Monthly Archives: July 2004

Tyco’s general counsel acquitted

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Mark Belnick, the former Paul, Weiss, Rifkind, Wharton & Garrison partner who was Tyco’s general counsel during the Dennis Kozlowski scandals, was acquitted yesterday of corporate fraud charges that involved an allegedly unapproved $15 million bonus and $14 million in personal real estate loans.
The article on the acquittal provides the normal exaggerations regarding the impact of the acquittal on prosecutors and defense attorneys, suggesting that it will make the former more cautious in future white collar prosecutions and that it will make the latter bolder in defending hte cases. In reality, the acquittal has very little effect in that regard.
However, the article does provide the following important information about the trial:

Mr. Belnick relied on the advice of the chief financial officer, Mr. Swartz, on the propriety and the disclosure of the relocation loans, Mr. Weingarten [Belnick’s defense attorney] told the jury. “There was nothing unusual, extraordinary or improper about seeking advice from that source,” he said.
Over nearly a week of testimony, Mr. Belnick essentially stuck to that argument, saying that he had done nothing wrong, had not intended to do anything wrong and had relied on advice from people he had no reason to distrust.

So, Mr. Belnick did what neither Martha Stewart nor Jamie Olis elected to do — i.e., testified during his criminal trial.
Although the temptation is great not to have a white collar criminal defendant testify during a trial and the decision can always be defended on technical grounds, the bottom line is that jurors want to hear what the white collar defendant has to say regarding the criminal charges. The decision not to testify is not the only reason that Ms. Stewart and Mr. Olis were convicted, but my experience is that the risk of conviction in white collar criminal prosecutions increases substantially if the jurors do not hear directly from the defendant.

Enron reorganization plan approved

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U.S. Bankruptcy Judge Arthur Gonzalez approved Enron Corp.’s Chapter 11 reorganization plan today in New York, under which $63 billion of claims will share about $12 billion in cash and the value of stock in newly formed companies that will hold and probably sell Enron assets.
Enron now employs 9,300 people, about a third as many as before its bankruptcy filing. Inasmuch as the Enron plan essentially calls for a going concern liquidation of Enron’s assets, most of the employees who are left will become employees of other companies that will hold and then sell Enron’s assets.
Enron’s domestic pipelines are being transferred to CrossCountry Energy Corp., which Enron is currently selling at a rather lively auction. Enron is awaiting regulatory approval on a sale of Portland General Electric, its Oregon utility, to a group headed by Texas Pacific Group, a Fort Worth, Texas, investment concern. A substantial portion of Enron’s remaining foreign assets are being transferred to a new entity, Prisma Energy International Inc., which may be sold or spun off to creditors.
However, the main legacy of Enron’s plan is the litigation that Enron’s bankruptcy has generated. Literally hundreds of lawsuits have been filed against former employees, trading partners, and many financial institutions that furnished money to partnerships that Enron used to mask its highly-leveraged financial condition. Those cases will continue to drain attorneys’ fees from Enron’s bankruptcy estate for years.
The Enron bankruptcy estate has already paid Enron’s attorneys, various other committee attorneys, and two examiners’ attorneys in the hundreds of millions in attorneys fees. When the final professional fees tab is calculated, the Enron case almost certainly will be the most expensive chapter 11 case in the history of reorganization law in the United States.

Southwest Airlines CEO resigns

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James F. Parker, Dallas-based Southwest Airlines’ CEO, unexpectedly resigned yesterday after just three years. The publicly stated reason for the resignation was the ubiquitous “personal reasons,” such as the “draining” nature of the job. Airline CEO’s are becoming as disposable as football coaches. Mr. Parker becomes the sixth major airline CEO to step down since the 9/11 attacks.
However, the resignation coincidentally came just hours after Southwest reported that its second-quarter earnings had fallen 54%, although that dip was attributable mainly to labor-related charges in the current quarter and a onetime gain a year earlier. Nevertheless, as with the entire airline industry, Southwest has been troubled by labor troubles, higher operating costs and terrorism concerns since the 9/11 attacks. Moreover, although it pioneered the no-frills, low-cost approach, Southwest faces increased competition from new low-cost upstarts who have chased its business and kept fares under pressure.
Mr. Parker’s undoing probably was due to the acrimonious labor contract talks with the flight attendants union that the CEO complained became “personal” and “off track.” They were were settled only with the involvement of an outside mediator and the company’s hard-charging co-founder and chairman, Herbert D. Kelleher, whom Mr. Parker had to bring in as lead negotiator in the labor negotiations.
Mr. Parker had been seen as a transitional CEO, who definitely had a tough act to follow in Mr. Kelleher. The charismatic Mr. Kelleher had worked hard to build personal rapport with employees and won popularity on Wall Street with his pioneering low-cost approach. The two men were longtime associates who began working together 30 years ago at a San Antonio law firm and Mr. Parker was for years known as Southwest’s coordinator of big projects such as leading Southwest’s successful opposition to a high-speed rail project in Texas. But Mr. Parker had also been largely in the background while Mr. Kelleher became the company’s public face.
Chief Financial Officer Gary Kelly, who is 49, was named to replace Mr. Parker as CEO. Mr. Kelly was responsible for negotiating protective price hedges against higher fuel prices that saved Southwest hundreds of millions of dollars as other carriers suffered higher fuel costs.
The scuttlebutt within the industry is that the Southwest board and Mr. Kelleher had become frustrated by the tenor of labor relations at the airline over the past few years. If true, it’s understandable that Mr. Kelleher would have a hard time comprehending why it took two years of negotiations to settle an agreement that he and the union were able to settle in two months once Mr. Kellerher got involved.

Thinking about buying a new car? Read this!

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It’s a buyer’s market.

Choosing Death

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This Nicholas Kristof NY Times op-ed is a must regarding the U.S. Attorney General’s attempt to halt Oregon’s “Death With Dignity” experiment. The A.G. is threatening legal action against any physician who participates in assisted suicide by writing a prescription for a drug that appears on the federal government’s list of controlled substances. Hat tip to Professor Mayo and his HealthLawBlog for the link to this op-ed.

The Open

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The Open begins today at Royal Troon in Scotland, and Quin Hillyer provides this excellent overview of this year’s tournament.

Rearranging the deck chairs on the Titanic of the Stros

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The worst kept secret in Houston this week was exposed today as the Stros fired Jimy Williams this afternoon, ending his 2 1/2 season stint with the club. The Stros named former Stro player and coach, Phil “Scrap Iron” Garner to replace Williams for the rest of this season.
Stros hitting coach Harry Spilman and pitching coach Burt Hooton were also fired and replaced by AAA hitting coach Gary Gaetti and Jim Hickey, respectively. Spilman was the club’s minor league field coordinator when he was named the Stros’ hitting coach in June 2000 after the club fired Tom McGraw. Hooton was the AA Round Rock pitching coach when he was named pitching coach during the middle of the 2000 season after Vern Ruhle was canned.
I always thought Williams was a rather odd choice as the manager for the Stros, and his record with the club justified my skepticism. Williams was 215-197 as the Stros manager. The 2002 club (84-78) was second in the NL Central, but finished 13 games behind the Cardinals and 11 games behind the Giants for the wild card playoff spot. The 2003 club (87-75) finished second by a game to the Cubs in the NL Central and four games behind the Marlins for the wild card spot. As we all know, this year’s club is 44-44 at the All-Star Break, 10.5 games behind the Cards in the NL Central and 4 games behind in the race for the wild card spot.
The Pythagorean winning percentage is an interesting statistic that estimates a team’s winning percentage given their runs scored and runs allowed. Developed by Bill James, it can tell you when teams were a bit lucky or unlucky, but it can also let you know whether a team managed by a particular manager consistently overachieves or underachieves.
Jimy Williams-managed teams have consistently underachieved. Williams has a career Pythagorean Differential of -24 (i.e., his teams have lost 24 more games than the statistics suggest they should have), with just one season in which his team exceeded expectations. Consequently, Williams just may prove Branch Rickey’s adage: “Sometimes luck is the residue of design.”
Although he appears to be a good coach of baseball skills, Williams just seems to make enough boneheaded managerial moves to make sure that his teams underachieve. Here are but a few examples:

His batting Berkman in the fifth and sixth hole for much of this season while he has been one of the best hitters in baseball;
His insistence on batting one of the worst hitters in baseball — Adam Everett — in the two hole and have him waste outs by laying down sacrifice bunts at every opportunity;
His decision to platoon poor hitting Geoff Blum with the hot-hitting Ensberg for much of the 2003 season, which may have in itself been enough to cost the Stros the game that they finished behind the Cubs in the NL Central; and
His strained relationship with Hidalgo, which may have ultimately cost the Stros a productive slugger over the next several seasons.

So, I cannot say that I am sorry to see Williams go. My sense is that he is overmatched as a big league manager.
On the other hand, although hiring Garner is a “feel good” P.R. move, it’s a dubious one from the standpoint of managerial competence. Although he managed teams for eleven seasons with generally bad players at both Milwaukee and Detroit, Garner only produced a won-loss record three times that was better than those clubs’ Pythagorean winning percentage. Moreover, Garner was a marginal hitter as a player, who rarely walked and thus, did not have as high an on-base percentage as he should have to compensate for his mediocre power. So, if Garner favors players like himself, we should expect a steady dose of Viz and Everett, which will only excerbate the Stros’ run scoring deficiencies.
The bottom line: It was time for Williams to go, but it’s not at all clear that Garner is an improvement other than he gets along with the media better than the irascible Williams. It’s becoming clearer by the day that the Stros’ plan of making a playoff run this season has failed, and that it’s time to clean house and begin bringing in younger players to surround Berkman and Oswalt.

WSJ on Mike Ramsey

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This Wall Street Journal ($) article profiles Houston criminal defense attorney, Mike Ramsey, who is heading up the criminal defense team that is defending former Enron Chairman and CEO, Kenneth Lay. The article captures Mr. Ramsey’s homespun wit in the following passage:

Even if he doesn’t succeed in gaining a separate trial, the effort gives Mr. Ramsey the opportunity to showcase is readiness to quickly rebut the charges. He seems to particularly enjoy attacking the bank-fraud charges brought against Mr. Lay in connection with loans he took out between 1999 and 2001. Part of the loan-related criminal charges involves a federal banking rule known as Regulation U.
Mr. Ramsey asserts that the government is unfairly going after his client for an alleged violation of some obscure rule. Until the indictment, says Mr. Ramsey, “I thought Reg U was a tomato sauce.”

As noted on this blog before, Mr. Ramsey is a member of Houston’s remarkably talented criminal defense bar, which in many respects is the legacy of legendary Houston-based criminal defense lawyers, Racehorse Haynes and the late Percy Foreman. A couple of other members of this prominent group of Houston criminal defense lawyers — Dan Cogdell and Tom Hagemann — will be defending clients in the upcoming mid-August trial of the Enron-related case known as the Nigerian Barge case.
Other prominent members of Houston’s criminal defense bar include Dick DeGuerin, who along with Mr. Ramsey, obtained the remarkable acquittal of murder charges for Robert Durst, Dick’s brother, Mike DeGeurin (yes, the brothers spell their last name differently), Jack Zimmerman, Rusty Hardin, David Berg, Joel Androphy, Robert Scardino, Mike Hinton, and Robert Sussman. The expertise and talent of Houston’s criminal defense bar compares favorably with that of any criminal defense bar of any city in the country.

No oil boom in Houston

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This NY Times article reports that the recent uptick in oil and gas prices has not translated into an economic boom for the local Houston economy. The article does a reasonably good job of explaining that Houston’s economy is less dependent on the oil and gas industry that in prior eras, and thus less prone to the boom and bust cycles that resulted from past run-ups in energy prices. Accordingly, while Houston’s economy used to be largely countercyclical to the national economy (i.e., Houston would do well during times of high energy prices that would drive the national economy down), Houston’s more diversified economy now tends to be more in step with the national economy.
Curiously, the Times reporter neglected to interview the foremost authority on the Houston economy, Dr. Barton Smith, University of Houston professor of economics and director of the UH Institute for Regional Forecasting. Twice a year or so, Dr. Smith gives an oral presentation over lunch to Houston businesspeople regarding the state of the Houston economy and his predictions for the economy’s future. These meetings provide valuable nuts and bolts information and analysis regarding Houston’s economy, and are extremely popular among Houston businesspeople. Not mentioned in the Times article is that Dr. Smith’s model of the Houston economy currently predicts an annualized rate of job growth of 2.6 % that, if sustained for the next six months, would translate into about 50,000 jobs. That would be the best job growth rate in Houston since 2000.

Two trials, two CEO’s

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The Wall Street Journal’s ($) Holman Jenkins’ weekly column today addresses the different troubles facing former Enron Chairman and CEO Kenneth Lay and Pfizer’s CEO Hank McKinnell.
First, Mr. Jenkins examines the indictment against Mr. Lay and observes that it essentially charges him with the crime of making false public statements in carrying out his duty to save Enron. That duty to Enron’s shareholders, investors and creditors conflicted with Mr. Lay’s other duty to tell the truth to those same folks:

Much will depend on what he was told by Enron employees in the weeks between his return to the CEO’s job and Enron’s collapse a few weeks later. The famous Sherron Watkins memo and follow-up meeting may have put Mr. Lay in the proverbial double bind. He could have told employees and investors that Enron had many sound businesses but, alas, the accounting mess would likely provoke a crisis of confidence among lenders and trade partners, driving the company out of business for lack of credit to continue its day-to-day operations.
Saying as much, of course, would have precipitated the very implosion that it was Mr. Lay’s mission to prevent for the benefit of employees, creditors and investors. “Oh well,” he might have said, “I saw my duty and did it. I disclosed all the material facts that investors deserve to know, even if it means the stock will go to zero before they can act on it.”
Failing to do so is what he’s being prosecuted for now, in good part. The indictment dwells most heavily on his public statements of confidence in the company after he reclaimed the helm of a sinking ship. No, we wouldn’t even try to guess at a solution for this problem. In theory investors deserve the truth, even when it hurts. Please, can’t somebody in the economics department figure out a way to measure how many companies lied their way back to solvency, saving their shareholders a total loss?

The other trial that Mr. Jenkins addresses is a financial and political one, which Pfizer and other drug companies face in a marketplace that increasingly limits the ability of U.S. drug companies to generate profits and fund research and development on new drugs:

By decade’s end, the last major market where prescription drugs aren’t currently subjected to price controls — the giant U.S. market — will feel the touch of the visible hand. Perversely, the industry can thank George W. Bush. Whatever he intended with his Medicare reform, the government sooner or later will try to limit its pharmaceutical spending on seniors by dictating prices.
History is replete with industries with high fixed costs and low marginal costs that embraced government regulation, believing they could capture the regulatory process and assure themselves an acceptable rate of return. Some say the drug companies will manage the politics of price regulation too, making up on volume what they lose in dictated prices. Don’t bet the cat on it. That approach ended badly for the railroad and electric power industries, and both could at least demonstrate clearly for regulators the relation between capital going into the pipeline and services to the public coming out the other end. Drug investment, by contrast, is a speculative shot in the dark, unfit for any kind of regulatory review that we can think of.

Mr. McKinnell at least sounds like a man who believes this future can be avoided, pressing for the U.S. to challenge price controls in other countries so Americans aren’t stuck bearing the whole cost themselves of the industry’s massive R&D budgets.

Inasmuch as the Bush Adminstration lacks a coherent approach to reforming America’s health care finance system, count me as skeptical that this administration can develop a sensible plan to require other countries to fund a fair share of drug R&D costs.