This Chronicle article reports that an independent law firm report on El Paso Corp‘s restatement of reserves earlier this year concludes that El Paso employees provided estimates of proven oil and gas reserves that “they knew or should have known were incorrect at the time they were reported.” Haynes and Boone‘s report also found El Paso employees from 1999 through 2003 “used aggressive and at times unsupportable methods” to book proven gas and oil reserves. In February, El Paso announced that it was reducing its proven reserves estimates by 1.82 trillion cubic feet of natural gas equivalent, representing 35 percent of its reserves as of Jan. 1, 2003. As a result, the Securities and Exchange Commission is commenced an investigation into the reserve revision, and the El Paso board hired Haynes and Boone to conduct an investigation and report on the matter. Earlier posts may be reviewed here regarding the El Paso reserve overstatement.

One of Houston’s oldest and largest annual conventions — the Offshore Technology Conference — begins on Monday at Reliant Park. This is the 35th straight year that the conference has been held in Houston. Over 50,000 engineers and industry executives will descend upon Houston this week. More than 2,000 exhibitors from 27 countries will fill nearly 400,000 square feet of space at Reliant Center.
Although the size of the conference has varied through the years as a reflection of the state of the offshore oil and gas business, the conference is again in an upward mode as offshore oil production now accounts for about 30 percent of domestic production, and industry estimates predict that to increase to around 40 percent by the end of the decade.

In a world where reality is often more intriguing than fiction, this Wall Street Journal ($) article reports that Carl Icahn needs no stinkin’ stock tips:

By now, everyone knows how Martha Stewart was alerted by a Merrill Lynch & Co. brokerage assistant that Sam Waksal, her friend and founder of ImClone Systems, was trying to sell the biotech company’s shares.
Less well known, however, is the story of how financier Carl Icahn was buying ImClone shares that very day, possibly even snapping up the same shares that Ms. Stewart was unloading.
Mr. Icahn recently disclosed in a filing with the Securities and Exchange Commission that he owns 5.24 million shares of ImClone, a stake he first began accumulating with a purchase of 10,000 shares on Dec. 27, 2001, people close to the situation say.
After his purchase on Dec. 27, Mr. Icahn stopped buying ImClone for a few months. As the scandal unfolded and the share price fell to below $10 in the summer of 2002, Mr. Icahn began buying ImClone shares again, adding 3.6 million shares to his holdings. He bought the stock again earlier this year, picking up 1.63 million shares. That purchase brought his average purchase price to $19.58, according to the SEC filing.
His profit, with ImClone shares now at $70 each, the level where they were before the scandal hit would be a cool $250 million.

Shaking his head from it all, Professor Ribstein places this latest development in appropriate perspective with earlier events in this saga:

So let’s take inventory. The stockbroker’s tip that Martha supposedly relied on, which as I have written likely was not illegal inside information, may not even have been material. But that’s ok, because she was not convicted of this non-crime, but of covering it up. The person she would have defrauded had she committed a crime has made a quarter billion dollars on the stock. The guy who invented the drug that produced these profits is already in jail.

With Nortel Network Corporation’s announcement yesterday of its firing of three top executives “for cause” (i.e., “we’re not paying you nuttin’ further”), another corporate accounting scandal appears to be warming up quickly. Nortel is North America’s largest telecommunications manufacturer.
Nortel‘s board fired President and Chief Executive Officer Frank Dunn and two other senior officials, Douglas Beatty (former CFO) and Michael Gollogly (former controller). Moreover, the company announced that there would be a sharp downward revision of its profit for last year.
The move drove the Brampton, Ontario-based company’s shares down 28% on the stock market yesterday, and raises questions about how severe the telecommunications-equipment maker’s problems really are. After restating results in November, Nortel announced last month that it would restate its past results again and delay filing its 2003 financial statements with securities regulators. The Securities and Exchange Commission and the Ontario Securities Commission, Canada’s main regulator, are currently investigating Nortel’s accounting.
Nortel named William Owens, 63, as its new president and chief executive. Mr. Owens, who has been a Nortel director since 2002, was previously the chairman and chief executive of Teledesic LLC, a satellite communications company. He was also vice chairman of the U.S. Joint Chiefs of Staff and Commander of the U.S. Sixth Fleet during Operation Desert Storm.
Nortel said yesterday that while its audit committee “has not yet determined the full extent of the adjustments that will be required, it expects “no material impact to prior period revenues” and “no material impact” to its Dec. 31 cash balance of $4 billion. In its first restatement filed last November, Nortel said $952 million of liabilities, mainly accruals and provisions, recorded on its June 30, 2003, balance sheet should have been recorded in earlier financial statements. A spokeswoman for Nortel’s longtime auditor, Deloitte & Touche, said it is “a speculative question” whether the firm should have caught Nortel’s accounting problems at an earlier stage.
Here’s betting that Deloitte representatives will have an opportunity to answer that “speculative question” in the various securities fraud class action lawsuits that will result from the foregoing events.

As reported yesterday, Comcast Corp. dropped its $48.7 billion unsolicited bid for Walt Disney Co., which put an end to a takeover battle that was in trouble from the start.
The bottom line on this saga is that Comcast’s management misjudged its the market and the Disney Board’s reaction to its offer. The former is reflected by the fact that, even though most stock prices fell yesterday, Comcast’s stock price rose, although not much (1%). Comcast’s shares are still 11% below where they were before the company’s Feb. 11 offer for Disney.
The theory behind Comcast’s bid was that years of poor performance at Disney and shareholder disenchantment over the leadership of Disney CEO Michael Eisner would make Disney an easy target. Initially, the bid looked interesting, but it became apparent quickly that the strategy had backfired when Disney’s Board refused to discuss the offer and hired poison pill expert Martin Lipton to advise it on the bid.
Moreover, when the value of the bid fell almost immediately below the value of Disney’s stock, the Disney Board could not be forced to act. Comcast’s offer of 0.78 share of Comcast for every share of Disney lost its premium of $2.38 a share immediately after it was announced, reflecting that Comcast shareholders and the market generally were not bullish on the deal. That gave the Disney Board a valid reason to ignore the bid. Before the bid was dropped, the offer was worth $23.77 a share, while Disney’s share price was $24.18. Inasmuch as increasing its offer for Disney in either stock or cash would have driven Comcast’s own stock price down, such a bid would have made it necessary to raise its bid yet again. So, with Comcast shareholders showing no enthusiasm for the deal, Comcast essentially could not raise its initial bid, which is almost always how unsolicited takeover offers ultimately are resolved.
Despite (or perhaps because of) the failed bid for Disney, Comcast continues to do quite well financially. The revenue of its cable systems rose $4.65 billion, or 9.8%, from the first quarter of 2003, and Comcast reported a profit of $65 million, or three cents a share (compared with a loss of $297 million, or 13 cents a share a year earlier). Comcast also announced resumption of its $1 billion stock-repurchase program. With the distraction of the Disney bid gone, Comcast management can now concentrate on less sexy but more productive acquisition targets, such as Adelphia Communications Corp., the country’s fifth-largest cable company, which is currently mired in bankruptcy.
Meanwhile, with Comcast’s withdrawal of its offer, Disney will shift the focus back to Mr. Eisner and whether he should be retained beyond the September 2006 expiration of his personal services contract with the company. Given Disney’s lackluster performance over the past decade, real questions remain whether Mr. Eisner is capable of sustaining a long-term turnaround and repairing glaring problems within the company, such as Disney’s reeling ABC television network.
The Disney Board still faces angry shareholders, 45% of whom attended the Disney annual meeting last month voted to oust Mr. Eisner. Next month, a committee of Disney executives and board members will meet with representatives of several public pension fund-investors in Disney, including the California Public Employees’ Retirement System, which have called on the Board to remove Mr. Eisner. The Disney Board also faces the continued public criticism of ex-directors Roy E. Disney and Stanley Gold, who issued a statement yesterday criticizing the board’s “complete indifference to the will and interests of its shareholders” and the appearance that “the only ‘succession plan’ is to keep Eisner as CEO for as long as he wants.”
Disney has projected earnings growth of more than 40% for the fiscal year that ends on Sept. 30, and it has predicted double-digit earnings growth through 2007. The company’s 2004 forecast has remained steady, despite such high profile mistakes as the movie “The Alamo,” which cost more than $100 million to make and has taken in only about $20 million in the U.S. since its release in early April. However, Disney’s theme-park business is making a solid comeback after being hammered by the 2001 recession and the travel slump resulting from the 9/11 attacks.
The most insightful commentator on the Comcast-Disney dance has been Professor Bainbridge, who is a bit under the weather and has not yet posted his views on the withdrawn bid. Meanwhile, Professor Ribstein over at IdeaBlog notes perceptively that “the price of acquisitions is so high now that it takes a near-delusional synergy theory to make ousting management of a major company even look plausible.”

Comcast announced this morning that it is dropping its stagnating bid for Disney.
Not surprisingly, Comcast shares rose 51 cents to $30.48 in mid-morning trading on Nasdaq.

On the heels of this announcement regarding Russian oil giant Yukos’ default on $1 billion in bank debt, this Wall Street Journal ($) article provides an excellent overview of Exxon‘s travails in attempting to make a major investment in Yukos. The entire article is well worth reading, and here are several excerpts:

Exxon and many other Western oil companies had big ambitions when they flocked to Russia looking for deals after the collapse of communism in 1991. Once the world’s largest oil producer, the former Soviet Union represented the biggest new opportunity for the world’s oil companies in a generation.
But the story of Exxon’s delicate dance with Russia shows that the opportunity has been much more elusive than the oil giants and the Western political leaders hoping for an alternative to Middle Eastern oil envisioned. Russian President Vladimir Putin, whose methodical strengthening of Kremlin authority has fueled fears he is undermining democracy, has increasingly sought to keep the state’s hand in the oil industry, which was almost completely privatized in the 1990s.
U.S. officials privately acknowledge that highly publicized efforts to diversify energy sources by cooperating with Russia have largely turned out to be a dry hole. Exxon officials declined to comment on anything related to a possible Yukos pact. The Kremlin press office declined to respond to a detailed request for comment.

As Exxon pursued the investment with Yukos president, Mikhail Khodorkovsky, the following exchange and incident occurred after one negotiating session:

After the session, where the exchange about Russia’s oil reserves took place, Mr. Khodorkovsky was asked if the Kremlin would allow him to sell a majority stake. “Political realities here change every day,” he said.
Moments later, as most panelists and audience members crossed the hall for a speech by President Putin, Mr. Khodorkovsky got an urgent cellphone call from his wife. She told him their house was surrounded by police.

As Exxon pressed on for an investment in Yukos, Russian government control tightened:

In an interview published that day on the Kremlin’s Web site, Mr. Putin was asked his view of Exxon buying 40% of Yukos. Mr. Putin said he would support Exxon’s activities, but that “it would be right” for Exxon to consult in advance with the Russian government on such a large deal. Russian oil-industry executives detected a cautionary tone, but Exxon officials remained confident their deal was on track, according to people familiar with the situation.
Mr. Khodorkovsky held a defiant news conference at Yukos’s new Moscow headquarters the Monday after the police searches. “If the goal is to drive me from the country or put me in jail,” he told a room packed with TV cameras and reporters, “they’d better put me in jail.”
On Oct. 25, they did. Heavily armed agents stormed onto his rented jet at a refueling stop in Siberia. He was flown back to Moscow.

The message from Exxon’s experience is clear — Russia will gladly accept foreign investment so long as Russian control of the assets and business is not disturbed. Frankly, Russia needs a few (maybe more) of dwindling foreign investment before its unrealistic position will change.

Citgo Petroleum Corporation. is expected to announce today that it plans to relocate its headquarters from Tulsa, Oklahoma to Houston. In addition to the economies of being located among Houston’s many major energy companies, the move makes sense because most of Citgo’s vendors, and the customers of Citgo’s parent — Petroleos de Venezuela SA — are located in Houston. Update: Here is the Chronicle story on the move.
Citgo is the nation’s fourth-largest retailer of gasoline, with 13,500 outlets. It also operates three oil refineries in the United States and owns a 42 percent interest in another refinery in Houston. The company will move approximately 700 jobs to Houston, leaving about 300 in Tulsa. As an inducement to make the move, Citgo will receive a $5 million grant from the state of Texas and $30 million in low-interest loans from the cities of Houston and Corpus Christi, where Citgo operates a major refinery.

The NY Times and the Wall Street Journal ($) both report extensively on the report to the Royal Dutch/Shell board regarding Shell management’s mishandling of reserve estimates. Here are the prior posts over the past couple of months on this developing scandal. As this matter deteriorates into such things as intercompany emails and dinner conversations, it is only matter of time before the drama is the subject of either a Congressional hearing or, better yet, an afternoon soap opera.

As these earlier posts report, big four accounting firm KPMG has been keeping its defense lawyers quite busy. Now it appears that fellow big four firm Ernst & Young is getting into the act.
Floyd Norris of the NY Times reports today on an unusual court order that the chief SEC administrative judge issued yesterday that fined E&Y a cool $1.7 million and precludes the firm from taking on new audit clients in the U.S. for six months as a penalty for the firm’s improper conduct in auditing PeopleSoft, Inc. at a time in which the firm maintained a highly profitable consulting arrangement with the company.
The six-month suspension ties the longest suspension on signing new business ever imposed on one of the leading accounting firms. In 1975, Peat Marwick, a predecessor of KPMG, accepted a similar six-month suspension as part of a settlement of charges that it failed to audit several companies properly, including Penn Central, the railroad that went bankrupt back in the early 1970’s.