Houston's Clear Thinkers

June 28, 2005

Big insurance premium for a big insurer

The following is noted at the end of this NY Times article about American International Group Inc.'s proxy statement that was recently published in anticipation of the company's annual meeting on August 11:

A.I.G.'s proxy also noted that the cost of insuring directors and officers against lawsuits had increased significantly since the company disclosed a number of accounting irregularities earlier this year. The premium A.I.G. paid for such coverage last year was $9.4 million; the current premiums are about $32.8 million.

Ouch!

Posted by Tom at 06:20 AM | Comments (0) | TrackBack

DOJ turns up the pressure on Milberg Weiss

Following on this post from over the weekend regarding the developments in the ongoing criminal investigation of lawyers in two firms who used to practice together in the well-known plaintiffs class action law firm formerly known as Milberg Weiss Bershad Hynes & Lerach, this Wall Street Journal ($) article reports that Paul L. Tullman, a former stockbroker and lawyer who referred clients for class action cases to the firm, is cooperating with federal investigators in their criminal investigation of the way in which the firm recruited class representatives in the class action cases that the firm handled. Mr. Tullman was charged with in May 2004 with fraud and false statements on tax returns, and the WSJ reports that he copped a plea late last year. The plea agreement remains under seal.

As Professor Ribstein has pointed out, there is already a witch hunt aura to the government's recent public disclosures regarding its investigation into Milberg Weiss' practices. Referral fees in all types of lawsuits have been common and legal for decades, and there is not even an allegation yet -- much less proof -- that Milberg Weiss failed to disclose any such fees in either its tax filings or disclosures to the various federal courts in the various class action cases. Nevertheless, the government is using leaks of information to play to the general public's resentment toward wealthy lawyers in turning up the pressure in its investigation of Milberg Weiss. Business interests may consider Milbert Weiss' current plight sweet irony, but that does not make what the government is doing right.

As noted in this earlier post regarding Eliot Spitzer's similar tactic toward former AIG chairman and CEO, Maurice "Hank" Greenberg, after over five years of investigating Milberg Weiss, if the government has a case the firm, then it should get on with it.

Posted by Tom at 04:31 AM | Comments (0) | TrackBack

June 27, 2005

Does Hank Greenberg read Clear Thinkers?

This post from last week made the following comment about the "finite risk" insurance transaction that is at the center of Eliot Spitzer's investigation of AIG and Berkshire Hathaway unit General Re, and AIG's former chairman and CEO, Maurice "Hank" Greenberg:

Despite the government's bludgeoning of various AIG and General Re executives into plea deals and the AIG's board acquiescence to Mr. Spitzer and other governmental investigators, it still has not been proven that the transaction in question in AIG's case was even accounted for improperly, much less illegal. Should not the government wait to address possible criminality (and its corresponding negative effect on value) until at least the underlying transaction has been proven to be violative of applicable accounting rules?

In this letter to the editor in today's Wall Street Journal ($), Mr. Greenberg observes as follows about the same transaction:

That transaction is the subject of litigation so I am not free to respond fully. I can assure you that an appropriate response will be made at a proper time in a proper forum. (I do note that rules for finite reinsurance are opaque and only now have the NAIC and FASB undertaken to clarify these rules.)

Posted by Tom at 04:49 AM | Comments (0) | TrackBack

June 25, 2005

Is Lerach a target?

The dozens of securities fraud lawsuits against Enron and various other parties are consolidated under the federal multi-district litigation rules in Houston federal court. The legal community involved in those cases is abuzz today with the news that a federal indictment last week of two Southern California lawyers is a sign that the lead plaintiff's lawyer in the Enron securities fraud litigation -- William Lerach -- and his former firm (Milberg Weiss Bershad Hynes & Lerach) may also be targets of the investigation. Mr. Lerach and Milberg Weiss split last year, and Mr. Lerach started a new firm based in San Diego.

The indictment of almost 70 pages (press release here) accuses a former Milberg Weiss client -- Palm Springs lawyer Seymour Lazar -- of taking $2.4 million in kickbacks from a "New York law firm," presumably Milberg Weiss. Although Mr. Lazar's personal attorney -- Paul Selzer -- was also named in the indictment, the indictment contains no formal charges against "the New York firm." The indictment alleges that the New York firm reaped $44 million in attorney fees from over 50 cases in which Mr. Lazar was the lead plaintiff. As an inducement for Mr. Lazar and his family members to serve as lead plaintiff, the indictment alleges that the New York firm and others secretly paid Mr. Lazar kickbacks out of a portion of the firm's attorneys fees.

The indictment is the result of an investigation that began in 2002 that resulted in subpoenas being issued to dozens of law firms that have been co-counsel with Milberg Weiss in securities fraud class action cases over the years. Speculation is rampant throughout the plaintiffs' securities class action bar that the purpose of the indictment of Messrs. Lazar and Selzer is to pressure them to turn on the former Milberg Weiss lawyers.

In addition to observing that it is "saddened" by the indictment, a Milberg Weiss press release stated the following:

"We are also surprised and disappointed that, in the face of recent criticism of the government following the reversal of the Arthur Andersen conviction, the U.S. attorney's office would risk harming the Milberg Weiss firm and its many fine lawyers and staff by making this accusation in circumstances where the firm cannot defend itself."

As usual, Professor Ribstein provides insight and caution regarding this latest use of governmental power against an unpopular target (i.e., plaintiffs' class action securities fraud lawyers) of the day. Moreover, check out Professor Hennings' thoughts on the differences between the government's potential case against Milberg, Weiss and the prosecution of Arthur Andersen, and Professor Bainbridge's comments regarding the implications of the possible indictments on the prosecution of class actions.

Posted by Tom at 06:27 PM | Comments (1) | TrackBack

Throwing popcorn at Enron

This NY Times article interviews Bruce A. Williamson, the former Duke Energy executive who the Dynegy, Inc. board brought in to restructure (some would say liquidate) the company following the economic fallout in the energy trading industry resulting from the company's failed bid for Enron and Enron's bankruptcy in late 2001. Previous posts are here and here regarding Dynegy's settlement of claims at least indirectly related to its Enron bid.

The entire interview is mildly interesting and certainly further evidence for the widespread rumors in the business community that Dynegy is for sale. However, Mr. Williamson's observation about life after Enron is priceless:

Q. Yes. What's the mood like [in Houston after Enron]?

A. If you're in the oil upstream exploration and production, there's a lot of money coming in. The biggest concern the upstream companies have is where to go from there. What do they do with the money? They're running out of places they want to go to explore.

The power merchants, and that includes ourselves and Reliant, El Paso, Calpine, Duke, are all recovering and have all been inwardly focused for the past two and a half years. I think broadly in the community in Houston, it goes in waves. Enron sort of dies down and then something rears its head up and washes it back in the news.

The Enron movie came out at the River Oaks Theater, literally a few blocks from where Ken Lay lives, and that was quite an event. One person - a board member that I will keep nameless - told me he hadn't been to a movie like this since he was 12 and went to see "Hopalong Cassidy." Someone would come on the screen and people would boo and hiss and throw popcorn.

Posted by Tom at 12:08 PM | Comments (1) | TrackBack

June 24, 2005

While Theodore Sihpol goes home, William Fuhs goes to jail

Continuing relentlessly to avoid addressing the real issue, this NY Times article speculates that the problem with Eliot Spitzer's recent unsuccessful prosecution of Theodore C. Sihpol, III was not that he charged Mr. Sihpol in the first place, but that he should have charged all of Mr. Sihpol's superiors, too. In so speculating, the Times confirms that it still does not understand that the governmental policy of regulating business through criminalization of merely questionable business transactions is a slippery slope toward injustice that ultimately undermines the rule of law.

Take the case of William Fuhs. He is the former mid-level Merrill Lynch executive who was recently convicted and sentenced to over three years in prison as a result of his participation in the Enron-related Nigerian Barge case. As has already been noted in regard to the conviction of Daniel Bayly -- the former head of global investment banking at Merrill Lynch and one of Mr. Fuhs' bosses -- the government's prosecution of the Merrill Lynch executives in regard to the Nigerian Barge transaction was dubious, at best. The resulting convictions are a plain miscarriage of justice.

As with its prosecution of Mr. Bayly, the government's case against Mr. Fuhs strains credulity. Of the four Merrill Lynch defendants in the Nigerian Barge case, Mr. Fuhs was the only one who was not a managing director of Merrill Lynch. Mr. Fuhs did not participate in the one telephone conference with former Enron CFO Andrew Fastow in which Mr. Fastow allegedly assured Mr. Bayly and other Merrill Lynch executives that Enron would find a buyer within six months of the interest that Merrill was buying in the barges.

In fact, Mr. Fuhs' only role in regard to the transaction was the ministerial processing of the transaction after Merrill Lynch had agreed to buy the interest in the barges from Enron. Incredibly, during the government's case-in-chief in the Nigerian Barge trial, none of the government's fact witnesses knew or interacted with Mr. Fuhs -- indeed, the only government witness who had ever worked at Merrill had neither met, spoken to, nor even heard of Mr. Fuhs! Mr. Fuhs never conferred with anyone at Arthur Andersen (Enron's auditors) regarding the transaction and the deal was the only Enron transaction that Mr. Fuhs ever worked on. In short, the government presented no witnesses or evidence during its case-in-chief that Mr. Fuhs -- who is not an accountant -- had any idea that Enron's booking of a $12 million gain on the Nigerian Barge transaction was arguably improper, much less that he intended to promote Enron's accounting of the transaction.

Nevertheless, while Mr. Sihpol walks away from the New York courthouse a free man, Mr. Fuhs -- a young man with a wife and two young children -- faces a shattered professional and family life and 37 months in federal prison. As Professor Bainbridge noted in this TCS op-ed and Professor Ribstein has repeatedly observed, the contrasting results in the cases of Mr. Sihpol and Mr. Fuhs -- not to speak of the sad case of Jamie Olis -- confirms that the pursuit of justice in such cases has become a sort of lottery. If the prosecution pursues a bit player such as Mr. Fuhs but can come up with something particularly distasteful to the jury -- such as Merrill Lynch's involvement with the corporate pariah, Enron -- then it wins. On the other hand, if the government slams a little guy such as Mr. Sihpol while not pursuing his dastardly superiors, then the government loses. This is a radical abuse of our criminal justice system, and the carnage to the families of Martha Stewart, Mr. Bayly, Mr. Fuhs, Mr. Olis and others who are caught in this troubling spiral simply cannot be responsibly dismissed as a "trade-off" of an imperfect system.

But as great as my compassion is for members of those families, my even greater concern is for the principles of justice and respect for the rule of law upon which the success of our society is largely based. If we lose those, then, as Sir Thomas More asked Will Roper in A Man for All Seasons, "do you really think you could stand upright in the winds [of abusive state power] that would blow then?"

Posted by Tom at 07:32 AM | Comments (2) | TrackBack

June 23, 2005

Bainbridge on criminalizing agency costs

U.C.L.A. law professor Stephen Bainbridge is one of America's leading experts in the area of corporate and securities law, and he has long been generous in sharing his expertise on those subjects and others on his popular ProfessorBainbride.com weblog. Professor Bainbridge is also a formidable writer who is particularly gifted in breaking down complex legal issues in a simple and straightforward manner.

In this TCS Central op-ed (his blog post on the article is here), Professor Bainbridge takes dead aim at the dubious governmental policy of criminalizing business interests through the prosecution of agency costs, which are essentially the costs of poor corporate governance. The entire op-ed is a must read, and here is the money quote:

[S]hareholders deserve protection from theft, but not from risk taking, even when the risk in question is how much to pay an executive. Unfortunately, it's not clear that prosecutors know the difference -- or even care.

Posted by Tom at 06:30 AM | Comments (0) | TrackBack

This is really, really not going well

During the recent trial of former Tyco CEO Dennis Kozlowski, I noted here and here that the cross-examination of Mr. Kozlowski did not go well for the defense.

Consistent with that theme, this Wall Street Journal ($) article reports today that Mr. Kozlowski -- who essentially was convicted of embezzling excess compensation from Tyco -- wrote this letter several years ago to a Houston assistant district attorney in which he requests that the prosecutor seek the maximum prison term for a former executive of a Tyco unit who had been found guilty in a Houston state court for -- you guessed it -- embezzlement.

In his letter, Mr. Kozlowski wrote that the former Tyco unit executive's crime "cannot be condoned in any manner" and that "not only did he steal from the stockholders ... but he breached the fiduciary duty placed in him." In advocating the "maximum term," Mr. Kozlowski noted that the court needed to send a message that "wrongdoing of this nature against society is considered a grave matter."

The former Tyco unit executive got 20 years, although he was paroled after four.

Posted by Tom at 05:19 AM | Comments (0) | TrackBack

June 22, 2005

Will the Scrushy jury deliberations take longer than the Scrushy trial?

U.S. District Judge Karon O. Bowdre today appointed an alternate juror to replace a male juror suffering from "recurring health problems" during jury deliberations in the corporate-fraud trial of former HealthSouth Corp. CEO Richard M. Scrushy (a previous post on the trial is here). With that move, the judge proceeded to instruct the jury that it would have to start over in its deliberations toward a verdict on the 36 criminal counts against Mr. Scrushy.

This development probably went over about as well as the proverbial turd in the punchbowl with the Scrushy jurors, who have been deliberating on the case since May 19 after enduring a trial that began on January 25.

The 36 counts against Mr. Scrushy include conspiracy, fraud, false statements and one count of false certification under the Sarbanes-Oxley Act. Mr. Scrushy used the "honest idiot" defense during the trial, contending that the finance executives at the company who engineered the fraud hid it from him.

Posted by Tom at 03:32 PM | Comments (0) | TrackBack

Criminalizing risk taking

Two columns in today's Wall Street Journal address one of the too little-discussed effects of this post-Enron era's criminalization of business -- that is, the chilling of beneficial risk-taking.

In his weekly WSJ ($) column, Alan Murray examines the motives of former AIG chairman and CEO Maurice "Hank" Greenberg to arrange the structured finance "finite risk" insurance transation that is at the heart of Eliot Spitzer's lawsuit and public allegations that Mr. Greenberg engaged in fraud while at AIG. According to Mr. Spitzer's theory of the case, the deal allegedly involved a phony, risk-free swap of insurance assets that allowed AIG to boost short-term reserves and assuage the concerns of analysts, who had been fretting that AIG was drawing down its loss reserves to boost profits. In return, the company paid Berkshire Hathaway's General Reinsurance Corp. unit a fee of $5 million.

Mr. Murray's column dismisses Mr. Spitzer's contention that Mr. Greenberg's arrangement of the questionable transaction was motivated purely by the Mr. Greenberg's greed in propping up the value of his extensive AIG equity holdings. Rather, Mr. Murray focuses more on Mr. Greenberg's obsession with short-term results over taking a longer term view of AIG's financial health.

However, the more interesting question is whether it makes any sense for the government to criminalize taking the risk of financial transactions that may push the edge of the envelope of applicable accounting rules, but that may nevertheless lead to preservation or creation of wealth for equity owners? Despite the government's bludgeoning of various AIG and General Re executives into plea deals and the AIG's board acquiescence to Mr. Spitzer and other governmental investigators, it still has not been proven that the transaction in question in AIG's case was even accounted for improperly, much less illegal. Should not the government wait to address possible criminality (and its corresponding negative effect on value) until at least the underlying transaction has been proven to be violative of applicable accounting rules?

Meanwhile, in his weekly WSJ ($) column, Holman Jenkins examines how the government's criminalization of structured finance transactions almost scuttled a market that has turned out to be perfectly legitimate and hugely beneficial for consumers of life insurance -- i.e., the business of buying and selling "used" life insurance policies where the buyer of the unwanted insurance policies (such as AIG) buys a life insurance policy from a seller, keeps up the premiums until the seller of the policy dies, and then collects the death benefit. As a result, owners of life insurance now have a legitimate market in which they can liquify their life insurance policy before the insured's death.

Whether you consider that market ghoulish or not, the market serves a legitimate financial demand of owners of life insurance policies. Nevertheless, as Mr. Jenkins reports, part of Mr. Spitzer's lawsuit against AIG attempts to penalize the company for its accounting of its investment in that market, and discovery in the lawsuit has already revealed that Mr. Greenberg wrote in a memo that adverse public relations emanating from an investment in the market may outweigh its financial benefit for AIG. But as Mr. Jenkins points out, Mr. Spitzer's assault on AIG's involvement in the market risks damaging a market that is valuable for ordinary citizens and actually a market that government should be encouraring:

Gone are the days when insurance companies were the sole market for policyholders who wanted something to show for decades of paying premiums without having to die first.

Once, these policies might have been allowed to lapse or returned to the company for a minuscule "surrender" payment. But -- here's the peculiar calculation -- where the covered person has suffered a health reverse that reduces his or her life expectancy, the real economic value of the death benefit may be far greater than the surrender value, even after the premiums that would have to be paid until he or she finally dies.

Now that institutional investors are buying and selling hundreds of policies at a time, vanished is the specter of an investor seeking to hasten his payoff with a blunt object. Pricing will improve too, as securitization takes advantage of the law of large numbers to remove much of the risk from mortality estimates.

The new securities are expected to appeal particularly to pension funds, always looking for ways to match the maturities of their investments with the timing of their payouts. Thus the recycling of life insurance by older Americans will become, twice over, a way for them to finance their own retirements.

Indeed, Mr. Spitzer's assault on the "used" life insurance policy market is taking place at the same time as he is hammering the sub-prime mortgage market, another market that benefits ordinary citizens (previous posts here and here).

Thus, in the wake of the morality plays of Mr. Spitzer and governmental prosecutions involving structured finance transactions that the prosecutors either mischaracterize or do not understand, legitimate and productive business transactions are unfairly and incorrectly portrayed as complex business frauds. The misguided nature of the government and the Enron bankruptcy examiner's criminalization of many of Enron's valid structured finance transactions has already been well-chronicled by University of Chicago structured finance expert Christopher Culp and others in the recent books, Corporate Aftershock (Cato 2003) and Risk Transfer (Wiley 2004). Mr. Spitzer and his minions are eminently capable of misusing the power of the state to deprive citizens of other valuable markets when what they really ought to be doing is encouraging the type of risk-taking that creates valuable markets for citizens such as the one that Mr. Jenkins describes.

Posted by Tom at 04:53 AM | Comments (0) | TrackBack

June 21, 2005

The effects of criminalizing auditors

This Wall Street Journal ($) article picks up on the theme of this post from late last year -- i.e., that the government's regulation of accounting firms through criminalization of their services is contributing to the shortage of accounting firms that have sufficient resources to provide the specialized services that big companies need:

Intel Corp. is one of the many big companies now bumping up against the limitations. After using Ernst & Young LLP as its auditor for more than three decades, the semiconductor maker considered switching recently for a fresh look at its financials. But it stuck with Ernst after receiving proposals from the other Big Four firms: Deloitte & Touche LLP, KPMG and PricewaterhouseCoopers LLP. That is because federal regulations bar the three other firms from serving as Intel's independent auditor unless they give up valuation, computer-software and other work they do for Intel.

Worries about the shrinking number of top-tier auditing firms began mounting with the collapse of Arthur Andersen LLP in 2002, after its conviction for obstruction of justice tied to its audits of Enron Corp. (The conviction was reversed last month by the Supreme Court.) The Sarbanes-Oxley corporate-governance act, passed by Congress in response to the accounting scandals at Enron and elsewhere, has complicated the situation, as well, by forbidding auditors from providing certain nonaudit-related services to audit clients. The restrictions, aimed at enhancing the independence of auditors, have led some companies to distribute nonaudit work to the other Big Four firms. But that puts these companies in a bind if they want to switch auditors.

Meanwhile, KPMG is learning that playing nice with the Justice Department may not be all that it's cracked up to be. As noted here last week, the threat of an indictment has KPMG pursuing a settlement of the government's criminal investigation into its promotion of tax shelters under a deferred-prosecution agreement. As a part of that effort, KPMG issued a well-publicized admission of wrongdoing and public apology last week regarding its involvement in the tax shelters.

However, as a result KPMG's public admission, this NY Times article reports KPMG is now a sitting duck for damages in the myriad of civil lawsuits involving the tax shelters and even unrelated accounting issues, and that KPMG's co-defendants in the tax shelter civil cases are furious over the financial implications to them of KPMG's public admission of wrongdoing.

All of this is having a devastating effect on KPMG financially. KPMG reported earlier this year that it had revenue of $4.1 billion last fiscal year, but that "practice protection costs" -- i.e., insurance, legal fees and litigation settlements -- were running at the staggering amount of more than $400 million annually, or more than 10 percent of the firm's revenue.

Thus, the cost of avoiding an indictment might just cause KPMG to meltdown anyway. At very least, the cost of cooperation will cause substantial financial damage to the firm, resulting in job loss and less competition for audit services for big companies. And let me get this right -- this is a "business-friendly" Republican Administration pursuing these policies?

Posted by Tom at 05:04 AM | Comments (2) | TrackBack

June 20, 2005

The increasing criminalization of business

This Wall Street Journal ($) article examines the increasing criminalization of business in the post-Enron era, which has been a frequent topic on this blog. Although the article does a reasonably good job of summarizing the troubling trend, it comes up somewhat short on analyzing the key implications of the trend, such as the disincentive to take risks resulting from regulating business through criminalization and the degradation of the rule of law resulting from the government's overly broad application of criminal laws in its quest to convict business interests. For more analysis in that regard, review this thread of blog posts over the past year and a half.

The money quote in the article come from Joseph Grundfest (earlier post here), the Stanford University business law professor and former SEC commissioner who is currently researching the implications of the government's growing power to bludgeon business interests into cooperating with a criminal investigation even if those business interests do not believe that they have done anything wrong:

"It's a lot like the scene in 'The Godfather' where Marlon Brando explains how he's going to make an offer they can't refuse."

Along those same lines, this WSJ ($) article reviews the prison sentences that have been and are expected to be handed down in the latest string of criminal prosecutions of business executives, while this article examines the unusual arrangement in which the Newark, N.J. U.S. Attorney has inserted himself into the management of Bristol-Myers Squibb Co.. The company's board agreed to the arrangement in order to stave off a large fine stemming from a criminal investigation into an alleged $2.5 billion fraud at the company.

American International Group Inc.'s board should get ready for the same type of arrangement with the Lord of Regulation. And don't miss Professor Ribstein's cogent analysis of the situation, in which he notes the big difference between prosecuting agency costs -- such as sloppy corporate controls over executive compensation -- and prosecuting a more clear-cut crime where the thief robs the victim at gunpoint.

By the way, Professor Ribstein's point about the arbitrary nature of prosecuting agency costs is perhaps best reflected by the irony that the key prosecution witness against Messrs. Kozlowski and Swartz -- Tyco outside counsel David Boies -- is simultaneously defending Maurice "Hank" Greenberg against Mr. Spitzer's criminal assault on AIG's agency costs.

It does all get quite confusing, doesn't it?

Posted by Tom at 04:00 AM | Comments (0) | TrackBack

June 18, 2005

Observations on the Tyco verdict

The morning brings several interesting obserations regarding yesterday's guilty verdict in the trial of former Tyco International, Ltd. executives, L. Dennis Kozlowski and former Tyco finance chief Mark H. Swartz.

Over at Conglomerate, Professor Hurt (a former Houstonian, by the way) notes insightfully in this post that, on one hand, the case against Messrs. Kozlowski and Swartz differs from most other corporate crime prosecutions because of its relative simplicity, but that -- on the other hand -- such simplicity insures that no amount of regulation will ever prevent such actions from occurring again.

Meanwhile, over at the White Collar Crime Prof Blog, Professor Henning makes a key technical point about the way in which the prosecution handled the more recent prosecution after the first trial ended in a mistrial:

The government made its case in about 25% less time (13 weeks as opposed to 18 weeks in the first trial), and kept the accounting and reporting issues front-and-center. Going technical is usually a recipe for disaster (see the Enron Broadband Services prosecution for an example of mind-numbing detail), but in this case the Manhattan D.A.'s office concentrated on what was truly important.

Finally, in this remarkable analysis, Professor Ribstein questions the wisdom of unleashing the power of the state based upon the human frailties that drive most prosecutions of questionable business conduct:

Not merely envy (one’s discomfort at comparing oneself with another), or wanting to have what another person has, but disliking that person for having it and believing that his good fortune is undeserved. The resenter wants to lower the envied person to his level.

This is the common element in Tyco, Martha Stewart, Mike Milken and many other cases of this ilk, despite the facial dissimilarity of the offenses being tried.

Resentment is pernicious enough in itself because it seeks to degrade human achievement. But it’s worse when it leads to criminal prosecutions for what amount to agency costs – failure to get the requisite corporate approval for expenditures. The marginal criminality of these offenses is what leads to months of hugely expensive trials.

The supposed social payoff is deterrence. But the Kozlowskis of the world probably will keep doing this stuff while the legitimate sorts will be ever more afraid of taking chances. Not that the conduct in Tyco was particularly worth encouraging, but Mike Milken was a different case, in my view, and I don’t see much chance of politically ambitious prosecutors being able or willing to tell the difference.

So white collar prosecutions become a sort of lottery. If the prosecution can come up with something colorful, it wins, or maybe loses if it’s too colorful (Sardinia). These are not the elements of a rational criminal justice system.

Nor is it rational to base corporate criminal prosecutions on the timing of going bust.

Posted by Tom at 11:27 AM | Comments (0) | TrackBack

The Lord does not enjoy competition in the regulation market

Following on the heels of this earlier post, this NY Times article reports on the lawsuits that the Office of the Comptroller of the Currency and the Clearing House Association filed on Thursday in Manhatten U.S. District Court to enjoin the Lord of Regulation from using his subpoena power to obtain nonpublic credit score and loan information from national banks such as HSBC Holdings, J. P. Morgan and Wells Fargo. Here is an earlier post on Mr. Spitzer's latest attempt to injure a productive part of the national economy, this time the sub-prime mortgage market.

Not pleased with competition in the regulation market that infringes on his demagogic ways, Mr. Spitzer commented as follows about the lawsuits:

"While such a move was expected from the banks, it is shameful that a federal regulator would join in an effort to shield the banks from scrutiny by state regulators."

To which I wish the Comptroller of the Currency would respond:

"While we understand that Mr. Spitzer enjoys undertaking investigations that will provide publicity for his political purposes, we do not expect him to undertake investigations into areas that are the province of federal regulation and that will harm the ability of low-income families to climb the ladder to prosperity through home ownership."

Posted by Tom at 11:00 AM | Comments (0) | TrackBack

June 17, 2005

Kozlowski and Swartz convicted

The New York state court jury in the criminal trial against former Tyco International Ltd. CEO L. Dennis Kozlowski and former Tyco finance chief Mark H. Swartz has rendered a guilty verdict against the two former Tyco executives on 22 of 23 counts, including grand larceny, conspiracy, securities fraud and falsifying business records. In essence, the jury concluded that the two had masterminded a scheme to loot Tyco of millions of dollars in unauthorized compensation and perks.

The result is not particularly surprising, especially after Mr. Kowlozski's less-than-inspiring performance on the witness stand (see previous posts here and here). Prosecutors will propose that the two serve between 15 and 30 years in prison, but my sense is that the two will be sentenced to considerably less than that. Sentencing is tentatively scheduled for August 2.

During the trial, prosecutors contended that Messrs. Kowlozski and Swartz stole millions in secret bonuses, including the forgiveness of $37.5 million in loans from Tyco. The defense contended that the two former executives did not hide the bonuses from either the Tyco board or outside auditors and, thus, lacked the requisite mens rea to commit the crimes alleged.

The first Tyco trial ended with a mistrial last year under colorful circumstances after two weeks of jury deliberations when one of the jurors -- who, it was later learned, had been holding out in favor of acquittal -- received a letter she perceived as threatening. The juror's name had been published by several media outlets after she had appeared to make a "thumbs up" hand signal to the defense team in court. After the declaration of mistrial, several of the jurors said that the panel was 11-1 in favor of conviction on most counts.

Posted by Tom at 05:02 PM | Comments (1) | TrackBack

Ripples from the Andersen decision reach the Bayly appeal

This post from mid-May noted former Merrill Lynch executive Daniel Bayly's motion to the Fifth Circuit Court of Appeals requesting that he remain free during the appeal of his conviction and sentence in the Enron-related Nigerian Barge case. Subsequently, the Fifth Circuit summarily denied Mr. Bayly's motion in a one page order.

However, the May 31st Anderson decision of the U.S. Supreme Court has prompted the Bayly appellate team to file this compelling motion requesting that the Fifth Circuit reconsider its denial of Mr. Bayly's motion for release pending appeal. The money section:

The fundamental errors in this case begin with the government's novel and unduly creative use of an "honest services" thoery in connection with the wire fraud statute. See 18 U.S.C. §§ 1343, 1346. As Bayly's motion for release shows, the honest services charge in this case permitted a criminal conviction for conduct -- the accelerated booking of gain -- that was undertaken primarily on behalf of the alleged victim (Enron), which knew every aspect of the transaction, and not for the self-interest of the alleged conspirators (see Bayly motion at 16-20). No court ever has sanctioned such a broad application of the honset services statute -- especially where, as here, no bribe or gratuity was provided to, nor were there any undisclosed conflicts of interest as to, the employees of the purtative victim (Id. at 19-20). As in Andersen, the Enron Task Force in this case secured a conviction through application of an entirely unprecedented theory in a hotly-contested area of the law. . . The government does not dispute that, if our view of the limits of Section 1346 prevails, all three counts of conviction must be set aside. (footnote omitted).

The motion goes on to address other grounds for reversal of Mr. Bayly's conviction, particularly the trial court's granting of the Enron Task Force's objection to a jury instruction that the defense proposed on a key defense theory in the case -- i.e., that the Enron promise to Merrill Lynch to arrange a sale of the interest in the barges within six months to a third party -- as opposed to an Enron promise to repurchase the interest within that time frame -- did not undermine Enron's accounting of the transaction and, thus, did not constitute the basis of a crime. Inasmuch as Enron ultimately arranged for such a sale to a third party as opposed to buying back the interest in the barges from Merrill itself, the lack of a jury instruction on that issue appears to be another solid basis for reversal of Mr. Bayly's conviction.

But read the entire motion, which is only eight pages. It is a masterful example of appellate advocacy and brevity that persuasively outlines the major injustice of the convictions of the Merrill Lynch executives in the Nigerian Barge case. Mr. Bayly worked on this relatively small transaction for less than two hours in the ordinary course of one of his business days. He is now facing two and a half years away from his family during the autumn of his life because of the government's broad application of criminal statutes to cover what is not even clearly questionable business conduct, much less clear criminal conduct.

The Fifth Circuit's Anderson decision is not a highlight of that body's judicial decision-making, as the U.S. Supreme Court's decision in the case reflects. Here's hoping that the Fifth Circuit sits up and takes notice before yet another grave injustice takes place in the case of Daniel Bayly.

Posted by Tom at 06:17 AM | Comments (13) | TrackBack

June 16, 2005

More on the Sihpol acquittal

The Sihpol acquittal from last week has generated much needed criticism of the demagogic ways of New York AG Eliot Spitzer, including this Wall Street Journal ($) editorial the day after the acquittal. While the WSJ editorial rightly criticizes Mr. Spitzer's questionable tactic of criminalizing merely questionable business practices, the editorial concludes with the following observation:

One lesson here is that juries, forced to make a decision about a defendant's fate, want to make sure that the alleged behavior is in fact criminal. Prosecution by press release won't do in court.

The Justice Department has understood this, and has built a record in business fraud cases that has held up in court on Enron, WorldCom and Adelphia. Mr. Spitzer, by contrast, has used New York's overbroad Martin Act to prosecute financial cases of dubious legal merit. Business fraud deserves to be prosecuted, but the criminalization of widely accepted business practices ex post facto is both unjust and offensive to the rule of law.

Well, that dubious compliment of the Justice Department's equally egregious conduct toward criminalizing business practices did not sit well with Harvey Silvergate, a Boston civil rights attorney and author who is working on a book on abusive federal prosecutions. In this WSJ letter to the editor, Mr. Silvergate notes the following:

The reason for the Justice Department's success is that the federal courts have aided and abetted in contorting the law by affirming dubious convictions for dubious crimes. The Supreme Court's welcome reversal of the Arthur Andersen conviction, one hopes, signals a counter-revolution rather than a mere blip in the continuing degradation of the federal criminal code.

However, in my book, a more insightful criticism of the WSJ's misguided compliment of the Justice Department comes from Ben Edwards, former American business editor for The Economist magazine, who wrote the following letter to the WSJ editors, which the WSJ has chosen not to publish, at least as of yet:

Sirs,

Your otherwise commendable editorial calling New York Attorney General Eliot Spitzer to account for his abusive disregard of the rule of law falls once again into what has become a most unfortunate and unthinking habit of mind regarding the rights and wrongs of the Justice Department's wider war on white-collar "crime".

While damning Mr Spitzer, you lavish praise on those wise folk at Justice for building "a record of business fraud cases that has held up in court". Two thoughts spring to mind.

First, just as with Mr Spitzer, most of the actions the Justice Department takes against white-collar defendants never end up in front of a jury of peers. Federal prosecutors use the threat of ultra-long jail sentences to bludgeon plea-bargain agreements from their victims instead. Who, in this climate, fancies their chances of acquittal in court, no matter how persuasive their defense?

Second, some of the cases that have reached the courts seem notable for reasons other than fine prosecutorial legal work. So far, we have had willful and abusive misinterpretation of the law (Arthur Andersen), absurd and dangerous criminalization of civil disputes (the Enron broadband trial) and stunning abuse of hearsay and other evidentiary rules to damn defendants with whispers and slurs (the Enron-related "Nigerian Barge" trial). No doubt, as the nation's temperature cools, more of these convictions will be overturned on appeal.

Of course, federal judges share some of the blame for failing to restrain this appalling government behaviour. But surely the thundering editorialists at the Wall Street Journal can muster the courage to stand up to the howling lynch mob and call this for what it quite nakedly is: a witch hunt.

Ben Edwards
Stamford, CT

Amen!

Posted by Tom at 05:21 AM | Comments (0) | TrackBack

KPMG = Arthur Andersen?

Over this past weekend, this NY Times article reviewed the civil litigation and criminal investigation into KPMG's mass-marketing of dubious tax shelters from the late 1990's through late 2003. Here are the previous posts over the past year and a half on KPMG's tax shelter woes.

Now, based on this Wall Street Journal ($) article, it appears that KPMG is literally fighting for its life as the Justice Department decides whether to indict the firm over is role in promoting the tax shelters. What is particularly troubling about KPMG's perilous situation is that the firm has cooperated with the Justice Department in an effort to stave off a criminal indictment. That should give the American International Group Inc. board members pause as they consider their similar decision to cooperate with governmental investigations into AIG.

The threat of an indictment already has KPMG pursuing a settlement of the case under a deferred-prosecution agreement or other settlement with the Justice Department. However, some partners in KPMG management are now convinced that even a deferred-prosecution settlement of potential criminal charges would seriously damage the firm and possibly cause an Arthur Andersen-type meltdown. An indictment would almost certainly cause thousands of innocent KPMG employees to lose their jobs and force KPMG's dozens of equally innocent institutional clients to find another accounting firm among the remaining three large accounting firms.

So, the dubious governmental policy of criminalizing merely questionable business practices may result in some big companies not being able to to find an accounting firm capable of providing adequate audit services at all.

Some governmental policy, eh? And even if an indictment of KPMG is justified in this particular circumstance, Professor Ribstein points out the irony in the situation.

Posted by Tom at 04:28 AM | Comments (0) | TrackBack

June 15, 2005

Is the NY Times really reading this blog?

I speculated facetiously awhile back that some NY Times editors are reading this blog. Now, I'm really starting to wonder.

First, over the weekend, the NY Times ran this less than flattering article on the Lord of Regulation's recent defeat in the Sihpol case, which dovetails with much of the criticism that this blog has leveled toward Mr. Spitzer over the past year.

Now, Joseph Grundfest pens this Times op-ed in which he addresses an issue that this blog has been hammering on for a long time: that is, the tactic of prosecutors damaging or -- in the case of Arthur Andersen -- effectively terminating a business entity before the nature or scope of alleged criminal activity is proven:

Andersen's demise did serve as a stern reminder to corporate America that prosecutors can bring down or cripple many of America's leading corporations simply by indicting them on sufficiently serious charges. No trial is necessary. ...

The current situation of the insurer American International Group is a case in point. Would you buy an insurance policy from a company that might be crippled by a criminal indictment that the New York attorney general, Eliot Spitzer, decides to file tomorrow morning? Neither would I. If the government insists that A.I.G.'s chief executive be fired as part of the price of not indicting the firm, the chief executive is gone. It doesn't matter that he ranks among the most powerful executives in America. A.I.G. has no realistic choice but to cooperate fully with the government, even if evidence might later demonstrate that the government's theories were legally infirm or that factual allegations couldn't withstand cross-examination. Who, after all, wants to be put out of business when indicted, only to be vindicated years later by a jury verdict or appellate ruling? . . .

. . . The prosecutor's decision to indict is largely immune from judicial review. The prosecutor acts as judge and jury. Traditional due process safeguards, like the right to confront witnesses, can't protect the potential corporate defendant. The innocent can therefore be punished as though they are guilty, and penalties imposed in settlements need not bear a rational relationship to penalties that would result at a trial that will never happen.

Hat tip to Professor Bainbridge for the link to the Mr. Grundfest's op-ed.

Posted by Tom at 06:19 AM | Comments (2) | TrackBack

First Enron Broadband defendant testifies

On the heels of the dramatic testimony that occurred late last week, this Chronicle article reports that Rex Shelby, former senior vice president of engineering and operations for Enron Broadband, yesterday became the first of the five defendants in the ongoing trial to take the stand in his own defense.

All of the five Enron Broadband defendants are expected to testify during the trial, which is a significantly different tactic than the defense team used in the previous Enron-related Nigerian Barge trial, the only other trial that has taken place involving former Enron executives. In that trial, only three of the six defendants testified and one of those -- former Enron in house accountant Sheila Kahanek -- was acquitted. All of the other five defendants in that case -- including the only other Enron defendant (Dan Boyle) -- were convicted.

Although not without risk, the defense move of having the defendants testify is sound. Juries in white collar cases almost always expect to hear what the defendants have to say and generally hold it against the defendants if they do not testify (even though they are instructed not to do so). The biggest obstacle that the defendants in the Broadband case have is attempting to explain the elephant in the courtroom -- that is, the huge amount of money on Enron stock sales that Mr. Shelby and two of the other defendants made -- and attempting to humanize the defendants by having them testify is an essential component of that explanation.

Posted by Tom at 05:04 AM | Comments (0) | TrackBack

JP Morgan Chase settles Enron class action

On the heels of Citigroup's settlement last week, J.P. Morgan Chase & Co. elected to avoid the risk of being placed in the "last to settle" position that it found itself in the WorldCom class action securities fraud litigation and agreed to pay about $2.2 billion to settle claims against the firm in the Enron securities fraud class action.

The Enron securities fraud class action accuses a group of Wall Street banks and securities firms of misleading investors by facilitating Enron transactions that removed billions of dollars of debt that allegedly should have been reported on the firm's public financial statements. The lawsuit specifically claimed JP Morgan underwrote Enron securities, lent more than $1 billion to the company, and syndicated more than $4 billion of bank loans for Enron while the bank's analysts were issuing allegedly false positive reports about the company.

Combined with the Citigroup settlement and previous settlements of lesser amounts (here, here and here), the JP Morgan settlement pushes the total amount of settlements in the Enron class action over $5 billion and ever closer to the $6 billion standard that the settlements in the WorldCom class action established.

JP Morgan's settlement is not surprising given what happened in the WorldCom litigation, in which the firm and its counsel were heavily criticized by analysts and investors for waiting until the courthouse steps to settle. JP Morgan settled that case for $2 billion, but that was reportedly $630 million more than it would have had to pay had the firm settled earlier.

The Citigroup and JP Morgan settlements ups the price of poker on the remaining institutional defendants in the Enron class action, which include Merrill Lynch & Co., Credit Suisse Group's Credit Suisse First Boston, Barclays PLC, Toronto-Dominion Bank, Royal Bank of Canada, Royal Bank of Scotland Group PLC and Goldman Sachs Group Inc. Plaintiffs counsel in the litigation has publicly stated that they are seeking $40 billion in damages in the case, but the pace and size of settlements indicates that the total amount recovered will be far south of that amount. Nevertheless, the total amount of settlements will certainly be higher than the WorldCom settlement total and, thus, will establish a new record for the highest amount recovered in a U.S. securities fraud class action against financial institutions.

Posted by Tom at 04:10 AM | Comments (0) | TrackBack

June 14, 2005

Is the bloom off the Spitzer rose?

Predicting the lifespan of popularity for a demagogue is a risky business, but recent mainstream media pieces certainly indicate that New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot Spitzer's fifteen minutes of fame as the nation's self-appointed Lord of Regulation may be coming to an end. Here are the posts from over the past year and a half that catalog Mr. Spitzer's relentless self-promotion campaign at the expense of business interests.

First, this NY Times article from this past weekend reviews Mr. Spitzer's resounding loss in the Sihpol case, where Mr. Spitzer had sought to put away for 30 years a young broker who simply was following orders in doing his job. It's never a good sign for a business regulator such as Mr. Spitzer when the NY Times -- not exactly on par with the Wall Street Journal's editorial page as a supporter of business interests -- suggests that his tactics are overreaching.

Meanwhile, in this Tech Central Station op-ed, Dominic Basulto points out what is really going on:

It is perhaps all too obvious why Spitzer has preferred to use headline-grabbing tactics, intimidation and the threat of criminal prosecution to achieve his ends rather than depend on the U.S. legal system. After all, Eliot Spitzer is not just campaigning against financial wrongdoing on Wall Street -- he is also campaigning to become the future governor of New York in 2006. His Spitzer2006.com Web site may not state it outright, but he is trying to leverage his crusade against the most corrupt of Wall Street practices to win over the hearts and minds of New York voters. Sound familiar? To some extent, it's the same strategy that Rudy Giuliani used to campaign for New York City Mayor nearly fifteen years ago. A few more setbacks in the courtroom, though, and New York voters may view Spitzer only as an over-reaching political opportunist.

Finally, in this OpinionJournal op-ed, Kimberly Strassel reports that Mr. Spitzer's well-publicized case against former New York Stock Exchange chairman Richard Grasso and NYSE board member Kenneth Langone (previous posts here) is not looking particularly rosy, either. In fact, it's looking downright baseless:

The AG charges in his suit that Mr. Grasso's compensation was not "reasonable"--that directors awarded him money based on "incomplete, inaccurate and misleading" information; and that Mr. Grasso influenced his awards. Mr. Spitzer is also suing former compensation committee head Ken Langone--on grounds that he misled directors about the true size of the compensation package--as well as the Exchange itself.

But [more than 1,000 pages of interviews with more than 60 former and current NYSE directors and staff, as well as third parties that Mr. Spitzer attempted to exclude from the lawsuit] refute much of this. Key directors admit that they knew exactly what they were doing in paying Mr. Grasso as they did, and continue to defend their actions.

In the end, Ms. Strassel asks the $64,000 question about the Grasso lawsuit:

Does it serve the interests of the NYSE? Or does it fuel, instead, the political Odyssey of Mr. Spitzer?

Posted by Tom at 06:27 AM | Comments (1) | TrackBack

June 13, 2005

General Re continues to serve up sacrificial lambs

As predicted in this earlier post, this NY Times article reports on the guilty plea of Richard Napier -- a senior vice president at General Re in 2000 and 2001 when the questionable transaction with American International Group occurred -- to a single criminal conspiracy count in United States District Court in Alexandria, Va. on this past Friday. Here are the previous posts on the investigation into AIG and Berkshire Hathaway, Inc.'s General Re.

Meanwhile, General Re continued its attempt to hedge the risk of loss resulting from the criminal probes by negotiating with the government about settling a continuing criminal investigation that focuses on whether General Re conspired with AIG to distort its finances and mislead investors. The negotiations are complicated by the competing government investigations into AIG and General Re, which a Justice Department probe, an SEC investigation, and the New York attorney general office's investigation.

A deal between General Re and the government would be based upon the Justice Department's 2003 Thompson Memo, which contains guidelines that federal prosecutors are supposed use to charge companies in criminal cases. For example, prosecutors can offer lighter charges against companies that "identify culprits" within their organizations, make witnesses available to prosecutors, disclose results of their own internal investigations and waive attorney-client protection.

Berkshire's Warren Buffet has been pushing General Re's cooperation with authorities as a basis for leniency. Berkshire's lawyers have instructed General Re executives to provide emails, notes and other documents to investigators in connection with the various investigations, and Berkshire has publicly stated several times that it is cooperating fully with all government investigations of its reinsurance businesses. AIG's Board has adopted a similar approach with regard to the investigations.

Posted by Tom at 04:47 AM | Comments (0) | TrackBack

June 11, 2005

A foul odor emanates from the Enron Broadband trial

Following on the heels of this post from yesterday, the slumbering Enron Broadband trial was jolted Friday as Lawrence Ciscon -- a former Enron Broadband systems engineer who the Enron Task Force has fingered as a target of its ongoing criminal investigation -- dramatically testified that Enron Task Force prosecutors had repeatedly threatened him in attempting to dissuade him from testifying on behalf of the five Enron Broadband defendants. Here are the previous posts on the Enron Broadband case.

The sparks began to fly when the prosecution attempted during cross-examination to impeach Mr. Ciscon's favorable testimony for the defendants that had been elicited during his direct examination. On cross, the prosecution had Mr. Ciscon confirm that prosecutors had advised him that he was a target of the Task Force's ongoing criminal investigation, thereby implying that Mr. Ciscon was testifying in favor of the Broadband defendants to save his own skin.

On re-direct examination, Mr. Ciscon confirmed that prosecutors had recently made three telephone calls to his attorney to "remind" Mr. Ciscon that he remained a target of the Task Force's criminal investigation. Defense counsel then asked Mr. Ciscon whether he considered those calls to his attorney as a "warning" not to testify? Mr. Ciscon replied that he did not consider the calls as merely a warning, but a "threat" by the Task Force prosecutors.

After that explosive testimony, the prosecution on re-cross-examination had Mr. Ciscon confirm that the prosecution's calls had all been to his attorney and that he had not talked directly with the prosecutors. Then, in a questionable move that simply highlighted the prosecution's thinly-veiled threat to Mr. Ciscon, the prosecution requested that Judge Gilmore strike Mr. Ciscon's testimony about the calls as inadmissible hearsay testimony.

Judge Gilmore -- who favored the prosecution during the early stages of the trial, but appears to be warming to the defense recently -- quickly denied the prosecution's request and pointed out that the government had waived any objection to Mr. Ciscon's testimony on the subject. The jurors watched the entire episode with rapt attention.

As noted in this previous post, the Task Force used the same tactic effectively during the trial of the Nigerian Barge case to suppress the testimony of dozens of former Enron employees who would have likely contradicted the testimony of Ben Glisan, the prosecution's main witness in that trial. However, due to the fact that none of the "chilled" witnesses in the Nigerian Barge trial came forward to testify as Mr. Ciscon has courageously done in the Broadband trial, the jury in the Nigerian Barge trial never heard about the government's tactic of fingering witnesses as targets of its criminal investigation to suppress favorable testimony for the Nigerian Barge defendants.

Thus, in a trial that looked like a tap-in for the prosecution at the beginning, a feisty defense team appears to have the Enron Task Force prosecutors back on their heels again. Earlier in the trial, the prosecution was in a similar position when it allowed its key witness to testify falsely regarding a video shown to the jury and then compounded that mistake by attempting to blame the error on a clearly intimidated woman who previously provided video services for Enron. Moreover, as this Mary Flood/Chronicle article reports, the prosecution's case appears to be so weak against two of the Enron Broadband defendants that they and their counsel are practically being ignored at this point in the trial.

Alas, one can only speculate as to the effect that any of this has on the jury. Three of the Enron Broadband defendants still have to overcome the "elephant in the courtroom" -- that is, the huge amount of money that they made from Enron stock sales during the period in which they were making their allegedly false public statements -- and that is no easy task under even the best of circustances.

But regardless of the outcome of this trial, the Enron Task Force's ugly tactic of effectively suppressing important testimony of witnesses favorable to Enron defendants has now been fully exposed. As a result -- and particularly in view of the Task Force's ongoing effort to suppress virtually all testimony favorable for the defendants in its case against former Enron CEO Jeff Skilling and former Enron chairman Ken Lay -- it is becoming clearer by the day that our government's "Justice" Department is not interested in justice at all when it comes to prosecuting unpopular business executives.

Posted by Tom at 10:41 AM | Comments (3) | TrackBack

June 10, 2005

Citi settles Enron civil securities fraud claims

Citigroup Inc., the nation's largest financial institution, announced this morning that it has agreed to pay $2 billion to settle class-action claims over its role in the sale of Enron Corp. stock and bonds prior to the company's collapse into bankruptcy at the end of 2001. As this earlier post notes, Citigroup had set aside $6.7 billion to cover its litigation exposure relating primarily to claims against the bank in the Worldcom class action and the Enron class action.

As is typical in such deals, in announcing the settlement, Citigroup denied any wrongdoing and said it had agreed to settle solely to hedge the risk of a bigger claim being awarded in the litigation. The settlement must be approved by the Board of Regents of the University of California (the lead plaintiff in the case) and the Board of Directors of Citigroup. It is also subject to the approval of the U.S. District Court for the Southern District of Texas.

Citigroup is the first really large bank settlement in the Enron class action litigation. Other bank defendant include J.P. Morgan Chase & Co., Merrill Lynch & Co.; Credit Suisse First Boston, a unit of Credit Suisse Group; Deutsche Bank AG; Canadian Imperial Bank of Commerce; Barclays PLC (BCS); Toronto-Dominion Bank; and Royal Bank of Scotland PLC. My sense is that we will see a steady stream of settlements for the remainder of this year as the financial institutions strive to clean up the Enron liability on their financial statements before the end of the year and the plaintiffs' lawyers attempt to exceed the total $6 billion in settlement proceeds from the defendants in the WorldCom class action.

Posted by Tom at 08:34 AM | Comments (0) | TrackBack

When "Justice" destroys good reputations

The Sihpol acquittal yesterday focuses attention on an important aspect of the current wave of criminalizing merely questionable business transactions -- that is, the government's destruction of good reputations in its quest to obtain convictions and prevent juries from hearing testimony that is favorable to unpopular defendants.

In this excellent Chicago Tribune op-ed (free registration req.), David Hall -- a former editor of the Cleveland Plain Dealer and Denver Post who covered Arthur Andersen as a Chicago reporter in the 1960s -- decries the cultural climate and the lack of prosecutorial discretion that led to the destruction of Andersen:

Andersen's head on the U.S. Justice Department's dish, with unjust charges regarding Enron Corp. and the connivance of a slow-witted judge, is a parallel in today's political-legal-news culture--blame quickly, accuse broadly and dare the accused to defend. Bloody heads on plates satisfy the evening news and pundits looking for the easy prey of righteousness.

The Justice Department, eager to demonstrate its conservative stance would not be cowed by big business, maliciously destroyed a fine American company, a contributor to orderly commerce for eight decades. Andersen stumbled amid the stampede of cliffside accounting in the '90s, particularly regarding Sunbeam Corp. and Waste Management, but nothing deserved a judicial death sentence. . .

Many institutions, private and public, must feel under such siege, must fear the plow and the salt and the unjust destruction of Andersen. Every good-faith act should not be turned into an inquisition--by politicians polishing campaign ads, prosecutors primping for the boss, or reporters intent on bringing the first head on a dish.

Meanwhile, as the defense in the ongoing Enron Broadband trial proceeds with putting on their case, an interesting development is taking place. As the Chronicle's Mary Flood reports, Lawrence Ciscon, a former Enron Broadband systems engineer, is testifying on behalf of his five former Enron Broadband colleagues despite the fact that prosecutors have told him that he is a target of the Enron criminal investigation and could be indicted himself.

Mr. Ciscon's decision to testify brings into focus an abominable governmental tactic that ensures that the jury will never hear much of the favorable testimony for the defense. In both the Enron Broadband case and the earlier Nigerian Barge case, the prosecutors have identified dozens of former Enron executives as either targets of the Enron criminal investigation of unindicted co-conspirators of the defendants. As a result, the government has effectively prevented many witnesses with favorable testimony for the defendants in both the Broadband and Nigerian Barge cases from testifying because those witnesses would waive their Fifth Amendment privilege and probably face further perjury charges if they chose to tesfify contrary to the government's position in those cases. Indeed, in the case against former Enron CEO Jeff Skilling, former Enron chairman Kenneth Lay, and former Enron chief accountant Richard Causey, the Enron Task force has identified 114 unindicted conspirators in an effort to chill as much favorable testimony for the defendants as possible.

Thus, the "Justice" Department is not really interested in "justice" at all, or even in having a jury fairly evaluate all evidence relating to its charges against unpopular business figures. Rather, our "Justice" Department is much more interested in indulging public bias against unpopular businessmen, regardless of the reputations of citizens that it destroys in the process. Something is seriously wrong with the administration of justice in America when it takes the uncommon courage of someone such as Lawrence Ciscon for a jury to hear favorable testimony for businessmen who are facing their government's overwhelming power to imprison them for most of the rest of their lives.

Posted by Tom at 05:14 AM | Comments (0) | TrackBack

Former Gen Re exec fingers others

As anticipated in this post from earlier this week, John Houldsworth, a former high-level executive of the Cologne Re Dublin unit of Berkshire Hathaway Inc.'s General Reinsurance Corp., implicated four other senior General Re executives while pleading guilty on Thursday in Alexandria, Va. to conspiring to commit securities fraud. Mr. Houldsworth is the the first person to be indicted from the various governmental investigations into finite risk insurance transactions between General Re and American International Group Inc. Here are the previous posts on the investigations into AIG and Berkshire.

According to the criminal complaint, Mr. Houldsworth, Ms. Monrad, Mr. Napier, and another unknown executive in late 2000 conspired to structure a reinsurance contract to allow AIG to pass its auditor's "smell test" and to create a paper trail to make the transaction appear legitimate.

The other executives identified in a parallel SEC civil suit who are referred to by title in the the criminal complaint are former General Re CEO Ronald E. Ferguson, former CFO Elizabeth Monrad, current senior VP Richard Napier (who is expected to plead guilty to similar charges today), and Chris Garand, an underwriter in General Re's international finite division. The complaint also cites another General Re "senior executive" whose identity is unknown to Mr. Houldsworth.

Posted by Tom at 04:36 AM | Comments (0) | TrackBack

June 09, 2005

The Lord of Regulation takes one on the chin

A New York state court jury acquitted former Bank of America Corp. broker Theodore C. Sihpol today on 29 criminal counts relating to alleged improper trading of mutual-fund shares. The jury deadlocked 11-1 in favor of acquittal on four additional counts, and the judge declared a mistrial on those counts. Here is a previous post on Mr. Sihpol's case.

The acquittal was a bitter blow for New York Aspiring Governor Eliot Spitzer, whose office tried the case against Mr. Sihpol as the first criminal trial emanating from Mr. Spitzer's crackdown on what he characterizes as abusive trading practices in the mutual fund industry. As is his custom in such matters, Mr. Spitzer bludgeoned settlements out of several major fund firms by threatening them with devastating criminal indictments, but the young Mr. Sihpol refused to back down. Thus, even though he threatened Mr. Sihpol with an absurdly harsh 30 year sentence in prison if he were to be found guilty of the charges, Mr. Spitzer was forced to try the case and, in the end, had his hat handed to him.

Couldn't happen to a nicer guy.

Posted by Tom at 04:02 PM | Comments (0) | TrackBack

June 08, 2005

The Enron Airline?

A sure sign that a discussion on a particular subject has deteriorated to an unrecoverable level is a participant's allegation that the other side's position defends Nazism in some respect. With regard to discussions about business, it's quickly becoming evident that such discussions have degenerated into uselessness when one participant accuses the other side's position of defending Enron.

This NY Times article reports on a Congressional hearing yesterday in which Delta Air Lines Chief Executive Gerald Grinstein, Northwest Airlines President and Chief Executive Officer Douglas Steenland, and UAL Chairman, President and CEO Glenn Tilton testified in favor of proposed legislation that would allow airlines to freeze pension plans and extend their current obligations over 25 years. Last month, United Airlines obtained Bankruptcy Court approval to shift its employee-pension plans -- including their nearly $10 billion shortfall -- on to the federal government's Pension Benefit Guaranty Corp.

In response to the airline executives' rather reasonable comments in support of common-sense legislation, Senator Charles Grassley (Rep. Iowa) called United Airlines a "catastrophe" and compared United Airlines to Enron Corp., saying the carrier used "illusory investment gains" to "hide and disguise" the true financial condition of its pension plans. "Unlike Enron, however," concluded Sen. Grassley. "Everything United did was perfectly legal."

Well, playing the Enron card may make for a good sound bite, but it's a sure sign that Mr. Grassley wants to avoid addressing what's really troubling the airline industry -- i.e., Big Labor supported by compliant politicians. Let's take United as a case in point. At a time when unions owned over 50% of the company, controlled three board seats, and effectively hired and fired the company's CEO, the unions decided to increase their retirement compensation by approving unfundable pension obligations while, at the same time, extracting maximum current wage benefits that made United uncompetitive from an operations standpoint. Thus, United's owner-employees effectively looted the company with high current compensation benefits while, at the same time, effectively insuring that they would also ultimately loot the federal government's Pension Benefit Guaranty Corporation, which they knew would be the guarantor of at least a substantial portion of United's unfundable pension obligations.

Frankly, even the Enron sharpies didn't think of such a scheme.

Posted by Tom at 05:18 AM | Comments (1) | TrackBack

The Lord of Regulation comments on the Anderson decision

In an interview yesterday with Wall Street Journal columnist Alan Murray, New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot Spitzer observed that he agreed with the recent Supreme Court decision in Arthur Andersen LLP v. United States and that a criminal indictment of a company often is the wrong way to proceed in an investigation because of the risk of destroying the company. Comparing his investigations to those of the heavy-handed Enron Task Force, Mr. Spitzer made the following comment:

"I've always said Andersen was an improper indictment, because it wasn't proportionate. We use a scalpel, not a meat ax."

If what Mr. Spitzer is using on American International Group Inc. is a scalpel, then he must own one helluva meat ax.

Meanwhile, this NY Times article reports that Mr. Spitzer's immunity deal with former AIG executive Joseph Umansky was not coordinated with other ongoing investigations into AIG and effectively removed Mr. Umansky as a realistic target of those investigations.

Posted by Tom at 04:49 AM | Comments (0) | TrackBack

June 07, 2005

Checking in on the NatWest Three

This Telegraph.com article updates the Enron-related case of the "NatWest Three," the three former National Westminster Bank PLC bankers based in London who are charged in Houston with bilking their former employer of $7.3 million in a scheme allegedly engineered by former Enron CFO Andrew Fastow. Here are the previous posts on the NatWest Three.

Yesterday, the three bankers -- David Bermingham, Giles Darby and Gary Mulgrew -- filed their appeal to England's High Court of the decision last month of Charles Clarke, the Home Secretary, who upheld an earlier decision by a judge at Bow Street Magistrates' Court in central London to extradite the three bankers to Houston to face the charges. The case has been undergoing increasing scrutiny in the English media because the U.S. is attempting to extradite the three men under the 2003 Extradition Act, which has been criticized in English legal circles for allowing British courts to extradite British citizens without proper evaluation of U.S. prosecutors' charges and evidence.

Of particular interest is the article's analysis of the three bankers' procedural options in the foreign courts if they lose their current appeal:

If [the NatWest Three] lose, they will take the matter to the House of Lords and then, if necessary, on to the European Court of Human Rights. The process could take over five years.

Five years?! The thought of the Enron Task Force remaining in business for another five years is definitely not comforting.

Posted by Tom at 07:19 AM | Comments (0) | TrackBack

George Melloan on the Andersen decision

George Melloan is deputy editor of The Wall Street Journal, where he is responsible for the editorial pages of The Wall Street Journal Europe and The Asian Wall Street Journal and writing a weekly column called Global View. Mr. Melloan has won the Gerald Loeb Award for excellence in financial journalism and two Daily Gleaner awards from the Inter-American Press Association for writings about Central America.

In this column in today's Journal ($), Mr. Melloan takes dead aim at the government's abuse of the rule of law to pursue currently unpopular businesspeople:

The Supreme Court has now ruled that it was excessive prosecutorial zeal and inadequate jury instruction that destroyed Arthur Andersen in 2002, not the merits of the federal obstruction-of-justice case. . .

For some years now, U.S. business corporations have been caught between the Scylla of predatory class-action lawyers and the Charybdis of overzealous prosecutors, regulators and lawmakers on the prowl for "white-collar crime." . .

In a democracy, arrogance or misbehavior by public figures with important responsibilities invites popular resentment.

Then, Mr. Melloan superbly summarizes how we got to this point:

Sensing the public mood, a Congress never reluctant to make work for fellow lawyers whooped through the Sarbanes-Oxley bill, proclaiming it an antidote to corporate corruption. In fact, it's a law that for proper compliance would require every assistant vice president to have a lawyer seated on his left and an accountant on the right to monitor his every movement, including trips to the WC. CEOs must now sign their annual reports with a trembling hand, knowing full well that a transgression by some anonymous drone in Walla Walla might cost a severe penalty. Corporate board members shiver for the same reason.

The sour public mood has had other effects. Staffers at the Securities and Exchange Commission and other regulatory agencies have been able to break free of adult supervision by appointive commissioners and have set about to regulate everything that moves. U.S. attorneys have endeavored to make their reputations pursuing big names in the business world. Martha Stewart went to jail for fibbing to investigators about what she had told her stockbroker, a misdemeanor at best.

The now-renowned Eliot Spitzer of New York and other state attorneys general began calling press conferences to denounce "crimes" never before known to man. Mr. Spitzer so terrorized the board of AIG, the global insurance giant, that it dumped CEO Maurice R. Greenberg. Among Mr. Greenberg's sins was "smoothing" quarterly reports, a common practice in industry that probably gives investors a better idea of a company's condition than letting the numbers bounce around from quarter to quarter. In a further act of appeasement AIG has now restated its profits for the last five years, lopping off $4 billion, which will surely cause confusion among tax collectors.

Read the entire piece. One of the most disturbing aspects of the recent trend of government using its enormous power to criminalize merely questionable business transactions has been much of the public's acquiescence to this abuse of power. The business-oriented media and blog commentators such as Professor Ribstein and Professor Bainbridge have decried the trend, but prosecutors -- with the help of compliant politicians -- continue to appeal to the general public's animus toward wealthy businesspeople in pursuing dubious business-related prosecutions. As we have seen in the Martha Stewart case, the sad case of Jamie Olis, and the Enron-related Nigerian Barge case, the personal loss to individuals and their families resulting from this abuse of power is enormous. Sadly, the damage to the rule of law may be even greater.

Posted by Tom at 04:59 AM | Comments (0) | TrackBack

June 06, 2005

The noose tightens -- General Re exec cops plea

John Houldsworth, an executive at Berkshire Hathaway Inc.'s General Reinsurance Corp. unit, has agreed to plead guilty to a charge of criminal conspiracy in connection with the company's nontraditional insurance finance transactions with American International Group Inc. Although Mr. Houldsworth -- who is on paid leave, but who headed General Re's reinsurance unit in Dublin -- faces up to five years in prison for participating in the disputed 2001 transaction between AIG and General Re, that sentence will likely be less so long as Mr. Houldsworth fulfills his pledge to cooperate with the U.S. Justice Department and the Securities and Exchange Commission in their investigation of AIG and Berkshire. Here are the previous posts on the various investigations of AIG and Berkshire.

Posted by Tom at 01:21 PM | Comments (0) | TrackBack

Lea Fastow released from prison

The Chronicle's Mary Flood reports that Lea Fastow -- who served a longer sentence under harsher conditions because of her marriage to former Enron CFO Andrew Fastow -- was released to a halfway house from the Federal Detention Center in downtown Houston today. She is scheduled to be released from the halfway house on July 11. Here are the previous posts on the Lea Fastow case.

Although U.S. District Judge David Hittner's handling of the Lea Fastow case has received the most media attention, the case is really a prime example of the Enron Task Force's lack of prosecutorial discretion and heavy-handed plea bargaining tactics. In reality, Judge Hittner simply never appeared comfortable with the Task Force's indictment of Mrs. Fastow. The indictment was a blatant move to place pressure on Mr. Fastow to cop a plea and cooperate with the prosecution, which he eventually did. During Mrs. Fastow's sentencing, Judge Hittner harshly criticized prosecutors for vascillating between an original indictment of six felonies and a final charge of just one misdemeanor, suggesting that justice may not have been served in either instance. "Such maneuvering as is present in this case might be seen as a blatant manipulation of the justice system," Judge Hittner stated on the record.

Yale law professor John Langbein, who has written extensively regarding prosecutorial abuse of the American plea bargaining system, identifies the problem in the following manner:

"Plea bargaining concentrates effective control of criminal procedure in the hands of a single officer. Our formal law of trial envisages a division of responsibility. We expect the prosecutor to make the charging decision, the judge and especially the jury to adjudicate, and the judge to set the sentence. Plea bargaining merges these accusatory, determinative, and sanctional phases of procedure in the hands of the prosecutor. Students of the history of the law of torture are reminded that the great psychological fallacy of the European inquisitorial procedure of that time was that it concentrated in the investigating magistrate the powers of accusation, investigation, torture and condemnation. The single inquisitor who wielded those powers needed to have what one recent historian has called 'superhuman capabilities [in order to] … keep himself in his decisional function free from the predisposing influences of his own instigating and investigating activity.'"

"I cannot emphasize too strongly how dangerous this concentration of prosecutorial power can be. The modern prosecutor commands the vast resources of the state for gathering and generating accusing evidence. We allowed him this power in large part because the criminal trial interpose the safeguard of adjudication against the danger that he might bring those resources to bear against an innocent citizen – whether on account of honest error, arbitrariness, or worse."

Posted by Tom at 08:59 AM | Comments (2) | TrackBack

More ripples from the Anderson decision

Ellen Podger over at the White Collar Crime Prof Blog points us to two documents that raise important issues relating to the federal government's questionable policy of attempting to regulate business through criminalization of what it deems to be questionable business practices.

As noted in this earlier post, Frank Quattrone's appellate attorneys have based his appeal in this reply brief squarely on last week's Supreme Court decision in Anderson. The following is the hard-hitting first paragraph from that brief:

The government’s brief is an effort to weave a rope of sand, and to imbue a trial with evidentiary substance and procedural fairness when it was sorely lacking in both. With regard to the evidence, the prosecutors dutifully characterize the defendant as plainly guilty, and describe their proof as "strong" or even "compelling." [record reference omitted]. This is standard rhetoric for those who write the red-covered briefs in criminal cases. But if this was a "strong" case, then there is no such thing as a weak one. Notwithstanding the government’s cavalier description, this case turned on a "threadbare phrase," United States v. Mulheren, 938 F.2d 364, 370 (2d Cir. 1991) — Quattrone’s one-line e-mail urging his colleagues to "follow [the] procedures" contained in a standard corporate document retention policy. As the Supreme Court reminded the government only recently, "[i]t is, of course, not wrongful for a manager to instruct his employees to comply with a valid document policy under ordinary circumstances." Arthur Andersen LLP v. United States, No. 04-368, 2005 WL 1262915, *5 (U.S. May 31, 2005).

Moreover, Professor Geraldine Szott Moohr of the University of Houston Law Center has written this law review article -- Prosecutorial Power in an Adversarial System: Lessons from Current White Collar Cases -- in which she points out that the increasingly common prosecutorial tactic of bludgeoning white collar defendants into plea bargains (noted earlier here) undermines the deterrent purpose of such prosecutions. Here is the synopsis for the article:

Successful disposition of the cases against Arthur Andersen, Martha Stewart, high-level Enron officers, and scores of mid-level executives testifies to the authority of federal prosecutors. A review of these cases identifies the sources of prosecutorial power and traces their effect in the investigation, charging, and sentencing phases of white collar crime.

A comparison of the roles of American federal prosecutors and their European counterparts in investigating, charging, and sentencing corroborates the judgment that our present system has a decidedly inquisitorial cast. The power of inquisitorial prosecutors is constrained by inherent safeguards that impose formal and informal limitations on their discretion. In contrast, federal prosecutors exercise greater power in the investigation and charging phases and exercise even more authority in sentencing and plea bargaining. The combination belies adversarial values.

Retreat from the adversarial trial can undermine the goal of deterring business misconduct in several ways. Inconsistent sentences that result from plea bargains can forfeit the moral authority of criminal law in the business community, the very group one wishes to deter. In contrast, public trials provide a rationale for sentences and educate the business community about the illegality of specific conduct, a requirement for optimal deterrence that is especially relevant in white collar crimes. Public trials also strengthen shared social norms of the business community against fraudulent practices. In sum, disposing of criminal cases through quasi-inquisitorial investigation and plea bargaining forfeits an opportunity to reinforce the standards of lawful business conduct and thereby strengthen deterrence.

In that connection, note Professor Langbein's related comments in this post about the Lea Fastow case.

Posted by Tom at 04:38 AM | Comments (1) | TrackBack

June 03, 2005

What killed Arthur Andersen?

One of the most difficult lessons to learn in becoming a wise counselor is to say "no" to a good client that desires to do something wrong. In this NY Times op-ed, Times business writer Floyd Norris observes that the demise of Arthur Andersen is attributable to its inability to say "no" to several lucrative clients who were engaging in shady deals.

He might be right. Certainly the double whammy of damages that a still-in-business Andersen would have probably had to pay in regard to such scandals as WorldCom and Enron would have been huge financial burdens. There is no certainty that the firm could have survived those hits.

But the fact remains that the federal government's decision to terminate Andersen through criminal prosecution was not only arbitrary and capricious, but bad public policy. Very few of the 30,000 employees of Andersen were engaged in any wrongdoing, and Andersen was only one of several firms who provided professional advice and services on shady transactions for WorldCom and Enron. Nevertheless, Andersen was singled out for criminal prosecution, and the result was economic hardship for thousands of its former employees and less competition for providing audit services for big companies. As we are now seeing in regard to American International Group Inc. and its auditor, PriceWaterhouseCoopers, the government's prosecution of Andersen did not deter professionals from helping their clients engage in risky transactions. That is why such deterrence should be left to the markets, which are much better than the government at efficiently sorting out the type of risk that is good from that which is not.

Posted by Tom at 05:16 AM | Comments (0) | TrackBack

June 02, 2005

Are the Times editors reading Clear Thinkers?

Yesterday morning, the headline to this Kurt Eichenwald/NY Times article was the following:

"Reversal of Andersen Conviction Not a Declaration of Innocence."

That headline prompted this yesterday morning post.

Today, the same Times article has the following headline:

"Analysis: Reversal of Andersen Conviction"

H'mm. Coincidence? ;^)

Posted by Tom at 03:30 PM | Comments (2) | TrackBack

Ripples from the Andersen decision

This NY Times article reports that former Credit Suisse banker Frank Quattrone, who was convicted of obstruction of justice last year for sending out an email regarding the bank's document retention policy, is raising new issues on his appeal based on the U.S. Supreme Court's decision earlier this week in the Arthur Andersen case.

Apparently, the jury instructions used in the Quattrone trial were similar to those used in the Andersen trial. Inasmuch as Quattrone was not charged with any other crime, those jury instructions appear to have become the key issue in his appeal.

Posted by Tom at 08:36 AM | Comments (0) | TrackBack

June 01, 2005

AIG's Enronesque experience continues

American International Group Inc. released its long-delayed annual report yesterday and, as expected, reported a 2.7% hit to the company's net worth along with cautionary notes about the longer-term cost that AIG is confronting as it deals with multiple governmental investigations. Here are the previous posts on the travails of AIG.

In a particularly important disclosure, AIG noted that credit downgrades over the past several weeks have forced it to post an additional $1.16 billion in collateral for certain financial contracts. Although that amount is manageable for the time being, AIG noted that "additional downgrades could result in requirements for substantial additional collateral, which could have a material effect" on how AIG manages its short-term liquidity needs.

As noted in this earlier post, a failure of trust is what caused Enron's failure, and credit downgrades and customer trepidation over AIG's financial difficulties can cause the same downward spiral for that company. In its latest annual report, accounting adjustments reduced AIG's previously reported net income for 2004 by 12% ($1.32 billion) to $9.73 billion, and reduced AIG's book value by $2.26 billion to $80.61 billion. Overall, the restatement reduced AIG's net income from 2000 through 2004 by 10% ($3.9 billion).

Posted by Tom at 07:39 AM | Comments (0) | TrackBack

The similarity of Russian and U.S. prosecutions of business figures

Former billionaire Russian oil magnate Mikhail Khodorkovsky was sentenced to nine years in prison yesterday by a Russian court in a case that businesspersons from around the world have followed carefully as a sign of the Russian government's willingness to treat business interests fairly. Here are the previous posts on Mr. Khodorkovsky and his now largely dismantled company, OAO Yukos.

Russian governmental officials have presented the case against Mr. Khodorkovsky as a repudiation of the corrupt capitalism in the early days of Russia's market economy of the 1990s that allowed Mr. Khodorkovsky to win control over Yukos, which was then Russia's largest oil company. Thus, the Russian government's actions against allegedly corrupt business leaders is quite popular among most Russians, who resent Mr. Khodorkovsky and the other Russian tycoons who made fortunes during the 1990's while most Russians struggled under the new market economy.

Nevetheless, the price that the Russian government will pay for prosecuting Mr. Khodorkovsky may be costly. Western governments and investors have begun to question the Russian government's commitment to the rule of law in regard to its treatment of business interests that compete with the government's business interests. Moreover, the government's dismantling of Yukos has made given foreign investors yet another reason to avoid investment in Russian capital markets precisely at a time when Russia's undercapitalized economy desperately needs that investment.

But lest we in the U.S. get too self-righteous about the Russian government's handling of Mr. Khodorkovsky's case, remember that the sentence pursued by U.S. prosecutors and handed down by a U.S. federal court in the sad case of Jamie Olis makes the Russian government's handling of Mr. Khodorkovsky's case look downright reasonable. And if you do not believe that a prosecution of a U.S. business figure could be based on similar political aspirations as those involved in Mr. Khodorkovsky's case, just watch the upcoming case against Maurice "Hank" Greenberg develop.

What parallel universe are we living in when the U.S. government's criminalization of business interests appears as bad, if not worse, than that of the Russian government's?

Posted by Tom at 05:18 AM | Comments (0) | TrackBack

Declaration of innocence?

This headline -- "Reversal of Andersen Conviction Not a Declaration of Innocence" -- to this NY Times/Kurt Eichenwald story about the Supreme Court's decision in Andersen is revealing of the mainstream media's mindset in regard to the government's dubious policy of criminalizing merely questionable business practices.

In reality, the Andersen decision is not a "declaration of innocence" for an entirely different reason than the ones set forth in the article. Indeed, Andersen does not need such a declaration because of a fundamental principle of American jurisprudence that the mainstream media and the government prosecutors routinely overlook while pursuing "justice" in regard to unpopular businesspersons.

Andersen is innocent until proven guilty.

Posted by Tom at 04:54 AM | Comments (0) | TrackBack

May 31, 2005

Andersen wins at the Supreme Court

In a unanimous decision, the Supreme Court overturned the conviction of the defunct Arthur Andersen accounting firm for destroying documents relating to its client, Enron Corp., before Enron collapsed into chapter 11 bankruptcy in late 2001. Here are the previous posts on the Andersen case.

Chief Justice Rehnquist, writing for the Court, said that the conviction was the product of defective jury instructions at trial that were too vague and broad for jurors to determine correctly whether Andersen obstructed justice. Justice Rehnquist noted that jurors were instructed to convict Andersen if the accounting firm had an "improper purpose," such as an intent to impede or subvert fact-finding in an "official proceeding." Thus, Justice Rehnquist reasoned, jurors were instructed to convict even if Andersen mistakenly thought it was acting legally. At trial, Andersen argued that employees who shredded tons of documents followed the policy and there was no intent to thwart the SEC investigation.

On a threshold basis, Justice Rehnquist analyzed the case in the following manner:

In this case, our attention is focused on what it means to "knowingly . . . corruptly persuad[e]" another person " with intent to . . . cause" that person to "withhold" documents from, or "alter" documents for use in, an "official proceeding."

We have traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress, . . . and out of concern that ‘a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed. [citations ommitted].

Such restraint is particularly appropriate here, where the act underlying the conviction -- "persua[sion]" -- is by itself innocuous. Indeed, "persuad[ing]" a person "with intent to . . . cause" that person to "withhold" testimony or documents from a Government proceeding or Government official is not inherently malign. Consider, for instance, a mother who suggests to her son that he invoke his right against compelled self-incrimination, . . . or a wife who persuades her husband not to disclose marital confidences. [citations ommitted].

Nor is it necessarily corrupt for an attorney to "persuad[e]" a client "with intent to . . . cause" that client to "withhold" documents from the Government.

In a later part of the opinion, Justice Rehnquist ribs the Government regarding its argument about Congress' alleged meaning of the key phrase in the criminal statute under scrutiny:

The Government suggests that it is "questionable" whether Congress would employ such an inelegant formulation as "knowingly . . . corruptly persuades." . . Long experience has not taught us to share the Government's doubts on this score, and we must simply interpret the statute as written.

And in discussing the defective instructions given to the jury at trial, Justice Rehnquist notes that following:

[T]he jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing. Indeed, it is striking how little culpability the instructions required. For example, the jury was told that, "even if [Andersen] honestly and sincerely believed that its conduct was lawful, you may find [Andersen] guilty." . .The instructions also diluted the meaning of "corruptly" so that it covered innocent conduct. . .

The ruling is a stunning setback for the Department of Justice generally and the Enron Task Force specifically, which pursued a dubious prosecution of Andersen that effectively terminated a going concern that employed 30,000 persons in the U.S. (in comparison, Enron's implosion cost approximately 5,000 employees their jobs). That economic carnage was a stark reminder of the increasingly common governmental regulatory practice of criminalizing merely questionable business transactions, a practice that has been played out over and over again in other aspects of the Enron case and, more recently, in regard to the governmental investigations into American International Group Inc.

Professor Ribstein, a longtime critic of governmental regulation through criminalization of merely questionable business transactions, places the Supreme Court's decision in the perspective of the damage done by the government's prosecution:

[I]n addition to destroying value and lives, it significantly reduced competition in the auditing industry and thereby impeded efforts to engage in the cleanup the pro-regulatory folks have thought is oh so necessary. Now it turns out the whole thing was a legal as well as policy mistake.

More generally, this is yet another nail in the coffin of the misbegotten idea that corporate criminal liability is the way to better markets.

In a subsequent post, Professor Ribstein also passes along these other salient thoughts. Professor Henning also has insightful thoughts about the Anderson decision here and here.

So, the Supreme Court reminds us that the rule of law does not allow the government to abuse the law to engage in popular prosecutions of unpopular business figures. As has been noted on many previous occasions on this blog, this principle is precisely what Sir Thomas More was talking about in A Man for All Seasons when he made the following comments to young lawyer Will Roper, who had just confirmed that he would abuse the rule of law in order to achieve the laudable goal of convicting the Devil of a crime:

"Oh? And Roper, when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down -- and you're just the man to do it, Roper -- do you really think you could stand upright in the winds that would blow then?"

"Yes, I'd give the Devil the benefit of law, for my own safety's sake!"

The Supreme Court's decision in Anderson cannot bring that firm back to life, and that is an injustice. But it does provide a measure of protection to us from the government abusing the law and using its overwhelming power to pursue wrongful prosecutions against the unpopular persons of the moment. And for that, I am very thankful.

Posted by Tom at 10:33 AM | Comments (4) | TrackBack

May 27, 2005

The Greenberg defense team

On the heels of this lawsuit, this New York Times article profiles the defense team of former AIG chairman and CEO, Maurice R. "Hank" Greenberg -- David Boies, Robert G. Morvillo, and longtime Greenberg confidant, Kenneth J. Bialkin of Skadden, Arps.

In typical NY Times style, the article treats Mr. Boies as a rock star, while essentially avoiding too much mention of the two less flashy members of the defense team. Overall, the team strikes me as somewhat odd. Mr. Boies is a longtime supporter of Democratic Party interests, which is the opposite of Mr. Greenberg's political interests. Moreover, Mr. Morvillo -- the criminal law expert -- is coming off the rather disappointing trial defense of Martha Stewart last year. I would not be surprised to see additional members added to this team when the inevitable criminal indictments against Mr. Greenberg are filed, probably later this summer.

Posted by Tom at 05:55 AM | Comments (0) | TrackBack

May 26, 2005

The Lord sues AIG and Greenberg

New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot Spitzer and the New York State Insurance Department filed a civil lawsuit today against American International Group, Inc and its two former top executives -- former CEO Maurice R. "Hank" Greenberg and former CFO Howard I. Smith -- alleging that the two executives orchestrated a scheme that allowed AIG to manipulate its financial results and mislead regulators and investors.

After managing AIG into one of the world's largest financial companies over the past 40 years, Mr. Greenberg resigned as AIG's CEO and chairman this past March under pressure from the AIG Board and Mr. Spitzer. At around the same time, Mr. Smith was fired as AIG's CFO for allegedly refusing to cooperate with Mr. Spitzer's investigation, although Mr. Spitzer had made clear by that time that both Mr. Greenberg and Mr. Smith were targets of his parallel criminal investigation. Here are previous posts on the saga of Mr. Spitzer's investigation of AIG and Berkshire Hathaway's General Reinsurance Corp, and here is a copy of the complaint and Mr. Spitzer's press release regarding the complaint.

There is really nothing much new in the complaint, which was filed in State Supreme Court in Manhattan and seeks damages and disgorgement of profits from the allegedly illegal transactions. The Lord of Regulation alleges that Mr. Greenberg orchestrated wrongdoing in "an apparent effort to improve the company's financial results," even as AIG "was a well-run and profitable company that didn't need to cheat." The complaint does not address the fact that the transactions in question were approved by AIG and its independent auditors. The Securities & Exchange Commission and Justice Department are also investigating AIG, but neither is involved in Mr. Spitzer's civil lawsuit.

Meanwhile, AIG and its auditors, PricewaterhouseCoopers LLP, are working to finish the company's delayed annual report by the company's self-imposed May 31 deadline. Still remaining to be seen is whether AIG can weather an Enronesque meltdown now that the Lord has deemed Mr. Greenberg's earnings management strategies as illegal, and to ponder the importance of good timing in going bust. AIG's shares have lost almost a quarter of their value since Mr. Spitzer announced his campaign against AIG on February 12, closing today at $55.71 compared to a value of $73.12 on Friday, Feb. 11.

Posted by Tom at 03:00 PM | Comments (0) | TrackBack

The BBC on the NatWest Three

In its inimitable style, the B.B.C. has produced a news video segment on the three U.K. bankers who have been dubbed the "NatWest Three" (earlier posts here) in the Enron case. To view the video:

Go to this site.

Hit the "Launch" button, which produces a new window.

In the new window, scroll down on the right hand side to the April 20 hyperlink, "Million Dollar Manhunt." The video plays in RealPlayer.

It's always entertaining to hear the British pronounce "Houston." Also, the piece is definitely not complimentary of the Federal Detention Center in downtown Houston. Finally, it seems in the video as if Philip Hilder (Sherron Watkins' attorney) is doubling as a spokesman for the Enron Task Force. ;^)

By the way, this Glasgow Herald article provides an interesting U.K. perspective on the NatWest Three case, including the following comment from a Glasgow University law professor:

"Three questions arise here. Firstly, will they receive a fair trial, second, would the sentence be out of proportion with European norms and thirdly, is there a real risk of other forms of mistreatment either in detention conditions or more usual the infliction of violence?"

Posted by Tom at 10:57 AM | Comments (0) | TrackBack

Prosecution rests in the Enron Broadband trial

The prosecution rested Wednesday in the Enron Broadband trial, about five weeks after the beginning of the trial. Here are previous posts on the trial.

The trial has been a strange one. Looking like a tap-in for the prosecution at the beginning, the prosecution committed some early blunders, such as allowing its key witness to testify falsely regarding a video shown to the jury and then compounding that mistake by attempting to blame the error on a clearly intimidated woman who previously provided video services for Enron. At that point, the trial was looking really interesting.

Unfortunately, the fireworks did not last long. The trial quickly descended into mind-numbing boredom, noted here and here. Thus, when the Enron Task Force prosecutors advised U.S. District Judge Vanessa Gilmore that they expected that it was going to take at least a week to ten days longer to complete presentation of their case-in-chief than they originally predicted, a jury rebellion nearly broke out. It's exceedingly difficult to read if a jury is blaming the prosecution or the defense for such delays, but the lawyers on both sides accelerated examination of witnesses over the past week in an attempt to get the trial back on course. Inasmuch as the defense side of this type of case normally does not take as long as the lawyers originally predict, my sense is that the trial is back on track to conclude by late June.

Despite their early mistakes, the Enron Task Force prosecutors ended their case-in-chief by eliciting testimony about the "elephant in the courtroom" -- i.e., the large amount of money that three of the former Enron executives-defendants made on stock sales during the period in which the prosecution alleges that they were making false public statements about Enron Broadband's prospects. That is clearly the strength of the prosecution's case, and expect the prosecutors to hammer that point again and again throughout the remainder of the trial.

The defense team begins presentation of their case today. Let's hope they liven things up a bit.

Posted by Tom at 05:00 AM | Comments (0) | TrackBack

May 24, 2005

Update on Enron's "NatWest Three"

One of the more interesting sidelights to the criminal investigations into Enron Corp. has been the saga of the "NatWest Three" -- David Bermingham, Gary Mulgrew and Giles Darby, the three former National Westminster Bank PLC bankers based in London who are charged in Houston with bilking their former employer of $7.3 million in a scheme allegedly engineered by former Enron CFO Andrew Fastow. Here are the previous posts on the NatWest Three.

Earlier this morning, English Home Secretary Charles Clarke approved the extradition of the NatWest Three to Houston to face the seven counts of wire fraud that each of them face under the U.S. indictment. The NatWest Three have two weeks to appeal Mr. Clarke's decision, and an appeal would likely tie the matter up further in U.K. courts.

The case of the NatWest Three is gaining increased public interest in England because the three bankers have contended that, if a fraud case should be prosecuted against them at all, then the case should go forward in England because the men are all British and the alleged offenses were committed against a United Kingdom company. If a British prosecution against the three were to proceed, then the U.S. prosecution would be delayed because the British charges would take precedence over foreign ones. A British prosecution would also raise all sorts of double jeopardy and collateral estoppel issues that could at least complicate any subsequent U.S. prosecution.

The U.K.'s Serious Fraud office decided not to prosecute the three former bankers, but the three bankers last month won a judicial review of that decision. Although Mr. Clarke was not required to consider the judicial review issue in deciding whether to approve the men's extradition, British legal commentators are now openly questioning why the British government is giving in so easily to a U.S. government extradition request relating to reputable U.K. businessmen, particularly in regard to an extradition that would result in a prosecution of those U.K. citizens in Houston's anti-Enron environment for alleged crimes that the U.K. government has declined to prosecute?

That's a pretty darn good question.

Posted by Tom at 11:06 AM | Comments (3) | TrackBack

May 21, 2005

The Chronicle makes a point about DeLay that it failed to make about Enron

A good, old-fashioned snit between Texas political opponents gave the Houston Chronicle an opportunity this week to make a good point about the rule of law and the integrity of governmental investigations. But in so doing, the Chronicle highlighted its failure to apply precisely the same standard to far more egregious examples of prosecutorial impropriety, a good bit of which is taking place in the Chronicle's own backyard.

As this Washington Times article reports, Travis County District Attorney Ronnie Earle (first picture left) -- who is investigating House Minority Leader Tom DeLay's campaign finance methods (previous posts here) -- characterized Mr. DeLay as a "bully" in a speech at a Democratic Party fundraiser in Dallas. Among Mr. Earle's comments were the following:

"This case is not just about Tom DeLay. If it isn't this Tom DeLay, it'll be another one -- just like one bully replaces the one before. This is a structural problem involving the combination of money and power. Money brings power and power corrupts."

Well, level-headed liberals and conservatives agreed that Mr. Earle should not have sullied the integrity of the investigation into Mr. DeLay's campaign finances by taking potshots at Mr. DeLay during a partisan gathering. But Mr. DeLay's hometown newspaper -- the Chronicle -- went even further and published this stinging editorial questioning Mr. Earle's judgment:

Earle's attendance and remarks attacking DeLay at a Democratic fund-raiser last week in Dallas damaged the credibility of his investigation with a stunning display of prosecutorial impropriety.

[I]t is inappropriate for a prosecutor to discuss a case under investigation in a political setting, or to single out a potential target of that probe for criticism.

The fact that Earle refuses to recognize his blunder and would do it again calls into question whether he has the necessary impartiality and judgment to conduct the investigation . . .

The Chronicle's broadside toward Mr. Earle was made all the more surprising by the fact that the local newspaper has been a frequent critic of Mr. DeLay. So, the Chronicle editorial definitely scores some points for objectivity.

However, before the Chronicle editorialists pat themselves on the back too much for their fairness in defending Mr. DeLay against Mr. Earle's imprudent remarks, they need to answer the following question:

Where has that objective viewpoint been over the past several years as other "stunning displays of prosecutorial impropriety" have been perpetrated on business executives, including many right under the nose of the Chronicle in Houston?

In that connection, it has become commonplace for officials of the federal government to conduct a virtual political rally as they flame already well-stoked local emotions against former executives of that favorite corporate pariah, Enron:

"[T]he president's corporate task force, which celebrates its second anniversary tomorrow . . . [has demonstrated that] just the mention of the name Enron evokes images of duplicity and greed," said Linda C. Thomsen, director of enforcement for the Securities and Exchange Commission;

"[T]he corporate culture of Enron guided by Mr. Lay is now synonymous with corporate fraud and greed at its worst. And Enron's crooked 'E' logo depicts the corporate management team at Enron -- crooked," opined Internal Revenue Service Commissioner Mark W. Everson; and

In a December, 2004 interview, the Chronicle reported that Andrew Weissmann (second picture above), director of the Enron Task Force, compared Enron executives to New York mobsters that he previously prosecuted.

Literally dozens of other examples of inflammatory public statements from Enron prosecutors and government officials could be cited.

Meanwhile, as noted in this earlier post, the Lord of Regulation went on the Sunday talk show circuit recently to condemn Maurice "Hank" Greenberg, one of the targets of the Lord's ongoing investigation into American International Group, Inc.:

"These are very serious offenses," stated Mr. Spitzer gravely. "Over a billion dollars of accounting frauds that A.I.G. has already acknowledged. . . That company was a black box, run with an iron fist by a C.E.O. who did not tell the public the truth. That is the problem."

Now, let's take stock here. In each matter described above, prosecutors have made inflammatory public statements about subjects of their highly-publicized criminal investigations. In Mr. Earle's case, the Chronicle condemns his one imprudent remark in the strongest terms. But what has the Chronicle had to say about the multiple comments of the Enron prosecutors and Mr. Spitzer, which frankly are much more numerous and egregious than Mr. Earle's relatively tame comments?

Nothing. Nada. Zilch.

The Chronicle's blindspot is typical of the mainstream media's apathy toward the prosecutorial misconduct that is taking place these days as big government criminalizes big business. The existence of business fraud at companies such as Enron, WorldCom, Tyco and maybe even AIG does not necessarily mean that there is more misconduct in big business than in any other relatively large organization, such as big government or even big news organizations. Nevertheless, prosecutors such as Mr. Spitzer and those on the Enron Task Force are publicizing these instances of business fraud to generalize arbitrarily against those who are easy and popular targets -- i.e., wealthy (and apparently greedy) businessmen. The Chronicle has embraced this public relations tactic while portraying the Enron Task Force as the defender of noble egalitarianism fighting against the forces of corrupt capitalism.

In the wake of such seemingly simple morality plays, many legitimate business transactions -- most notably structured finance transactions that most prosecutors and journalists neither understand nor do the homework necessary to understand -- are unfairly and incorrectly portrayed as complex business frauds. Completely ignored in the process is the fact that such transactions build wealth in companies for the benefit of shareholders, and that such transactions are usually reviewed and approved by multiple professionals who are experts in such transactions. The misguided nature of the government and the Enron bankruptcy examiner's criminalization of Enron's valid structured finance transactions has been well-chronicled by University of Chicago business professor and structured finance expert Christopher Culp in his recent books, Corporate Aftershock (Cato 2003) and Risk Transfer (Wiley 2004).

So, three and a half years now after Enron spiraled into bankruptcy, the Enron Task Force has completed one trial, and obtained one conviction and one acquittal of former Enron executives (the Task Force is currently conducting a trial against five former Enron executives in the Enron Broadband case). Rather than prosecute clearly criminal conduct, the preferred approach of the Task Force has been to sledgehammer former Enron executives with multi-count indictments so that each of the executives is faced with the prospect of what amounts to a life prison sentence if they risk exercising their Constitutional right to defend themselves against the charges. Yale Law School Professor John Langbein has written and spoken extensively about how the government is manipulating this plea bargain system to pressure people to buckle and accept a plea, even if they are innocent.

Admittedly, some of the former Enron executives who copped pleas -- notably Andrew Fastow, Ben Glisan and Michael Kopper -- stole from Enron and thus, certainly engaged in criminal conduct. However, many others who have entered into plea deals did not engage in any clearly criminal conduct. Rather, they entered into those deals simply because they could not risk either the financial drain or the long prison term that they faced if they attempted to defend themselves against the Task Force's sledgehammer.

In the meantime, just to make sure that public perception remains inflamed against big business targets, Mr. Spitzer and the Enron Task Force continue to make inflammatory public statements and disclosures about their targets that strongly imply guilt and wrongdoing. Again, what has the Chronicle had to say about this unsavory use of the government's overwhelming prosecutorial power?

Nothing. Nada. Zilch.

The preservation of our freedom is inextricably tied to upholding the rule of law, and that includes restraining the government when it attempts to erode the rule of law to convict an unpopular defendant. As noted many times on this blog, this principle is precisely what Sir Thomas More was talking about in A Man for All Seasons when he made the following comments to young lawyer Will Roper, who had just confirmed that he would abuse the rule of law in order to achieve the laudable goal of convicting the Devil of a crime:

"Oh? And Roper, when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down -- and you're just the man to do it, Roper -- do you really think you could stand upright in the winds that would blow then?"

"Yes, I'd give the Devil the benefit of law, for my own safety's sake!"

The Chronicle is right that even Tom DeLay is entitled to the protection of due process of law in the face of the overwhelming power of a governmental prosecution. But so are former Enron and AIG executives. Not only for their protection, but for ours.

Posted by Tom at 12:00 PM | Comments (9) | TrackBack

May 18, 2005

Juror rebellion brewing in Enron Broadband case

As noted in this previous post, the Enron Broadband trial -- after some early fireworks -- has really turned into a snoozer. And, according to this Chronicle article, the jurors are close to open rebellion:

Initially, lawyers for both sides estimated the trial would take two months to complete. Prosecutors are in their fourth week of presenting their case and told Ú.S. District Court Judge Vanessa Gilmore during a break in the trial Tuesday it would take them at least another seven to 10 days beyond their original estimate to finish.

"The government underestimated the length of the cross-examination," Gilmore told the jury at the end of Tuesday's proceedings.

Jaws of some jurors dropped while others became wide-eyed when she told them the trial would now not likely end until July 8, which is 12 weeks from its April 18 start.

Gilmore then spoke privately outside the courtroom with jurors before returning to address attorneys.

"The jury is going insane back there," Gilmore said, pointing to a door that leads to the jury room. "They're having a fit."

Many of the jurors, she said, will miss out on summer vacations and will not be getting paid at their jobs for up to a month longer than expected.

I'm still not sure that the trial will last as long as Judge Gilmore told the jury yesterday because the defense case in such trials often does not take as long as predicted. However, the prosecution's poor time-planning in putting on its case in chief is another potential blunder in a case that looked like a layup for the prosecution before trial. Although one never knows for sure which side the jurors are blaming for trial delays, my experience is that jurors tend to blame the side that is less entertaining in their questioning of witnesses. And unquestionably, at this stage of the Broadband trial, the prosecution's presentation of its case has clearly been less lively than the defense's cross-examination.

Consequently, stay tuned. If you can stay awake, that is.

Update: The defense counsel in the Broadband case proposed this morning that the defendants would create a fund from which anonymous payments could be made by the District Clerk to jurors. Although parties in long civil trials in Texas state courts will occasionally fund such anonymous payments to jurors to defray a part of the financial hardship of jury service, Judge Gilmore is researching whether such an arrangement is allowed in a federal criminal trial.

Posted by Tom at 06:43 AM | Comments (0) | TrackBack

May 14, 2005

First AIG exec cops immunity deal

Joseph H. Umansky, president of AIG Reinsurance Advisors over the past 13 years, became the first senior executive at American International Group Inc. to strike a deal with authorities to offer his testimony in return for immunity from potential charges related to the ongoing investigations of the company's accounting of structured finance transactions, although it is still unclear with which governmental entity Mr. Umansky has cut his deal. Here are previous posts on the various investigation of AIG and Berkshire Hathaway related to these transactions.

Various governmental agencies are investigating AIG's structured finance transactions involving reinsurance over the past five years or so that the regulators contend artificially inflated the company's financial statements to mislead investors. The basic theory of the government's case is that the reinsurance deals in question did not transfer enough risk to qualify for the favorable accounting that AIG used. Earlier this month, AIG announced that its revision of accounting treatment relating to various transactions would reduce its net worth by about $2.7 billion, which is about 3.3% of the company's net worth.

Mr. Umansky is expected to testify against two key AIG executives who appear to be the prime targets of the investigations -- AIG's former chief financial officer, Howard I. Smith, who AIG fired in March for declining to cooperate with the ongoing investigations, and Maurice R. "Hank" Greenberg, AIG's chief executive for almost 40 years, who resigned under pressure when he decided to exercise his his Fifth Amendment rights in response to the governmental inquiries.

Meanwhile, on the Berkshire Hathaway side of the investigatory landscape, that company announced on Friday that two executives working for overseas units of its General Reinsurance Corp. unit have been put on administrative leave with pay while U.S. and foreign authorities investigate their involvement in AIG reinsurance transactions and other similar transactions.

Just in case you are keeping track, the value of AIG's shares has dropped by almost 30% since the disclosure of the government investigations in mid-February and, as this earlier post points out, the end of that drop may not yet be in sight.

Posted by Tom at 07:06 AM | Comments (0) | TrackBack

May 13, 2005

Would you please pass the coffee?

This earlier post noted that, after some early sparks, the ongoing criminal trial of the Enron Broadband case has not exactly been a toe-tapper.

In that regard, the Wall Street Journal passes along the following exchange that took place earlier in the trial between defense lawyer Jack Zimmermann and U.S. District Judge Vanessa Gilmore:

Mr. Zimmerman: Judge, while we don't have the jury here, can I get some guidance? If we see a juror that's sleeping, what do you want us to do?

Judge Gilmore: That's y'all's problem. That means the case is boring.

Mr. Zimmermann: How do we alert the Court?

Judge Gilmore: What am I supposed to do? Y'all are boring them to death. Does anybody else want to see that? It says just what I said. What are we supposed to do? God, how are we going to stay awake through two months of this? I can barely stay awake. I don't even drink coffee and I'm drinking it every day.

Posted by Tom at 05:25 AM | Comments (0) | TrackBack

SEC lawyer who headed Enron investigation named Enforcement Division chief

The Securities and Exchange Commission lawyer who headed the agency's investigation into Enron Corporation has been named to head its enforcement division. Here is the SEC's press release on the appointment.

Linda Chatman Thomsen, 50, will be the first woman to hold the top enforcement position at the SEC. She has been the enforcement group's deputy director since 2002 and succeeds Stephen M. Cutler, who ran the enforcement division for several years before resigning last month.

Posted by Tom at 05:00 AM | Comments (0) | TrackBack

May 12, 2005

More Nigerian Barge sentencings

The two remaining unsentenced former Merrill Lynch executives and the only Enron executive convicted of fraud and conspiracy in the Enron-related criminal trial known as the Nigerian Barge case are being sentenced today by U.S. District Judge Ewing Werlein in Houston.

This morning, one of the two Merrill defendants -- Robert Furst -- received a similar sentence to those received last month by co-defendants and former Merrill executives, Daniel Bayly and James Brown. As in the previous sentencings, Judge Werlein basically ignored the government's proposed 15 year sentence for Mr. Furst, and sentenced him to three years, one month in prison and to pay $665,000 in restitution.

The other Merrill defendant -- William Fuhs -- and the lone Enron defendant -- Dan Boyle -- are scheduled to be sentenced this afternoon. Mr. Fuhs' sentence will likely be a bit less than Mr. Furst's, while Mr. Boyle -- a mid-level former Enron executive who the government inexplicably wants to put away for life over this -- will probably receive a bit longer sentence than Mr. Furst's.

Update: This afternoon, Judge Werlein first sentenced Mr. Boyle to three years and 10 months in prison and a $320,000 fine. Late this afternoon, the Judge completed the sentencing in the Nigerian Barge case by sentencing Mr. Fuhs to the same sentence as that of Mr. Furst -- 37 months.

Meanwhile, Mr. Bayly's legal team recently filed this brief with the Fifth Circuit Court of Appeals in support of Mr. Bayly's request to be allowed to remain out of prison pending disposition of his appeal. The brief previews Mr. Bayly's arguments on appeal, which are focused on the paucity of direct evidence linking Mr. Bayly to the transaction, the hearsay nature of the evidence that did, and the refusal of Judge Werlein to instruct the jury on a key defense theory. That key defense theory is that an Enron promise to Merrill Lynch to arrange a sale of the barges within six months to a third party -- as opposed to an Enron promise to repurchase the barges within that time frame -- did not undermine Enron's accounting of the transaction and did not constitute the basis of a crime. Inasmuch as Enron ultimately arranged for such a sale to a third party as opposed to buying back the barges from Merrill itself, the lack of a jury instruction on that issue appears to be a solid basis for Mr. Bayly's appeal.

Posted by Tom at 01:48 PM | Comments (0) | TrackBack

May 11, 2005

Couldn't you arrange for some false testimony or something?

After last week's fireworks in the ongoing Enron Broadband criminal trial noted here and here, the Chronicle's Mary Flood reports that the attorneys in the trial have reverted to the dubious tactic of chloroforming the jury with mind-numbing techno-jargon:

On the stand Tuesday was jargon-dependent computer specialist John Bloomer. It was his third day of testimony, and for most of morning he was questioned by Enron Task Force prosecutor Ben Campbell.

Campbell took Bloomer through statement after statement made at a critical January 2000 Enron conference for stock analysts to ask about the truth of what was said.

It was no more exciting in the afternoon when defense attorney Per Ramfjord took over. Ramfjord is so well-versed in technology that the courtroom can become Silicon Valley when he gets going with a geeky witness. Bloomer sometimes answered enthusiastically with something like: "We were late. Whether it be MPLS over ATM, whether it be precedent bit over IP." Don't ask.

So the jurors and alternates, if they've stayed fully awake, know what a hop and a POP are in the tech world, may know the difference between quality of service and quality of stream delivery, and likely know what media cast and media transport are.

Meanwhile, Ms. Flood also reports that some of Mr. Bloomer's testimony yesterday on behalf of the prosecution in the Broadband trial was helpful to the defense of former Enron CEO, Jeff Skilling, whose criminal trial with former Enron chairman Ken Lay and former Enron chief accountant Richard Causey on securities fraud and related charges is scheduled for January 2006.

Posted by Tom at 05:00 AM | Comments (0) | TrackBack

May 09, 2005

The Lord of Regulation's latest abuse of power

Jay Bryant writes this Tech Station Central piece in which he criticizes New York Aspiring Governor Eliot Spitzer's latest abuse of power -- i.e., his investigation of some of the nation's biggest banks to determine whether they had discriminated against minority groups in setting mortgage rates and fees in the sub-prime mortgage market.

The sub-prime lending industry provides the valuable service of lending money for home loans at higher interest rates to those who cannot qualify for a conventional mortgage because of insufficient income, lack of assets or credit problems. Of Mr. Spitzer's latest foray into political image-making, Mr. Bryant warns:

[I]f Spitzer's ominous letters are any indication, he is about to insert himself and his publicity-seeking machine into the sub-prime lending industry, and if he's not careful, he could destroy it. [His investigation will likely] damage the industry, reduce the number of people it can profitably serve and scale back the growth rate in home-ownership.

As former Senator Sam Hayakawa famously observed, you can't expect people to climb the ladder of success if you kick out the bottom rungs. That's the central point about home ownership: that it provides, for people of modest means, the best opportunity they will ever have to build equity. For a great many of them, this equity will mean that before long they will be able to refinance their mortgage at a better rate, their newfound equity having served to improve their creditworthiness. They will, in other words, have moved up the ladder a few rungs. This sort of movement happens all the time.

The threat Spitzer represents is very real, but its victims are not the ones he pretends to threaten. If the bankers who got Spitzer's letters don't make money by sub-prime lending, you may be sure they will find another way to make it. But whether the low-income family trying to climb the ladder to prosperity through home ownership can find another way to make it -- that is a much less likely proposition.

Posted by Tom at 07:16 AM | Comments (0) | TrackBack

May 08, 2005

The Oracle's sacrificial lamb?

Berkshire Hathaway used the tried-and-true tactic of a late Friday afternoon news release in an attempt to generate the least amount of notice possible for its most recent quarterly earnings report.

However, in doing so, Berkshire raised eyebrows by disclosing that a current VP at its General Reinsurance Corp unit had received a "Wells" notice from the Securities and Exchange Commission, which means that the SEC is planning on filing civil charges alleging violations of federal securities laws. The Wall Street Journal ($) disclosed later in the weekend that the General Re VP is Rick Napier, and that the SEC is considering filing a complaint against Mr. Napier for assisting American International Group Inc. in allegedly accounting for a highly-publicized reinsurance transaction improperly. Moreover, inasmuch as Wells notices are usually sent out to all potential defendants to an SEC civil action, more General Re and AIG executives who were involved in the reinsurance transaction will probably receive such a notice soon.

Berkshire also disclosed that General Re and its former CEO, Ronald Ferguson, were sued along with AIG and several AIG executives in a recent class-action civil lawsuit filed in federal court in New York City. Mr. Ferguson was the CEO of General Re when Berkshire purchased the company in 1998. After several years of poor results, Mr. Ferguson stepped down as chief executive in 2001 and has been a consultant to Berkshire's reinsurance businesses ever since. AIG's former CEO Maurice "Hank" Greenberg allegedly contacted Mr. Ferguson in 2000 to arrange the reinsurance transaction that is now the subject of the multiple investigations.

Posted by Tom at 03:06 PM | Comments (0) | TrackBack

May 06, 2005

The Enron brand

One of the remarkable cultural developments since the collapse of Enron Corporation has been the branding of the "Enron" name to become synonomous with all forms of corporate corruption. Earlier this week, the prosecution's use of the Enron brand in the corporate-fraud trial of former HealthSouth CEO Richard M. Scrushy got the prosecution in some very hot water with the judge in that case.

The fireworks came after the witness -- HealthSouth's security chief and a key defense witness -- had mentioned Enron during cross-examination. The prosecutor then then asked the witness if he was referring to "the same company that defrauded investors and laid off many employees, resulting in prison sentences for some people." That prompted U.S. District Judge Karon O. Bowdre (pictured above) -- who previously had warned lawyers in the trial to refrain from references to Enron or any other corporate frauds -- to pound her gavel and yell the prosecutor's name.

After slamming her gavel, Judge Bowdre instructed the jury that the prosecutor had asked a "series of inappropriate questions." The judge then advised the jury that she was terminating the cross-examination "as a sanction" to the prosecution. No word yet on whether the prosecutor faces further sanctions for what is a serious and intentional breach of the judge's previous order.

Professor Ribstein has a typically adept observation about this latest incident of prosecutorial misconduct:

"If the government actually has to try the facts of each individual corporate fraud case, it could get sticky."

Posted by Tom at 05:57 AM | Comments (0) | TrackBack

May 05, 2005

It's a tough time to be an insurer

Frustrated with the Lord of Regulation getting all the headlines recently, the Federal Bureau of Investigation announced yesterday a wide-ranging inquiry into the insurance industry that could extend into banking and other financial sectors.

FBI investigators and insurance regulators from multiple states are meeting in New York City today during which the regulators are apparently going to school the FBI agents on the structured finance transactions that insurers commonly use to manage earnings or -- as described in the current climate of regulatory demagoguery -- to manipulate financial statements. The FBI has assigned between 50 and 75 agents from its Financial Crimes Section to the probe and confirmed that its investigation is the result of the various criminal and regulatory probes that are already underway in regard to AIG and Berkshire Hathaway's reinsurance unit, General Re.

One would hope that the FBI actually hires an expert or two in structured finance to explain the legitimacy of many such transactions before going on the Sunday talk shows and alleging widespread criminal activity within the industry. The misguided nature of the government and the bankruptcy examiner's similar investigations into many of Enron's structured finance transactions has already been well-chronicled, particularly by University of Chicago business professor and structured finance expert, Christopher Culp, in his recent books, Corporate Aftershock (Cato 2003) and Risk Transfer (Wiley 2004).

Meanwhile, checking in on the AIG saga, the Wall Street Journal ($) and others published a copy of a letter from former AIG CEO Maurice "Hank" Greenberg to the AIG board yesterday in which Mr. Greenberg laments AIG's restatement of net worth earlier this week and points out that the restatement lacked critical input from Mr. Greenberg and former AIG CFO, Howard I. Smith. How the company could have reached its conclusions without Mr. Smith's input "is beyond my comprehension," observed Mr. Greenberg in the letter.

Of course, the Lord of Regulation made certain that the AIG board did not have such input by effectively forcing Messrs. Greenberg and Smith to invoke their Fifth Amendment privilege against self-incrimination by publicly alleging that they had committed crimes before even hearing from either man. So it goes in the post-Enron business world of being guilty until proven innocent if one engages in structured finance transactions.

Posted by Tom at 05:11 AM | Comments (0) | TrackBack

May 03, 2005

"You guys scare me to death"

Following this development from Monday, the Enron Task Force prosecution is now clearly in serious damage control mode in the ongoing criminal trial against five former Enron Broadband Services executives in Houston federal court.

As this Mary Flood Houston Chronicle story reports, the prosecution hurriedly changed course after the prosecution's key witness -- former EBS CEO Ken Rice -- was forced on Monday to admit during cross-examination that he had falsely testified on direct examination that defendant Rex Shelby had made certain statements to an analysts' conference in 2000.

After Mr. Rice was finally excused on Tuesday after eight days of increasingly grueling testimony, the prosecution departed from its pre-trial witness list and called Beth Stier, who works for a company that previously provided independent contractor video services for Enron. That company continues to maintain a large library of Enron-related videos, and the company is currently providing consultant services for the criminal defense team of former Enron CEO Jeff Skilling.

The source of confusion in Mr. Rice's testimony was a videotape of the analysts' conference that the prosecutors used in examining Mr. Rice. That particular video contained a segment of Mr. Shelby's comments that Mr. Rice contended had been shown at the analysts' conference.

However, the defense revealed this past Friday that the prosecution had used the wrong video and that the raw footage video of the analysts' conference clearly showed that the segment containing Mr. Shelby's comments had not been played for the conference. On Monday, the defense was allowed to show the jury the raw footage video that proved that the segment containing Mr. Shelby's comments had not been played for the conference.

Ms. Stier testified on Tuesday that she had originally taped the segment with Mr. Shelby for the conference, but that the segment was not used during the conference and that she had later inserted the segment into an edited version of the videotape at the request of Enron's investor relations department. Ms. Stier also admitted that she had given the prosecution a copy of both the edited videotape that the prosecution ended up using in examining Mr. Rice and also the raw footage videotape that the defense team used on cross-examination to impeach the credibility of Mr. Rice's testimony.

During her testimony, Ms. Stier then revealed that the Enron Task Force prosecutors had hauled her down to the Federal Courthouse over this past weekend to question her over the videotapes after they first became aware of video mixup during cross-examination of Mr. Rice last Friday. During the weekend questioning, Ms. Stier apparently hedged her answers to prosecutors' questions regarding the work she has done for the Skilling defense team. Accordingly, when the prosecution asked her today on the witness stand whether she had lied to the prosecution in answering those questions over the weekend, Ms. Stier admitted that she had been very careful about her answers and then added:

"You guys scare me to death. I do not want to lie to you."

As noted in this earlier post, the damage from the prosecution's use of the wrong video on Mr. Rice's direct examination could have been limited by the prosecution's forthright admission of its mistake. However, from the report of today's proceedings, the prosecution not only failed to adopt that approach, but inexplicably compounded the damage from its previous error by attempting to shift the blame to a frightened woman on the witness stand before a predominantly male jury. Such a major tactical blunder is a clear sign of a panicked prosecution.

Consequently, a trial that formerly looked like a sure-fire winner for the Enron prosecution has now turned into a real horse race. Stay tuned, for this trial is has just become very interesting.

Posted by Tom at 09:19 PM | Comments (4) | TrackBack

May 02, 2005

Checking in on the Enron Broadband trial

An interesting development occurred last Friday during the ongoing Enron Broadband trial, and the development is turning into the first genuine problem for the Enron Task Force prosecution based on Mary Flood's report of today's testimony.

Here's what happened on Friday. Tony Canales, a former United States Attorney in Houston from 1977-80 who is a defense attorney for one of the Broadband defendants, was cross-examining the key prosecution witness and former Enron Broadband CEO, Ken Rice (pictured above). Mr. Canales attempted to offer into evidence the raw footage video of an analysts' conference that Mr. Rice testified about on direct examination from another video that the prosecution used. U.S. District Judge Vanessa Gilmore would not allow Mr. Canales to show the raw footage video to the jury on Friday afternoon because the prosecution had not yet had an opportunity to review it on Friday, which was a rather odd ruling given that the prosecution had given the video to the defense in the first place.

At any rate, the defense's raw footage video came into evidence this morning, and the defense showed the raw footage video side-by-side to the prosecution's video from which Mr. Rice had previously testified during direct examination. It turns out that the prosecution video of the analysts' conference is different in material respects from the raw footage video and that the prosecution's video -- contrary to Mr. Rice's testimony on direct -- contained footage of defendant Rex Shelby making statements that was not shown to the analysts at the conference.

Well, as you might expect, Mr. Rice is in full retreat today as Mr. Canales and other defense attorneys hammer him on why he previously testified that Mr. Shelby had made statements at the analysts' conference that he actually did not make. According to Mary Flood's Chronicle article, Mr. Rice appeared to be rather confused:

Rice said he'd seen the government's video before testifying and when prosecutor Ben Campbell showed it to him in court Tuesday, Rice testified that he was surprised that Shelby was talking about the network operating system as up and running when it wasn't.

"The government represented that the tape that included Shelby came from Enron and was played at the analysts conference," Rice said.

In questioning from defense attorney Tony Canales, Rice said he knew Shelby had taped the segment in question and knew it was slated to be shown to the analysts.

Under questioning today, Rice said he thought about this a lot of over the weekend and even talked to his lawyer about whether he'd been shown the wrong tape and convinced himself he did see the Shelby segment at the analyst conference.

"He wasn't any help to you then?" Canales asked Rice.

"All that money, no," Rice said smiling back.

It was one of several light moments in the day when Rice acknowledged being somewhat overwhelmed by the circumstances.

Of note, Mr. Rice is testifying under a cooperation agreement in which he has pleaded guilty to one count of securities fraud in return for the prospect of a reduced sentence. However, the government's support for that reduced sentence is conditioned upon Mr. Rice testifying truthfully during the Broadband trial. He is in his seventh day of questioning.

Even inside the courtroom -- much less outside it -- it's notoriously difficult to evaluate how much any of this affects the jury. If the prosecution handles it correctly on re-direct, then the Enron Task Force prosecutors will take the blame for using the wrong video, apologize to the jury for their mistake, and simply have Mr. Rice re-confirm his opinion that certain of the statements made on both the raw footage video and the prosecution's video were false. So long as the prosecutors take such an approach in a forthright manner, the jurors may view the prosecution's use of the wrong video as an honest mistake and not think much about the erroneous part of Mr. Rice's testimony.

On the other hand, if not handled well on re-direct, this is the type of mistake that could blow up in the prosecution's face. Mr. Rice will almost certainly be called a liar by future witnesses for the defense during this trial, so his credibility will be a key issue for the jury. The prosecution's mistake in using the wrong video -- and Mr. Rice's failure to catch it -- opens him up to the age-old defense tactic of arguing to the jury that "telling the truth is easy, but lying without making mistakes is hard" -- in short, Mr. Rice was lying and the best evidence of it is that he was willing to lie about what statements were made at the analysts' conference in return for the promise of government support of a shorter prison sentence.

So, watch this part of the trial closely. Three of the defendants in the Broadband trial have to overcome a huge elephant in the courtroom -- i.e., the multi-millions that they made on selling Enron stock during an 18 month period. However, discrediting the government's key witness is a nice start to deflating the prosecution's case. Let's see whether the prosecution can minimize the damage to their witness in the jurors' eyes and move on to refocusing their case against the defendants on that elephant.

Posted by Tom at 02:40 PM | Comments (1) | TrackBack

Daily negative AIG report

Following on Friday's negative report, American International Group Inc. announced late Sunday that it would restate more than four years of financial statements and reduce its net worth by $2.7 billion, which is about 3.3% of AIG's net worth. Although the report does not name names, the report concedes that former AIG executives -- including embattled former CEO Maurice "Hank" Greenberg -- had been able to "circumvent internal controls over financial reporting" and that the company's auditors, PricewaterhouseCoopers LLC, will issue an adverse opinion regarding AIG's defective internal controls over financial reporting. Here are the posts over the past several months involving AIG and Berkshire Hathaway.

In addition to admitting certain reinsurance deals such as the one between AIG and General Re (Berkshire Hathway's unit) involved insufficient risk transfer to qualify for favorable insurance accounting, AIG's Sunday public statement conceded widespread use of trades in and out of hedge funds as one of several improper company strategies to convert capital gains into investment income toward the end of reporting periods to impress the market. With regard to the accounting for those and other transactions, the report concludes as follows:

The restatement will correct errors in prior accounting for improper or inappropriate transactions or entries that appear to have had the purpose of achieving an accounting result that would enhance measures important to the financial community. In certain instances, these transactions or entries may also have involved misrepresentations to members of management, regulators and AIG's independent auditors.

The statement admitted that the company used accounting tactics to change the timing and characterization of gains and losses, but it does not address the alleged improper characterization of worker's comp insurance premiums that surfaced last week. Here is the Wall Street Journal ($) copy of the company's statement.

Meanwhile, the Oracle of Omaha -- in addressing his Berkshire Hathaway subjects . . er, I mean, shareholders over the weekend -- stated that he is confident that Berkshire's General Re unit will survive the current regulatory scrutiny and continue to contribute to Berkshire's earnings.

Posted by Tom at 04:51 AM | Comments (0) | TrackBack

April 29, 2005

It continues to get worse for AIG

Following on this progression of damaging public disclosures over the past several months, American International Group Inc. announced yesterday, as this NY Times article reports, that the company has decided to delay for a third time the publication of its annual report. The cause for the delay is that AIG management and nervous PriceWaterhouseCoopers LLP auditors continue to wrangle over the financial implications of accounting errors that now are expected to reduce AIG's net worth by over $2.5 billion, which is about 3% of the company's net worth. That's about a billion more in losses than previously predicted.

As one would expect, there appears to be a fair amount of disagreement over what accounting issues should be acknowledged in the annual report between AIG and its longtime auditor PricewaterhouseCoopers, which is already girding for the inevitable lawsuits from AIG investors over its failure to uncover the improper accounting and the company's allegedly defective internal controls. Since the Sarbanes-Oxley legislation was passed in 2002, auditors and management are required to sign off on the adequacy of a company's internal controls, the lack of which at least partly contributed to the accounting scandals that led to the demise of Enron Corp. and WorldCom Inc.

Although the incessantly bad public disclosures are troubling for AIG long term, the market appears to have stabilized for the time being with regard to AIG's stock price. Although AIG's stock price has fallen almost 30% since February 14 (it opened at $72 on that date), the price has been meandering around $51 since mid-April. The price was was down $.71 in yesterday's trading.

Meanwhile, the Lord of Regulation is moving on to another scene in his vast landscape of business corruption as several financial institutions confirmed that they have received letters from the Lord's office in connection with an investigation into mortgage-lending practices. The Lord's civil-rights division is in the early stages of an investigation into possible discriminatory practices in determining interest rates and fees charged on mortgage loans, which was prompted by recent public disclosures showing that certain minorities are more likely than are whites to be given high-cost sub-prime loans. Lenders say that the difference in interest rates reflects underwriting factors, such as income and credit records.

Posted by Tom at 04:56 AM | Comments (0) | TrackBack

April 27, 2005

Is Andersen a winner?

Although such matters are notoriously unpredictable, the SCOTUS blog -- the premier U.S. Supreme Court blog -- reports that observors of the oral argument earlier today on Arthur Andersen's appeal to the Supreme Court of its witness tampering conviction unanimously reported that the Justices appeared to favor Andersen's side of the argument strongly. In particular, Justice Scalia expressed incredulity at the government's position:

"You want criminal liability to attach to that?" Justice Scalia asked, referring to Andersen in-house lawyer Nancy Temple's email. "You want somebody to go to jail?"

Here is the Washington Post report on the argument.

Posted by Tom at 05:47 PM | Comments (2) | TrackBack

AIG is sounding more like Enron all the time

As noted earlier here and here, there are several characteristics of the structure of American International Group Inc. that are similar to the structure of Enron Corp. In particular, both companies' business is largely dependent on its customers' trust and, as Enron showed us in dramatic fashion, once that trust is lost, a company structured in such a manner can literally collapse in a very short period of time.

On face value, this report from yesterday regarding the Lord of Regulation's investigation into whether AIG wrongly pocketed tens of millions of dollars in insurance premiums that should have gone to the New York state workers' compensation fund is probably not any more damaging to the public's trust in AIG's finances than any of the dozens of other revelations that have occurred in regard to AIG and Berkshire Hathaway in connection with that investigation over the past couple of months.

However, in what can only be described as an astounding revelation in this morning's Wall Street Journal ($) article, AIG's general counsel in 1992, E. Michael Joye, informed AIG's senior management -- including former CEO Maurice "Hank" Greenberg -- that the company's accounting treatment with regard to the insurance premiums was illegal. Even more interestingly, Mr. Joye resigned from AIG (or was forced out) later that same year over problems relating to accounting issues.

To top it all off, according to the WSJ article, Mr. Joye provided to the Lord of Regulation a copy of his memo to AIG management about the insurance accounting issue, and then AIG waived its attorney-client privilege regarding Mr. Joye's memo and the accounting issue to allow Mr. Spitzer's office to proceed with its investigation into the issue. AIG's board is allowing this highly unusual level of cooperation with the Lord of Regulation because of its realization that the Lord has the board over a barrel: if the AIG board were to assert such basic rights as the attorney-client privilege, then the Lord of Regulation would almost surely issue an indictment that would have a potentially cataclysmic effect on AIG's various insurance licenses.

On the other hand, if AIG's senior management forced Mr. Joye out because of his calling out of questionable or illegal accounting practices, then that would reflect a serious defect in AIG's internal controls in that an advocate of adhering to legal requirements was canned rather than rewarded. Inasmuch as a similar defect in internal controls allowed Enron's Andrew Fastow to profit wildly from Enron's apecial purpose entities while serving as Enron's CFO, this latest revelation about AIG sure is starting to sound familiar, isn't it?

By the way, the WSJ's ($) article on AIG's ultra-exclusive New York area golf club -- Morefar -- makes it sound as if getting an invitation to play Augusta National is easy in comparison to getting one to play Morefar.

Posted by Tom at 12:15 PM | Comments (3) | TrackBack

April 26, 2005

Are you ready to rumble, Mr. Spitzer?

This Washington Post article reports on the trial that is cranking up this week in New York City as New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot Spitzer's prepares to prosecute former Bank of America securities broker Theodore C. Sihpol III in connection with an alleged crime uncovered during Mr. Spitzer's wide-ranging investigation of the financial services industry over the past three years. Here is a sampling of posts regarding the Lord of Regulation's investigations over the past year and a half.

While more than a dozen brokerage firms and fund companies have rolled over and paid $3 billion in fines, restitution and promised fee reductions (i.e., ransom) to settle Mr. Spitzer's investigations, Mr. Sihpol has refused to give in to Mr. Spitzer's public relations machine. Mr. Sihpol contends that the trades that are at the heart of the criminal case against him were not illegal and that Mr. Sihpol did not have criminal intent to commit larceny, fraud and alteration of business records.

The case revolves around whether the 37 year old Mr. Sihpol knew his clients were breaking the law by putting in same-day orders after 4 p.m. In his usual public relations blitz on such cases, Mr. Spitzer has compared the the trades to betting on a horse race after it was over because the late trades allowed Mr. Sihpol's clients to profit from news announced after the markets closed. However, the Securities and Exchange Commission regulation in place at the time of the trades did not use the words "4 p.m." Rather, the reg simply stated that all mutual fund orders placed after a fund has computed its daily price must get the next day's price. Inasmuch as many funds do not calculate their daily price until nearly 5:30 p.m., Mr. Siphol contends that the trades were in compliance with the regulation. In fact, an SEC survey done shortly after the scandal broke found that a quarter of brokerage firms had helped clients trade after the 4 p.m. close. New SEC rules proposed after Mr. Spitzer's investigations into trading abuses state specifically that the trades must be placed before 4 p.m.

The risk of loss is so high that it is understandable that companies and individuals under Mr. Spitzer's relentless public relations campaigns roll over and settle without so much as a whimper. Nevertheless, it is refreshing when an individual stands up and requires Mr. Spitzer actually to prove what he enjoys preaching about on television talk shows. Here's hoping that the jury is not swayed by Mr. Spitzer's glitz and examines carefully whether Mr. Spitzer's criminalization of merely questionable business transactions is an appropriate form of business regulation.

Posted by Tom at 06:22 AM | Comments (0) | TrackBack

AIG's Enronesque experience continues

As noted in this previous post, the reason that Enron crashed was that its business model required that its customers rely on the company's financial integrity and not necessarily on the company's net worth. Accordingly, when Enron's financial integrity came into question over a slew of questionable transactions with some equity funds run by Enron's CFO, Andrew Fastow, Enron melted faster than an ice cream cone in a Texas summer.

Unfortunately for American International Group Inc., its business model is built upon the same sense of trust, and this latest public revelation is not going to help the company maintain that trust. Here is a sampling of earlier posts on AIG's developing problems, including the questionable transactions between AIG and Berkshire Hathaway.

The report referred to in the NY Times article was prepared by two outside law firms -- Simpson Thacher & Bartlett and Paul, Weiss, Rifkind, Wharton & Garrison -- who are working for AIG's board. According to the Times article, the report raises serious questions about the integrity of AIG's financial-reporting systems. The report contends that recently retired AIG chairman and CEO Maurice R. "Hank" Greenberg and fired CFO Howard I. Smith controlled critical aspects of the company's financial reporting without appropriste financial and accounting controls in place to oversee that control. The report's conclusions sound remarkably similar to those contained in the Powers Report, which was the similar report that the Enron board commissioned when Enron's questionable transactions with Mr. Fastow's partnerships came to light.

Is AIG is headed for an Enronesque meltdown? My sense is that markets that have been seared by Enron, WorldCom and other big business meltdowns of the past five years will probably not flee AIG's nest without more damaging revelations. AIG reported net income of over $11 billion on revenue of about $98.5 billion in 2004, so the accounting problems identified to date probably will not deplete shareholders' equity by more than about 2%, which would leave the company's net worth above $80 billion.

But as we saw with Enron, a company's net worth will not always sustain investor trust in the face of damaging information regarding the integrity of the company's financial statements. AIG faces precisely the same problem, and it is not clear by any means that it can succeed where Enron failed.

Posted by Tom at 05:02 AM | Comments (0) | TrackBack

Andersen finally settles with WorldCom

The last defendant standing in the WorldCom securities fraud litigation stood down on Monday as Arthur Andersen announced that it had settled with the WorldCom class for $65 million. The settlement occurred at the beginning of the fifth week of what amounted to an auditing malpractice case against Andersen.

The settlement was apparently reached after Andersen disclosed its limited financial resources to the WorldCom plaintiffs, which should not have been any surprise to the plaintiffs. After having been convicted of witness tampering in a dubious government prosecution in connection with the Enron scandal, Andersen collapsed as a going concern and is now merely a liquidating trust for its former partners. Andersen is still contending with similar civil litigation in connection with its audits of Qwest Communications International Inc., Global Crossing Ltd., and the Big Kahuna, Enron.

As noted in these previous posts over the past year, Andersen was the last of more than two dozen defendants who agreed to pay a total of $6 billion to settle securities fraud claims in connection with WorldCom's collapse into bankruptcy in 2002. That total amount is a record recovery in a securities class action in the United States, but that record is probably short-lived. The aggregate settlements in the similar class action in the Enron case projects to lap the WorldCom record by several billion.

Posted by Tom at 04:30 AM | Comments (0) | TrackBack

April 23, 2005

Upcoming Supreme Court argument in the Arthur Andersen case

On Wednesday of next week, the U.S. Supreme Court will hear arguments over the meaning of the law under which now defunct accounting giant Arthur Andersen was prosecuted and convicted. Previous posts are here, here, here, here, and here about this case, which corporate legal departments and corporate lawyers are following closely.

The main reason that the Andersen appeal is being followed closely is that it began with an e-mail that any in-house counsel could have written -- that is, a reminder to colleagues about the company's document retention policy. "It will be helpful to make sure that we have complied with the policy," wrote Nancy Temple, the in-house lawyer for Andersen in the October 2001 as Enron was spiraling toward bankruptcy. Andersen's policy called for destroying documents when they were "no longer useful" for an audit. The timing of the email eventually led to the criminal prosecution and conviction of Andersen for destroying thousands of Enron-related documents. The prosecution and conviction doomed Andersen as a going concern and a once-proud company that employed almost 30,000 employees in the U.S. Andersen has withered into what is now essentially a self-liquidating litigation defense fund with fewer than 200 employees.

As a result of what happened to Andersen, numerous professional organizations such as the National Association of Criminal Defense Lawyers and the American Institute of Certified Public Accountants have filed amicus curie briefs that urge the Supreme Court to interpret the law under which Andersen was prosecuted narrowly so as not to criminalize routine legal and professional advice. In particular, the NACDL brief asserts that the Andersen lower court decisions place "lawyers at risk of investigation, prosecution, and imprisonment for doing their jobs," and contends that those decisions improperly chill attorneys from lawfully advising their clients not to volunteer information to a grand jury or not to include unnecessary information in responding to the Securities and Exchange Commission.

For its part, the government claims in its brief that Andersen was well aware that an SEC investigation was likely at least a month before Ms. Temple sent her e-mail, noting that the accounting firm had assembled an Enron crisis-response team in September, 2001 as public revelations mounted regarding Enron's questionable accounting.

Nevertheless, the government's prosecution of Andersen was required to place a square peg in a round hole in that its indictment asserted only a form of witness tampering that occurs when one "corruptly persuades" others to destroy documents in order to make them unavailable for an official proceeding. What is often overlooked in the aftermath of the demise of both Enron and Andersen is that no Andersen official has ever been charged criminally or even cited by the SEC for violating securities laws in connection with Andersen's work for Enron.

The narrow issue that is before the Supreme Court is whether U.S. District Judge Melinda Harmon properly instructed the jury in the Andersen trial on the meaning of "corruptly persuades." The dispute is essentially over whether "corruptly" should be given a transitive or intransitive meaning. The Andersen side of the argument embraces the the transitive -- i.e., in order to to prove the crime, the government would have to show that the persuading was done by corrupt or improper means. Under such an interpretation, Ms. Temple's e-mail would not constitute a crime.

On the other hand, during the trial, Judge Harmon adopted the government's jury instruction based on the intransitive meaning -- i.e., that the government merely had to establish that Andersen had some improper intent of impeding an official proceeding regardless of whether Andersen believed its actions were lawful. Judge Harmon ruled that, so long as Andersen's intentions were improper, the government did not have to prove that an official proceeding was under way or even likely in order to prove that Andersen had committed a crime.

Thus, the importance of the Andersen case to in-house counsel and corporate counsel is clear -- if the Supreme Court upholds the 5th Circuit decision, virtually any coporate document retention policy that includes throwing things out would be at risk because making such documents unavailable is at least part of such a policy's purpose. Somewhat surprisingly, the document warehousing industry has not filed an amicus brief with the Supreme Court in support of the government's position. ;^)

However, in a larger sense, the Andersen appeal gives the Supreme Court an opportunity to knock down one of the government's most visible symbols of its dubious policy of regulating business generally -- and auditors in particular -- through criminalization of heretofore normal business practices. One brave U.S. District Judge already this week firmly rejected the government's over-zealous attempt to obtain what would have amounted to a life sentence for former Merrill Lynch head of international investment banking, Daniel Bayly, who was bit player in a relatively small Enron-related fraud. Inasmuch as the government's disembowelment of Andersen as a source of productive employment for approximately 30,000 U.S. citizens is equally indefensible, here's hoping that the Supreme Court sends the government a clear message in the Anderson case that misapplying criminal law to regulate business will not be tolerated.

Posted by Tom at 08:21 AM | Comments (1) | TrackBack

Did Skilling violate the Rule?

In what appears to be a questionable ruling, former Enron CEO and COO Jeff Skilling was required to leave the courtroom on Friday morning during the ongoing trial of the Enron Broadband trial.

Normally, at the commencement of most trials, counsel for either or both parties will invoke "the rule," which simply means that fact witnesses cannot listen to the testimony of any other witnesses during the trial. The rule was apparently invoked at the start of the Enron Broadband case.

However, prior to the commencement of the trial, one of Mr. Skilling's lawyers -- Daniel Petrocelli -- had been advised that Mr. Skilling would not be called as a witness during the trial. So, on Friday morning, Mr. Skilling walked into the courtroom gallery to attend the trial, probably in anticipation of the testimony of former president of Enron Broadband Services and close Skilling confidant, Ken Rice, who has copped a plea bargain and began his testimony yesterday afternoon on behalf of the prosecution.

When the prosecution realized that Mr. Skilling was in the courtroom, the prosecutors raised an objection to U.S. District Judge Vanessa Gilmore based on "the rule." Mr. Skilling was asked to leave the courtroom and did so without incident.

If Mr. Skilling had indeed been taken off the witness lists for Broadband trial, then it was more than a minor mistake to exclude him from attending the testimony of Mr. Rice. Inasmuch as Mr. Rice's testimony on behalf of the prosecution is going to be detrimental to, and disputed by, Mr. Skilling in his trial next January, Mr. Skilling is absolutely entitled to be present in the courtroom during that testimony so long as he is not going to be called as a witness during the trial.

If a witness is not telling the truth in his testimony, then often it is much harder to prevaricate in the presence of someone who knows that the witness is lying. Inasmuch as the truth of Mr. Rice's testimony is a key issue in the Broadband trial, the jury in the Broadband trial ought to be allowed to view Mr. Rice's demeanor while testifying in front of his former boss who, if Mr. Rice's testimony is false, would know it.

Posted by Tom at 07:03 AM | Comments (0) | TrackBack

April 22, 2005

Lay's team heaves a sigh of relief

U.S. District Judge Sim Lake ruled Thursday afternoon that bank-fraud charges against Enron former chairman and CEO Ken Lay would be tried to him without a jury early next year immediately following the multi-defendant conspiracy jury trial against Mr. Lay, which is scheduled to begin in mid-January, 2006. Judge Lake had previously severed the bank-fraud charges against Mr. Lay from the conspiracy and securities fraud case against Mr. Lay and co-defendants Jeff Skilling, Enron's former CEO and COO, and Richard Causey, Enron's former chief accounting officer. The government had been seeking to try Mr. Lay on the bank-fraud charges -- which will not take as long to try as the larger multi-defendant case -- later this summer. Earlier posts on this particular issue relating to Mr. Lay's case can be reviewed here, here, here and here.

Although Judge Lake indicated during the hearing that he preferred to go ahead and get the bank fraud trial out of the way, he decided that such an early trial could cause a flurry of publicity that could negatively affect the jury pool for the trial of the larger conspiracy and securities fraud case that will begin in January.

Meanwhile, Banjo Jones speculates on what Tony Curtis and Mr. Lay talked about at a recent party.

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

April 21, 2005

A masterful performance

Inasmuch as I had to appear at an hearing in federal court early this morning, I stuck around after my hearing to attend the sentencing hearing of former Merrill Lynch executive Daniel Bayly in connection with the Enron Nigerian Barge case, which has been a regular subject on this blog over the past year.

To say the least, I'm glad I stuck around.

In one of the most impressive judicial performances that I have witnessed in my 26 year legal career, U.S. District Judge Ewing Werlein, Jr. (picture above) -- in the face of widespread public and political expectation that anyone who had anything to do with Enron should be punished severely -- rejected the Enron Task Force prosecutors' pleas to punish Mr. Bayly with up to 15 years of prison and sentenced the former Merrill Lynch executive to 30 months in prison, six months of probation, a $295,000 restitution award, and a $250,000 fine. Later in the afternoon, Judge Werlein sentenced former Merrill executive James Brown -- who, unlike Mr. Bayly, also faced conviction on perjury and obstruction of justice charges over the barge deal -- to 46 months of prison and similar financial penalties as the ones assessed to Mr. Bayly.

Inasmuch as Mr. Bayly is the first defendant to be sentenced after being convicted at trial of an Enron-related crime, the far shorter sentence than the punishment that the prosecutors recommended was a bitter blow to the Task Force prosecutors, who did not attempt to hide their displeasure with Judge Werlein's ruling after the hearing.

Clearly in full command of the legal issues and evidence before him, Judge Werlein carefully stated his findings and conclusions, which included the following:

He categorically rejected the prosecution's controversial $44 million "market loss" theory as being contrary to the U.S. Supreme Court's recent decision in Dura Pharmaceuticals v. Broudo, in which the Court rejected the price inflation theory of causation that the Task Force prosecutors used in calculating the $44 million in market loss.

He declined to adopt the jury's $13.7 market loss theory, essentially on the same grounds as he rejected the government's theory.

He ended up calculating market loss at $1.4 million, which was the total profit that Merrill and the Enron-related partnership ultimately made on the Nigerian Barge deal.

He rejected the prosecutors' pleas for an upward adjustment of the sentence under the advisory sentencing guidelines "to make an example out of Mr. Bayly for Wall Street."

He granted a downward adjustment of the sentence under the sentencing guidelines because of Mr. Bayly's exemplary professional and personal record. "I may have never had a defendant before me who had a more glowing and extraordinary record of being a good citizen," noted Judge Werlein.

Although he noted the jury conviction of fraud, Judge Werlein observed that -- in the constellation of of Enron fraudulent conduct that former Enron CFO Andrew Fastow orchestrated -- Mr. Bayly's involvement in the barge transaction was relatively benign and not central to Enron's fraudulent transactions.

He noted that the Enron Task Force had obtained plea bargain sentences for two Enron executives who were central to Enron's more wide-ranging fraudulent conduct -- 10 years for Mr. Fastow and five years for former Enron treasurer Ben Glisan -- and that those sentences were less than the one that the prosecution was recommending for Mr. Bayly, who was a bit player in Enron's fraudulent conduct.

Then, as if to punctuate his rulings, Judge Werlein firmly rejected the prosecution's over-the-top call at the end of the hearing for Mr. Bayly to be taken into custody immediately, and allowed Mr. Bayly to report to prison voluntarily in accordance with a date to be scheduled in the near future by the Bureau of Prisons.

Judge Werlein delivered his rulings in his customary conscientious and professional manner that exuded the careful consideration that this man of extraordinary depth gave to the issues before him. After the hearing, I happened to get on the same elevator as Mr. Bayly and several members of his family. After having lived through a nightmarish prosecution and clearly expecting the worst when they came to court today, Mr. Bayly and each of his family members -- several of whom had tears in their eyes -- were clearly touched by Judge Werlein's courage, grace and fairness in sentencing Mr. Bayly.

Later, as I drove back to my office after the hearing, I reflected on Ewing Werlein, Jr. and the remarkable judicial performance that I had just witnessed.

When I moved to Houston as a young college student over 30 years ago, one of the first Houston families that my family and I met was that of Mr. and Mrs. Ewing Werlein, Jr., who hired a couple of my younger sisters to babysit their daughter and son. I recall my late father observing to me at the time: "Tom, if you want to become a gentleman, Mr. Werlein would be a fine model for you to follow."

Several years later, after finishing law school and becoming a young attorney in Houston, I learned quickly that Ewing Werlein, Jr. -- then a partner at Vinson & Elkins -- was one of the most respected lawyers in the Houston bar and a model for young lawyers.

Over a decade later, Judge Werlein's son, Ken, became an associate pastor at my family's church here in The Woodlands before going on to start his own church in northwest Houston. One of Ken's finest sermons during his time at my family's church was one that he gave on Father's Day in which he lovingly described his father's tender mentoring of his son and daughter.

Finally today, in the face of virtually unprecedented public animus toward anyone or anything having to do with Enron, Judge Werlein has shown judges everywhere the model of what a judge should aspire to be.

That's quite a fine legacy in my book.

Posted by Tom at 01:22 PM | Comments (1) | TrackBack

April 20, 2005

More on sentencing run amok

Following on the heels of this post from last week on the sentencing hearing tomorrow in U.S. District Judge Ewing Werlein's court in regard to two defendants in the Enron-related Nigerian Barge case, developments in another case this past week shine a clearer light on the dubious nature of the government's position that Judge Werlein should toss the barge defendants in prison and throw away the key. Even the Justice Department does not have a license to take contradictory positions in important cases, even if one of those cases is Enron-related.

As noted in last week's post, the Enron Task Force is taking the position that former Merrill Lynch executive Daniel Bayly should receive a more severe sentence based on a bogus theory of "shareholder loss" that has been long rejected in civil securities fraud cases. By way of background, Mr. Bayly was a well-regarded and longtime Merrill Lynch executive who was involved in a transaction in late 1999 in which Merrill bought from Enron an interest in three Nigerian energy-generation barges as a favor for Enron. An Enron partnership bought the barges six months later and then sold them to a third company for a profit. The Enron prosecutors argued that the deal allowed Enron to book illegal profits at the end of 1999 because Enron had orally agreed to buy the barges back from Merrill, and a jury convicted Mr. Bayly and four others of conspiracy and fraud (Enron's in-house accountant - Sheila Kahanek - was acquitted). The prosecutors are now arguing that Judge Werlein should increase Mr. Bayly's sentence by up to 15 years because the alleged fraud caused a near $44 billion shareholder loss.

As noted in this prior post, the prosecution has no legal basis for this alleged loss figure. Under civil securities fraud law, investors sue for a decline in the value of a security only if they can show that the decline was actually caused by the fraud. Thus, if a company puts out news of a transaction that causes a share price to rise, and then discloses that the transaction is a sham that, in turn, causes the share price to decline, investors can recover any loss that resulted directly from the disclosure of the misrepresentation.

Which is precisely the rub in the Enron Nigerian Barge case -- no such loss resulted from the alleged sham deal. As noted in this prior post, Enron sold the barges to Merrill and Merrill sold them to an Enron-related partnership well before Enron collapsed at the end of 2001. Accordingly, any reduction in the price of Enron stock happened well in advance of disclosure of details of the barge transaction, which disclosure did not occur until well after Enron had filed bankruptcy and Enron's share value had already dropped to zero. Consequently, the government simply cannot show that Enron shareholders lost a dime from the disclosure of this particular transaction.

Thus, to get around this rather substantial legal problem, the Enron Task Force prosecutors are taking the position that, because some shareholders bought Enron stock at an inflated price due to losses that were covered up by the barge transaction, those purchases equate to a loss. The prosecutors even got an "expert" to opine during the market loss hearing after the completion of the Nigerian Barge trial that the relatively small barge deal pumped up Enron's price and, presto, the government has its $44 billion market loss figure.

Interestingly, even the Justice Department does not support the Enron prosecutors' dubious views regarding market loss. Earlier this week, the Supreme Court unanimously ruled in Dura Pharmaceuticals v. Broudo that plaintiffs who claim securities fraud must prove a connection between a misrepresentation and an investment's subsequent decline in price. In direct contradiction of the Enron Task Force's position in the Enron Nigerian Barge case, the Justice Department and the Securities and Exchange Commission filed this joint brief in Dura in support of the proof-of-causation position and against the price inflation theory of causation that the Justice Department prosecutors used in asserting "market loss" in the Nigerian Barge trial.

Does simply the fact that a case is related to Enron justify the Justice Department in taking such blatantly contradictory positions? As noted in last week's post, the Justice Department continues seeking maximum sentences against easy targets, such as relatively wealthy business executives who had the misfortune of doing business with the pariah Enron. Apparently, it's going to take wise judges to step in and check the government's zeal. Judge Werlein is capable of doing so, and I hope he does so tomorrow.

Posted by Tom at 08:02 AM | Comments (0) | TrackBack

April 19, 2005

The Lord of Regulation's abuse of power

In this Wall Street Journal ($) op-ed, Chief Executive magazine editor William J. Holstein addresses a common theme of this blog -- namely, the dubious motives and methods behind New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot's Spitzer's multiple investigations into alleged business corruption. Here is a sampling of posts over the past year regarding Mr. Spitzer's abuse of power.

Addressing Mr. Spitzer's heavy-handed treatment of former AIG chairman and CEO Maurice Greenberg and his son, Jeff, the former Marsh & McClennan CEO, Mr. Holstein notes the following:

Mr. Spitzer has charged in and discovered a pattern of practices he doesn't like. He is applying a new set of values to reinsurance practices that had been in place for years . . .

Reflecting their dismay at the high-handed conduct of King George, the Founding Fathers created a judicial system with a stringent set of procedural safeguards to protect against overzealous or arbitrary prosecution. Yet in the atmosphere that Mr. Spitzer has helped create, the presumption is that CEOs are guilty -- if Eliot Spitzer says they're guilty.

Then Mr. Holstein turns to the specific "charges" that Mr. Spitzer has made publicly to prompt AIG to can Mr. Greenberg:

In dispute in the AIG case are highly complex transactions that may have reduced the company's shareholder equity of $82.9 billion by as much as 2%. It's not yet known if the total losses will reach that level, nor if they were material to AIG as a whole. After Mr. Greenberg's departure, the board ran up the white flag to Attorney General Spitzer and declared the transactions "improper."

Were they? One proper way to resolve this would be to create a policy framework with clear rules, which does not currently exist. Another way would have been for the Securities and Exchange Commission to negotiate an earnings restatement with AIG.

But Mr. Spitzer reportedly threatened a criminal indictment, which in effect would have put AIG out of business. Then he went on television to pronounce that the AIG transactions were "wrong" and "illegal," . . . It's not yet clear what the charges are. Nor has Mr. Spitzer heard Mr. Greenberg's side of the story.

So the New York attorney general both charges and convicts in the court of public opinion.

Then, Mr. Holstein bores in on the hypocritical nature of Mr. Spitzer's self-righteous campaign against business executives:

Mr. Spitzer's political ambitions are increasingly clear. He wants to use his record to become governor of New York. Mr. Spitzer's campaign office even paid Google to link a search for "AIG" to a Web site promoting his campaign before it was quickly taken down. In the same television show where he discussed the AIG case, Mr. Spitzer said he was "very close" to presidential hopeful Hillary Clinton and didn't rule out a run for the vice presidency or presidency.

Mr. Spitzer has thus created a reasonable doubt about whether he is using the legal process for political gain. An attorney general running for higher office is different than a senator running because it creates a risk that the legal system becomes politicized and is no longer seen as adhering to principles of fair play and due process. . .

Ironically, the cornerstone of Mr. Spitzer's actions has been an attack on conflicts of interest and cozy relationships that had long been tolerated. He is attempting to create a new ethical standard. Yet he has turned a blind eye to his own ethical problem.

The existence of business fraud at companies such as Enron, WorldCom, Tyco and maybe even AIG does not necessarily mean that there is more misconduct in big business than in any other relatively large organization, such as big government. Nevertheless, Mr. Spitzer and other prosecutors are publicizing these instances of business fraud to generalize arbitrarily against those who are easy and popular targets -- i.e., wealthy and apparently greedy businessmen.

That tactic plays well with the mainstream media, which enjoys portraying the morality play of Mr. Spitzer as the defender of noble egalitarianism fighting against the forces of corrupt capitalism. In the wake of such seemingly simple stories, many complex structured finance transactions -- which most prosecutors and journalists do not understand and do not perform the homework necessary to understand -- are unfairly and incorrectly portrayed as complex business frauds despite the fact that such transactions are beneficial to shareholders of the company and have been reviewed and approved by multiple professionals who are experts in such transactions. Moreover, with the inviting prospect of greater political rewards resulting from the favorable publicity, prosecutors such as Mr. Spitzer have dispensed with any notion of prosecutorial discretion in regard to investigating business executives over such transactions.

And for those who would respond -- "So what's the big deal? What's the problem with eroding the rule of law a bit to nail a few greedy business executives?" -- I would remind them of Sir Thomas More's advice to young lawyer Will Roper in the great movie, A Man for All Seasons. After Roper opines that it is acceptable to abuse the rule of law in order to achieve the laudable goal of prosecuting the Devil, Sir Thomas responds:

"Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down -- and you're just the man to do it, Roper! -- do you really think you could stand upright in the winds that would blow then?"

"Yes, I'd give the Devil the benefit of law, for my own safety's sake!"

Folks, even greedy business executives are entitled to the protection of due process in the face of the overwhelming power of government. Not only for their protection, but for ours.

Posted by Tom at 05:20 AM | Comments (3) | TrackBack

April 16, 2005

The Enron Broadband Trial

Almost three and a half years after Enron collapsed into bankruptcy, the first criminal trial involving exclusively former Enron executives will crank up in front of U.S. District Judge Vanessa Gilmore in Houston federal court on Monday. Here is the Mary Flood's article from last week and from the Sunday edition of the Chronicle on the case, which is know in Enron legal circles as the "Enron Broadband case."

Despite widespread public acceptance that the name "Enron" means "business corruption," the Enron Task Force has not actually done much in court to prove that proposition. Of the 23 people on which the Task Force has obtained indictments so far in connection with the Enron scandal, six have pled guilty and five -- but only one former Enron executive -- have been convicted in the Nigerian Barge case. Moreover, in that trial, one of the two former Enron defendants (former Enron accountant, Sheila Kahanek) was acquitted. Accordingly, 11 of the 23 people who have been indicted in Enron-related cases still await trial.

The trial of the Enron Broadband case will take care of five of those remaining 11 defendants. Those five former Enron employees of the Enron Broadband Services ("EBS") subsidiary face charges of making false and misleading public statements about the financial viability of EBS. Adding intrigue is that those charges are closely related to charges against Enron's big three defendants -- former chairman and CEO Ken Lay, former CEO and COO Jeff Skilling and former chief accountant, Richard Causey -- that are pending and will go to trial in January, 2006. Thus, the outcome of the Broadband trial will likely set the stage for that big Enron trial and possibly for future Enron-related prosecutions.

EBS was a part of the Enron's emergence from a large but unexciting gas pipeline company to a high-techn global trading market-maker. In acquiring EBS, Enron planned to build a high-speed network that could not only deliver telecommunications services, but also create a trading market for the network, much as the company had created big trading markets in natural gas and electricity. Thus, EBS helped give Enron the glow of a trendy Internet stock when investor interest was creating the bubble in such stocks during the late 1990s.

The latest indictment in the Broadband case alleges that the five former EBS executives from April 1999 through May 14, 2001 engaged in a scheme and made false and misleading statements that were designed to deceive investors and others about EBS' technological capabilities, value, revenues and business performance. Essentially, the indictment contends that the EBS defendants had Enron issue false and misleading press releases to equity analysts and other investors, used fraudulent structured finance transactions to generate bogus revenue so EBS would appear to reach publicly announced financial targets, and failed to disclose materially adverse information about EBS' poor business performance.

However, perhaps most troubling for three of the defendants -- Joseph Hirko, Scott Yeager and Rex Shelby -- is the government's insider trading charges. Those three former EBS executives made a boatload of money on sales of Enron stock during the period in which the government contends that they made false and misleading statements regarding EBS. According to the indictment, Mr. Hirko sold stock valued at about $70 million, Mr. Yeager about $55 million and Shelby about $35 million, which are numbers that will perk up any jury. Messrs. Hirko, Yeager, and Shelby -- along with former EBS executives Kevin Howard and Michael Krautz -- face conspiracy to commit wire and securities fraud charges, while the indictment's insider trading and money laundering charges are focused solely on Messrs. Hirko, Yeager and Shelby.

Other potential problems for the defendants are the plea bargains that two former EBS executives have struck with the Task Force prosecutors. Ken Rice, a former high-level Enron executive who was once EBS' CEO, and Kevin Hannon, EBS' former chief operating officer, were originally indicted in the Broadband case, but both entered into plea deals with the prosecution in which they agreed to testify during the upcoming trial. Under cooperation agreements with the government, Messrs. Rice and Hannon admit to some of the indictment's allegations, including that Enron and EBS made false statements about the products, services and business performance of EBS. Mr. Rice pled guilty to one count of securities fraud and faces up to 10 years in prison and a $1 million fine, while Mr. Hannon pled guilty to one conspiracy to commit securities and wire fraud count and faces up to five years in prison and a $250,000 fine.

The prosecution's theory of the case revolves around the allegation that Messrs. Hirko, Yeager and Shelby orchestrated false press releases in April 1999 when touting the Enron Intelligent Network, which was a software driven telecommunications network. Although other EBS employees allegedly told the three defendants that "the Enron network was not intelligent," the prosecution contends that the three continued issuing misleading press releases and marketing materials promoting EBS. In particular, the indictment refers to early drafts of a PowerPoint presentation that disclose that EBS' network control software was under development. According to the prosecution, later versions of that PowerPoint presentation that were actually used in analyst meetings in December 1999 and January 2000 did not include that key disclosure. After one supposedly misleading presentation that was "received favorably by analysts and investors," the prosecution contends that Enron's stock price spiked from $54 on the day of the presentation to more than $72 the following day.

Meanwhile, the charges against Messrs. Howard and Krautz relate to a April 2000 structured finance transaction known as Project Braveheart that was designed to allow EBS to monetize a 20-year agreement with Blockbuster Inc. EBS' agreement with Blockbuster provided that Blockbuster would obtain digital rights to films that EBS would encode and stream over its network to customers' homes. The government contends that Messrs. Howard and Krautz understood the accounting rules relating to such a structured finance transaction, but that they intentionally violated those rules and withheld key information from Enron's auditors so that the Braveheart transaction could be booked and allow Enron to post about $110 million in revenue in 2000-01.

The trial will feature at least two prominent members of Houston's fine criminal defense bar. Jack Zimmermann -- one of many proteges' of legendary Houston criminal defense lawyer, Richard "Racehorse" Haynes -- will represent Mr. Howard, while Lee Hamel, an experienced defender of white collar criminal cases in the Houston area, will defend Mr. Yeager.

Jury selection begins on Monday when 100 prospective jurors will report to Judge Gilmore's courtroom for voir dire. Judge Gilmore told lawyers at a pretrial hearing earlier in the month that she will bring in another group of about 90 potential jurors on Tuesday if the lawyers do not pick a jury from the first group. Each side says they will need about four weeks for trial, so I'm guessing that the case will go to the jury sometime in early to mid-June.

Posted by Tom at 03:00 PM | Comments (0) | TrackBack

Sentencing run amok

The Chronicle's Mary Flood reports today on recent developments in the Enron-related Nigerian Barge case, in which four former Merrill Lynch executives and one former Enron executive are awaiting sentencing after being convicted last year of wire fraud and conspiracy charges in regard to a relatively small transaction in which Enron allegedly disguised a loan from Merrill as a sale of an interest in some barges off the coast of Nigeria. Two of the defendants are scheduled to be sentenced by U.S. District Judge Ewing Werlein this coming Thursday and the other three will be sentenced on May 12.

Ms. Flood and the Chronicle have gotten involved in the case by filing a motion to unseal pleadings after the Task Force and the defendants attempted to keep the Task Force's recommendations relating to their sentences under seal (i.e., not available for public scrutiny). But one of the Merrill defendants -- James Brown -- earlier this week filed his objection to the Task Force's sentencing recommendation in regard to him, and that pleading contains shocking information regarding the length of sentences that the Task Force is proposing. The Task Force Court is proposing sentences ranging from seven years for William Fuhs, the former low-level Merrill executive who had little control over the transaction, to an effective life sentence in prison for Dan Boyle, the former Enron executive who was in charge of closing the deal.

The basis of the Task Force's draconian sentencing recommendations is the alleged loss to Enron resulting from the Nigerian Barge transaction. However, as noted in earlier posts here and in regard to the U.S. Chamber of Commerce amicus curie brief noted here, the Task Force's position on the damages to Enron investors resulting from the relatively small barge deal is highly dubious and simply is not a credible basis for tossing business executives with no prior criminal record into prison for long periods of time.

Thus, even after the injustice of the sad case of Jamie Olis, the Justice Department continues its unfortunate policy of seeking maximum sentences against easy targets, such as relatively wealthy business executives. Given the utter lack of any perspective within the Justice Department regarding such matters, it's going to take strong-willed judges to step in and impose sentences that relate fairly to the nature of the offenses. Let's hope that Judge Werlein does just that on Thursday.

Posted by Tom at 08:27 AM | Comments (0) | TrackBack

Dynegy settles class action claims

Former Enron suitor Dynegy Inc. has agreed to pay $468 million to settle a class action suit that accused the Houston-based company and several of its former officers and directors of conspiring to cook the company's books to mislead investors. The Chronicle story on the settlement is here.

For more than a decade in the Houston business community, Dynegy was known as "Enron-lite" -- a smaller energy company that tracked Enron's success in various business ventures, but primarily in natural gas trading. The class action claims arose during the period after Dynegy's failed merger with Enron during that latter company's meltdown at the end of 2001. Inasmuch as Enron was a market-maker in energy trading, that entire industry suffered a major shakeout immediately after Enron's demise, and Dynegy was one of the trading companies that had to scramble to avoid its own demise in the aftermath of Enron's bankruptcy.

Dynegy said it will pay the settlement using available cash, insurance, company stock, and bank lines. Dynegy reported about $1.2 billion in cash and unused bank credit availability as of Dec. 31, 2004. Dynegy will use insurance to cover $150 million of the settlement, $250 million from its cash reserves, and the remaining $68 million will be in the form of Dynegy's common stock issuance. Dynegy expects to book a first-quarter charge of $155 million from the settlement and associated legal expenses, and its stock finished Friday's regular session down 3.8% at $3.56.

The class action claims revolved around a financial project dubbed "Project Alpha," a system of gas trades that Dynegy allegedly used to mollify a discrepancy between lagging operating cash flow and rising net income. As a part of that deal, class plaintiffs alleged that Dynegy disguised a $300 million loan as cash to inflate its financial statements. Representatives of Arthur Andersen, Dynegy's former auditor, testified that Dynegy representatives had not disclosed key parts of the deal to Andersen and that its accounting treatment of the deal would have been different had all information been disclosed. That testimony led to a well-known conviction in a related criminal case that is known on this blog as the sad case of Jamie Olis.

The settlement also covers negligence allegations pending against former Dynegy CEO Chuck Watson, former president Steve Bergstrom, and former CFO Rob Doty. Their portions of the settlement will be paid out of the company's Directors and Officers' liability insurance policy.

Posted by Tom at 07:00 AM | Comments (1) | TrackBack

April 14, 2005

Lay's response to government's quick trial request

The gamesmanship continues in the battle between the Enron Task Force and former Enron chairman and CEO Ken Lay over when and how to handle the trial of the government's bank fraud charges against Mr. Lay. Prior posts on this flanking action in the war between the Task Force and Mr. Lay can be reviewed here, here, and here.

In response to the government's request for a trial within the next two months on the severed bank fraud charges, Mr. Lay not surprisingly has asked U.S. District Judge Sim Lake to include the bank fraud charges in the January 2006 trial of the larger conspiracy-securities fraud charges in which Mr. Lay is a defendant along with former Enron CEO Jeff Skilling and fomer Enron chief accountant Richard Causey. However, in an interesting twist, Mr. Lay has requested that Judge Lake adjudicate the bank fraud charges himself rather than allowing those charges to be considered by the jury that will hear the conspiracy-securities fraud charges. Thus, Mr. Lay's attorneys are attempting to hedge the substantial risk that a jury might be inclined simply to throw the book at Mr. Lay and convict him on all counts whereas he might stand a better chance of acquittal on the bank fraud charges in front of Judge Lake.

Although an interesting strategy, my sense is that Mr. Lay's approach will not work because the Task Force will want to try the bank fraud charges to a jury, which the government figures will be more sympathetic to its case than Judge Lake. A hearing is scheduled on the matter on April 21. The Chronicle's Mary Flood's report on the skirmish is here.

Posted by Tom at 07:11 AM | Comments (0) | TrackBack

April 13, 2005

For goodness sakes, get on with it

Don't miss this Wall Street Journal ($) editorial today, which addresses the same issue that many of these earlier posts address in regard to the Lord of Regulation's ongoing public flogging of American International Group, Inc. and its former chairman and CEO, Maurice "Hank" Greenberg:

[Y]ou don't have to belong to the ACLU to wonder about the lack of due process here. Mr. Spitzer uncovers questionable accounting about an insurance transaction and demands that the board fire the CEO. He then uses that firing to justify a public accusation of "fraud" that he hasn't yet proven to anybody, much less to a jury of Mr. Greenberg's peers.

To which our reaction is, then why not get on with it and indict the man? If Mr. Greenberg's behavior is so heinous that it warrants a denunciation as "fraud" on national TV, what is Mr. Spitzer waiting for?

As an aside, this post addressed the Lord's unusual public statement from last week in which he stated that his public flogging of AIG would probably not result in a criminal prosecution of the company, although the same could not be said about Mr. Greenberg. AIG and Berkshire Hathaway board members and shareholders heaved a joint sigh of relief and gave thanks to the Lord for his public statement.

Well, it turns out that the Lord may have had more than market stabilization as a motive for that public statement. The Lord is already running for Governor of New York, and it turns out that some of the Lord's largest campaign contributors are partners in the law firm that is defending AIG in the Lord's investigation of the company. Inasmuch as that firm has apparently been advising AIG to roll over for the Lord during the investigation, do you think the AIG board knew of the connections between the company's law firm and the Lord before acting on that advice?

Posted by Tom at 05:28 AM | Comments (0) | TrackBack

April 12, 2005

Justice Department's brief in Arthur Andersen appeal

Here is the Justice Department's brief in Arthur Andersen's appeal to the U.S. Supreme Court of its criminal conviction of witness tampering in connection with its destruction of Enron Corp.-related documents during the latter stages of that company's collapse in late 2001.

The Justice Department frames its argument of the key issue in the appeal in the following manner:

The lower courts correctly defined the term “corruptly” in Section 1512(b) as “having an improper purpose” “to subvert, undermine, or impede the fact-finding ability of an official proceeding.” The lower courts’ definition is consistent with the purpose-based definition long given to the identical term in the general obstruction-of-justice statute, 18 U.S.C. 1503, on which Section 1512 was based; in other obstruction-of-justice statutes; and in other federal criminal statutes more generally. That definition does not render the term “corruptly” superfluous. Nor does it criminalize conduct that is not inherently wrongful, because it has long been understood that it is improper to destroy documents when litigation is anticipated for the purpose of frustrating the truthseeking process.

Petitioner’s novel alternative definitions of the term “corruptly” — which would require either “proof of improper means of persuasion or inducement to unlawful acts,” or “proof of consciousness of wrongdoing” — should be rejected. The former definition cannot be reconciled with the text of the statute; would give the term “corruptly” a different meaning in Section 1512(b) than in other obstruction-of-justice statutes; and would criminalize little, if any, conduct that is not already criminalized by other provisions. The latter definition contravenes the established principle that ignorance of the law is no defense, and no exception to that principle is warranted here.

The Justice Department's brief is 77 pages, which makes it even more incredible to me that appellate attorneys are not using the bookmark tool in Adobe Acrobat to facilitate ease of review of lengthy appellate briefs.

Posted by Tom at 07:46 AM | Comments (0) | TrackBack

The Lord of Regulation chats with the Oracle of Omaha

Let's review the landscape of regulating business for a moment.

Various former executives of disgraced and insolvent Enron Corp. are under indictment for using structured finance transactions that independent lawyers and accountants approved to mislead investors regarding Enron's true financial condition. Although such transactions came to light almost four years ago, no such Enron executive has yet to be tried on such charges. In the meantime, Enron has been effectively liquidated.

Several years ago, General Reinsurance Corp., a unit of Berkshire Hathaway, and American International Group, Inc. entered into at least one large structured finance transaction with each other. As with Enron's structured finance transactions, numerous executives, lawyers, accountants and perhaps even consultants for both companies reviewed and approved the deal. Here are the previous posts on the saga involving AIG and Berkshire.

New York Attorney General Eliot Spitzer, the new Lord of Regulation, believes that the companies did not account for the transaction properly and, as a result, that the transaction made AIG and Berkshire's financial performance appear better to each company's investors than it really was. Despite not having heard his side of the story, the Lord has already concluded that former AIG chairman and CEO Maurice "Hank" Greenberg -- a rather hard-knuckled executive -- committed a crime in regard to the transaction.

Yesterday, as this NY Times article reports, the Lord had a nice chat with the avuncular Oracle of Omaha, the chairman of Berkhsire, in which he questioned the Oracle over his knowledge of the transaction. The Oracle replied that he knew about the deal generally, but that others at General Re handled the details of the transaction. The Oracle also stated that he understood that the deal had been properly accounted for, but again, he did not really know much about the details of all that.

By the way, the Oracle agreed to chat with the Lord because the Lord assured him that -- unlike the dastardly Mr. Greenberg -- the popular Oracle is not a target of the Lord's investigation. In appreciation for the Lord's courteous gesture, the Oracle served up some more juicy tidbits of AIG's involvement in the transaction for the Lord to chew on.

In the meantime, former Enron chairman and CEO Ken Lay's defense of the criminal charges against him relating to Enron's structured finance transactions is precisely the same as the Oracle's above explanation of his role in the transaction with AIG.

In the wake of almost unprecedented negative publicity -- much of which has been flamed by prosecutors pursuing him -- Mr. Lay is facing the prospect of spending much of the remainder of his life in jail. The same is probably true for Mr. Greenberg.

Meanwhile, another large company that engaged in similar structured finance transactions -- and which collapsed at about the same time as Enron -- announced yesterday that it had settled civil charges with the SEC over its involvement in such transactions. No criminal charges were ever filed in regard to that matter.

And the Oracle returns to Omaha to work on his next letter to shareholders.

Quare: Is this any way to regulate business?

Posted by Tom at 05:14 AM | Comments (0) | TrackBack

April 11, 2005

You don't say?

Eliot Spitzer, the New York AG (i.e., "Aspiring Governor") made the Sunday talk show circuit yesterday in regard to his campaign against corporate wrongdoing generally and his ongoing investigation of transactions between AIG and a unit of Berkshire Hathaway (earlier posts here) specifically.

The investigation -- which has not yet resulted in a single indictment, but has battered AIG's stock and credit rating -- involves scrutinizing complicated financial transactions that were approved by scores of transaction lawyers, accountants, and consultants for both AIG and Berkshire. Indeed, the MSM reporting on Mr. Spitzer's campaign have not even attempted to obtain an explanation of the transactions from the persons involved in structuring the transactions. Nevertheless, the Lord of Regulation said yesterday that he had strong evidence that former AIG chairman and CEO Maurice "Hank" Greenberg committed fraud in initiating the deal between A.I.G. and General Re, the subsidiary of Berkshire. Mr. Spitzer's following comments will give you a flavor for the entire interview:

These are very serious offenses, over a billion dollars of accounting frauds that A.I.G. has already acknowledged. . . That company was a black box, run with an iron fist by a C.E.O. who did not tell the public the truth. That is the problem.

Today, this NY Times article today reports that Mr. Greenberg is probably going to refuse to testify based on his Fifth Amendment privilege at a deposition that Mr. Spitzer has scheduled for Tuesday.

After Mr. Spitzer's public comments of yesterday, how could Mr. Greenberg responsibly do anything else?

By the way, it's nice to see that someone else is noting that Mr. Spitzer is manipulating prejudices in an unhealthy manner.

Posted by Tom at 05:07 AM | Comments (0) | TrackBack

April 08, 2005

Did Buffett rat out AIG?

In an extraordinary development in the unfolding criminal investigation of transactions between American International General, Inc. and Berkshire-Hathaway, Inc., this NY Times article reports that Berkshire chairman Warren Buffett -- in an effort to win leniency for Berkshire in an unrelated case -- directed Berkshire's lawyers several months ago to turn over documents describing the transaction between Berkshire unit General Re and AIG that is at the heart of the criminal investigation. Here are the previous posts on the AIG and Berkshire saga.

As a result of Mr. Buffett's peace offering, former AIG chairman and CEO Maurice "Hank" Greenberg is facing the prospect of giving a deposition next week to the Justice Department, Securities and Exchange Commission, Eliot Spitzer and the New York attorney general's office, and New York insurance regulators. In comparison, Mr. Buffett will merely be "interviewed" on Monday by the investigators, who consider him merely a witness in the AIG probe at this point.

According to the Times article and this similar Wall Street Journal ($) article, Mr. Buffett and Berkshire served up AIG and Mr. Greenberg on a platter to prosecutors in December when prosecutors were questioning Berkshire officials regarding General Re's transactions with Reciprocal of America, a failed Virginia-based insurer. The prosecutors are investigating whether General Re had helped Reciprocal disguise loans as reinsurance to hide losses from insurance regulators. Two Reciprocal executives have copped plea deals and began cooperating with investigators, which led prosecutors to inform Berkshire lawyers that General Re and Berkshire executives may face criminal charges in connection with their probe of Reciprocal. A couple of weeks later, the Times and WSJ report that, at Mr. Buffett's behest, Berkshire lawyers gave investigators documents regarding General Re's questionable transaction with AIG.

Sort of makes one feel warm and fuzzy about doing business with that American business icon, Warren Buffett, doesn't it?

Posted by Tom at 05:29 AM | Comments (2) | TrackBack

April 07, 2005

Lawyers, bring your schedules

Coming on the heels of this earlier post on the Enron Task Force's use of Ken Lay's prior public statements to move for an early trial on the pending bank fraud charges pending against him, Mary Flood of the Chronicle reports that U.S. District Judge Sim Lake (picture on the left) has called a hearing in the case for next Friday to discuss scheduling matters in regard to the bank fraud charges against Mr. Lay.

Contrary to my earlier speculation, Ms. Flood speculates that Judge Lake -- who does run an efficient docket -- will schedule the bank fraud trial against Lay this summer before the bigger January 17, 2006 trial of the securities fraud charges against Mr. Lay and his co-defendants Jeff Skilling and Richard Causey.

This is a horrifying development not only for Mr. Lay, but also for Messrs. Skilling and Causey. The adverse publicity that will result from a trial of Mr. Lay six months before the trial of the multi-defendant case will be hard for the defendants to deal with in an environment that is already hostile to anyone associated with Enron.

Meanwhile, Ms. Flood also reports that there will be a panel discussion about the Enron scandal before the Houston premiere of Alex Gibney's documentary, Enron: The Smartest Guys in the Room on April 19, which was the subject of this earlier post.

By the way, I have not been asked to participate on the panel. ;^)

Posted by Tom at 06:15 AM | Comments (0) | TrackBack

April 06, 2005

Enron-AIG-Berkshire: Regulating earnings management

Don't miss Wall Street Journal ($) columnist Holman Jenkins' Business World piece today. In analyzing the Lord of Regulation's assault on American International Group, Inc. and its long history of being rewarded by the market for its adroit management of earnings, Mr. Jenkins makes an interesting point about the importance of trust -- or, as he dubs it, the "predictability premium" -- in AIG's business, something that was touched on in this earlier post:

That Mr. Greenberg did his accounting as he thought best was no secret to anybody, even before recent revelations. Money Magazine called AIG a "faith stock," lumping it with other giant, complex money machines such as GE and Citigroup. This newspaper dubbed it one of the economy's great "black boxes." Indeed, the whole reason to own AIG in the 1990s was to reap the predictability premium built into its stock price thanks to Mr. Greenberg's ability to generate uncannily rising earnings from a complex of more than 100 businesses, including not just insurance, but aircraft leasing, commodity trading and much else.

In some ways, this model was already falling out of step with the business mainstream by the 1980s, long before Enron made "transparency" the central virtue of the new corporate value system. But exceptions were granted to AIG and a few others (like GE). Their opacity might have earned them skepticism in the marketplace, but instead they were awarded higher share prices. AIG sold for about 26 times its earnings, compared to 10 or 15 for most insurers.

Let's dwell on this for a moment: When the market was the arbiter, it unambiguously rewarded Mr. Greenberg and AIG's shareholders for applying the techniques of earnings management. The market understood that behind the screen lay all the volatility and mishaps that insurance is heir to, but it applauded Mr. Greenberg for using his wiles to create a security (AIG's stock) that transmuted that volatility into unnaturally smooth reported earnings.

One big albatross for [former AIG chairman and CEO, Maurice "Hank" Greenberg] will be the Enron overhang. By far, the largest factor in AIG's stock decline is the evaporation of its predictability premium, not the accounting scandal. But that won't stop trial lawyers, prosecutors or the media from assuming that the distance between AIG's peak and its ultimate low reflects the damage Mr. Greenberg personally did to investors.

And in closing, Mr. Jenkins notes that it may still be a tad early to be making a play for AIG stock, which is down almost 30% in value from the beginning of the year:

[AIG's board of directors] no interest in defending any of this, since board members have learned that their personal fates are best served by running up a white flag. Eliot Spitzer, New York's attorney general, let it be known this week that their compliance had met with his approval.

There's also a question of whether, in a market where skepticism rather than trust is the rule, it's possible or sensible to maintain an organization as complex as AIG. Hold onto your seats for the battle over Starr International, a peculiar entity set up years ago and holding much of the incentive wealth of the company's top executives. We can't think of a quicker way to destroy the morale of AIG's remaining leadership, and thus perhaps the company.

Posted by Tom at 05:15 AM | Comments (0) | TrackBack

April 05, 2005

The Lord of Regulation moves the market

In an effort to calm the harried investors in his latest target, American International Group Inc., New York AG ("Aspiring Governor") the reigning Lord of Regulation Eliot Spitzer announced yesterday that his office expects to reach a civil settlement with AIG even as he rachets up the criminal investigation into several private entities closely tied to AIG's business. Here are the previous posts on the developing AIG and Berkshire Hathaway debacle.

After being hammered for over a month, the price of AIG shares responded to the Lord's announcement yesterday by increasing to $2.35, to $53.30 on the New York Stock Exchange. Even with yesterday's spike, however, AIG shares are down 26% since the beginning of the Enronesque investigation into AIG's finances. The seemingly bottomless drop in AIG's share price is driven by the fact that no major financial company has survived criminal charges in the history of U.S. financial markets.

Meanwhile, seemingly just to make things more interesting, several senior AIG executives were fleeing the boards of C.V. Starr & Co. and Starr International Co,, two closely-owned AIG-associated entities, the former of which controls 12% of AIG's stock. Former AIG chairman and CEO Maurice R. "Hank" Greenberg is the CEO of Starr International, which uses its stake in AIG to provide deferred-compensation to AIG executives. Inasmuch as the Lord of Regulation does not approve of Mr. Greenberg's tentacles affecting AIG, the AIG board is scrambling to disassociate itself from the closely-owned entities and reassert control over AIG's executive compensation program.

Given the Lord's disapproval of AIG's arrangement with Starr International, that the structure of the arrangement may actually benefit AIG shareholders does not appear to be a particularly important consideration at this time to the AIG board.

Posted by Tom at 05:03 AM | Comments (0) | TrackBack

April 04, 2005

The Enron law of unintended consequences

Remember that motion that former Enron chairman and CEO Ken Lay filed last fall in which he requested a separate trial from his Enron co-defendants Jeff Skilling and Richard Causey?

You know, the one in which U.S. District Judge Sim Lake delivered a body blow to the Lay defense team when he granted Mr. Lay a separate trial on the bank fraud counts that are specific toward him, but ruled that he would also have to stand trial with Messrs. Skilling and Causey in regard to the securities fraud and related criminal counts that are common to all three of the former Enron executives.

Well, the effect of that ruling is reverberating through Houston's Federal Courthouse today. The Chronicle's Mary Flood is reporting that the Enron Task Force has filed a motion in which it requests that Judge Lake schedule the trial of Mr. Lay's bank fraud charges in May or June of this year before the trial of the larger case against Messrs. Lay, Skilling, and Causey that is currently scheduled to begin on January 17, 2006. Apparently, in support of its motion, the Task Force is relying upon Mr. Lay's prior pleadings and public statements to the effect he wanted a speedy trial of all criminal charges against him.

Of course, Mr. Lay made those statements in the context of seeking a separate trial altogether from Messrs. Skilling and Lay, and quickly waived his speedy trial right when Judge Lake ruled that he would be tried with Messrs. Skilling and Causey on the common charges relating to all three. Thus, the Task Force is taking Mr. Lay's request for a speedy trial out of context in using those statements to support its request for a quick trial on the bank fraud charges. Mr. Lay has suggested that the separate bank fraud trial commence within 60 days after the conclusion of the multi-defendant trial.

Judge Lake probably will not want to risk the prejudicial publicity of having Mr. Lay tried on the smaller bank fraud case before the larger multi-party case, so my sense is that he will deny the Task Force's request for an earlier trial of the bank fraud charges against him. But the results of Mr. Lay's seemingly innocuous motion seeking a separate trial in this case will prompt defense attorneys to think twice (and maybe three times) before filing such a motion in future multi-defendant cases.

Posted by Tom at 04:36 PM | Comments (0) | TrackBack

April 01, 2005

Chronicle wins prestigious award for Enron coverage

Kevin Whited at blogHouston.net notes that the Houston Chronicle has been awarded a prestigious business writing prize from the Society of American Business Editors and Writers in the Breaking News category for its coverage of the indictment of former Enron chairman and CEO, Ken Lay. The award is a well-deserved honor for the Chronicle Enron-reporting team, which has been led by Chronicle reporter Mary Flood. The Chron endured some criticism from local and national press sources for its supposedly slow reaction when the Enron scandal began to unfold in late 2001. However, regardless of that criticism, the Chronicle is now clearly the leading source of information on the Enron scandal. The Chron's special Enron online section is the best overall source of information on pending matters relating to the Enron scandal.

Posted by Tom at 05:45 AM | Comments (1) | TrackBack

Is PriceWaterhouseCoopers next?

American International Group Inc.'s public admission this week that it engaged in improper accounting practices has placed AIG's auditor -- PricewaterhouseCoopers LLP -- squarely in the sights of government regulators and plaintiffs' lawyers. Here are the earlier posts on the fast developing scandal that has enveloped AIG and Berkshire Hathaway over the past several weeks.

Federal and state investigators (Mr. Spitzer is seemingly everywhere these days) are currently evaluating what AIG told PWC auditors about the questionable transactions, but it is only a matter of time before investigators and class action securities plaintiffs' lawyers will begin to question PWC regarding its failure to uncover the allegedly improper accounting. As noted in this earlier post, one of the most troubling aspects of the current AIG investigation is that many of these transactions under scrutiny may well have been reviewed and approved by various business professionals working on behalf of AIG. Already, press reports on the AIG investigation assume that the accounting for the transactions was improper, and any defense that the transactions were accounted for properly has been shoved aside in the wave of negative publicity and the AIG board's efforts to bend over backwards for the regulators in an attempt to limit the collateral damage to AIG's stock price.

At any rate, if the transactions were accounted for improperly and were material, generally accepted accounting principles require that AIG restate its financial reports for several past years. If the violations are not deemed material, then AIG could correct its financials by taking a one-time adjustment to its fourth-quarter results for 2004. The question of whether an accounting violation is material is determined by whether the financial result of the violation would have influenced the opinion of a hypothetical reasonable investor. AIG has already stated that correcting the known violations would reduce its $83 billion net worth by only 2%.

So, as we wait for the other shoe to drop on PWC, let's hope that governmental regulators take note of this point.

Posted by Tom at 04:47 AM | Comments (1) | TrackBack

March 31, 2005

Absolutely Enronesque

In the most stunning in a series of revelations that has rocked the U.S. business community, American International Group Inc. admitted yesterday to numerous and substantial accounting irregularities that could reduce its net worth by over $1.75 billion. Moreover, the company's accountants -- PriceWaterhouseCoopers -- received a subpoena for documents relating to the probe.

AIG, the largest insurance company in the U.S., admitted transactions that "appear to have been structured for the sole or primary purpose of accomplishing a desired accounting result." The company's statement listed eight areas in which an ongoing internal review has identified accounting mistakes. The statement specifically declared as improper the treatment of a deal with General Re Insurance Corp., a unit of Warren Buffett's Berkshire Hathaway Inc., that has been at the center of the probe since it began. Here are the previous posts on the investigation into AIG and Berkshire.

To make matters worse, state and federal investigators believe that the full extent of AIG's accounting improprieties over the past decade are even larger. According to unnamed sources within the government's investigation units, the investigations have already uncovered a pattern of alleged misconduct in regard to the business transactions that will likely prompt criminal prosecutions against the individuals responsible for the transactions.

The Lord of Regulation was pleased with AIG's public admissions. "The board's decision to provide this information represents a welcome step toward transparency and accountability as our investigation proceeds," said the Lord's spokesman.

The market is clearly worried by AIG's mounting problems. Yesterday, during a broad stock-market rally, AIG's shares fell almost 2% to $57.16, continuing a slide that began in mid-February after disclosure of the governmental probes. Since that time, AIG shares are down 22% since closing at $73.12 on Friday, Feb. 11. Perhaps even more importantly, Standard & Poor's yesterday downgraded AIG's long-term bonds and certain other debt by a notch from its top AAA rating.

Given these latest developments. the question of the moment is whether AIG is headed for an Enronesque meltdown. Financially, it would appear that such a meltdown is unlikely. In 2004, AIG reported net income of over $11 billion on revenue of about $98.5 billion. Consequently, the accounting problems identified to date probably will not deplete shareholders' equity by more than about 2%, which would leave the company's net worth above $80 billion. That's not chump change.

However, the reason that Enron collapsed is that Enron’s business-model -- as does AIG's -- requires its customers to rely on the company's financial integrity and not necessarily the company's net worth. Accordingly, when customer confidence in a company such as Enron or AIG is undermined, participants in those companies' markets become less willing to engage in the purchase or sale of long-term contracts that might not be fulfilled. By way of comparison, As the "bid-ask" spreads on Enron's trading contracts diverged in late 2001, Enron’s markets unraveled and Enron's formerly profitable trading business collapsed.

Enron and AIG's business models are quite similar to that of a bank. Banks take in money from depositors on a short-term basis and then loan it out on a long-term basis. The bank only keeps a small fraction of its assets available as working capital. Consequently, as sometimes happens, if too many depositors try to withdraw funds from a bank (i.e., a "run on the bank"), then the bank will not have adequate cash on hand to pay them their withdrawals and the customers will be have to be turned away.

So what prevents a run on the bank? Beyond federal deposit insurance, the only thing that really prevents the run on the bank is that the bank’s depositors trust that the bank will be able to fulfill their demands for withdrawals. Stated another way, the bank will fail when its depositors stop trusting the bank. That’s one of the reasons why banks traditionally have built huge and impressive bank lobbies and offices — to advertise the strength of the bank’s assets and its concurrent financial integrity. Enron followed that example in building the Enron office tower in downtown Houston, and AIG's New York building is equally impressive. However, regardless of the financial soundness of any bank, when its depositors stop believing in the financial integrity of the bank, the bank will fail.

Life insurance companies such as AIG operate in much the same way. Insureds deposit money with a life insurance company for years and build up equity. However, if the insurance company fails (as they sometimes do), then the investment is lost. Thus, customers rationally hesitate to use a life insurance company that is not financially solid, and insurance companies attempt to fulfill that customer expectation regarding their financial stability through public accounting, by building enormous offices, and by advertising themselves as bastions of stability. In that regard, governmental regulation of companies in the life insurance and banking industries help those industries by reducing the public’s fear of hidden financial problems.

Enron was similar to a bank or life insurance company because Enron’s largest business was in natural gas contracts. Inasmuch as Enron created the long-term natural gas market, Enron became the market maker for such contracts and, thus, offered to buy or sell long-term natural gas contracts in that market.

That raises an important attribute of Enron’s business that led to its downfall — Enron was a party to every transaction in its trading business. That is, buyers and sellers did not contract with each other, but with Enron. Thus, every company that conducted trading business with Enron had credit exposure to Enron and, as a result, a big part of the value placed on a contract depended on Enron’s creditworthiness. This exposure is greater in long-term contracts, particularly for buyers who prepaid some or all of the contract.

Therefore, as the revelations of Enron’s accounting problems began to emerge in late 2001, buyers of such contracts from Enron began to bid lower — the value of a contract fell with the increased risk. On the other hand, sellers of contracts began to demand a higher price from Enron because of the increased risk that the contract might not be fully consummated. Moreover, the foregoing process was not limited to Enron’s natural gas trading market. It also occurred in regard to electricity, plastics, chemicals, metals, oil, fertilizers, coal, freight, tradable emissions (pollution) permits, lumber, steel, and other markets that Enron had created. Almost overnight, Enron’s profit margins in its trading business diminished dramatically or disappeared completely, and that process ultimately led to the implosion of Enron’s trading markets.

Consequently, accounting improprieties are unlikely, in and of themselves, to lead to AIG's collapse. By way of comparison, bad accounting alone would not have brought down Enron. However, bad accounting can undermine the business customers' trust in AIG's financial integrity, and the disappearance of that trust in the marketplace can cause AIG's business to decline dramatically or, in the worst of all scenarios, collapse completely. That lack of trust is what brought Enron down, and AIG needs to be concerned with that same dynamic.

Posted by Tom at 05:07 AM | Comments (0) | TrackBack

March 30, 2005

JPMorgan Chase wins a key decision in Enron-related litigation

Only a week after agreeing to an embarrassing $2 billion settlement arising from its role as an underwriter of WorldCom bonds, JPMorgan Chase got some good news yesterday in a securities fraud case arising from its somewhat different dealings with Enron.

U.S. District Judge Sidney Stein granted JPMorgan's motion to dismiss a securities class action that the bank's shareholders brought on the theory that the bank had misled investors on its financial exposure arising from allegedly fraudulent transactions that the bank had entered into with Enron. The plaintiffs alleged that specific trading transactions between JPMorgan and Enron were really just disguised loans to Enron and that JP Morgan's assistance to Enron in arranging off-balance sheet entities allowed Enron to hide debt. When news of JPMorgan's alleged involvement in Enron became public in late 2001, the bank's stock price fell, triggering the class action by the investors.

In the 61 page decision, Judge Stein carefully considered plaintiffs' allegations, but concluded that plaintiffs failed to meet the standard of proof required in a securities class action and dismissed the claims. Inasmuch as the securities fraud claims must meet the heightened pleading standards set out in the 1995 Private Securities Litigation Reform Act, Judge Stein ruled that the plaintiffs were required to show that JPMorgan had made materially false statements with scienter. Establishing scienter is not an easy, as the plaintiffs must either show that JPMorgan had the motive and opportunity to commit fraud or show facts that constitute strong circumstantial evidence of conscious behavior or recklessness,

In his decision, Judge Stein found that plaintiffs offered generalizations rather than specific instances needed for scienter. Inasmuch as JPMorgan continued to fund Enron with new capital virtually up to the time of the company's collapse, Judge Stein concluded that JPMorgan was unlikely to have known that Enron was on the brink of financial collapse. Consequently, Judge Stein reasoned that the bank could not have been expected to reveal its exposure in its financial statements before the Enron collapse actually took place.

Judge Stein did find that plaintiffs had pleaded scienter with the requisite particularity in connection with their allegation that JPMorgan's prepay transactions with Enron were characterized as trading assets rather than as loan assets (an allegation that JPMorgan strongly disputes). However, Judge Stein ruled that, even assuming that the investors' allegation on this technical accounting point is true, that distinction by itself was not material to investors.

Posted by Tom at 06:41 AM | Comments (0) | TrackBack

March 29, 2005

Meanwhile, the Enron investigation goes on and on and on

This Mary Flood Houston Chronicle article reports that a second grand jury has been empaneled to replace the original federal grand jury that has been investigating the Enron scandal for the past three years. According to Ms. Flood, Enron Task Force prosecutors informed the new grand jurors that they should expect to remain working on the Enron case until at least November, 2006.

The first Enron grand jury indicted 23 people in connection with the Enron scandal. Six of those 23 pled guilty, five were convicted in the Nigerian Barge case -- which is remarkably the only criminal case that has gone to trial to date in connection with the Enron affair -- and one of the two former Enron employee-defendants in that trial was acquitted. The other 11 indicted persons still await trial.

Quare: If it takes over three years to figure out how to indict someone, then doesn't that length of time, in and of itself, indicate that reasonable doubt exists that a crime occurred in regard to matters under investigation?

Meanwhile, in regard to the Nigerian Barge case, the U.S. Chamber of Commerce took the unusual step of filing an amicus curie brief in the case this past week on the issue of sentencing. The Chamber of Commerce brief focuses on the market loss issue, which could have a big impact on U.S. District Judge Ewing Werlein's decision on sentencing the convicted defendants in the case.

Posted by Tom at 05:56 AM | Comments (0) | TrackBack

The Lord of Regulation goes after the Oracle of Omaha

Almost on cue, this Wall Street Journal article($) is reporting that Warren Buffett, the famed investor who is chairman and CEO of Berkshire Hathaway Inc., will be questioned by regulators next month over his involvement in the transaction between Berkshire's General Re insurance unit and American International Group Inc. that has led to the resignation of Maurice "Hank" Greenberg as AIG's chairman and CEO.

Here are the previous posts on the probe into AIG and Berkshire, and a NY Post article from last week that reported on a leak from New York Attorney General Eliot Spitzer's office that Mr. Buffett was not a target of the investigation.

H'mm. I guess Mr. Spitzer has changed his mind.

Mr. Buffett's interview is scheduled for April 11, a day before Mr. Greenberg's interview unless he has decided to assert his Fifth Amendment privilege in light to his resignation from AIG. At this point, Mr. Spitzer's office and the Securities and Exchange Commission are handling the probe, although Justice Department lawyers will also be present at both interviews.

Mr. Buffett will be questioned specifically about his involvement in a 2000 reinsurance transaction between AIG and General Re that regulators contend allowed AIG to boost its financial position improperly. The transaction shifted half a billion of expected claims to AIG from General Re along with a commensurate amount of premiums. AIG booked the premiums as revenue and then added $500 million to its reserves to account for its obligation to pay the claims at a time when market analysts were questioning whether AIG had adequate liability reserves. Regulators contend that the premium was designed to ensure that AIG was not at risk and, therefore, that the half billion was improperly booked as premium revenue. For its trouble, General Re received a $5 million commission on the deal and now even more investigative scrutiny into similar transactions with other companies.

Posted by Tom at 05:04 AM | Comments (0) | TrackBack

March 27, 2005

But what about this issue?

The NY Times Gretchen Morgenson provides this lucid analysis of the deal that prompted American International Group's board to call upon Maurice "Hank" Greenberg to step down as AIG's CEO after a generation of phenomenal wealth building for AIG shareholders. Here are the prior posts on AIG and Mr. Greenberg's mounting troubles.

Ms. Morgenson asserts that the purpose of the questionable transaction that led to Mr. Greenberg's ouster was to mask AIG's declining financial performance from the market. Unless AIG's stock price was maintained, AIG risked overpaying for American General Insurance Co. in 2001, which was a key acquisition in Mr. Greenspan's strategy of diversifying AIG's insurance business.

Nevertheless, Ms. Morgenson's analysis fails to address the nuance that the transaction in question was not performed in Mr. Greenberg's basement where no one could see it. Rather, it was a material transaction that was fully disclosed after careful review and approval by AIG and General Re's executives, auditors and attorneys. Presumably, Mr. Greenberg would not have approved the transaction without such disclosure and approvals. In fact, Ms. Morgenson's article simply assumes that the transaction was at least wrong without even entertaining the notion that numerous experts in such transactions had approved the transaction and are prepared to defend AIG's booking of it.

Despite all this, Mr. Greenberg faces a possible indictment on criminal charges that could result in a substantial prison sentence in the autumn of his long and successful business career. In a couple of weeks, Mr. Greenberg will be removed from the the board of directors of the company he built into a financial powerhouse unless he waives his privilege against self-incrimination in connection with the regulatory investigation into the transaction.

Maybe AIG took risks with certain transactions that should result in restatement of its earnings and reserves. Although the value of AIG's shares are fallen 24% for over $46 billion in market value since the beginning of the above-described probe, perhaps the value of such shares should be hammered in the market as a result of such a restatement. But do we really want the government criminalizing talented people such as Mr. Greenberg simply because he approved a questionable transaction that multiple experts in such deals had previously blessed?

That a reporter of Ms. Morgenson's stature does not even mention that troubling issue reflects just how socially acceptable it has become for the government to abuse its awesome police power to criminalize merely questionable business transactions.

Posted by Tom at 07:25 AM | Comments (0) | TrackBack

March 25, 2005

The Lord of Regulation demands even more from AIG

In what is becoming a typical development in such sagas, this NY Times article reports that the board of financial services giant American International Group Inc. is considering a move to restate its financial statments as a result of suspected accounting mistakes on its financial statements that may total as much as $3 billion from as many as 30 different insurance transactions. Here are the earlier posts on the the government's assault on AIG.

As the governmental probes into AIG's accounting is now far broader than what was believed just a week ago, the AIG board is assessing whether to restate its financial statements in regard to an additional 60 transactions that internal AIG investigators have identified as being potential problems. The potential errors under scrutiny occurred over five year period and include the possible booking of revenue and income prematurely and improperly transferring liabilities off the company's books. Many of the deals in question could have been designed either to boost AIG's reserves or to "smooth the earnings" of the company to meet Wall Street expectations.

Gosh, isn't this starting to sound downright Enronesque?.

Nevertheless, even a multibillion-dollar writedown of earnings should not damage AIG's long-term financial stability much. The company had net income of over $11 billion last year on revenue of almost $100 billion.

Former AIG chairman Maurice "Hank" Greenberg, who remains as AIG's nonexecutive chairman, is tentatively scheduled to give a sworn statement to investigators from New York AG Eliot Spitzer's office and the SEC on April 12. At the rate this scandal is developing, Mr. Greenberg better think seriously about stepping down and taking the Fifth. It is becoming increasingly clear that the Lord of Regulation is going to want more from AIG than simply financial sacrifices.

Posted by Tom at 05:06 AM | Comments (0) | TrackBack

March 24, 2005

Not good legal advertising

This Wall Street Journal article ($) reports on one of the biggest litigation miscalculations of the past several years -- Skadden Arps' partner Jay Kasner's recommendation to JP Morgan Chase and other WorldCom underwriters that they reject an earlier settlement in the WorldCom class action lawsuit that was proposed last year. By waiting until the trial loomed this month, J.P. Morgan and the other underwriters paid over $675 million more in the settlement than they would have paid had they accepted the earlier offer. Here are the posts over the past year on the WorldCom class action and related matters.

Not exactly the type of result that you would want splattered on the front page of the Wall Street Journal.

Posted by Tom at 05:50 AM | Comments (0) | TrackBack

March 22, 2005

Well, at least it's playing close by

The Chron's Mary Flood reports today that the documentary Enron, The Smartests Guys in the Room (earlier post here) will open in Houston on April 20 at the River Oaks Theatre, just down the street from where Ken Lay, Jeff Skilling and Andy Fastow all live.

No word on whether the three are on the invitation-only list for the Houston premiere.

By the way, I am patiently waiting for a movie reviewer to read this paper before penning a review on the Enron documentary. Don't worry, though. I am not holding my breath while waiting.

Posted by Tom at 07:06 AM | Comments (1) | TrackBack

Former WorldCom chairman finally settles

Former WorldCom chairman Bert C. Roberts, Jr. -- the final settlement holdout among WorldCom Inc.'s former outside directors -- agreed to settle the WorldCom investors' class-action lawsuit claims against him for $5.5 million, including $4.5 million out of his own pocket. Earlier posts on the WorldCom directors' settlement may be reviewed through this post.

Roberts' settlement leaves WorldCom's former auditor Arthur Andersen as the only remaining defendant in the trial of the class action, which is scheduled to begin on Wednesday. With huge litigation exposure remaining in connection with both the WorldCom and Enron class actions cases, Arthur Andersen has apparently decided to use its remaining cash reserves (estimated to be several hundred million dollars) to defend the cases rather than dilute the reserves through settlement. Andersen really does not have much to lose in pursuing such a high risk litigation strategy. It's not like the firm can be put out of business. The Justice Department has already taken care of that.

Posted by Tom at 05:37 AM | Comments (0) | TrackBack

AIG sacrifices more to the Lord of Regulation

Following on these earlier posts regarding the increasing threat of criminal indictment that is being place on American International Group executives, AIG canned two of its top executives -- CFO Howard I. Smith and VP Christian M. Milton -- after the two invoked their Fifth Amendment right against possible self-incrimination in the ongoing investigation into whether whether AIG manipulated its books in connection with a transaction involving General Re Corp., a unit of Warren Buffett's Berkshire Hathaway Inc.

Both men were terminated pursuant to an AIG company policy that requires employees to cooperate with government authorities investigating matters pertaining to the company. However, the two employees were clearly placed in an untenable position given recent developments in similar criminal investigations. In connection with this investigation involving Computer Associates, three former executives of that company pleaded guilty to obstruction of justice charges that were not tied to alleged misstatements told to federal investigators, but to alleged misstatements made to the company's own law firm during the company's internal investigation. Similarly, in this case involving accounting giant KPMG, the government required threatened criminal action against KPMG in connection with a tax avoidance scheme unless the firm forced one of its partners to cooperate with the government, which of course can use the partner's statements against him in prosecuting a crime.

Accordingly, rather than attempt to facedown the government over its increasingly common use of its odious power to criminalize merely questionable business transactions, the AIG Board has decided to offer several sacificial lambs to the Lord of Regulation in an effort to avoid a meltdown of the company. One can only ponder how many such lambs this Lord will require?

Posted by Tom at 04:57 AM | Comments (0) | TrackBack

March 20, 2005

More on "Conspiracy of Fools"

Following this earlier excerpt, The New York Sunday Times is running this second excerpt from Kurt Eichenwald's new book on the Enron scandal, Conspiracy of Fools.

I am about halfway through Conspiracy of Fools and it is excellent. With more information and the benefit of more hindsight, Mr. Eichenwald's book will likely replace the earlier Smartest Guys in the Room as the best book on the Enron scandal.

Posted by Tom at 11:16 AM | Comments (1) | TrackBack

March 19, 2005

WorldCom directors settle (again)

Eleven of WorldCom Inc.'s former directors who served on the WorldCom board between 1999 and 2002 yesterday agreed to revive a settlement that the District Court had earlier rejected (see earlier posts here and here) under which the directors agreed to pay $55.25 million in the WorldCom class action, including $20.25 million of their own money. The balance of the settlement will be paid with insurance proceeds.

That leaves just two defendants remaining in the WorldCom class action, former director Bert Roberts and former WorldCom auditor Arthur Andersen. Jury selection is scheduled to begin in the case on Tuesday.

With the directors' settlement, the WorldCom settlement pot stands at about $6.06 billion, which is the largest recovery to date in a class action securities case, at least until the banks start settling in the Enron class action case. Sixteen investment banks sold a total of $15.4 billion of WorldCom bonds in 2000 and 2001 and those bondholders suffered about $9 billion of losses.

Posted by Tom at 07:09 AM | Comments (0) | TrackBack

March 18, 2005

Outside directors' liability

Bernard S. Black, a University of Texas Law School professor, contributed to this timely article that summarizes the landscape of outside directors' liability to investor lawsuits in the wake of the recent Enron and WorldCom directors' settlements. The article nicely sets forth the current state of the law on outside directors' liability, and includes the following money passage on whether Enron and WorldCom-type settlements really induce outside directors to do a better job of overseeing management:

Outside directors fearing financial ruin will no doubt be more careful than directors feeling immune to out-of-pocket liability will be. But by how much? We simply don’t know. And there can be too much of a good thing. With jittery directors at the helm, prudent caution can readily transform into counterproductively defensive decision making and even paralysis in the boardroom.

Hat tip to Professor Bainbridge for the link to this article.

Posted by Tom at 07:06 AM | Comments (0) | TrackBack

March 17, 2005

JP Morgan Chase settles WorldCom class action

J.P. Morgan Chase & Co. became the final major holdout in WorldCom investor class-action lawsuit to settle as it agreed to pay a cool $2 billion in the WorldCom settlement pot. The settlement came a day before jury selection was expected to start in the class action case against the remaining defendants in the case, but now the jury selection date has been put off until next week.

It doesn't look as if J.P. Morgan improved its settlement posture by waiting until the last minute to settle. Under the formula used in Citigroup's earlier $2.58 billion settlement, J.P. Morgan would have paid $1.37 billion. But with all other major investment bank defendants already having settled, it appears that J.P. Morgan had to almost two thirds of a billion more for waiting to settle until the case was on the courthouse steps. Incredibly, the $2 billion settlement wipes out about five years worth of underwriting fees that J.P. Morgan has generated through the the sale of investment grade bonds.

The settlement raises the amount recovered in the WorldCom class action to over $6 billion, which is a record for a securities class action case that will stand at least until the Enron class action defendants begin settling or take that case to trial. Here are the earlier posts on the WorldCom class action.

WorldCom was valued at $180 billion at its peak in 1999, but collapsed into a Chapter 11 case in 2002 amidst an accounting scandal and $30 billion in debt. As is common in such huge business failures, investors sued virtually all of WorldCom's investment bankers, accusing the banks of failing to evaluate WorldCom's financial health properly when the banks sold $17 billion of WorldCom's bonds in 2000 and 2001. When WorldCom tanked, the holders of those bonds lost most of their value.

The banks collected about $85 million in fees for underwriting the WorldCom bonds, and about $5 billion of the $6 billion in settlement proceeds is earmarked for those bonds investors. Those proceeds will generate a dividend to those bond investors of about 50 cents on the dollar.

With J.P. Morgan out of the way and as predicted earlier here, the former directors of WorldCom will now enter into multimillion dollar settlement that collapsed in February. That would leave the only remaining defendants in the case as Arthur Andersen (WorldCom's auditor) and Bert Roberts, a former director.

Posted by Tom at 05:19 AM | Comments (0) | TrackBack

March 16, 2005

Meanwhile, over at AIG and Berkshire . . .

And while the business and legal worlds focus on the implications of the Ebbers conviction, this NY Times article reports on the uneasiness at Berkshire Hathaway as New York Attorney General Eliot Spitzer carves another notch in his anti-business holster with the resignation of longtime American International Group chairman, Maurice "Hank" Greenberg, who is every bit as prominent in financial circles as Berkshire chairman Warren Buffett is in the investment field.

In striking contrast to Mr. Ebbers' fate, this week's "retirement" of AIG CEO Greenberg was the result of AIG's board trying to soften the wrath of AG (i.e., "Aspiring Governor") Spitzer. AIG remains one of the world's largest and most lucrative financial services businesses. Mr. Spitzer was about to take Mr. Greenberg's deposition in his ongoing investigation of transactions between AIG and Berkshire's General Re Corp., so the AIG board unceremoniously elected to dump the man who had built the company into a giant in the hope of avoiding further legal scrutiny by the Aspiring Governor.

What is unfortunate about all of this is that, in the current anti-business culture that is fostered by films, the MSM, and prosecutors such as Mr. Spitzer, the AIG Board's throwing of Mr. Greenberg to the wolves just might have been the most reasonable business decision under the circumstances. In light of recent civil settlements by directors in the Enron and WorldCom cases, the main risk for directors now is failing to get rid of a CEO at the first sign of Mr. Spitzer or some other irregularity. Even if that that means showing the door to a CEO with Mr. Greenberg's long record of great returns for shareholders, that's just life in the big city.

Based on what is publicly known about Mr. Spitzer's investigation into the AIG-General Re transaction, it would not be unreasonable for any CEO to run for cover out of fear that she is the next target of this voracious appetite to criminalize even normal business practices. If you believe Mr. Spitzer, Mr. Greenberg arranged a transaction in 2000 with General Re that made AIG's reserves look slightly better than they really were. However, the deal did not affect AIG's net income and was the type of transaction that AIG -- and many other companies in the insurance industry -- have done for years without any adverse market reaction, much less a criminal investigation.

Nevertheless, as Mr. Spitzer continues pressing his campaign to criminalize business, it does not matter whether a transaction was considered proper in the past. Mr. Spitzer knows that he can get what he wants without the details of due process and a trial by undermining a company's stock price in the media. Such an approach is contrary to the rule of law, but Mr. Spitzer proceeds with the warm understanding that no one in the MSM will ever call him out on the injustice of his ways.

Perhaps the Aspiring Governor will yet turn up something more damaging at AIG and Berkshire than what has been reported to date. But the AIG morality play is turning out about the same as other Spitzer investigations -- a CEO gets canned, the company pays a big fine, and the Aspiring Governor gets good P.R. with perhaps a few crimes sprinkled in to titillate public interest in the matter. Although the dubious policy of criminalizing business generally is bad enough, Spitzer's manipulation of huge companies by publicly attacking common business practices -- without any measure of prosecutorial discretion or due process -- is taking governmental regulation of business to an entirely new and more dangerous level.

Update: Don't miss Professor Ribstein's observations on the foregoing process, which he insightfully characterizes as the "Imperial Regulator and the Divine CEO."

Posted by Tom at 07:35 AM | Comments (4) | TrackBack

The "honest idiot" defense fails

Bernie Ebbers' honest idiot defense fails as he is convicted on all counts.

The conviction is further bad news for former Enron chairman Ken Lay and former CEO Jeff Skilling who are claiming -- as did Mr. Ebbers -- that former Enron CFO Andrew Fastow kept them in the dark regarding the dire implications that Mr. Fastow's creation and management of several off-balance sheet partnerships had on Enron's true financial condition.

In fact, in many respects, Messrs. Lay and Skilling's defense is harder than Mr. Ebbers' because both Lay and Skilling supported Fastow's involvement in the off-balance sheet partnerships and their co-defendant -- former Enron chief accountant Richard Causey -- approved the dubious accounting relating to the partnerships. It is going to be risky for Messrs. Lay and Skilling to criticize Mr. Causey's accounting for Fastow's machinations with off-balance sheet entities during a trial in which all three are defendants. The bet here is that Mr. Causey cops a plea prior to trial and Messrs. Lay and Skilling end up defending the case between themselves. In that regard, Mr. Ebbers' defense counsel -- Reid Weingarten -- is one of the lawyers on Mr. Causey's defense team.

However, a key difference between the Ebbers theory of the case and that of Messrs. Lay and Skilling is that the latter two are not arguing that they were left in dark because of ignorance, but because of Mr. Fastow's desire to hide the enormous income that he was making from managing the partnerships. Thus, where Mr. Ebbers was forced to argue that he simply did not understand WorldCom's complicated accounting, Messrs. Lay and Skilling are contending that Mr. Fastow's greed to generate huge income from Enron's off-balance sheet partnerships incentivized him to lie to Lay and Skilling regarding the true nature of Enron's off-balance sheet partnerships. Of course, a complicating fact in Messrs. Lay and Skilling's defense is that they engineered the Enron board's dubious approval of Fastow's management of the partnerships, but that's another issue.

Moreover, another difference between the Ebbers case and the case against Mr. Lay is that the government's indictment against the three former Enron executives attributes a much larger role in the alleged crimes to Messrs. Skilling and Causey than to Mr. Lay. Messrs. Skilling and Causey are charged charged with crimes all the way back to 1999, and are identified as the men who "spearheaded" the purported conspiracy to hide Enron's true financial condition from the marketplace. On the other hand, the charges against Mr. Lay are focused on his actions during the months following following Mr. Skilling's resignation as CEO in August, 2001, when the government alleges that Lay "took over leadership of the conspiracy."

This past weekend, Mr. Lay continued an unusual public relations campaign that he has mounted since his indictment in which he has claimed that he was ignorant of wrongdoing at Enron. During an interview on CBS' 60 Minutes, Lay contended that Enron was a huge company in which senior management was delegated enormous trust to do the right thing. Mr. Lay contended that Mr. Fastow had "betrayed that trust" and "ultimately caused Enron's collapse. To the extent that I did not know what he was doing, and he obviously didn't share with me what he was doing, then indeed I cannot take responsibility for what he did."

Similarly, although Mr. Skilling has not been spoken publicly since his indictment, he did raise eyebrows in legal circles by testifying before Congress in February 2002 in which he asserted that "while I was at Enron, I was not aware of any financing arrangements designed to conceal liabilities or inflate profitability."

Posted by Tom at 07:30 AM | Comments (0) | TrackBack

The "honest idiot" defense fails

Bernie Ebbers' honest idiot defense fails as he is convicted on all counts.

The conviction is further bad news for former Enron chairman Ken Lay and former CEO Jeff Skilling who are claiming -- as did Mr. Ebbers -- that former Enron CFO Andrew Fastow kept them in the dark regarding the dire implications that Mr. Fastow's creation and management of several off-balance sheet partnerships had on Enron's true financial condition.

In fact, in many respects, Messrs. Lay and Skilling's defense is harder than Mr. Ebbers' because both Lay and Skilling supported Fastow's involvement in the off-balance sheet partnerships and their co-defendant -- former Enron chief accountant Richard Causey -- approved the dubious accounting relating to the partnerships. It is going to be risky for Messrs. Lay and Skilling to criticize Mr. Causey's accounting for Fastow's machinations with off-balance sheet entities during a trial in which all three are defendants. The bet here is that Mr. Causey cops a plea prior to trial and Messrs. Lay and Skilling end up defending the case between themselves. In that regard, Mr. Ebbers' defense counsel -- Reid Weingarten -- is one of the lawyers on Mr. Causey's defense team.

However, a key difference between the Ebbers theory of the case and that of Messrs. Lay and Skilling is that the latter two are not arguing that they were left in dark because of ignorance, but because of Mr. Fastow's desire to hide the enormous income that he was making from managing the partnerships. Thus, where Mr. Ebbers was forced to argue that he simply did not understand WorldCom's complicated accounting, Messrs. Lay and Skilling are contending that Mr. Fastow's greed to generate huge income from Enron's off-balance sheet partnerships incentivized him to lie to Lay and Skilling regarding the true nature of Enron's off-balance sheet partnerships. Of course, a complicating fact in Messrs. Lay and Skilling's defense is that they engineered the Enron board's dubious approval of Fastow's management of the partnerships, but that's another issue.

Moreover, another difference between the Ebbers case and the case against Mr. Lay is that the government's indictment against the three former Enron executives attributes a much larger role in the alleged crimes to Messrs. Skilling and Causey than to Mr. Lay. Messrs. Skilling and Causey are charged charged with crimes all the way back to 1999, and are identified as the men who "spearheaded" the purported conspiracy to hide Enron's true financial condition from the marketplace. On the other hand, the charges against Mr. Lay are focused on his actions during the months following following Mr. Skilling's resignation as CEO in August, 2001, when the government alleges that Lay "took over leadership of the conspiracy."

This past weekend, Mr. Lay continued an unusual public relations campaign that he has mounted since his indictment in which he has claimed that he was ignorant of wrongdoing at Enron. During an interview on CBS' 60 Minutes, Lay contended that Enron was a huge company in which senior management was delegated enormous trust to do the right thing. Mr. Lay contended that Mr. Fastow had "betrayed that trust" and "ultimately caused Enron's collapse. To the extent that I did not know what he was doing, and he obviously didn't share with me what he was doing, then indeed I cannot take responsibility for what he did."

Similarly, although Mr. Skilling has not been spoken publicly since his indictment, he did raise eyebrows in legal circles by testifying before Congress in February 2002 in which he asserted that "while I was at Enron, I was not aware of any financing arrangements designed to conceal liabilities or inflate profitability."

Posted by Tom at 07:30 AM | Comments (0) | TrackBack

March 14, 2005

CEO news

After a couple of years of shareholder unrest over the direction of the Walt Disney Co., the company's board yesterday named veteran Disney insider Robert Iger to replace Michael Eisner as the company's CEO. Mr. Iger was Mr. Eisner's choice to to succeed him. Here are the previous posts over the past year on the turmoil at Disney.

The theory behind the appointment of Mr. Iger is that he is best suited of all the candidates to continue Disney's recent financial success because of his experience with the inner workings of the unique Disney culture. On the other hand, some Disney board members are still smarting over the choice of Mr. Iger over over outsider Meg Whitman, the eBay Inc. CEO who interviewed for the job a week ago but almost immediately withdrew her name from consideration because she felt the Disney board favored Mr. Iger.

Consequently, Mr. Iger's selection is unlikely to bring immediate peace to the fractured Disney boardroom, in which dissident board members Roy E. Disney and Stanley Gold have already criticized Mr. Iger's selection as being a sham orchestrated by by Disney Chairman George Mitchell.

Meanwhile, Eliot Spitzer is about to carve another notch in his belt as this NY Times article reports that Maurice R. "Hank" Greenberg, who turned American International Group Inc. into a financial services industry giant over the past generation, is planning to step down as chief executive amidst concern on the company's board over investigations into certain of the company's structured finance transactions with a Berkshire Hathaway insurance unit. Here is an earlier post on Mr. Spitzer's investigation into AIG's practices.

Mr. Greenberg's imminent departure from AIG is a stunning reversal for the New York-based financial-services titan. Mr. Greenberg is one of America's most successful CEO's, and has personally transformed AIG over the past 40 years from an obscure property-casualty insurer into one of the world's largest financial-services companies. Its market capitalization of almost $170 billion makes it one of the world's most valuable companies, and Mr. Greenberg is one of the company's largest individual shareholders.

Finally, President Bush on Friday picked John Hopkins University physicist Michael Griffin to lead the National Aeronautics and Space Administration to replace Sean O'Keefe, who left NASA earlier this year after three years in the top job to become chancellor of Louisiana State University. Dr. Griffin will become the space agency's 11th administrator.

For the past year, Dr. Griffin has headed the space department at Johns Hopkins University's Applied Physics Laboratory in Laurel, Md. It is the lab's second-largest department and specializes in projects for both NASA and the military. Dr. Griffin has a fairly incredible academic background, which includes a Ph.D. in aerospace engineering and five master's degrees -- aerospace science, electrical engineering, applied physics, civil engineering and business administration. Before taking over the space department at Johns Hopkins, Dr. Griffin was president and chief operating officer of In-Q-Tel, a CIA-bankrolled venture-capital organization and, earlier in his career, Dr. Griffin worked at NASA as chief engineer and as deputy for technology at the Strategic Defense Initiative Organization.

Last year, Dr. Griffin was a part of a team of experts who recommended that NASA retire the space shuttle by 2010, send astronauts back to the moon by 2020, and then mounting human expeditions to Mars and beyond. The report recommended retiring the space shuttle in order to accelerate work on a spaceship that could carry astronauts to the international space station and ultimately to the moon.

Posted by Tom at 05:19 AM | Comments (0) | TrackBack

March 13, 2005

First excerpt from "Conspiracy of Fools"

This NY Sunday Times article provides the first excerpt from Kurt Eichenwald's new book about the collapse of Enron Corp. -- Conspiracy of Fools -- that was the subject of this earlier post.

The entire excerpt is well worth reading, but the following part of the excerpt is particularly interesting. It involves an Enron management crisis meeting in late October 2001 as public revelations of Enron's off-balance sheet partnerships began making Enron's bank creditors extremely nervous. At the outset of the meeting, Greg Whalley, Enron's chief operating officer, fired Andrew Fastow as Enron's chief financial officer and replaced him with Jeff McMahon, who Fastow had canned as Enron's treasurer a year and a half earlier after McMahon had objected to then Enron CEO Jeff Skilling about Fastow's conflict of interest in managing the partnerships:

The men made their way to a tiny conference room upstairs, crowding around an oblong table. Fifteen minutes later, Whalley blew into the room.

"O.K., let's get going," he said. "Let's start with the organization first."

Whalley shot a look at Fastow, pointing at him.

"Andy," he said rapidly. "As we discussed, you're no longer C.F.O., effective right now."

Fastow's face fell. "Wait ..."

Ignoring Fastow, Whalley swept his arm across the table, pointing at [former Enron treasuerer Jeff] McMahon.

"Jeff, you're now C.F.O."

What was that? McMahon wasn't sure he heard Whalley correctly.

"Excuse me?" McMahon said. "I'm C.F.O.?"

"Yes, you're C.F.O."

McMahon glanced across the table. Fastow was shaking his head, looking shocked. The moment was surreal.

"Wait a minute!" Fastow sputtered. "That was not my understanding of the deal!"

Whalley held up a hand. "Andy," he said, "I don't know the legal stuff. You get with Ken and work it out."

That was it. Whalley turned away from Fastow.

Read the entire excerpt.

Posted by Tom at 01:46 PM | Comments (0) | TrackBack

March 12, 2005

Small PUD's anti-Enron P.R. campaign appears to working

This earlier post told the story of the Snohomish County Public Utility District, which is riding an unparalleled wave of popularity among its customers despite hiking electricity rates 50 percent in the past four years and disconnecting a record number of customers for failure to pay bills.

The reason for this rather incongruous situation? The utility has been leading the public charge against the popular business whipping boy of the moment, Enron Corp.

Well, the utility's anti-Enron public relations campaign appears to be working. Yesterday, the Federal Energy Regulatory Commission issued an order that determined that Enron was engaging in illegal activity at the time it entered into contracts with West Coast utilities during the West Coast power crisis of 2000-2001. Accordingly, FERC has ordered a hearing to determine whether Enron should be allowed to collect profits it would have received had those contracts been fulfilled. The hearing is expected to occur in May, and that hearing will be followed by FERC's final decision later this year.

The decision is a landmark for West Coast utilities that continue to fight their Enron contracts because it is the first time that FERC has acknowledged that the contracts were signed under fraudulent pretenses. The utilities and cities involved terminated their contracts with Enron or watched as Enron terminate its contracts with them when the company slid into bankruptcy in late 2001.

When Enron went bankrupt, the Enron bankruptcy estate sued the utilities and cities for the money it would have made had the contracts been fulfilled. Enron is seeking a cool $300 million from a couple of Nevada utilities, and $122 million from the Snohomish County PUD, which signed a nine-year contract with Enron in January 2001 for power that was four times as expensive as it had been just months earlier. To come up with the $122 million, Snohomish contended that it would have to collect about $400 per customer.

As noted in the previous post, Snohomish searched through thousands of pages of Enron documents and paid for hundreds of hours of taped conversation transcripts involving Enron traders. The material turned out to be Watergatesque -- the Enron traders joked about stealing money from California grandmothers and about the possibility of going to jail for their actions. With this explosive evidence, Snohomish sought a finding from FERC that it did not have to pay any damages to Enron under the terminated Enron contract. The FERC ruling on Friday means that Snohomish is inching closer to that goal.

Despite the FERC ruling and the tape recordings, the Enron Task Force has not taken much of an interest in pursuing former Enron traders on criminal charges. In October 2002, former Enron trader Tim Belden pleaded guilty to wire fraud for participating in trading schemes to game the California market, and two other former Enron traders -- Jeffrey Richterand John Forney -- later pleaded guilty to similar charges. However, those are the only former Enron traders who have been charged with crimes to date and, during a deposition in an Enron-related civil case last month, former Enron Online trading desk executive Louise Kitchen disclosed that the Justice Department had never even interviewed her.

Meanwhile, despite all of these legal machinations, the customers of the Snohomish PUD continue to pay much higher utility bills than utility customers in most other parts of the country. Perhaps the excess amount should be called the "flog Enron premium?"

Posted by Tom at 07:25 AM | Comments (0) | TrackBack

March 11, 2005

More courthouse steps settlements in WorldCom class action

Deutsche Bank AG, German bank WestLB AG and Italian bank Caboto Holding Sim joined most of the other financial institution-defendants in the WorldCom class action yesterday in agreeing to settle fraud allegations for their participation in the sale of WorldCom Inc. bonds in 2000 and 2001. The settlements come on the eve of a scheduled trial of the case next week, and leaves JP Morgan Chase and a couple of smaller financial institutions as the only remaining defendants in the case. This link will take you to the previous posts on the WorldCom class action settlements.

Deutsche Bank's settlement amount is $325 million, while WestLB agreed to pay $75 million and Caboto $37.5 million. Those amounts increase the WorldCom class action settlement pot to about $3.7 billion, which is for the time being the largest recovery ever in in a securities class-action lawsuit. Nevertheless, sharpies on such matters are already betting that the settlement pot and/or damages awarded against the financial institution-defendants in the Enron class action will lap the WorldCom settlement pot by several billion.

Posted by Tom at 05:28 AM | Comments (0) | TrackBack

Texas Pacific's purchase of Enron Oregon utility scuttled

The Oregon Public Utility Commission announced Thursday that it had decided not to approve Texas Pacific Group's proposed $2.35 billion purchase of Enron subsidiary Portland General Electric because "the potential harms or risks to PGE customers from the deal outweigh the potential benefits." Here are the earlier posts on this situation.

PGE is Oregon's largest utility with about 755,000 customers. Texas Pacific is the closely-owned Fort Worth investment firm that has been trying to buy PGE out of Enron's bankruptcy estate for more than a year despite widespread public resistance in Oregon. Even such major industrial customers of the utility such as Intel Corp. came out against the deal.

State law required the state regulators to decide whether ratepayers would benefit from the takeover and that no public harm would result. Inasmuch as the commission could have approved the deal outright or conditioned approval of a sale on certain additional requirements, the outright denial of the proposed purchase is a crushing defeat for Texas Pacific and Enron creditors.

If Texas Pacific does not win an appeal of the utility commission's ruling, then Enron's creditor's committee will essentially decide what to do with PGE. The two most likely results are just to distribute new stock of the utility among Enron creditors or reopen the bidding for the utiity. Representatives of the City of Portland has publicly stated that it would make a bid for the utility.

Posted by Tom at 05:02 AM | Comments (0) | TrackBack

March 10, 2005

Enron-related developments

The Chronicle's Mary Flood, who continues to do a bang up job of keeping up with the unfolding events relating to the various aspects of the Enron scandal, has a couple of Enron-related news items today.

First, she reports that the next Enron-related criminal trial -- the one known as "the Enron Broadband case" -- has been pushed back to at least April 18 as a result of U.S. District Judge Vanessa Gilmore's involvement in this case. Here are the previous posts on the Broadband case.

Although the intensity of the media attention given to Enron makes it seem as if there have been a plethora of criminal trials related to the case, the Broadband case is only the second criminal case involving former Enron executives that will go to trial. Interestingly, the first case -- the trial of the Nigerian Barge case -- resulted in convictions of four Merrill Lynch executives and one Enron mid-level executive. However, of the two Enron defendants in that case, the Enron accountant who was closest to the alleged sham transaction in that case -- Sheila Kahanek -- was the only defendant who the jury acquitted in the case.

The Broadband case is interesting in that it involves a division of Enron that was one of the company's more auspicious business failures, but one that undeniably had great potential. The five remaining former Enron executives in the case will argue that Enron's other financial problems undermined the broadband division's business potential, and that none of their public statements regarding the division's business opportunity were false or intentionally misleading. Although the Enron Task Force's public stance on the case has been typically bullish, the two former Enron executives who have copped pleas in the case to date -- Ken Rice and Kevin Hannon -- pleaded guilty to only one count of securities fraud in their plea bargains. The nature of those pleas does not exactly reflect that the government thinks it has a lock cinch winner in this prosecution.

Meanwhile, Ms. Flood reports in this article that the Chronicle has requested that U.S. District Judge Ewing Werlein unseal a couple of pleadings that three of the convicted Nigerian Barge defendants filed in connection with their upcoming sentencing hearings. There appears to be no basis for the pleadings to be sealed permanently, so Judge Werlein will likely grant the Chronicle's request. Probably the only reason that the pleadings have not been unsealed to date is that the Judge probably just has not gotten around yet to ruling on the defendants' motion to seal the pleadings.

Finally, in what could be one of the more entertaining interviews of the year, former Enron chairman and CEO Ken Lay will be interviewed on this Sunday's 60 Minutes show in connection with the release of the new Enron book, Conspiracy of Fools by New York Times reporter Kurt Eichenwald. According to Mr. Lay's publicist, Mr. Lay rather enjoyed the book.

Posted by Tom at 06:00 AM | Comments (0) | TrackBack

March 09, 2005

Bad Bankruptcy bill clears Senate

The Senate on Tuesday rejected further opposition to approval of the horrific bankruptcy "reform" legislation, which clears the way for a final Senate vote on the bill over in the next couple of days. House Republican "leaders" have already publicly announced that they would approve the Senate bill next month and send the bill to the White House later this spring.

Harvard Law professor Elizabeth Warren wrote the following about this special interest-backed abomimation on a temporary "subweblog" on the bankruptcy bill that she has been contributing to over on Josh Marshall's blog:

So the bankruptcy bill moves forward, speeding toward inevitable passage