As Russian oil giant OAO Yukos continues its attempt to maintain jurisdiction of its pending chapter 11 bankruptcy case in Houston, this report today confirms what had been suspected earlier — i.e., that energy-driven China loaned Russia $6 billion secured by future oil shipments to help finance the effective nationalization of Yuganskneftegaz (“Yugansk”), which was Yukos’ main production unit and produces about 1% of the world’s crude oil output.
Russian state oil company OAO Rosneft had taken over management of Yugansk in December after a Russian shell company had purchased the unit at a Russian government auction. There had been discussions of a sale of a 15% stake in Yugansk with state oil companies from China, but apparently those talks are now on hold.
The loan is effectively a forward payment for a total of about 352 million barrels of oil that Rosneft has already agreed to ship to China through 2010. The contract replaces an earlier deal between China and Yukos. China is being quite aggressive in oil markets these days as it attempts to satisfy the country’s growing demand for oil, which is currently estimated to be over 6 million barrels a day.
The Russian state takeover of Yugansk has raised concerns in Western markets over the Russian government’s commitment to the rule of law, which is a key component of a market economy. Although Western oil and gas interests remain interested in investing in Russia’s vast oil and gas reserves, Yukos’ chapter 11 case and the the threat of legal action has chilled Western companies from getting involved in the bidding for Yugansk. The Russian government has jailed several current and former Yukos executives — the most prominent being former Yukos CEO and main shareholder, Mikhail Khodorkovsky — in a campaign that Yukos claims is merely a government campaign to nationalize Russia’s oil and gas industry.

This Dallas Morning News article reports that the sad case of Jamie Olis, the mid-level Dynegy executive who was sentenced to a 24 year prison sentence last year for attempting to prove his innocence on accounting fraud charges, has taken what can only be described as a punitive turn for the worse:

First he received 24 years in prison for accounting irregularities that got his plea-bargaining boss a five-year sentence. Now Jamie Olis has been moved to a tougher prison, and his wife has e-mailed friends asking for prayers.
Mr. Olis, 39, a former midlevel accounting executive at Dynegy Inc., has been transferred from a minimum-security lockup at Bastrop, Texas, to a medium-security prison at Oakdale, La., according to U.S. Bureau of Prisons records.
“He is in a place where prison gangs are a necessary part of day-to-day existence and in a population that includes people who are serving multiple life sentences,” Monica Olis wrote in an e-mail to friends.
She has declined to comment to the news media.

Meanwhile, oral argument on Mr. Olis’ appeal of his sentence occurred today at the Fifth Circuit Court of Appeals in New Orleans. David Gerger of Houston is representing Mr. Olis in the appeal. Here is the Chronicle story on the oral argument.
According to the Chronicle story, a substantial part of the oral argument was taken up with questions from the panel to the prosecution regarding the evidence of the financial loss that the accounting scam allegedly caused. That is a key issue because U.S. District Judge Sim Lake relied on an absurdly high financial loss figure in calculating Mr. Olis’ sentence. As noted in this earlier post, even the government expert on financial loss upon whom Judge Lake primarily relied acknowledged that he did not testify that Project Alpha caused the amount of monetary loss that Judge Lake used in sentencing Mr. Olis
Although Mr. Olis is the poster boy of how the federal sentencing guidelines had run amok and needed to be overturned, the darker story is that the case is an egregious example of failed prosecutorial discretion. The conduct of the Justice Department in this case is shameful and the failure of the current Justice Department leaders to do anything about this miscarriage of justice reflects poorly on the Bush Administration. Here’s hoping that the Fifth Circuit uses this opportunity to right a clear wrong.

In what can only be described as the result of an embarrassing lack of oversight, a grand jury in Williamson County indicted six people yesterday for allegedly being involved in a strikingly simple scam of the state’s electricity grid operator, the Electric Reliability Council of Texas (“ERCOT”).
The five former top managers and one contractor at ERCOT billed the organization $2 million for work by shell security and computer-contracting companies that the individuals controlled, even though much of the work was not performed. The activities were first detailed last summer in a series of articles by The Dallas Morning News, which prompted questions around the state about whether anyone involved with ERCOT had ever heard of the concept of “financial controls.”
All of the indicted individuals joined ERCOT as it grew rapidly in response to the introduction of electric competition in Texas in 2002. ERCOT’s mission is to maintain the reliability of the Texas electricity grid and coordinate key pieces of the state’s $20 billion deregulated electricity market. The nonprofit organization’s $127 million annual budget is generated through mandatory fees paid by electricity customers or their power providers.
A state district judge appointed Texas Attorney General Greg Abbott in November, 2004 as special counsel in the case after the findings of an internal ERCOT investigation were disclosed to the Williamson County district attorney. At the same time, the judge impaneled the special grand jury in Williamson County, where ERCOT has its primary control center. ERCOT’s headquarters are in Austin.
In announcing the indictments yesterday, Mr. Abbott said that the case is “far from over” and that additional indictments may be coming down the pike. Indictments make for good publicity, but I’m more interested in the identities of the people in ERCOT management, on the ERCOT Board, and at the Texas Public Utility Commission (ERCOT’s regulator) who were asleep at the switch and missed such a simple scam. Funny how those names tend to get lost in the shuffle of indictments.

Ernst & Young LLP agreed to pay an $84 million settlement two weeks into the ongoing trial of a long pending malpractice lawsuit in Boston over its audit work more than a decade ago for the defunct Bank of New England Corp. Here is an article that set the stage for the trial.
The bank’s bankruptcy trustee filed the lawsuit in 1993 accusing Ernst of malpractice, among other claims. The bank’s demise was triggered by the January 1990 announcement that it would report more than $1 billion in previously undisclosed losses on bad loans for its 1989 fourth quarter. Just four months earlier, the bank had raised $250 million through a public debt offering. The bank filed a chapter 7 (i.e., a liquidation) bankruptcy case in January 1991.
The settlement is yet another reminder of the litigation pressures that the Big Four accounting firms are currently facing over big business failures. Here are earlier posts on Ernst’s other legal problems over the past year.

Houston business plaintiffs’ firm Susman Godfrey recently obtained an $87.5 million settlement from Big Four accounting firm PricewaterhouseCoopers in connection with a negligent misrepresentation claim of over $1 billion that arose from Laidlaw Environmental Services’ ill-fated 1999 takover of scandal-ridden Safety-Kleen Corp.
Susman Godfrey represented a syndicate of lenders headed by Toronto Dominion Bank that provided almost $3 billion in financing to Laidlaw in connection with the Safety-Kleen adverse takeover. Shortly after Laidlaw acquired the company, Safety-Kleen filed a chapter 11 case amidst revelations of an internal accounting scandal. As a result of the scandal and Safety-Kleen’s reorganization, the value of the bank syndicate’s loans declined dramatically.
The banks sued PW and alleged that the loans would not have been made but for the fact that PricewaterhouseCoopers had provided audit reports indicating that Safety Kleen was financially healthy. PricewaterhouseCoopers contended that Safety-Kleen’s management had misled it in connection with the audits (former Safety-Kleen executives were sanctioned by the SEC and at least one criminal proceeding arose from the scandal), and that besides, the banks had not relied on the PricewaterhouseCoopers’ audits anyway in making the loans to fund the takeover. The case settled on the courthouse steps before trial last October, but the details of the settlement are just now becoming public.
The settlement is interesting in that it was came in mediation after the parties had engaged in a summary jury trial last May, in which the parties engage in a non-binding, streamlined presentation of their cases to a jury, which then gives each side feedback on how the jury would decide the key fact issues in the case. Although not used nearly enough in complex litigation, summary jury trials are an efficient and effective tool for parties involved in such mattrs to assess the risks of proceeding to trial versus a pre-trial settlement.

As noted in earlier posts here and here, U.S. District Judge Vanessa Gilmore of Houston is currently presiding over a rather ugly criminal case in Houston against against three people accused in the deaths of 19 illegal immigrants who were being smuggled into this country in the back of a blistering hot trailer.
As noted in the earlier posts, Judge Gilmore and the prosecution have not been getting along very well during the course of this prosecution. After Judge Gilmore’s earlier threat to hold the prosecutors in contempt of court for failing to divulge internal Justice Department deliberations regarding the decision to seek the death penalty against one of the defendants, the prosecution filed a writ of mandamus (that’s like suing the judge) with the Fifth Circuit Court of Appeals requesting the appellate court to order Judge Gilmore, in effect, to quit jacking with the prosecution over communications that are clearly privileged. The Fifth Circuit agreed with the prosecution, and issued this pointy-edged 22 page opinion that, among other things, is clearly a rather sharp rebuke of Judge Gilmore’s treatment of the prosecution in the case.
On the heels of that dust-up, the Houston Chronicle ran this editorial last week on the matter that contains so many errors and misleading statements that it is questionable whether the author had even bothered reading the Fifth Circuit’s decision before writing the editorial. Kevin Whited over at blogHouston.net dissects the Chron editorial and, in so doing, establishes that the Chron editorial page is certainly not going to allow facts to get in the way of its political agenda.

Harry G. Frankfurt is an emeritus philosophy professor at Princeton, and he has just published a new book, On Bullshit (Princeton 2005). Here is the product description:

Deleted at Professor Frankfurt’s request.

Here is a shorter paper by Professor Frankfurt regarding the same subject matter. Hat tip to the Legal Theory Blog for the link to this fascinating analysis of bullshit.

This NY Times article reports on an interesting struggle that is developing within the American Civil Liberties Union board of directors.
I wonder whether the ACLU will represent the board members against the ACLU in protesting the ACLU’s attempt to chill their free speech rights? ;^)

This Law.com article reports on the avoidance lawsuits that the bankruptcy trustee of the former high tech law firm Brobeck, Phleger & Harrison is filing against the firm’s former partners for bonuses and a portion of the firm’s unpaid bank debt.
The key issues in pursuing former Brobck partners is when the firm became insolvent and whether partners took money out of the firm for inadequate consideration. Under the California Corporations Code, limited liability partnerships may make distributions to partners only when the total assets of the firm exceed liabilities.
The trustee contends that Brobeck’s income began to decline in 2000, a decline that accelerated during the second half of that year and continued until the firm tanked in September, 2003. Although Brobeck’s net per-partner income dropped to $245,000 for 2002, the trustee contends that Brobeck’s partners did not correspondingly reduce the distributions they received.
According to the trustee, in 2001 and 2002 alone, Brobeck’s partners spent more than $100 million more than the firm’s net income on partner distributions and leasehold improvements. Brobeck financed these excess distributions through debt, which increased from $34 million and $173,000 per partner in 2000 to $89 million and $505,000 per partner in 2002. In particular, the trustee asserts that Brobeck borrowed an additional $39 million on its credit line in the first quarter of 2002 and distributed over $43 million to its partners during the same time period.