Already under the pressure of an SEC investigation into its accounting, beleagured automaker General Motors Corp. announced late yesterday — after the close of New York Stock Exchange trading — that it will restate financial results for 2001 by reducing income generated from accelerated booking of credits from suppliers. The amount of the write-down will be between $300 to $400 million, which represents about 50% of GM’s profit reported at the time. Although the announcement came after the close of trading, GM’s shares yesterday fell to their lowest level in almost 15 years (GM shares are down almost 40% this year) as GM attempts to endure the financial punches that are inevitably associated with losing almost $3 billion this year. Earlier posts on GM’s increasing problems are here.
GM did not disclose yesterday whether its restatement involved transactions with its former parts subsidiary, Delphi Corp. Earlier this year, Delphi disclosed it would need to restate results for several years after an internal investigation revealed improper booking of revenue from technology contracts and rebates that should have been spread over the life of contracts. The issue of how to book rebates and other credits from suppliers has tripped up several troubled businesses, including supermarket chain Royal Ahold NV and retailer Kmart Corp. Demanding credits from suppliers is a common practice in many industries, but if those credits are rebates related to larger orders from suppliers, they are supposed to be booked as income over time and not immediately.
In another ominous sign, GM disclosed in an SEC filing yesterday that it has withdrawn about $2 billion this year from a fund earmarked for paying hourly-wage and retiree employee health benefits to cover ongoing health-care costs as it continues “evaluating the need for additional withdrawals as the cost of health care continues to adversely affect GM’s liquidity.”
Sounding absolutely Enronesque, don’t you think?

The Chronicle’s Mary Flood, back from a well-deserved vacation, is again writing on Enron matters and, in this article, notes that the Fifth Circuit has asked the attorneys involved in the Arthur Andersen criminal case to advise the Court on whether the case should be remanded to District Court for re-trial or simply dismissed altogether after the Supreme Court’s decisive opinion overturning the firm’s conviction. Using prediction skills that have become well-honed from dealing with the Enron Task Force over the past several years, Ms. Flood speculates that the Task Force will request that the Fifth Circuit remand the case to the District Court for a new trial.
Other than providing an annuity for Andersen defense attorney Rusty Hardin, what possible benefit could be derived from a re-trial of a dead accounting firm? The fact that such a re-trial is even being considered reflects that the misguided criminal investigation into Enron has officially gone from being merely abusive and desperate to truly absurd.

In an interesting development, U.S. District Judge Vaughn R. Walker in San Francisco stayed a series of civil lawsuits over the legality of some KPMG LLP tax shelters pending the outcome of parallel criminal proceedings against certain of the individual defendants in New York. Prior posts on the KPMG tax shelter cases are here.
Normally, it’s the defendants who are facing criminal charges in parallel criminal proceedings who seek a stay of the civil lawsuit over the same subject matter. The argument in favor of a stay is that a defendant should not be required to choose between asserting the privilege against self-incrimination, on one hand, and effectively defending a civil lawsuit, on the other, while a criminal investigation of the subject matter involved in the civil lawsuit is ongoing.

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

Let’s see now. Johnson & Johnson has contracted to buy medical-device maker Guidant Corporation in a deal worth nearly $24 billion. However, J&J included in the deal some fairly sophisticated provisions that allow it to walk away in the event of a material adverse effect on Guidant’s financial condition. J&J has given strong indications recently that it is wanting to walk on the deal, and Guidant has responded that it does not believe an MAE exists and that it expects J&J to consummate the deal.
So, so if you’re J&J, how exactly do you come up with a sure-fire material adverse effect?
Well, how about New York AG (“Attorney General” or “Aspiring Governor,” take your pick) Eliot Spitzer? Yesterday, the Lord of Regulation filed a lawsuit against Guidant alleging the the company concealed from the public a design flaw in one of its surgically implanted heart defibrillators.
No word yet on where and when the J&J-sponsored “Spitzer for Governor Rally” will be held. ;^)

It’s looking as if the Texas State Board of Accountancy needs to catch up with the government’s investigation into Enron. In this Chronicle article, John Roper and Purva Patel report that the Texas state accounting board is seeking disciplinary action against seven former Arthur Andersen accountants for allegedly failing to scrutinize and report financial events that led to the collapse of Enron. The state board’s press release is here and a copy of the complaint is here.
But wait a minute. Hasn’t the state board staff checked in with the Enron Task Force recently? The board’s complaint is rather dated — indeed, it is based on many of the same allegations that the Enron Task Force made in 2002 when it demonized Arthur Andersen and its partners and improperly prosecuted the firm out of business. But now, faced with the realization that it actually will have to attempt to prove its amorphous charges against former Enron executives Ken Lay, Jeff Skilling and Richard Causey, the Task Force has done a 180 degree turn and is contending that the Arthur Andersen partners were duped by Enron just like everyone else (sorry about the prior misunderstanding, Andersen). Wouldn’t it be the ultimate irony if the former Andersen partners call as witnesses in defending themselves against the board’s complaint members of the same prosecution team that prosecuted their firm out of business?
By the way, the best reflection of the absurdity of the Board’s complaint is that former Andersen partner Carl Bass was included as a defendant. As anyone with even a passing understanding of the Enron case knows, Mr. Bass was a sometimes lone voice of skepticism and reason regarding aggressive accounting positions that Enron management sought to take in regard to various transactions.

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

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

His sentence is only one year less than WorldCom’s Bernie Ebbers, who oversaw the biggest accounting scam in U.S. history, a fraud of more than $11 billion.
Olis may have helped commit a crime, but it was far from Ebbersian in its proportion. After all, Olis didn’t directly profit from Project Alpha. He didn’t enrich himself at shareholders’ expense.

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

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

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

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

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

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

The sad case of Jamie Olis has been a frequent topic on this blog as an egregious example of the injustice that has resulted from the government’s increasing criminalization of business in American society.

Last night, after many months of waiting, Mr. Olis finally received some relief from his ordeal.

Although the Fifth Circuit declined to overturn his conviction, the Court did in this long-awaited opinion vacated Mr. Olis’ 24 year sentence and ordered U.S. District Judge Sim Lake to resentence Mr. Olis in accordance with Booker’s overall standard of reasonableness, including a recalculation of the amount of loss for which Mr. Olis should truly be held responsible.

Sentencing expert Doug Berman has more analysis of the Fifth Circuit’s opinion here and business law expert Larry Ribstein comments here.

Writing for the Fifth Circuit panel, Judge Edith H. Jones — who is one of the top appellate judges in the country on business issues — zeroed in on the main flaw in Judge Lake’s acceptance of the prosecution’s dubious theory relating to Mr. Olis’ sentencing.

As noted in this previous post relating to the Enron-related Nigerian Barge trial, the prosecution in Mr. Olis’ case misled Judge Lake regarding the proper method for calculating the market loss for purposes of Mr. Olis’ sentencing.

Indeed, at the time of Mr. Olis’ sentencing, the Justice Department had already taken the position before the Supreme Court in Dura Pharmaceuticals v. Broudo that the market loss calculation method that it was using in Mr. Olis’ case was not the proper method for calculating market loss.

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

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

During sentencing, moreover, Olis offered the expert report of a Rice University expert, Professor Bala Dharan, which explored numerous forces at work on the Dynegy stock price during the relevant periods. The court refused to consider the report, criticizing the expert’s analysis of whether Olis could have “reasonably foreseen” the impact of his conduct on the stock market. As the court observed, the economist was arguably stretching his expertise into an improper legal conclusion, but his statements on this matter are separate from his economic analysis of price and market movements. Professor Dharan’s report demonstrates that Dynegy stock declined during the period covering Project Alpha in tandem with the stocks of other publicly traded companies in the energy marketing and trading business.

Further, Dynegy’s stock was negatively affected, even before the restatement of Project Alpha’s cash flow impact, by the company’s failed bid to acquire the faltering Enron. These factors and others cited in the report suggested that attributing to Olis the entire stock market decline suffered by one large or multiple small shareholders of Dynegy would greatly overstate his personal criminal culpability.

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

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

Stay tuned for further developments.

Following on this earlier post regarding the proposed settlement, U.S. District Judge Dennis Cavanaugh preliminarily approved a proposed $225 million class-action settlement by KPMG LLP and the Sidley Austin Brown & Wood LLP law firm over questionable tax shelters that KPMG promoted and sold to hundreds of wealthy clients. Here are posts over the past year or so that chronicle KPMG’s multiple problems arising from its tax shelter venture.
Under the settlement, KPMG will pay about 80% of the settlement while Sidley Austin — which had written legal opinions supporting many of the shelters — will pick up the balance of the settlement amount. The settlement covers about 275 former KPMG tax-shelter clients. The preliminary settlement comes a couple of months after KPMG reached a $456 million settlement with the Justice Department over the same tax shelters under which KPMG avoided a criminal indictment but admitted criminal wrongdoing.

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The former CEO of Houston-based geophysical seismic company Seitel, Inc. — 58 year old Paul Frame, Jr. — was sentenced today in federal court to over five years in federal prison for converting $750,000 from the company to fund a settlement of a civil lawsuit filed by a former fiancee. Here are previous posts on Seitel and Mr. Frame’s case, and here is the Chronicle story on the sentencing.