prison camp that is a converted college campus.

Englewood, Colo. Just outside Denver, it is a satellite camp to the federal correctional institution there.

Texarkana, Texas. Has drug and alcohol treatment and offers adult continuing education and correspondence courses.

Sheridan, Ore. In the heart of the south Yamhill River Valley near Portland. Offers college programs.

Pensacola, Fla. Inmates can work during the day at a nearby naval base.

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

The Enron Task Force's unraveling Nigerian Barge case

Early last week, oral arguments were heard in the Fifth Circuit Court of Appeals on the appeal of the four Merrill Lynch executives who were convicted of wire fraud and conspiracy charges in November 2004 in the trial of the Enron-related case known as the Nigerian Barge case.

Reports from those who attended the oral argument indicate that it went well for the appellants, but it may have gone even better had counsel for the Merrill Four known about former Enron CFO Andy Fastow's testimony from this past Thursday afternoon in the ongoing criminal trial of former key Enron executives Ken Lay and Jeff Skilling.

The Enron Task Force contended in the Nigerian Barge case that the Merrill Four were guilty of conspiring with Enron executives to mislead Enron investors in connection with Merrill's purchase of a dividend stream attributable to an ownership interest in some power-generating barges moored off the coast of Nigeria. On a threshold basis, the Task Force's case against the Merrill Four was bizarre because it was Enron, not Merrill, that may have improperly accounted for the transaction, although even that issue was never proven at trial. For its part, Merrill was simply buying a relatively small asset that Enron wanted to sell in Merrill's ongoing effort to ingratiate itself to a potentially good customer of Merrill's investment banking services.

The prosecution's case against the Merrill Four rested almost entirely on the testimony of former Fastow henchmen, Michael Kopper and Ben Glisan, both of whom were deeply involved with Fastow in effectively embezzling money from Enron in connection with Fastow's management of certain special purpose entities. Kopper and Glisan both testified on the key issue in the trial -- i.e., that Fastow made during a December 1999 telephone call a legally unenforceable oral inducement to Bayly that Enron would either buy Merrill's interest in the barges back or broker the interest to a third party, such as LJM2, an Enron SPE -- despite the fact that neither Kopper nor Glisan participated in the telephone call. Inasmuch as Fastow's oral inducement allegedly constituted a "hidden side deal" for Enron to "buy-back the barges," the Task Force argued that Enron's accounting of the transaction as a "true sale" was fraudulent and that the Merrill Four should have known that, so they were guilty of conspiracy.

Remarkably, the prosecution did not call either Fastow or anyone else who actually participated in the key December 1999 telephone call to testify during the trial of the Nigerian Barge case. Nevertheless, the Task Force represented to defense counsel for the Merrill Four that Fastow's testimony in regard to the transaction was consistent with that of Kopper and Glisan. Based on that representation and the weakness of the prosecution's case at trial generally, the defense team of the Merrill Four elected not to call Fastow as a witness during the trial. The jury convicted the Merrill Four, anyway.

With that backdrop, imagine the surprise of counsel for the Merrill Four when they heard about Fastow's following testimony on cross-examination this past Thursday afternoon in the Lay-Skilling trial. After reading a portion of Kopper and Glisan's testimony from the barge trial, Fastow testified as follows:

Q. Now, after having read through those pages [of Glisan and Kopper's testimony], does that refresh your recollection at all about the events that transpired in December of '99 concerning LJM[2] having been approached and what it did in response to that approach about these barges?

A. No, sir. They're largely contradictory to my recollection of events.

Fastow went on to testify at some length on the barge transaction and contradicted key portions of both Kopper and Glisan's testimony from the barge trial, such as the reason why LJM2 elected not to buy the interest in the barges at the time that Merrill bought the interest.

As noted earlier here (see also the thread here), this is not the first example of key testimony from prosecution witnesses in the Nigerian Barge trial being contradicted by testimony of prosecution witnesses in the Lay-Skilling trial. Meanwhile, four former Merrill Lynch executives sit in prison with their lives turned upside down based largely on testimony of prosecution witnesses that the Enron Task Force knew contradicted that of another key prosecution witness who the Task Force elected not to call.

The Department of Coercion, indeed.

Posted by Tom at 4:33 AM | Comments (5) | TrackBack (1)

March 12, 2006

The always entertaining Bill James

Major League Baseball Spring Training is well underway in Florida and Arizona, so it's time to check in on Clear Thinkers favorite, Bill James (previous posts here, here, here, and here), the father of the statistical analysis of baseball called sabermetrics.

In this paper, the always insightful James addresses his increasing recognition of the limitations of sabermetrics:

I have come to realize, over the last three years, that a wide range of conclusions in sabermetrics may be unfounded, due to the reliance on a commonly accepted method which seems, intuitively, that it ought to work, but which in practice may not actually work at all. The problem has to do with distinguishing between transient and persistent phenomena, . . .

James then goes on to explore eight commonly-held sabermetric beliefs about baseball and explains why a majority of them may not be as well-understood as sabermetricians think. The primary reason? Essentially luck.

Then, to get you in the mood for listening to the radio broadcast of your favorite team, listen to this hilarious NPR spoof of what many radio broadcasts of baseball games -- including those of the Stros -- have become in the age of ubiquitous commercial endorsements.

Posted by Tom at 8:19 AM | Comments (1) | TrackBack (0)

March 11, 2006

Department of Coercion

John Hasnas is a professor of ethics and law at Georgetown University's McDonough School of Business and is the author of the new book, Trapped: When Acting Ethically is Against the Law (Cato 2006), which is an adaptation of Hasnas' article Ethics and the Problem of White Collar Crime.

In this superb Cato Institute op-ed (first published in the Wall Street Journal), Professor Hasnas addresses a common topic on this blog -- the perverse effect that implementation of the Department of Justice's Thompson Memo has had on companies serving up their employees as sacrificial lambs to avoid an Arthur Andersen-like meltdown:

Say you run a financial services firm that markets tax shelters to wealthy clients. Although the shelters are aggressive, you firmly believe they're legal. Indeed, you have sent one of your tax partners to testify before Congress to that effect. The IRS hasn't challenged the shelters in court, and no court has declared them to be illegal. Nevertheless, the Department of Justice has opened an investigation of your firm for tax fraud and indicted the partner who testified before Congress.

As a responsible executive, what should you do? Instruct corporate counsel to conduct an internal investigation to ensure that no law has been broken? Have the legal department begin to work on the corporation's defense? Enter into a joint defense agreement with the partner under indictment? Advance the partner's legal fees in accordance with the company's policy of supporting employees sued for employment related actions?

Or should you have the corporation accept responsibility for tax fraud, officially declare that several of your tax partners engaged in unlawful conduct, refuse to enter into a joint defense agreement or advance the legal fees of any of these partners, fire those who refuse to cooperate with the government, waive the firm's attorney-client and work product privileges, disclose all information that may incriminate your employees to the government, and agree to pay a several hundred million dollar fine?

[The latter approach], surprisingly, is the answer. Under current federal law and Department of Justice policy, it would be irresponsible management to attempt to defend the corporation or its employees.

Incidentally, my . . . hypothetical is not a fanciful one. KPMG recently agreed to pay $456 million to avoid indictment for marketing tax shelters that have never been shown to be illegal. It also waived its attorney-client and work product privileges and is helping the government prosecute 17 of its former employees, including a tax partner it sent to testify before Congress. This help includes providing the government with all incriminating evidence in its possession and firing and refusing to advance the attorney's fees of employees who defend themselves rather than cooperate with prosecutors. It also includes agreeing not to retain employees who say anything inconsistent with the indicted employees' guilt, something that neatly precludes the accused from obtaining defense witnesses.

Legally, KPMG is on good grounds in taking these actions. Ethically, the case is considerably less clear.

Read the entire op-ed. The syndrome that Professor Hasnas addresses has resulted in enormous economic cost (see Arthur Andersen, Dynegy, Merrill Lynch, AIG, KPMG, etc.) and damage to lives, families and reputations, perhaps best reflected by the plight of the four Merrill Lynch executives in the Enron-related Nigerian Barge case and the sad case of Jamie Olis.

However, apart from those horrific costs, the most troubling aspect of the government's criminalization of business is the damage to justice and societal respect for the rule of law. As noted earlier here, prosecution of business crimes has become a game of roulette for government prosecutors, who play on an ugly cauldron of public cynicism, resentment, and tolerance for abusive use of governmental power to prosecute the unpopular executive of the moment. When the frightening loss of thousands of jobs and the destruction of careers and families is rationalized as 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. What Ann Rynd reminded us about socialism applies equally well to the abusive exercise of the state's prosecutorial power:

[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 7:46 AM | Comments (13) | TrackBack (1)

March 10, 2006

BAPCPA Interim Rules online

This past Tuesday evening, my old friend Randy Wilhite and I did our annual divorce-bankruptcy class for Randy's Family Law Course at the University of Houston Law Center, and the usual good time was had by all. For those interested in the subject -- which Randy and I characterize as "the train wreck of the law" -- feel free to review my powerpoint presentation and contact me if you desire further information on our presentation.

This year's presentation was particularly interesting because of the impact of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which went into effect this past October. The Advisory Committee on Bankruptcy Rules has approved Interim Bankruptcy Rules and Official Forms for BAPCPA, the purpose of which is to implement BAPCPA's substantive and procedural changes during the gap period between the effective date of BAPCPA and the Supreme Court's promulgation of new BAPCPA rules. These interim rules and forms officially took effect on December 1, 2005, and here is the full text of the new rules and forms. Some of the additional proposed rules and forms remain subject to public comment until February 15, 2006 and, thus, are not yet effective, but you can review the text of those rules here.

Posted by Tom at 8:55 AM | Comments (0) | TrackBack (0)

A real hero

While enduring Andy Fastow's explanations this past week on how he was a hero at times while working at Enron, I've been meaning to note the story of a real hero, Dallas-based blogger and writer, Virginia Postrel.

Check out Virginia's posts here, here and here for the story.

What a gal!

Posted by Tom at 8:33 AM | Comments (3) | TrackBack (0)

Lay-Skilling, Week Six

The Andy Fastow Week of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling drew to a quiet close on Thursday afternoon, which contrasted sharply with the crispness of his heavily-scripted direct examination and the combative opening cross-examination of Skilling lawyer, Daniel Petrocelli. Thus, the corporate criminal trial of the decade is now through six weeks (prior weeks' summaries here), and the Enron Task Force's case against Lay and Skilling continues to shrink before our eyes.

Fastow's testimony drew the largest crowds of trial spectators to date, who appeared to be drawn to Fastow's appearance in much the same way many fans are drawn to NASCAR events to see the collisions. Fastow really is a train-wreck of a witness, and his gaunt appearance on the stand dramatically contrasted with the ebullient nature of Petrocelli, who clearly has become a jury favorite during his entertaining cross-examinations of Task Force witnesses. Normally, a defeated and somewhat pathetic person such as Fastow would tend to draw sympathy from the jury, but Fastow admitted to doing such despicable things that it is decidedly unclear whether even his repeated apologies could generate much juror empathy. Even grizzled courthouse veterans were shaking their heads in disbelief over Fastow's duplicity.

Fastow's brazen conduct in regard to his wife Lea is a case in point. During direct examination, Fastow played the part of a loving and protective husband in resolutely maintaining that his wife was innocent of the tax fraud charges for which she served a year in prison from mid-2004 through mid-2005. However, during the electric opening moments of Petrocelli's cross-examination, it became clear that Fastow had actually hung his wife out to dry while negotiating his own plea deal with the Task Force, and that his gaming of Lea's fate almost certainly contributed to the fact that prosecutors did not believe Fastow's eventual protestations of his wife's innocence. Incredibly, Fastow was apparently so insistent upon negotiating retention of a substantial net worth under his plea deal that he agreed that his and Lea's plea deals would be "cross-collateralized" -- i.e., if Fastow breaches his plea deal, then the Task Force can pursue additional charges against Lea!

Fastow's testimony in regard to his hidden "Global Galactic" memo was almost as bizarre. Fastow testified that the memo outlined a series of secret guaranties that former Enron chief accountant and former Lay-Skilling defendant Richard Causey had supposedly approved with Skilling's alleged blessing. However, Fastow admitted that he had never had Skilling approve the memo directly and that he destroyed the original of the memo soon after he was canned as Enron's CFO. Only after Fastow had cut his plea deal with prosecutors and was attempting to negotiate a better deal for Lea did he come up with a copy of the memo, which Fastow testified that Lea fetched from a safe-deposit box.

However, even that part of Fastow's story was put into question on Thursday when Petrocelli clearly surprised Fastow by showing him that Lea and her attorney -- well-known Houston-based criminal defense attorney, Mike DeGeurin -- had visited the safe-deposit several months earlier and apparently had either not found the copy of the memo in the box or decided not to bring it to Fastow's attention at the time. That bizarre revelation prompted Petrocelli to ask Fastow, "Mr. Degeurin wasn't going to your safe deposit box to retrieve your wife's jewelry, was he?"

So, although Fastow did implicate Skilling in "secret side deals" and undisclosed "bear hug" guaranties, and Lay in supposedly misrepresenting Enron's financial condition after Skilling's resignation, Fastow is such a despicable character that it remains decidedly unclear whether the prosecution gained much of anything with the jury from his testimony. Likewise, it's not a feather in the cap of the Task Force that prosecutors were forced to allow the jury to understand that even they thought the Task Force's most-publicized witness to date was lying to them about his wife's case at the same time while he was cooperating with them in regard to the Lay-Skilling case. However, one thing is absolutely clear from Fastow's testimony -- the prosecution is going to have to put Causey on the witness stand to corroborate Fastow's story on the Global Galactic memo or else the jury is going to sense a massive hole in the prosecution's case.

Moreover, that is not the only problem in the prosecution's case. Through six weeks of its case, the prosecution still has not presented a substantive witness who has not testified under either a plea deal or a non-prosecution agreement. Although that approach is partly the result of the prosecution's strategy in regard to freezing-out testimony that would be exculpatory for Lay and Skilling, the Task Force faces a substantial risk of jury skepticism regarding the prosecution's case if the primary witnesses alleging wrongdoing are doing so under deals in which the are retaining large amounts of money and hedging the risk of a long prison sentence. Perhaps sensing that dynamic, the prosecution plans to call a couple of witnesses next week -- former Enron risk analyst Vince Kaminski and trading analyst David Port -- who apparently will not be testifying under either a plea deal or a non-prosecution agreement with the Task Force.

Consequently, despite the enormous public relations advantage that the Enron Task Force enjoys in this case, my sense continues to be that the Task Force has big problems in making its case in court. Although the Task Force is probably 75% through its case-in-chief, all 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 from Task Force witnesses 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 documentary evidence that corroborates the allegations of wrongdoing has been practically non-existent. On the other hand, the Lay-Skilling defense has been able to submit mounds of documentary evidence that casts doubt on much of the allegations of wrongdoing by prosecution witnesses and the defense has not even begun what will almost certainly be a vigorous and well-orchestrated case-in-chief.

In short, this does not appear to be the stuff of a clear-cut winner for the prosecution.

Posted by Tom at 6:21 AM | Comments (12) | TrackBack (0)

March 9, 2006

Breakfast of Champions?

This SI.com article contains the excerpts from the new book about Barry Bonds' alleged steroid use that has received a fair amount of media play this week.

However, as noted in this earlier post, the issue of whether use of steroids allowed Bonds to hit more home runs than he otherwise would have hit is an entirely different issue and not as clear-cut as most folks assume. Art DeVany has written this paper on the subject and here is the abstract:

There has been no change in MLB home run hitting for 45 years, in spite of the new records. Players hit with no more power now than before. Records are the result of chance variations in at bats, home runs per hit, and other factors. The clustering of records is implied by the intermittency of the law of home runs. Home runs follow a stable Paretian distribution with infinite variance. The shape and scale of the distribution have not changed over the years. The stable Paretian law of home runs generalizes the laws of extreme human performance developed by Pareto, Lotka, Price, and Murray. The greatest home run hitters are as rare as great scientists, artists, or composers.

By the way, don't miss this hilarious DeVany post on taking a meal in a sports bar.

Posted by Tom at 5:42 AM | Comments (1) | TrackBack (0)

Eliot Spitzer's next investigation?

While the Lord of Regulation engages in one of his more dubious forms of business regulation, this NY Times article reports on a study that could really get people's attention as the NCAA Basketball Tournament cranks up next week:

College basketball is a big business today, and betting on it is not merely a sideline for mobsters. It is a national pastime.

One thing about the sport, however, has not really changed since Henry Hill's day. Of all the major forms of betting — lotteries, poker, craps, slots, football — college basketball is almost certainly the easiest to fix.

It is played by young men who don't usually have a lot of money. With just five players on the court, one person can determine the outcome. And the point-spread system, in which bets are based on the margin of victory rather than wins and losses, allows players to fix a game without losing it.

"There's every reason to think this is as bad as it gets," Justin Wolfers, an economist at the University of Pennsylvania, said.

Mr. Wolfers, a blond pony-tailed Australian, calls himself part of a new generation of forensic economists — researchers who sift through data to look for patterns of cheating that otherwise go unnoticed. . .

You can probably guess where this is going. Mr. Wolfers has collected the results of nearly every college basketball game over the last 16 years. In a surprisingly large number of them, it turns out that heavy favorites just miss covering the spread. He considered a number of other explanations, but he thinks there is only one that can explain the pattern. Point shaving appears to be occurring in about 5 percent of all games with large spreads. . .

Read the entire article. The bottom line -- be careful in betting the favorite in games with big point spreads.

Posted by Tom at 5:11 AM | Comments (2) | TrackBack (0)

March 8, 2006

The "Carly-got-overpaid" lawsuit

So, two Hewlett-Packard shareholders filed the seemingly inevitable lawsuit yesterday against the company contending that a $21.4 million severance package provided to former CEO Carly Fiorina violated the company's policy on executive compensation. Previous posts on Fiorina's reign at HP are here.

Although the corporate case of decade would appear to be fairly persuasive authority for dismissal of this lawsuit, the cause of action might survive simply because of a dispute over the technical issue of valuation of Fiorina's severance package.

Nevertheless, as I recall, HP stock was trading at around $19 per share at the time of Fiorina's forced resignation in early 2005. The stock closed at $32.96 yesterday. Rather than criticizing the severance package for Fiorina, shouldn't HP shareholders be celebrating the wisdom of the HP board in cutting Fiorina loose even with a generous severance?

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

The increasingly bizarre case of Lea Fastow

As expected, the media is all over the well-scripted direct examination of former Enron CFO Andy Fastow, although some media sources are already questioning the credibility of some of Fastow's direct testimony. However, given the breadth of Fastow's direct examination, the media has not yet focused on the absolutely bizarre testimony that Fastow gave yesterday on the sad case of his wife, Lea Fastow.

As noted in these previous posts, the Enron Task Force prosecuted Mrs. Fastow on tax fraud charges more harshly than normal -- and she endured longer and harsher punishment (one year in prison) -- because of her relationship to Mr. Fastow. In that regard, as noted in this previous post, Fastow filed an affidavit in his wife's criminal case during 2003 in which he swore that "I never, and to my knowledge and belief, Michael Kopper never, agreed or conspired with Lea Fastow to commit the crimes alleged in Counts 1 and 2 of Lea's indictment."

The purpose of that affidavit was to support a motion requesting that Mrs. Fastow's trial be put off until after Mr. Fastow's criminal trial so that Mr. Fastow could testify on his wife's behalf without waiving his Fifth Amendment privilege against self-incrimination, although Mr. Fastow's affidavit comes pretty darn close to waiving it, at least in regard to the tax fraud charges. U.S. District Judge David Hittner ultimately denied that motion and scheduled the case against Mrs. Fastow to trial, which prompted both Fastows to have their plea deals with the Enron Task Force approved in May, 2004. By that time, Mr. Fastow had been cooperating with Task Force prosecutors for since at least January, 2004 and Mrs. Fastow had withdrawn from an earlier plea deal with prosecutors after Judge Hittner had rejected it. Judge Hittner proceeded to sentence Mrs. Fastow to a year in prison, which she has completed.

With that backdrop, Fastow attempted to explain during the early afternoon portion of his testimony yesterday the statements that he made in the affidavit that he filed in his wife's criminal case. Apparently, Fastow contends that his affidavit was technically truthful because it says that he and Kopper did not conspire with Mrs. Fastow to commit tax fraud. Left unsaid in the affidavit is that Fastow and Kopper did conspire with each other to commit tax fraud; they just didn't include Mrs. Fastow in that conspiracy.

So, let's get this straight. While cooperating with Task Force prosecutors, Fastow tells prosecutors that his wife is innocent of the tax fraud charges. Either the Task Force prosecutors did not believe him and proceeded with the criminal case against Mrs. Fastow, anyway, or the Task Force prosecutors believed him and proceeded with the criminal case against Mrs. Fastow, anyway.

If the reason that the Task Force proceeded against Mrs. Fastow is that they didn't believe Mr. Fastow, that certainly doesn't say much for the credibility of one of the prosecution's key witnesses in the case against Skilling and Lay. On the other hand, if the prosecutors believed Mr. Fastow and proceeded with the criminal case against an innocent Mrs. Fastow, anyway, that is an egregious example of the type of prosecutorial misconduct that has plagued the Task Force's entire investigation of the Enron scandal.

Cross-examination of Mr. Fastow is going to be very interesting.

Posted by Tom at 5:57 AM | Comments (6) | TrackBack (4)

Be careful what you ask on re-direct

As predicted yesterday, the media frenzy over former Enron CFO Andy Fastow's testimony relegated the previous Enron Task Force witness -- former Enron Broadband chief operating officer Kevin Hannon -- to obscurity rather quickly. However, before leaving the stand, the final moments of Hannon's testimony yesterday reminded me that a lawyer should always be extra-careful about what to ask the witness during re-direct examination.

As noted here, one of the Enron Task Force's main themes last week during the testimony of former Enron Energy Services executive David Delainey and a couple of other witnesses was that Skilling engineered a reorganization of the Enron Energy Services ("EES") unit in a manner that hid trading losses of that unit underneath the blanket of high profits being generated by Enron's top-flight trading unit, Enron Wholesale. During cross-examination, Skilling's lawyers challenged Delainey and the others by suggesting that the true purpose of the reorganization was simply business efficiency -- to combine EES' poorly-performing trading operation with the better trading expertise of the Wholesale unit. Delainey, in particular, generally contested that defense contention during cross-examination.

Which leads us to the following exchange between Task Force prosecutor Cliff Stricklin and Hannon during redirect examination yesterday:

Q. And what did [Enron Wholesale CEO] Mr. Whalley, first of all, remind the jury who Mr. Whalley was at the time?

A. He was the CEO of Wholesale.

Q. And what did Mr. Whalley tell you about the rationale for Mr. Skilling moving EES into Wholesale?

A. He said he had met with Dave Delainey, who was depressed over the state of the EES business and he said we had to do something. I didn't want Dave to quit, so we made the argument to Arthur Andersen that we should move the risk folks [from EES] into Wholesale.

Q. And why?

A. To improve the operation of EES [was] my impression.

Mr. Stricklin quickly moved on to another line of questioning, but it's hard to downplay testimony of a prosecution witness that directly contradicts a major theme of the testimony of the prosecution's previous witness.

Be careful what you ask on re-direct.

Posted by Tom at 4:27 AM | Comments (7) | TrackBack (0)

March 7, 2006

More on rearranging the deck chairs on the Titanic

A day after the news of the latest big merger, the WSJ's Melanie Trottman reports here ($) that the merger of U.S. Airways and America West Airlines is having, ahem, might we say, "cultural problems":

As executives try to figure out how to make the newly merged US Airways Group Inc. profitable, employees from both sides of the merger are squabbling over everything -- from choosing uniforms to more weighty issues such as how to determine seniority for pilots and how to manage discounted free-flight privileges for workers.

Last month, violence erupted at a Philadelphia airport hotel between members and officials of unions vying to represent the fleet-service workers of the combined airline. According to the police, 25 members of the premerged US Airways' fleet-service workers union showed up at an open meeting conducted by five organizers for the union that represents fleet-service workers at America West, telling them to leave. When they didn't, the entrants started to fight and throw chairs at the five organizers, according to police.

Read the entire article. Inasmuch as US Airways has been in chapter 11 twice over the past several years and America West has also been through a chapter 11 reorganization in its past, the next chapter 11 reorganization of this merged airline would technically be a chapter 44 (4 X 11) case, which I believe would be a record for even the notoriously reorganization-prone airline industry.

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

Leif Clark denies motion on grounds of incomprehensibility

The indefatigable Peter Lattman shares with us this hilarious opinion by Bankruptcy Judge Leif Clark of San Antonio, who cites a scene from the Adam Sandler movie, Billy Madison, in concluding that "[t]he court cannot determine the substance, if any, of the Defendant’s legal argument, nor can the court even ascertain the relief that the Defendant is requesting. The Defendant’s motion is accordingly denied for being incomprehensible.”

A friend of mine commented that Judge Clark's opinion reminded him of Houston-based U.S. District Judge Lynn Hughes' reaction several years ago to a particularly illiterate FDIC motion to substitute counsel. After marking up the proposed form of order to delete surplusage, Judge Hughes wrote the following message in bold pen under his signature to the attorney who had drafted the motion:

"How did you write before your lobotomy?"

Posted by Tom at 3:10 AM | Comments (2) | TrackBack (2)

The risk of going for the cheap score

Former Enron Broadband chief operating officer Kevin Hannon will finish his testimony today in the trial of former key Enron executives Ken Lay and Jeff Skilling. Most likely, with the testimony of former Enron CFO Andy Fastow to follow, Hannon's testimony will quickly fade into obscurity.

However, the nature of the media reporting on Hannon's testimony from last Thursday afternoon got me to thinking. The prosecution went for a cheap score with Hannon by eliciting from him that Skilling had supposedly admitted during a May 2001 meeting with a group of other Enron executives that "they're on to us" after a small analyst firm had produced a research note critical of some Enron transactions. Most of the media covering the trial (representative examples: NY Times and Houston Chronicle) seized on Hannon's statement as gripping testimony that could prove to be highly probative in the government's case against Skilling.

Well, maybe so, but doesn't Hannon's testimony really undermine the government's case? The report that supposedly prompted Skilling's remark was based on negative information about Enron that the company had made available to the efficient securities market. The report was not even a particularly novel analysis of Enron, given that it came a couple of months after Peter Elkind and Bethany McLean's much-bantered Fortune article that suggested that Enron stock was overpriced. Despite the negative inference that Hannon attributed to Skilling's alleged comment, it's at least just as likely that Skilling -- if he made the statement at all -- was making light of the report to a group of company executives while emphasizing that his more optimistic opinion of the same information should also be made known to the markets.

But more importantly, how does the Enron Task Force square the report's negative evaluation based upon information that Enron disclosed to the efficient securities markets with its core allegation that Skilling withheld such information from the markets?

Call it the risk of going for the cheap score. The prosecution went for testimony that seemed damaging to Skilling on its face, but in substance is counterproductive to the prosecution's case. By the time Skilling lawyer Mark Holscher had elicited from Hannon on cross-examination yesterday that previous anti-Skilling witness David Delainey had also attended the meeting and heard Skilling's supposed dramatic admission, but somehow failed to recall it in his testimony last week, it would not be surprising if the jury is, might we say, skeptical of Hannon's testimony about Skilling's statement and of the prosecution's motive in eliciting it.

All of which just reinforces that Lay and Skilling will never win their case in the court of public opinion. But they still just might win it in court.

Posted by Tom at 3:00 AM | Comments (2) | TrackBack (0)

March 6, 2006

And you thought that Southlake Carroll football was competitive?

Southlake Carroll High School is a suburban Metroplex high school that, over the past decade or so, turned into a proverbial Texas high school football powerhouse. This past season, the Dragons won their second straight Texas 5A-Div. II championship and were named the mythical no. 1 high school football team in the country by USA Today.

However, according to this Ft. Worth Star Telegraph article, as tough as competition is in the Southlake football program, it's nothing compared to the competition in the cheerleading program:

SOUTHLAKE -- The Carroll school district has been consumed for weeks about how to handle the selection of cheerleaders for Carroll Senior High School's varsity squad.

Investigations have been conducted, grievances filed and several meetings held between administrators and parents. Tonight, the school board will convene behind closed doors to consider a request by parents of 12 cheerleaders to cut more than half the squad members, who the parents say don't deserve to be on the team. . .

Read the entire sordid tale, which does not mention the possible solution of forming a parent-cheerleader team at Southlake to mollify the demands of several of the mothers involved.

Posted by Tom at 7:08 AM | Comments (3) | TrackBack (1)

Can SBC, er, I mean, AT&T swallow BellSouth?

Last year, San Antonio-based SBC Communications swallowed the much smaller AT&T Corp., but then started using the venerable AT&T brand for the merged company. This year, SBC/AT&T is attempting to eat BellSouth Corp. in an estimated $67 billion deal, which is a much larger acquisition than the SBC-AT&T merger of last year.

The proposed merger continues a trend in the telecommunications industry over the past several years that really is a reaction to what happened in the industry after the court-ordered 1984 breakup of the old AT&T or "Ma Bell." That break-up led to a restructuring of the entire industry and then the landmark 1996 Telecommunications Act enhanced head-to-head competition between phone companies for customers.

Since that time, long-distance phone rates have decreased substantially as consumers have many more options for such service. Meanwhile, cable companies are increasingly offering phone service as part of their consumer packages, declining prices on wireless calling plans have induced some consumers to forego traditional landlines entirely, and broadband connections are generating an entirely new new industry that allows calls to travel over the Internet.

Thus, in the wake of that competition, AT&T CEO Edward Whiteacre justified the new merger because AT&T needs "a bigger footprint. The world is changing. There is more competition." Maybe so, but as with Hewlett-Packard's acquisition of Compaq and Comcast's failed bid for Disney, is the acquisition price for BellSouth so high that -- as Professor Ribstein has observed -- it takes a near-delusional synergy theory for AT&T management to justify it?

Posted by Tom at 6:29 AM | Comments (0) | TrackBack (4)

Oral argument today in the Nigerian Barge appeal

Oral argument takes place today at the Fifth Circuit Court of Appeals in New Orleans in the appeals of Dan Bayly, Robert Furst, James Brown and William Fuhs, the former Merrill Lynch executives who were convicted of wire fraud and conspiracy charges in November 2004 in the trial of the Enron-related case known as the Nigerian Barge case.

The plight of the Merrill Four in the Nigerian Barge case is a case study in the dubious nature of the government's criminalization of business in the post-Enron era (for a thorough discussion of that subject, begin here). In the barge case, the Task Force took a finance transaction between Enron and Merrill Lynch and criminalized it through a brazen web of distortion, suppression of key testimony, inadmissible hearsay, opposition to the defense's jury instruction on the key issue in the case and prosecutorial misconduct. In short, the Task Force effectively prosecuted the Merrill Four for doing their jobs in connection with the firm's purchase of a dividend stream for which Enron, not Merrill, may have improperly accounted, although even that issue was never proven at trial.

Then, to make matters worse, the Task Force at trial played on the jury's hindsight bias and presented to the panel a fictional screenplay of the underlying transaction while effectively effectively preventing the Merrill Four from presenting exculpatory testimony and evidence that contradicted the Task Force's fictional account. The Task Force is deploying precisely the same deplorable tactics in the ongoing trial of former key Enron executives Ken Lay and Jeff Skilling.

Interestingly, part of the key testimony that the Task Force has elicited to date during the Lay-Skilling trial contradicts an important part of the testimony that it presented in convicting the Merrill Four during the Nigerian Barge trial. In Lay-Skilling, the Task Force had former Enron investor relations chief Mark Koenig testify that he learned on January 14, 2000 -- just days before Enron was scheduled to publish its fourth-quarter 1999 financial statement -- that earnings were likely to be 30 cents a share, a penny below the 31 cents a share that had been forecast on Wall Street. Koenig then testified that he alerted Enron's CFO, Richard Causey, that the company would miss its forecast and that, on January 17 -- the day before the earnings report was scheduled to be publicly released -- he saw a draft memo saying that the company would earn 31 cents a share. On Jan. 19, the day after the earnings release, Koenig testified that he discussed the sudden change with Lay, who seemed surprised and allegedly observed to Koenig that "he went to bed and we were at 30 cents and, when he woke up, we were at 31 cents."

In contrast, during the barge trial, the Task Force elicited extensive testimony and contended during closing argument that Enron's motivation to arrange the barge transaction with Merrill Lynch in December 1999 was to help Enron hit its earnings target of 31 cents per share, not the 30 cent-per-share target that Koenig in his Lay-Skilling testimony suggested was the company's true target until just days before the January 18 earnings release. Thus, the Task Force's evidence in the barge trial that Enron's earnings target in December 1999 was 31 cents per share directly contradicts Koenig's testimony in Lay-Skilling that the company increased its earnings target by a penny-per-share just days before the January 18, 2000 earnings release.

So it goes in the wacky world of criminalizing corporate agency costs.

Meanwhile, Alexei Barrionuevo and Kurt Eichenwald of the NY Times provide this article today in which they summarize the testimony to date in the Lay-Skilling trial and observe that this week's star witness -- demonized former Enron CFO Andy Fastow -- may end up being just another witness in the trial.

Posted by Tom at 4:09 AM | Comments (1) | TrackBack (0)

March 5, 2006

Warren Buffett Live!

Warren Buffett's annual letter to Berkshire Hathaway shareholders is always entertaining (previous letters here and here), but this year's edition contains so much levity that Buffett could use it as the script for a guest stand-up routine on Leno, Letterman or Comedy Central. My favorite observation is the following one on the subject of picking good managers for Berkshire's businesses:

The attitude of [Berkshire's] managers vividly contrasts with that of the young man who married a tycoon's only child, a decidedly homely and dull lass. Relieved, the father called in his new son-in-law after the wedding and began to discuss the future:

"Son, you're the boy I always wanted and never had. Here's a stock certificate for 50% of the company. You're my equal partner from now on."

"Thanks, dad."

"Now, what would you like to run? How about sales?"

"I'm afraid I couldn't sell water to a man crawling in the Sahara."

"Well then, how about heading human relations?"

"I really don't care for people."

"No problem, we have lots of other spots in the business. What would you like to do?"

"Actually, nothing appeals to me. Why don't you just buy me out?"

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

March 4, 2006

Baseball Prospectus 2006

Any brief perusal of the Stros/Baseball category of this blog will reflect that I am a big supporter of the folks at Baseball Prospectus, who produce the flat-out best research and analysis of baseball on the planet. A couple of days ago I received my copy of Baseball Propectus 2006 and, as usual, it's combination of witty writing and first-rate statistical research and analysis makes it essential reading for anyone who wants to keep up with the current status of MLB teams and players. I actually take my copy of Baseball Prospectus with me to each of the many Stros games that I attend each season.

The lastest edition of Baseball Prospectus -- as with the past two annual editions -- is bearish on the Stros, primarily because of the club's reliance on high-priced aging stars Bagwell and Biggio and an overall lack of talent in the farm system. My more optimistic appaisal of the Stros allowed me to one-up Baseball Prospectus in predicting that the Stros would be a playoff club last season (pre-season post here), although I must admit that -- during both of the past two seasons -- there were times that I was ready to throw in the towel on the Stros, too.

This year's edition of BP continues its pessimistic tone toward the Stros because of the club's failure to correct an overall lack of hitting, but my sense is that BP's overall negative tone is overblown due to BP's under-appreciation of the Stros' pitching talent, both at the MLB club level and in the farm system. Not only can the Stros continue to to be a playoff-caliber club based on their pitching, the club can patiently sit back and wait to parley some of the club's pitching depth for a hitter or two that would improve the overall balance of the club.

Nevertheless, BP's capsule summaries of each MLB player continue to be priceless, as reflected by BP's following analysis of Clear Thinkers' whipping boy Brad Ausmus and Stros' pitcher Brandon Backe: First, Ausmus:

There are few players in the history of baseball who have been as consistently bad and consistently on the field as [much as] Ausmus. His offensive production has been a significant problem for every team he's ever been on. Sherri Nichols long ago coined the "Nichols Law of Catcher Defense," which states that a catcher's defensive reputation will be inversely proportional to his offensive contribution. This is certainly true in Ausmus' case, as is the unstated corollary that one's clubhouse rep will also behave in said fashion. Though Ausmus' Gold Glove is worthy of its luster, it can't begin to make up for the runs forgone. Apparently ravenous for players likely to post on OPS within 40 points of 625, the Astros have re-upped Ausmus for two more out-encrusted seasons.

And then Backe:

Pretty much a vanilla #5 starter. Backe's missing a great pitch and has a pretty generic repertoire. No one expects him to develop into anything more than Kyle Lohse, but with a bat comparable to Brad Ausmus. Think we jest? Backe's a career .246 BA/.303 OBA/.393 SLG hitter with an ERA a shade under 5.00. Ausmus is a .255/.332/.353 hitter, and he doesn't even pitch.

Meanwhile, although BP is not particularly enamored of the talent in the Stros' farm system, check out the following description of the farm system of one of the Stros' Central Division competitors, the Cincinnati Reds:

The Cincinnati Reds player development system is worth of the term "farm" only in the sesne that the Stalinist collectives of the 1930's Ukraine were a farm system -- they caused millions to starve to death. While the Reds system is unlikely to cause widespread famine, the club will have to subsist on a truly thin diet in the next few years; the organization is almost completely bereft of blue chip talent.

Posted by Tom at 7:01 AM | Comments (3) | TrackBack (0)

March 3, 2006

Is the Flagship Hotel this hard up?

I knew from my friends with Galveston homes that the venerable Flagship Hotel had seen its better days, but I didn't realize that it had come to this:

United States Attorney Chuck Rosenberg announced today the return of a 39-count indictment charging Daniel Yeh, 52, of Sugar Land, Texas, with 22 counts of wire fraud and 17 counts of filing false claims against the Federal Emergency Management Agency (FEMA). Yeh is the principal owner of Flagship Hotel Ltd., which operates the Flagship Hotel (Flagship), located at 2501 Seawall Boulevard in Galveston, Texas.

Yeh is accused of wire fraud and filing false claims totaling at least $232,000 in connection with disaster relief lodging programs for hurricane evacuees funded by FEMA’s Public Assistance Program. . . . Yeh is accused of filing fraudulent claims for reimbursement for

(1) rooms in the names of hotel employees who previously stayed at the Flagship free of charge as part of their employment arrangement;

(2) rooms in the name of supposed hurricane evacuees on dates when those rooms were occupied by paying hotel guests with different names;

(3) rooms occupied by friends, relatives, and employees of his wife’s business, who were recruited to stay at the hotel, but were not evacuees;

(4) rooms in the names of supposed hurricane evacuees who never had rooms at the Flagship;

(5) rooms in the name of supposed hurricane evacuees on dates when those rooms were unoccupied; and

(6) for multiple rooms in the names of a single guest when, in fact, the guest occupied fewer rooms than billed.

Each of the twenty-two wire fraud counts carries a punishment of up to 20 years imprisonment and a fine of up to $250,000. Each of the seventeen false claim counts carries a punishment of up to five years imprisonment and a fine of up to $250,000.

Hat tip to the ever-observant Peter Henning for the link to the DOJ press release.

Posted by Tom at 8:15 AM | Comments (0) | TrackBack (0)

The San Antonio Marlins?

Following on this earlier post, this Miami Herald article reports that the Florida Marlins, beset by lease and attendance problems, are seriously focusing on San Antonio as its most likely relocation target:

[Marlins President] Samson said the Marlins are ''very encouraged'' about how aggressively San Antonio is pursuing the Marlins and that the city is ''under very serious consideration.'' Samson always has said the Marlins prefer to remain in South Florida, but stadium talks remain stalled.

San Antonio was the first city the Marlins visited after receiving permission to explore relocation. ''I imagine there will be another visit there,'' Samson said.

San Antonio is presently preparing a stadium financing plan, which will be submitted soon to the Marlins and Major League Baseball. With a stadium located with good access from both the San Antonio and Austin metro areas, my sense is that the Marlins could do quite well in San Antonio, which -- along with Austin -- is a hotbed of baseball interest.

However, San Antonio's leaders may want to get the Chamber of Commerce in line with their effort to attract the Marlins.

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

Lay-Skilling, Week Five

The pace of the Enron Task Force's legacy case against former key Enron executives Ken Lay and Jeff Skilling continued to pick up pace during its fifth week (earlier weekly summary posts here), but that quicker pace is highlighting an unusual aspect of the trial -- that is, the Task Force's case appears to be shrinking dramatically before our very eyes.

After years of a highly-publicized propaganda campaign against anything having to do with Enron, after bludgeoning plea bargains from over a dozen former Enron executives, after alleging the biggest criminal conspiracy in the history of federal prosecutions and after issuing a 66-page indictment against Lay and Skilling that is so far afield from what is going on in court that the prosecutors don't want the jury to see it, the Task Force's case is coming down to a complex jumble that relies heavily on innuendo and requires the jury to connect the dots of amorphous points that the Task Force is hoping will be enough to convict Lay and Skilling.

This week's testimony was a case in point. The Task Force's main theme was that Enron was so successful in making money in its trading operations that it allowed Lay and Skilling to soft-pedal to the investing public the losses that Enron was incurring in a couple parts of its business. Mind you, the Task Force is not suggesting that Lay or Skilling was involved in approving fraudulent accounting; rather, the Task Force alleges that Skilling engineered a reorganization of an Enron business unit in a manner that hid losses of the poorly-operating unit underneath the blanket of high profits of Enron's trading unit. According to the Task Force, the hiding of these losses, along with over-reserving to hide excess profits of the trading unit, allowed Skilling -- and presumably Lay, although he was almost an afterthought this week -- to misrepresent Enron as a stable logistics company than a more volatile trading company, which the Task Force contends would not have been as highly valued in the marketplace.

Thus, as noted in this earlier post, the prosecution of Lay and Skilling is shaping up as the purest prosecution of corporate agency costs in the post-Enron era. The underlying message of this prosecution is that an executive of any publicly-owned corporation better disclose every bit of bad news about their company or risk prosecution -- under the sharp lens of hindsight bias -- for misleading the investing public about the true health of the company. If the Task Force's approach is successful against Lay and Skilling, one would wonder why any executive of a publicly-owned corporation would risk saying anything to analysts and the investing public other than "go read the financial statements in our regulatory filings. It's all there."

Amidst this muddle, the Task Force continues to show clear signs of desperation. One such sign is that the Task Force continues to fumble about in regard to the order of its witnesses, a problem that drew the rare ire of the remarkably patient Judge Lake early this week. Moreover, the Task Force continues to rely heavily on testimony from witnesses who are testifying under cooperation agreements with the Task Force under which the witnesses hedged the risk of a long prison term and the loss of millions in return for their testimony. Is the jury really going to believe that the biggest corporate conspiracy in history was hidden from everyone except the relative few Enron executives who have copped pleas or entered into non-prosecution agreements?

An even bigger problem for the Task Force is that the testimony of the cooperating witnesses has been all over the map in regard to their conduct. Mark Koenig testified that he lied a few times while touting Enron. Paula Rieker testified that others lied, but she did not -- she only "overstretched" a few times. This week's star prosectution witness, former Enron Energy Services executive David Delainey, testified that he lied all the time. Wes Colwell, a former Enron trading unit accountant, incredibly testified that he was involved at Enron in defrauding Tom Bauer, a former Andersen accountant with whom Colwell is now in business!

Meanwhile, there is no documentary evidence that any of these cooperating witnesses thought they were lying at the time of the alleged crimes and no meaningful evidence that they even told anyone that they thought they were lying. Meanwhile, the defense has introduced on cross-examination large amounts of documentary and video evidence that the cooperating witnesses appeared to be working hard under difficult conditions to help Enron's cause. Is the jury going to believe that all of these witnesses were such good liars? And, if so, will the jury believe that they were lying then or lying now on the stand?

Seemingly sensing this dynamic, the Task Force elicited testimony at the end of the week from its latest cooperating witness -- former Enron Broadband executive Kevin Hannon -- that Hannon had actually participated in a meeting with Skilling, Lay and others in May 2001 in which Skilling supposedly admitted that an analyst's report at the time had finally figured out his elaborate fraud on the market. Testimony for the week closed with Hannon still under direct examination from the prosecution, so no cross-examination has occurred. But just how likely is it that such a significant meeting took place and Skilling made such incriminating statements, and yet none of the half-dozen previous former Enron executives who have testified during the trial were told about it by either Hannon or any other participant in such meeting? Stay tuned on that issue.

Consistent with the shrinking nature of the prosecution's case, the Task Force announced this week that it is over halfway through with putting on its case in chief and expects to be through presenting its case by the end of this month. Inasmuch as the Task Force originally estimated that it would take 36 days (i.e., nine weeks) to put on its case, assuming an equal amount of time on cross-examination to that spend on direct. Even though the Task Force took more time than was necessary or advisable with its initial witness Koenig and cross-examination has been taking far longer than direct, the Task Force is now over halfway through presenting its case. That's another indication that the Task Force is literally adjusting its theory of the case "on the fly" during the trial, and that it has concluded that it cannot prove the vast majority of what it alleged in its charging documents against Lay and Skilling.

Next week should be particularly interesting as demonized former Enron CFO Andy Fastow -- the architect of Enron's special purpose entities or "SPE's" -- takes the stand after Hannon. Fastow was a notoriously volatile fellow -- at least to subordinates -- while at Enron, and it will be interesting to see whether his demeanor has changed since he copped a plea deal with prosecutors back in early 2004. On the other hand, the Task Force's case to date has wandered away from the SPE's, so there is a decent chance that a difficult-to-control Fastow could end up being a not-so-important witness in the ever-changing big scheme of this corporate criminal case of the decade.

Posted by Tom at 5:07 AM | Comments (4) | TrackBack (0)

March 2, 2006

Graceless

Looks as if Bill O'Reilly is not the only prominent television pundit who is a tad wacky.

This NY Observor article (hat tip to Walter Olson) reveals that CNN personality Nancy Grace is playing fast and loose with background facts that bear on the motivation for her crime-busting agenda.

Beward of the demagogues.

Posted by Tom at 6:59 AM | Comments (1) | TrackBack (0)

The Sea Sponge brief

The Latin phrase sua sponte is often used in legal pleadings to refer to actions that the court takes in a case on its accord or motion. But this Law.com article ($) indicates that Santa Cruz, CA lawyer Arthur Dudley's use of that phrase will never quite be the same:

In an opening brief to San Francisco's 1st District Court of Appeal, a search-and-replace command by Dudley inexplicably inserted the words "sea sponge" instead of the legal term "sua sponte," . . .

"Spell check did not have sua sponte in it," said Dudley, who, not noticing the error, shipped the brief to court.

That left the justices reading -- and probably laughing at -- such classic statements as: "An appropriate instruction limiting the judge's criminal liability in such a prosecution must be given sea sponge explaining that certain acts or omissions by themselves are not sufficient to support a conviction."

And: "It is well settled that a trial court must instruct sea sponge on any defense, including a mistake of fact defense."

The sneaky "sea sponge" popped up at least five times.

At least grizzled courthouse veterans are honoring Dudley with a new characterization of the legal duty involved in his case:

The faux pas has made Dudley the butt of some mild ribbing around Santa Cruz. Local attorneys, he said, have started calling his unique defense the "sea sponge duty to instruct."

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

Criminalizing the business reporters

The increasing criminalization of business took an interesting turn earlier this week when the Securities and Exchange Commission's San Francisco office subpoenaed email and other documents from several journalists, including one who works at Dow Jones Newswires, another at MarketWatch.com, and even TheStreet.com and its co-founder, "Mad Money"'s James Cramer, who, ironically, is a buddy of that subpoena-issuing machine, New York AG Eliot Spitzer. My younger son -- a big fan of Cramer's off-the-wall show -- got a big kick out of Cramer rebelliously throwing the subpoena on the floor during his television show.

The subpoenas started flying after the online retailer Overstock.com accused a hedge fund and a stock-research firm of manipulating the media to drive down the price of its stock for the purpose of profiting through shorting Overstock.com stock (this tactic is described earlier here and here). It apparently meant little to the SEC Enforcement Division that the reporters were simply doing their job of tapping sources for information and then reporting that information to investors who make informed judgments in buying and selling stocks. Some of those sources may have even profited from shorting Overstock.com stock. Who knows and, frankly, who cares? So long as reporters are reporting what they learn and are not bribed to do so, they are simply doing their jobs and fulfilling their role in the complicated workings of efficient financial markets.

Then, in an extraordinary development, SEC Chairman Christopher Cox called off the SEC Enforcement Division dogs and issued a public rebuke of the division for failing to obtain his approval for issuing the subpoenas in the first place. Although I am occasionally critical of the media's reporting on the increasing criminalization of business by various governmental entites, I viewed Cox's action as a good thing and an indication that he was intent upon implementing responsible oversight of dubious regulatory initiatives that has been sadly lacking in the SEC and the Department of Justice in the post-Enron era.

With that backdrop, I was surprised to read Chronicle business columnist Loren Steffy's column today in which he calls for Cox's resignation as a result of his pullback of the subpoenas. Steffy, who generally favors more regulation of financial markets than I think is necessary or advisable, contends that Cox's action improperly politicizes the decision-making process within the SEC Enforcement Division and effectively portends an anti-enforcement policy of regulatory rules. That this position is difficult to square with his earlier column on shorting generally (related blog post here) makes no difference to Steffy -- Cox must go to save the cause of regulation protecting investors from the greedy business crooks.

Well, someone needs to take up the cause of the business reporters and I'm glad to do it. The SEC subpoena flap reflects a misguided desire to control financial information, which is precisely the mindset that generated Regulation FD, the regulation that bars publicly-traded companies from sharing certain information with analysts before it is broadcast to the public. The fact that Regulation FD is based upon a myth has not stopped various governmental entities from pursuing questionable investigations and prosecutions of various business executives who -- in the regulators' view -- misstate positive or negative news about their company. The SEC subpoenas took that dubious policy one step further by threatening journalists who are simply doing their jobs of reporting information that markets rely upon. It is with more than a touch of irony that the SEC subpoenas targeted the same media that the SEC and Spitzer-type prosecutors use in their propaganda campaigns against the unpopular businessperson of the moment.

At the end of the day, I'm not too concerned about this governmental assault on the journalists because the reporters have the rather powerful protection of the First Amendment on their side, which is a defense that the Ken Lay, Jeff Skilling and Hank Greenberg's of the businessworld do not have in their battles with the government. However, here's hoping that the media's experience of being the recipient of such dubious governmental initiatives has the beneficial effect of making the media more skeptical of the government's motives and tactics in such cases and leads to a more reasoned analysis of whether the staggering costs of such regulation-through-criminalization is really in the public interest.

Update: This OpinionJournal piece makes several of the same points that I address above and more.

Update II: Loren Steffy responds and clarifies his position on his blog.

Update III: As usual, Larry Ribstein has a common sense view toward the assault on the shorts:

But we shouldn’t let these relatively side issues obscure the essential perversity of attacking short-selling. To the extent that short-sellers break the law, as by manipulating or lying, they should be punished with everybody else. But short-selling is more a solution to market inefficiency than a problem in itself.

Posted by Tom at 4:24 AM | Comments (4) | TrackBack (3)

March 1, 2006

A big UT-A&M game in March?

The University of Texas - Texas A&M game that most folks in these parts normally care about occurs on the day after Thanksgiving, but a capacity crowd will be whooping it up this evening in College Station (televised on ESPN2) as the A&M basketball team attempts to derail league-leading UT's attempt to add a Big 12 Conference basketball title to its Big 12 Football Championship.

Basketball -- which is normally a diversion in College Station between football season and spring football practice -- is generating more interest in Aggieland this season because A&M has a legitimate shot at making the NCAA Tournament for the first time since, well, this year's freshman class of A&M students was waiting to be born. The Ags really need a win to keep their NCAA Tournament hopes alive because, despite winning their last five and sporting an 18-7 record (8-6 in the Big 12), the Aggies have only a 1-4 record against top 50 RPI teams and padded its overall record by playing an absurdly weak non-conference schedule.

Nevertheless, a win over the sixth-ranked Horns (24-4 overall record, 12-2 in Big 12) would be a feather in A&M's hat and, coupled with a couple of Aggie wins to close out the season, might be enough to push the Ags into the tournament. Forward P.J. Tucker (16.4 ppg, 9.2 rpg) and center LaMarcus Aldridge (16.0/9.3) are UT's top players, while the Ags are led by guard A.C. Law (16.5 ppg, 3.8 apg) and center Joseph Jones (15.8 ppg, 6.7 rpg).

Update: Aggies win on a buzzer-beater, 46-43!

Posted by Tom at 6:44 AM | Comments (5) | TrackBack (0)

Anna Nicole a winner?

Based on yesterday's oral argument in Anna Nicole Smith's appeal to the Supreme Court in regard to her claims against the estate of former Houston oilman J. Howard Marshall, the early speculation from the experts in such matters is that Anna Nicole is likely to win. Steve Jakubowski has a nice wrap-up of the argument here.

Despite all the hoopla of Anna Nicole barreling into the normally stuffy Supreme Court courtroom, the legal issue in the case is decidedly unsexy -- Did the bankruptcy court have jurisdiction over a tort claim that Anna Nicole's bankruptcy estate owned and asserted against against J. Howard's son, who is the executor of J. Howard's estate? My sense is that it's not particularly surprising that the experts believe that Anna Nicole has a winner on that issue.

Anna Nicole's appeal is based on what is called a “related to” claim to a bankruptcy case, which simply means that it is a claim that could have some impact on the bankruptcy estate. Inasmuch as successful assertion of Anna Nicole's claim against the younger Marshall could generate money for her estate, the claim is clearly a "related to" claim. Although a bankruptcy court has broad discretion to abstain from adjudicating such a claim, it is clear that such abstention is not mandatory, and the Anna Nicole bankruptcy court elected not to abstain from adjudicating her claim.

The younger Marshall’s legal team asserts that there is a non-statutory “probate exception” to federal jurisdiction that applies in federal diversity cases and bankruptcy cases. But their legal authority for that proposition in the context of Anna Nicole's case is pretty skimpy and distinguishable. As such, I too will be surprised if Anna Nicole doesn't win.

In discussing my view that Anna Nicole is a winner with one of my teenage daughters, she asked: "Does that mean that she will get her television show back?" ;^)

Posted by Tom at 5:21 AM | Comments (1) | TrackBack (1)

Guilty plea in another gas trader reporting case

Donald Burwell, a former El Paso Corp. energy trader, pled guilty under a cooperation agreement with the Justice Department to federal charges Tuesday that he falsely reported natural gas trading data to a natural gas industry publication. Burwell faces a possible five-year prison sentence and a fine of $500,000, and his plea deal comes just two weeks after another of the dozen or so traders ensnared in the Justice Department's prosecutions of natural gas traders filed a motion to withdraw his guilty plea. Earlier posts on Burwell's case are here and here. The DOJ's press release on the plea deal is here.

Given that he is unemployed and broke financially, Burwell's plea deal is not surprising. The Justice Department has been alleging some astronomical market effect figures in these cases in order to threaten defendants with draconian prison sentences and, as we have seen in the sad case of Jamie Olis, the DOJ will follow through on the threat regardless of the law or the facts. At least one of the other trader cases similar to Burwell's is scheduled for trial later this year.

Posted by Tom at 3:47 AM | Comments (1) | TrackBack (0)