Category Archives: Business – General

Greece and the Enron Narrative

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The New York Times’ Floyd Norris is still having a hard time giving up the tired and largely debunked Enron narrative.

This time, Norris applies the Enron narrative to Greece, which supposedly hid its true financial condition from honest investors through engaging in complex derivative transactions with the ever-present and greedy investment bankers.

There is one big problem with Norris’ morality tale.

It’s not true.

As University of Houston finance professor Craig Pirrong points out in this blog post that runs rings around Norris and the Times’ dubious analysis, what Greece was doing in using swaps engineered by the investment banks to finance its way into the European Monetary Union has been well known since the early part of this decade.

Thus, as Professor Pirrong points out, “nobody  .   .   . has any more reason to be shocked about these transactions than Captain Reynaud had to be shocked about gambling going on at Rick’s.”

That includes Floyd Norris and the New York Times.

The wisdom of Will

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georgewill Tax simplification has been a frequent topic on this blog. So, I was enthused to see George Will knock the ball out of the park in describing the U.S. income tax system while addressing the issue in his WaPo Sunday column:

ìToday’s tax system was shaped by sadists who were trying to be nice: Every wrinkle in the code was put there to benefit this or that interest.î

The proposals that Will addresses would do more for the American economy than virtually any other proposal on the table at this point. Unfortunately, the proposals have virtually no chance of being implemented.

So it goes.

Running into the abyss

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cliff fall 17th century philosopher Blaise Pascal observed in his Penses that we run heedlessly into the abyss after putting something in front of us to stop us seeing it.

Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, observed something similar in his quarterly report regarding the troubled TARP program:

The government’s bailout of financial institutions deemed "too big to fail" has created a risk that the United States could face a worse fiscal meltdown in the future, an independent watchdog assigned to review the program told Congress on Sunday.

The Troubled Assets Relief Program, known as TARP, has not addressed the problems that led to the last crisis and in some case those problems have festered and are a bigger threat than before, warned Neil Barofsky, the special inspector general at the Treasury Department.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

Barofsky wrote the $700 billion financial bailout has encouraged more risk-taking because bank executives, who are still receiving massive bonuses, figure the government will come to the rescue the next time they steer their ships nearly aground.  .   .   .

None of what Barofsky reports is a surprise to regular readers of this blog. It was not rocket science.

We sure have progressed, haven’t we?

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fire_3 Larry Ribstein points us to the abstract of a new Peter Leeson paper, Ordeals:

For 400 years the most sophisticated persons in Europe decided difficult criminal cases by asking the defendant to thrust his arm into a cauldron of boiling water and fish out a ring. If his arm was unharmed, he was exonerated. If not, he was convicted. Alternatively, a priest dunked the defendant in a pool. Sinking proved his innocence; floating proved his guilt. People called these trials ordeals.

No one alive today believes ordeals were a good way to decide defendants’ guilt. But maybe they should. This paper investigates the law and economics of ordeals. I argue that ordeals accurately assigned accused criminals’ guilt and innocence. They did this by leveraging a medieval superstition called iudicium Dei. According to this superstition, God condemned the guilty and exonerated the innocent through clergy conducted physical tests.

It sure is comforting to know that we sophisticated modern folk no longer believe that such ordeals are a good way to decide the guilt of a defendant.

On the other hand .   .   .

The growing threat of prosecutorial power

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white-collar-crime A frequent topic on this blog is the overcriminalization of American life, particularly in regard to taking business risks that create jobs for communities and wealth for citizens.

One of the most lucid writers on this disturbing trend is William Anderson (prior posts here), an economics professor at Frostburg State in Maryland. In this recent Regulation magazine article for the Cato Institute, Professor Anderson provides an excellent overview of how the federal government has gradually imposed police state-type laws on us that allow prosecutors to target citizens for a criminal case and then rationalize a crime from any number of vague criminal statutes:

The numbers tell a harsh story. In 1980, there were about 1,500 federal prosecutors and approximately 20,000 federal prisoners. Today, there are more than 7,500 U.S. attorneys and more than 200,000 federal prisoners, according to an October 2009 count. About 52 percent of federal prisoners are drug offenders, reflecting the emphasis of the ìWar on Drugs,î and while there is no specific ìwhite collarî crime category, one estimates, using Federal Bureau of Prisons statistics, that about 5 to 10 percent of the federal prison population consists of people convicted of white collar crimes.

The federal criminal code is growing. In the early days of the republic, there were three federal crimes: piracy, treason, and counterfeiting. Today, there are more than 4,000 federal criminal laws and more than 10,000 regulations that prosecutors easily can fold into the criminal statutes.  .   .  .

In surveying this sad state of affairs, Anderson notes one of the perverse incentives driving these dubious prosecutions:

The resulting near-free reign that prosecutors have in federal court is an open invitation to abuse of the law and the legal system. To make matters worse, federal prosecutors enjoy almost total legal immunity and are unlikely to face any sanctions no matter how dishonest or abusive their behavior might be; the rules that apply to everyone else do not apply to U.S. attorneys. [.  .  .]

The only thing that stands between almost any American and doing a stretch in federal prison is the choice of whom prosecutors will target. This is a serious problem that shows no signs of disappearing.

The fact that one such prosecutor in Massachusetts was even seriously considered by many in that state for a position in the U.S. Senate reflects that citizens still have not grasped the extent of this awful trend in American society.

It makes one wonder what itís going to take for Americans to stand up and put a stop to this?

So, you want to be a big-firm deal lawyer?

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Collins_3 Continuing to fly well beneath the radar screen — probably because lawyers don’t want to talk about it except in hushed tones — is the seven-year prison sentence that former Mayer Brown partner Joseph P. Collins was handed late last week.

As this earlier post explains in detail, Collins was the former outside deal lawyer for Refco, Inc., which unraveled back in 2005 under the weight of public disclosure of a series of insider transactions that were apparently designed to hide millions in liabilities from customers and investors.

As the earlier post notes and as the Memorandum of Law in support of a new trial for Collins explains, whether Collins even knew about the allegedly fraudulent nature of the transactions is highly questionable and whether he hid those transactions from anyone is even more dubious. But that hardly matters in this era of “let’s hammer the white-collar defendant.”

Meanwhile, Collins’ family will be deprived of the presence of their father for seven years.

What is it going to take for this madness to stop? A truly civilized society would find a better way.

Memorandum of Law in Support of New Trial for former Refco, Inc outside counsel, Joseph P. Collins

One Step Forward, a Big Step Back

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Well, the Department of Justice finally did the right thing and dismissed the remaining criminal charges against former Merrill Lynch banker, Dan Bayly, in connection with the shameful Enron-related Nigerian Barge prosecution.

Even in the heavily-littered landscape of failed Enron-related prosecutions, the Nigerian Barge prosecution stood out for its sheer brazen nature. As noted in this post from over five years ago (!), the Nigerian Barge prosecution was baseless from the start and, as later developments revealed, trumped-up to boot.

After prosecuting Arthur Andersen out of business in the intensely anti-business post-Enron climate of Houston in 2004, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which it did by offering Mr. Bayly, Robert Furst, James Brown and William Fuhs.

Through a deferred prosecution agreement with Merrill, the Task Force then proceeded to hamstring the Merrill defendants’ defense by limiting access to other Merrill Lynch executives who were involved in the barge transaction. To make matters worse, the Task Force then intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the Merrill defendants’ defense.

Thus, after bludgeoning a couple of plea deals from former key witnesses Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the defendants, which was good enough to obtain convictions.

Of course, most of the convictions were vacated on appeal (and in Fuhs’ case, thrown out completely), but not before each of the Merrill defendants had served over a year in prison and their families had incurred the incalculable human cost of these misguided prosecutions.

Incredibly, over the past couple of years, the Department of Justice (the Enron Task Force has, mercifully, been disbanded) actually has been threatening to pursue a re-trial of the Merrill defendants. Accordingly, the dismissal of the remaining charges against Mr. Bayly was good news. A similar dismissal of charges against his remaining co-defendants — Messrs. Furst and Brown — would certainly follow, right?

Apparently not, at least for the time being. Inexplicably, the DOJ announced yesterday that it is continuing to pursue charges against Mr. Furst.

So, Mr. Furst unloaded on the DOJ yesterday with the filing of this motion to dismiss on the grounds of pervasive and egregious prosecutorial misconduct. You can review the motion here, but if you go ahead and download it, then you can review a version of the motion that is bookmarked in Adobe Acrobat to facilitate ease of review. Inasmuch as the 45 page motion includes about 350 pages of exhibits, bookmarks are helpful.

The summary of the motion gets right to the shocking point:

The American criminal justice system is built upon the principle that the government’s interest is not that it shall win a case, but that justice shall be done. Berger v. United States, 295 U.S. 78, 88 (1935).

The Enron Task Force (the “ETF”) team of prosecutors and investigators formed in 2002 to address the public demand for individual accountability in the aftermath of Enron’s collapse investigated, indicted, and prosecuted Defendant Robert Furst and his co-defendants with the goal to win at all costs.

And the ETF “won.” Mr. Furst spent almost a year in prison before his conviction was overturned on appeal.But to secure victory, the ETF engaged in a campaign of misconduct which violated Mr. Furst”s constitutional rights to due process and a fair trial.

This misconduct was necessary because the case the ETF indicted and hoped to prosecute, which would involve a sordid tale of a well-organized conspiracy to defraud Enron and its shareholders, was not supported by the facts.

The ETF could not prove that Enron or its shareholders lost any money in the barge transaction, because they did not. The form and mechanics of the transaction were thoroughly vetted through hundreds of hours of negotiation by dozens of highly-competent attorneys. Witnesses interviewed by the ETF undercut its theory of the case.

In short, the barge transaction had all the markings of a legitimate business transaction, because it was.

But legitimate business transactions do not generate convictions, and the ETF needed convictions. So, in order to ensure victory, the ETF withheld volumes of exculpatory, case-dispositive evidence which nullified its theory of criminal liability; manipulated and misstated exculpatory testimony in pretrial disclosures to make it appear inculpatory; silenced witnesses by indiscriminately designating nearly all material witnesses as unindicted co-conspirators; and sponsored inculpatory testimony that it knew was false.

The ETF’s conduct did not end with the return of the verdict.

After trial, but before sentencing, the ETF received additional case-dispositive, exculpatory evidence from one of the key witnesses in the case. This evidence further nullified the ETF’s theory of criminal liability, and exculpated Mr. Furst.

Rather than disclosing this evidence to the Court, the ETF instead withheld the evidence and brazenly asked this Court to enhance Mr. Furst’s sentence for conduct which was negated by this and other evidence in the ETF’s possession.

This misconduct eliminates all faith in the integrity of the jury’s verdict and warrants dismissal of the Indictment.  .   .   .

The mess that is the Nigerian Barge prosecution is a quintessential example of what happens when government is given the leeway to bastardize charges to criminalize a merely questionable business transaction and then appeal to juror resentment against wealthy businesspeople to procure politically popular convictions.

The damage to the defendants, their careers and their families that this abuse of power has caused is bad enough.

But the carnage to justice and respect for the rule of law is even more ominous. Does anyone really think that they could stand upright in the winds of such abusive governmental power if that gale turned toward them?

The remaining charges against Messrs. Furst and Brown should be dismissed. Not only for their protection, but for ours, too.

Game, Set, Match — Houston

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mcgrady-dunk O.K., so the Cowboys are doing alright so far in this seasonís NFL playoffs and the Texans, as usual, are in their annual ìwait until next seasonî mode.

But there are other areas in which Houston simply throttles Dallas, hands down.

For example, in connection with its mandate to promote Houston, the Greater Houston Convention and Visitorís Bureau released the video below late last year. Featuring the edgy local band The TonTons, the video does a very nice job of providing an attractive introduction to Houston:

But I didnít realize just how good the GHCVBís video was until I came across the abominable video below that the City of Dallas recently produced for the Professional Convention Management Association:

Key tip to Dallas ñ you are trying way too hard.

Understanding Adoption

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One of the most discouraging aspects of the societal tide of resentment and scapegoating that has permeated the corporate criminal prosecutions since the demise of Enron has been the utter lack of perspective regarding the horrendous human cost of those prosecutions.

Even the horrendous financial cost of those prosecutions seems easier to confront.

A stark example of the human cost is what happened to Ken Lay’s family, who endured the decline of a loving father and grandfather as he defended himself against dubious charges that in a less-heated climate would likely never have been pursued.

Equally barbaric is the reprehensible 24-year prison sentence assessed to former Enron CEO Jeff Skilling, whose family has been deprived of their father for over three years now and is threatened to be without him for most of the rest of his life.

But the family that arguably paid the steepest cost from the wave of unjust corporate prosecutions was the family of Jamie Olis, the former mid-level Dynegy executive who was thrown to the prosecutorial wolves by his employer and then sentenced to a ludicrously excessive 24 plus-year prison term for his involvement in a structured finance transaction for which he profited not one dime.

The Fifth Circuit Court of Appeals ultimately threw out that sentence, which resulted in a still-too-harsh six-year re-sentencing. Olis was finally paroled last year and reunited with his wife and young daughter, who literally grew up visiting her father in prison.

But even in the face of such inhumanity, the human spirit perseveres.

Throughout the Olis family’s ordeal, Jamie’s father — Bill Olis — stood out as a rock of stability and common sense.

Whether it was attending the myriad of hearings in Jamie’s case in Houston, or escorting Jamie’s wife and daughter the hundreds of miles to visit Jamie in far-off prisons, or lending moral support to other families who were enduring similar injustices, Bill Olis projected a sense of calm perspective that was contagious to all who came in contact with him.

He had much to be bitter about in regard to what the federal government did to his son and family, but Bill Olis never gave in to bitterness. He was a quintessential Christian gentleman and nothing that the government did to his family could change that.

Throughout his son’s darkest times, Bill remained confident that he and his family would ultimately be reunited with Jamie. Yeah, the government is powerful, but no earthly force was going to destroy Bill Olis’ family.

As a result, Ellen Podgor of the White Collar Crime Prof Blog re-named her “Collar for the Best Parent Award” to the “Bill Olis Best Parent Award” because — in the category of a parent supporting an imprisoned child — “no one comes close to Bill Olis.”

What was not well known through all of this was that Bill Olis was slowly fading away physically during his son’s imprisonment. Bill had an oxygen unit with him almost constantly as he tended to his family’s needs throughout their ordeal.

No big deal for Bill. Mere failing health was not going to stop Bill Olis from being present when his son was released from prison last year. He was there embracing Jamie with the rest of the family, oxygen tank and all.

With the work of reuniting his son with his family done, Bill Olis died over this past weekend. I understand from a family friend that Jamie was able to spend most of Bill’s final two weeks with him, which I know Bill enjoyed immensely. He adored his son.

The Olis family story is a remarkable one and frankly far more interesting than the government’s dishonest case against Jamie.

Years ago, Bill Olis married a single Korean mother and adopted her young son. He provided his wife and son a stable and loving home, and the family flourished. His son excelled in school, obtained advanced degrees in both business and law, and embarked upon a successful career in corporate finance.

And when the government targeted the son as a sacrificial lamb for the anti-business mob, Bill Olis spent his last days in this world supporting his son every step of the way and making sure that he returned to his wife and daughter.

Then he passed away.

A Christian minister friend once observed to me that a good way to embrace what is good about the Christian spirit is through understanding the nature of adoption.

Bill Olis was living proof of the truth of that observation.

The Mike Leach Train Wreck

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After what happened earlier this year, no one should really be surprised that Texas Tech University elected to fire Mike Leach yesterday.

But we still are. Just how does someone as successful and intelligent as Leach lose one of the 20 or so highest-paying jobs in big-time college football?

Absent a financial settlement between Tech and Leach, this mess will make for a particularly nasty lawsuit.

From the beginning of their relationship, Tech has never been entirely comfortable with Leach, while Leach has been without success trying to find a better job than the Tech gig almost from the day he set foot in Lubbock.

So, both parties have incentive to get this settled without exposing all that dirty laundry in court, notwithstanding Leach’s somewhat provocative public statement about his termination.

Frankly, I don’t have a clue from reading media reports whether Leach’s handling of Adam James justified a termination for cause (i.e., no further compensation) under his contract.

Football is a tough sport and coaches are often rough on players to make a point. Leach has also alleged publicly that James was a slacker and that his prominent father lobbied him and the other Tech coaches on behalf of his son.

For what it’s worth, Leach has supporters and detractors among the folks close to the program who have personal knowledge about the situation.

Although Leach’s alleged conduct toward James was clearly odd and certainly meant to embarrass the young man, it’s reasonably clear that James was never physically endangered or abused.

Thus, this does not appear to be a situation that rises to the level of risking what happened to Ereck Plancher at at Central Florida last year or the alleged physical and verbal abuse that supposedly led to the recent resignation of Mark Mangino at Kansas.

On the other hand, this is another example of a situation that — for whatever reason — Leach just didn’t handle well.

Beyond his shabby treatment of James, Leach was apparently given the opportunity by Tech to resolve the matter privately with an apology to James. Leach balked at that, so Tech suspended him from coaching the upcoming Alamo Bowl game.

When Leach sued Tech seeking to be “unsuspended,” Tech fired him (in my experience, employers often have that reaction when sued by their employees). That’s not the advice I would have given Leach, but his lawyer (Ted A. Liggett) purports to be on the aggressive side.

Furthermore, stories about Leach’s eccentric behavior have circulated for years.

For example, Leach’s tardiness for meetings is legendary (sometimes very tardy) and has caused much misery for his staff and players.

When one of his players called Leach out on Twitter about that habit earlier this year, Leach reacted by banning Tech’s players from using Twitter. Leach has also used poor judgment in making public remarks about assistant coaches on his staff.

Finally, although Leach did a good job at Tech, his public relations were better than his overall record.

But still, even with all that, how did it come to this?

Given Leach’s eccentricities, there is certainly no assurance that any other big-time college football program will take a flyer on him — it’s telling that none came calling during his successful tenure at Tech.

Leach has now blown a contract that would have paid he and his family around $11 million over the next four years and may well be the best contract that he ever has.

And what does he have left to show for it? A lawsuit.

As complicated as we tend to make such issues, my sense is that the answer to what would have prevented this imbroglio is really quite simple.

Mike Leach needs to grow up.