The always entertaining Gordon Prather has a theory.
John Keegan is England’s foremost military historian and, for many years, was the Senior Lecturer at the Royal Military Academy at Sandhurst. His book — The Second World War — is arguably the best single volume book on World War II.
Professor Keegan recently wrote this op-ed in the London Telegraph in which he places current events regarding the war in Iraq in historical perspective:
Then, Professor Keegan puts the current troubles in Iraq in the context of previous 20th Century wars:
History boys can explain easily – and convincingly – why some wars, as that against Germany in 1945, end in unopposed occupation of enemy territory and why others, as in Iraq in 1920 and 2004, do not. In the first case, the defeated nation has exhausted itself in the struggle and is dependent on the victor both for necessities and for protection against further disaster – social revolution or aggression by another enemy. In the second case, the war has not done much harm but has broken the power of the state and encouraged the dispossessed and the irresponsible to grab what they can before order is fully restored.
What monopolises the headlines and prime time television at the moment is news from Iraq on the activity of small, localised minorities struggling to entrench themselves before full peace is imposed and an effective state structure is restored.
While noting those troubles, Professor Keegan closes by focusing on the bottom line:
It is a regrettable but not wholly to be unexpected outcome of a campaign to overthrow a dangerous Third World dictator. If those who show themselves so eager to denounce the American President and the British Prime Minister feel strongly enough on the issue, please will they explain their reasons for wishing that Saddam Hussein should still be in power in Baghdad.
In this earlier post, the recent Fifth Circuit decision in (Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., No. 02-1055 (5th Cir. March 31, 2004)) was noted for holding that the group pleading doctrine for alleging a company’s public statements (such as press releases or regulatory filing statements) as a basis for fraud against corporate officers does not withstand the Private Securities Litigation Reform Act of 1995 (PSLRA)’s specificity requirements.
However, other federal courts have not been as demanding as the Fifth Circuit in requiring specific allegations of fraud against defendants. In the recent decision of In re NUI Sec. Litig., 2004 WL 895846 (D.N.J. April 23, 2004, the court found that the plaintiffs had adequately pled a sufficiently strong inference of scienter to sustain Rule 10b-5 claims against the corporate defendant (NUI) based on allegations that a stock-for-stock acquisition of another company gave NUI a motive to inflate the price of its stock and that NUI’s associate general counsel (who is not a defendant in the case) knew of NUI’s fraudulent conduct. As to NUI’s CEO and CFO (both of whom are defendants in the case), the court concluded that the plaintiffs’ allegations regarding their motive to commit fraud and knowledge of the fraudulent conduct were insufficient to sustain the Rule 10b-5 claims against them.
But wait. The CEO and CFO are not off the hook. Inasmuch as they controlled NUI and the court found that a Rule 10b-5 claim was adequately pled against NUI, the Section 20(a) claims against the CEO and CFO based on control person liability can continue. Ouch!
This decision — as with last year’s decision in In re Interpublic Securities Litigation, 2003 WL 21250682, (S.D.N.Y. May 29, 2003) — are eroding the PSLRA’s requirement that plaintiffs specifically plead scienter as to each defendant in the lawsuit. Normally, courts reject “collective scienter” theories — that is, in determining whether a corporate defendant acted with scienter, courts examine the specific state of mind of the individual corporate official who made or approved the corporate statement rather than the collective knowledge of all the corporation’s officers and employees. However, in the In re NUI Sec. Litig. decision, the court clearly imputed the knowledge of the associate general counsel to the corporate defendant for scienter purposes despite the fact that the associate general counsel was not alleged to have made or issued the false statements.
This is a trend worth keeping an eye on. Hat tip to the 10b-5 Daily for the link to the NUI decision.
The Stros looked listless after a golf day in St. Louis as the Cards parlayed a four run fifth inning into a 5-3 win at Busch Stadium.
Wade Miller continued to look unimpressive as he walks far too many batters to be effective over the long term. Kent and Lamb had solo yaks, but Berkman‘s 33 game on base streak came to an end. To make matters worse for Berkman, his alma mater was upset 4-3 by Texas Southern in the NCAA Regional Baseball Tournament.
Tim Redding attempts to get the Stros back on track on Saturday night against the Cards’ Jason Marquis.
James D. Hamilton is an economics professor at Cal-San Diego who specializes in the economics of energy. In this excellent piece, Professor Sullivan summarizes the recent spike in energy prices and compares it to similar spikes of the past. The entire short piece is worth reading, and here is a tidbit to pique your interest:
The current behavior of oil prices is unlike the spike that preceded earlier recessions in two key respects. First, oil prices have gone up not because of a shortfall of supply but rather because of an increase in demand. The world is producing 3 million more barrels of oil each day relative to last year, nearly a 4% increase. But demand is up even more dramatically. . .
This is quite a different situation from other historical oil shocks that were caused by military conflicts that physically disrupted the production or delivery of petroleum, forcing consumers and firms to make less use of this vital input. The current situation is simply that we have to share the increased supply with other consuming nations. There should be no quarrel with the proposition that a booming world economy overall is good economic news, not bad.
The second way that the current oil price spike differs from those that preceded earlier U.S. recessions is that a good part of the recent increase is merely a correction to an earlier dramatic drop in oil prices. The current oil price of $41 a barrel is 45% higher than the $28 price we saw last September. However, it is important to remember that before those September lows, oil had been selling for $36 back in February of 2003, so that the current price is only 15% above what we saw just a little over a year ago. There were similar corrections (an oil price spike following an earlier downturn) in 1987 and 1994 with no apparently adverse economic effects.
For more a detailed analysis of price spikes in energy markets, review Professor Hamilton’s paper “What is an Oil Shock” that he published originally in 1999 and updated in 2001.
Hat tip to Professor Sauer for the link to Professor Hamilton’s work.
One of the most insightful social commentators of our time, Victor Davis Hanson, posts his weekly article on NRO in which he opines on the real problem in the prosecution of the war against the radical Islamic fascists:
Our Real Dilemma. We do have a grave problem in this country, but it is not the plan for Iraq, the neoconservatives, or targeting Saddam. Face it: This present generation of leaders at home would never have made it to Normandy Beach. They would instead have called off the advance to hold hearings on Pearl Harbor, cast around blame for the Japanese internment, sued over the light armor and guns of Sherman tanks, apologized for bombing German civilians, and recalled General Eisenhower to Washington to explain the rough treatment of Axis prisoners.
We are becoming a crazed culture of cheap criticism and pious moralizing, and in our self-absorption may well lose what we inherited from a better generation. Our groaning and hissing elite indulges itself, while better but forgotten folks risk their lives on our behalf in pretty horrible places.
As usual, Professor Hanson closes by placing the current troubles in Iraq into perspective:
Historic forces of the ages are in play. If we can just keep our sanity a while longer, accept our undeniable mistakes, learn from them, and press on, Iraq really will emerge as the constitutional antithesis of Saddam Hussein, and that will be a good and noble thing ? impossible without America and its most amazing military.
In this post, Cal-Berkeley economics professor Brad DeLong examines an interesting aspect of John Kerry’s health care finance plan:
[T]he Kerry campaign has dusted off and brought forward a very clever idea from Brandeis’s Stuart Altman to not eliminate but at least diminish the magnitude of these two ways that market-based health-care reforms self-destruct. The idea? Have the government take its task of social insurance seriously, and reinsure private insurers and HMOs: construct a ‘premium rebate’ pool to pay annual health-care bills over $50,000. This greatly diminishes the cost to insurers and HMOs of covering the really sick. The cost of treating the really sick will then be on the taxpayer rather than on the insurance-purchasing consumer. Insurance rates will fall. And the incentive for the young without many assets to go naked and uninsured will diminish as well.
Thus two of the big problems with our health care system become smaller problems. If this plan is enacted, we will no longer have to worry as much (i) adverse selection–the enormous financial incentives HMOs and insurance companies have to figure out some way not to cover the sick people–and (ii) cost shifting–the fact that those who buy insurance have to pay not only their own routine costs and their own catastrophic costs but the catastropic costs of others and the uninsured as well. The first means that–often–those who need health care the most have a hard time getting it. The second means that–often–those who could afford or would buy insurance if it were priced at its fair actuarial value don’t because of this cost shifting.
This is an interesting proposal. In short, the government would offer reinsurance for catastrophic health care costs. In so doing, this would reduce the incentive for health insurance companies to avoid providing insurance for high-risk applicants. At least in theory, the cost of health insurance should decline, which would make it more attractive to consumers. In effect, the Kerry proposal would make the government’s role in health insurance similar to its role in automobile insurance, where the government subsidizes coverage for the highest-risk applicants.
Indeed, as Professor DeLong points out, the Kerry proposal is consistent with the interests of the Bush Administration’s approach to health care finance. Why then has not the Administration adopted such a proposal? Simply another example of the void of creative policy development that is currently taking place under this Administration.
British historian Paul Johnson (author of “Modern Times,” “History of the Jews,” “History of Christianity,” “A History of the American People,” and his more recent “Art, A New History,” among others) is one of my favorites. In this Wall Street Journal op-ed from several days ago, Mr. Johnson makes the following poignant point about the planning and implementation of the D-Day invasion during World War II, and relates it to the Allies’ current situation in Iraq:
The history of D-Day, and the fortnight that followed, showed the value of meticulous preparations, rehearsals, elaborate testing of every kind of equipment, and the study of logistics. Having secured the bridgehead, the Allied buildup was so rapid that, within a month, the Germans had palpably lost the battle in the West and with it the war. But that did not mean an early Nazi capitulation. Granted the Allied war aim of unconditional surrender, Hitler would clearly fight on to the end, and that meant we had to destroy his large-scale fighting capacity by breaking up all major units and occupying territory. But how, exactly? Montgomery was all for the rapid thrust by armored divisions deep into Germany, backed by overwhelming air-power. “Berlin by Christmas” was one phrase used. This was a fighting soldier’s strategy and one which the Germans, in a similar situation, would certainly have used. Indeed, to some extent it was used by Gen. Patton and his armor. But it was risky. The faster the spearhead moved, the more extended its lines of communication became and the more likely it was that the Germans would be able to mount a devastating lateral attack which might sever the advanced armored units from their tail.
In the end, Eisenhower decided it was too risky and overruled Montgomery’s enthusiasm. Instead, a “broad front” strategy was adopted, the Allies advancing slowly, steady and always as a continuous mass, forward units never out of touch with their companions to left or right. This virtually ruled out the possibility of German counterattack breaking right through the front and nipping off a spearhead. It was the safe approach, and typical of Eisenhower’s minimum-risk attitude to warfare.
But of course such an approach involved penalties. It allowed the Germans to keep their line, to regroup and reinforce, and to maintain morale. Not until the very last weeks of the war did their front collapse, and individual units begin to surrender freely. Moreover, the political consequences were enormous. Instead of the war ending in autumn or early winter 1944, it lasted until the end of April 1945. Instead of the U.S. and Britain occupying Berlin and most of central Europe, it left these spoils to the Russians. The broad-front policy set the stage for 40 years of Cold War. Indeed, had it not been for the firmness of President Truman in reversing Roosevelt’s policy of appeasing Stalin, it is quite possible that Western Europe too might have fallen victim to communism, and that the frontiers of Stalin’s empire would only have ended at the English Channel.
These reflections of D-Day and its aftermath remind us that military decisions can never be entirely separated from their political consequences. Geopolitics is like a game of chess: You have to think a dozen moves ahead. This is as true today as in 1944-45. When President Bush and British Prime Minister Tony Blair decided to destroy Saddam Hussein’s military power, they took a risk that was abundantly justified both geopolitically and morally. But they paid insufficient attention to the possible political consequences.
Unlike Montgomery in 1944, who never underestimated the German genius for counterattack, and made provision against it, the allies this time did not study and prepare for the peculiar Arab genius for counterattack, which is to carry out prolonged and vicious guerilla warfare, completely disregarding human life, including their own. Moreover they did not study and prepare for the difficulties of meeting this form of counterattack against the political background of a free society at home, reacting nightly to what it sees on TV, and reading highly critical reports from the front written by journalists who have their own opinions and agendas and feel under no obligation to pursue the war (and peace) aims of the allied commanders. Both Mr. Bush and Mr. Blair are currently suffering from their lack of provision and foresight.
Given patience and determination, all will be well in time: Democracy and the rule of law will grow in the Middle East, and the roots of terrorism will be destroyed. But we are learning, once again, that the lessons history has to teach are inexhaustible and that statesmen should never plunge into the future, as we did in Iraq, without first examining what guidance the past could supply.
This timely Wall Street Journal ($) article reports on the government’s new pressure tactic in investigating and prosecuting business crimes — pressuring businesses to condition the business’ support of its employees who are under investigation on the employee’s cooperation with the government, which can of course use the employee’s statements against him in prosecuting him for a crime. The WSJ article uses the example of the government’s ongoing investigation into Big Four accounting firm KPMG’s tax shelter promotion (earlier posts on that matter are here). As the WSJ article notes:
Jeffrey Eischeid, a onetime star at accounting giant KPMG LLP, is bracing for possible criminal charges that could land him in federal prison for more than two decades. His offense? Marketing tax shelters that KPMG said were legal.
While the U.S. Attorney in Manhattan is the immediate source of his legal jeopardy, he has another one to worry about: KPMG.
Until recently, the accounting firm staunchly supported both its tax shelters and Mr. Eischeid, whom it sent to Congress to defend the shelters. But this year the firm, which like Mr. Eischeid is at risk of a fraud or conspiracy indictment over the tax shelters, switched strategies. It placed Mr. Eischeid, a 46-year-old partner, on leave, then asked him to resign. And it refused to pay his legal costs unless he agreed to cooperate with the prosecutors, where anything he said could be used against him.
Why the about-face? The answer involves federal sentencing guidelines for businesses, prescribing stiff mandatory penalties for white-collar crimes such as fraud. The sentencing guidelines also tell how companies can lower their odds of being charged with a crime in the first place: by cooperating fully with the federal investigators. And the government has been refining and tightening its definition of cooperation — with broad implications for how U.S. companies interact with employees.
Recent changes, contend critics who include attorneys for some KPMG staffers, encourage companies to break faith with their own employees, making it harder for them to avoid self-incrimination. The critics say that companies, to avoid facing charges themselves, now sometimes feel obliged to fire people, snitch on them, refuse to pay their legal fees and withhold documents they need.
And the price of not cooperating with the government? Based on recent cases, the price is extremely high:
Companies can ill afford to ignore the guidelines because criminal charges, even without a conviction, take a severe toll. This is especially true for financial-services companies. The damage is evident in the fate of such once-mighty firms as Drexel Burnham Lambert and Arthur Andersen LLP, which later faced criminal charges. Drexel folded and Andersen all but disappeared, with a remnant today of only 215 employees.
For a partner like Mr. Eischeid in a firm such as KPMG, the choices and stakes in such a criminal investigation are also extremely high:
After Mr. Eischeid learned prosecutors were interested in him, KPMG gave him a choice. He could cooperate with the investigators, and the firm would pay his legal fees. Or he could go it alone, in which case he would have to foot his own legal bills and would risk being fired.
Mr. Eischeid decided it was too risky to meet KPMG’s conditions for paying his bill. He retained Mr. Arkin. The lawyer recently refused prosecutors’ requests to speak with his client unless Mr. Eischeid is assured “he would not be viewed with the specter of certain indictment or forced guilty plea.”
Mr. Eischeid has a lot to lose. Since graduating from the University of Georgia, he has never held any other job than the one at KPMG and a predecessor firm, and his chances of finding other employment in his field now appear slim.
[Mr. Eischeid] could face more than 20 years in prison if he is indicted and later convicted at a trial. Mr. Eischeid knows that cooperating with the prosecutors prior to charges could mean a smaller penalty. But prosecutors have indicated he would have to plead guilty to at least three felonies, his lawyer says, even though “everything Jeff Eischeid said and did with the tax products he’s now being investigated for selling was scripted by KPMG and approved by KPMG’s professional-responsibility committee.”
Finally, the sad case of Jamie Olis looms large over Mr. Eischeid’s case:
Looming large in Mr. Eischeid’s thinking is the case of Jamie Olis, a midlevel executive at Dynegy Inc. Maintaining his innocence, Mr. Olis went to trial in Houston, was convicted — and drew a 24-year prison term dictated by federal sentencing guidelines. Says Mr. Eischeid, whose last day at KPMG was last Friday, “That could be me some day.”
Let’s assume for a moment that Mr. Eischeid’s tax shelter work was on the margin of tax avoidance legitimacy. Apart from the issue of whether our Tax Code should be written in a manner that encourages such tax avoidance schemes, is not the public interest protected sufficiently by the financial risk that Mr. Eischeid’s clients take in attempting to avoid taxes in this manner? Additional tax, penalties, defense costs and even more accounting fees — clearly, the potential cost of such avoidance schemes is high. Does criminalization of such behavior — particularly where the government’s approach makes it difficult for the persons involved to mount a defense — serve any useful public purpose?
This NY Times article reports on a potentially important development in the Enron-related criminal case against two former Enron executives and four Merrill Lynch executives dubbed the “Nigerian Barge case.” The Houston Chronicle story on these latest developments is here.
A day after the Enron Task Force had elected not to list former Enron CFO Andrew Fastow as a witness in the case, the Task Force advised the defendants that the government has in its possession potential exculpatory evidence for the defense relating to Mr. Fastow. Defendants immediately asked U.S. District Judge Ewing Werlein Thursday to conduct an evidentiary hearing to find out why prosecutors have withheld until the last minute evidence from Fastow that could help the defense.
According to the defense motion, in one FBI interview, Fastow said he did not even recall one of the defendants — former Enron finance executive Dan Boyle — being involved in Enron’s 1999 sale to Merrill Lynch of an interest in electricity-generating barges in Nigeria.
As noted in this earlier post, the government’s theory of the case is that Enron’s sale of an interest in the barges to Merrill was a sham and not a “true sale” for accounting purposes because Fastow orally promised Merrill in a secret side deal that Enron would either buy back the barges or broker a deal for them the following year. However, none of the deal documents contained that promise, and the the parties contirmed in the written documents that they were relying only on the representations and agreements contained in the written agreements between the parties. Fastow’s statements to the FBI and Justice that no such oral agreement existed could be strong evidence for the defense that the alleged side deal did not exist.
In a pre-trial conference last Thursday, Judge Werlein was openly skeptical about several of the prosecutors’ statements regarding why they had not turned over potentially exculpatory evidence in their possession to the defense. It will be interesting to see how this eminently fair Judge reacts to these latest developments.