Daily Archives: July 8, 2004

Update on Lay indictment

Posted on by
1

It looked like a video campsite outside the Federal Courthouse in Houston on Thursday as the media gathered to observe the spectacle of former Enron Chairman and CEO Kenneth Lay being led into the courthouse in handcuffs. Mr. Lay pled not guilty to an 11 count indictment that was included in a superceding indictment against Mr. Lay’s co-defendants, former Enron CEO Jeffrey Skilling and former Enron chief accountant, Richard Causey. The case is pending before U.S. District Judge Sim Lake, an able and fair judge who oversaw the sad case of Jamie Olis earlier this year.
In an unusual response in case that seems to generate unconventional moves, Mr. Lay conducted a press conference soon after his initial court appearance in which he asserted that he was not responsible for the company’s accounting problems and that former Enron CFO Andrew Fastow was to blame for most of Enron’s problems. During the press conference, Mr. Lay acknowledged that there had been wrongdoing at Enron, but claimed he did not know about it and that Mr. Fastow had betrayed his position of trust at Enron.
Defendants in high-profile criminal cases usually do not make public comments on their case out of fear that the statements could provide new ammunition to prosecutors. But Mr. Lay’s attorneys almost certainly feel that the public climate related to anything having to do with Enron is so polluted that they have little to lose by attempting to have Mr. Lay proclaim his side of the story publicly, just as he did in this earlier extraordinary interview in the NY Times.
The indictment alleges that Mr. Lay played a criminally culpable but surprisingly limited role in a massive conspiracy to deceive and defraud investors of Enron. The 11 criminal counts accuse Mr. Lay of helping to manipulate Enron’s financial statements and giving a false picture of the company’s financial health in the months before it filed its chapter 11 case in early December 2001.
One of the most interesting aspects of the indictment is that it acknowledges that Mr. Lay was not the most important player in the alleged criminal enterprise. The indictment paints Mr. Lay more as a protector of the alleged manipulative scheme by keeping it secret from the public. Indeed, all of the misdeeds attributed to Mr. Lay occurred after Mr. Skilling’s August, 2001 departure.
The indictment alleges that, until his resignation, Mr. Skilling “spearheaded” the alleged scheme and only afterward did Mr. Lay take “over leadership of the conspiracy.” The indictment against Mr. Lay focuses on the period after Mr. Skilling’s resignation, which was the period in which elaborate financial structures used to mask Enron’s true debt load became unstable and began straining the company financially.
The indictment describes several times in which Mr. Lay represented to equities analysts, credit-rating agencies and employees that the company was financially sound when, the indictment alleges, Mr. Lay knew that the company was not. The indictment alleges that Mr. Lay was being apprised on a daily basis by other Enron managers regarding the company’s financial condition, and that Mr. Lay helped devise strategies for attempting to hide even larger losses than those reported in the third quarter of 2001.
According to the indictment, a crucial period involving Mr. Lay began with a September 26, 2001 online forum he had with Enron employees. In that forum, Mr. Lay informed employees the “third quarter is looking great” even though he knew that the company would soon be reporting a giant loss for the period because of a write-down of assets, that Enron’s balance sheet contained billions of dollars of “embedded losses” and “overvalued investments,” and that the company “had been exploring such drastic solutions to Enron’s financial problems as a merger with another company (what turned out to be the ill-fated Dynegy merger). The indictment contended that Mr. Lay followed up this conference with a series of similarly misleading presentations to securities analysts and others in October and November, 2001.
The indictment includes a number of sentencing allegations that address last month’s U.S. Supreme Court ruling in the Blakely case that is being construed as limiting federal judges’ ability to boost convicts’ sentences beyond the lower end of the Federal Sentencing Guidelines range. Among these allegations are that the losses related to Enron exceeded $100 million and involved more than 50 victims, levels that put a white-collar offender at the top of the federal fraud guidelines range for sentencing purposes. Consequently, if convicted on all counts, Mr. Lay could face what amounts to a life sentence in prison and millions of dollars in financial penalties.
After Mr. Lay’s initial appearance, veteran Houston criminal defense lawyer Mike Ramsey stated that he would file a motion to sever Mr. Lay’s case from that of Messrs. Skilling and Causey and hoped to be in trial by September of this year, which is highly unlikely in a case of this magnitude. Mr. Ramsey acknowledged that Enron had problems when Mr. Lay retook control in August 2001, but observed that all major corporations have problems and that Mr. Lay strongly believed that, despite the problems, Enron was doing well overall and had a bright future.
In a related action, the Securities and Exchange Commission piled on Mr. Lay by filing civil charges of fraud and insider trading against him in Houston federal court. Those civil charges allege that Mr. Lay lied to investors about Enron’s financial health and falsely inflated the company’s share price so he could profit from a series of stock transactions. Unlike the criminal cases against Messrs. Skilling and Causey, Mr. Lay was not criminally charged with insider trading of Enron stock, but the SEC’s civil action included such a charge.
Meanwhile, other than the criminal prosecution that put Arthur Andersen out of business, the Enron Task Force still has not prosecuted a single trial of a former Enron executive, primarily because the Task Force’s sledgehammer approach to indicting executives has elicited guilty pleas from the executives charged to date in order to take advantage of prison sentences that are a fraction of the length that the executives would face if they took their cases to trial.
The first trial of a former Enron executive is currently scheduled to begin in mid-August in the so-called “Nigerian Barge case” before U.S. District Judge Ewing Werlein. Under normal circumstances, that case would not be a strong case for the prosecution. However, normal circumstances simply do not exist in regard to Enron, so all parties and counsel involved in the Enron-related cases will be watching that case closely to determine whether it is possible for an Enron defendant to receive a fair trial in today’s negatively charged atmosphere for anything related to Enron.
On that latter point, Professor Ribstein — rested from his Scottish holiday — hits the nail on the head with his latest observation regarding Mr. Lay and Enron.

The futures market for books

Posted on by
Reply

Bill Clinton’s autobiography may be hot, and the Harry Potter series continues to set records, but this National Endowment for the Arts survey indicates that such books are becoming an aberration. The study describes a precipitous downward trend in Americans’ book consumption and a particular decline in the reading of fiction, poetry and drama.
Among its findings are that fewer than half of Americans over 18 now read novels, short stories, plays or poetry; that the consumer pool for books of all kinds has diminished; and that the pace at which the nation is losing readers is accelerating; and that the downward trend is occurring in virtually all demographic areas.
The survey also makes an interesting correlation between readers of literature and those who are socially engaged, noting that readers are far more likely than nonreaders to do volunteer and charity work and go to art museums, performing arts events and ballgames. Of literary readers, 43 percent perform charity work while only 17 percent of nonreaders do.
The Census Bureau study upon which the survey was based measured the number of adult Americans who attended live performances of theater, music, dance and other arts; visited museums; watched broadcasts of arts programs; or read literature in the past year. The survey sample ? 17,135 people ? is one of the largest studies ever conducted on the subject of arts participation, and the data was compared with similar studies from 1982 and 1992.
In the literature segment of the study, respondents were asked whether they had, during the previous 12 months, without the impetus of a school or work assignment, read any novels, short stories, poems or plays in their leisure time. Their answers show that just over half ? 56.6 percent ? read a book of any kind in the previous year, down from 60.9 percent a decade earlier. Readers of literature fell even more dramatically, to 46.7 percent of the adult population, down from 54 percent in 1992 and 56.9 percent in 1982. Although the number of readers of literature is about the same now as it was in 1982 ? about 96 million people ? the American population has increased by almost 40 million.
Last month the Association of American Publishers released worldwide sales figures for 2003, indicating that total sales of consumer book products increased 6 percent for the year. Much of the increase can be accounted for by sales of audio books, juvenile titles and nonpaper e-books that are sold online. Adult hardbound books, adult paperbacks and mass-market paperbacks all showed relatively flat revenues in spite of price increases. Interestingly, the one category of book to rise markedly was that of religious texts, with total sales of $337.9 million, 36.8 percent over the previous year.

California expects Shell charity

Posted on by
Reply

In what can only be described as bizarre governmental intervention, this Wall Street Journal ($) article describes a politically-motivated Federal Trade Commission investigation that has been launched into the planned closing of an unprofitable Royal Dutch/Shell Group refinery in California and the FTC’s reinstatement of an antitrust complaint against Unocal Corp.
Shell announced plans last year to close its Bakersfield, California refinery Oct. 1 because a nearby oil field will run out of crude in coming decades and because the refinery is too expensive to repair and profitably operate. Given that relatively few refineries in the United States produce the type of environmentally-favored gasoline that California requires, the closure will likely crimp gasoline supply further in the West, where supplies are already tight and prices the highest in the nation. The small refinery handles 70,000 barrels of oil a day, providing 20,000 barrels of gasoline that amounts to 2 percent of California’s needs. It provides a larger percentage of diesel fuel, 15,000 barrels a day, which is the equivalent of 6 percent.
Shell lost more than $50 million over the past three years on the Bakersfield refinery and is facing between $30 million and $50 million in turnaround and environmental costs on the facility, which is old (the original portion of the facility was built in 1932).
So, let’s see here. Rather than encouraging companies to invest and build new refineries that would address the economic problem of tight supplies in the Western part of the United States, our federal government is taking expensive legal actions against one of the relatively few companies in the refining business to minimize its losses in the business. My sense is that forcing companies to operate refineries at a loss is not a sound policy for addressing the problem of tight gasoline supplies in the West.
Separately, the FTC overruled an administrative-law judge and reinstated an antitrust complaint against Unocal for pursuing patents for a special low-emissions gasoline at the same time that the company was helping California regulators mandate that gasoline as a state standard. The complaint originally was filed in March 2003, but was overruled by the judge in November.

Stros break latest three game skid

Posted on by
Reply

Roy O had his game face on and Jose Vizcaino did his best imitation of Lance Berkman as the Stros salvaged the final game of their series against the Padres, 5-1.
Oswalt was steady and unyielding, giving up six hits, three walks and a run in seven and a third quickly paced innings. After he uncharacteristically walked two straight with one out in the eighth, Jimy Williams pulled Oswalt in favor of Brad Lidge who secured the win by fanning four of the six batters he faced.
Viz had a two run yak in the first and three more hits (including two doubles) later in the game, which is an anecdotal performance that has the bad side effect of prompting Williams to overplay the normally light-hitting Viz (.319 OBP and .345 SLG. in 15 MLB seasons) for the forseeable future. The Stros had twelve hits — a veritable offensive explosion for them — but left 14 runners on base and failed to score after loading the bases in the first, second, and sixth.
The sixth inning situation was particularly egregious as the Stros loaded the sacks with no outs, and then Bags and Lamb whiffed, and Everett popped out weakly to second.
It is becoming increasingly difficult to watch Bags struggle at the plate. He has had a Hall of Fame quality career, but is now a tremendous burden to the Stros — a singles hitting first baseman who whiffs often and is owed an incredible $39 million over the next three seasons (at least Bags has an All-Star quality agent). Bags’ contract is the last big one the Stros have stemming from the overheated players’ market from several years ago, and it is my sense that the Stros simply need to bite the bullet and arrange the best deal possible either to pay a large portion of Bags’ contract in connection with a trade or simply buy out Bags’ contract. The Stros will lose between $10-13 million over each of the next three seasons on any such deal, but the first loss is always the best loss in this type of situation.
Bags is still the fifth most productive hitter on the team (behind Berkman, Beltran, Bidg, and Lamb), but he is now a relatively unproductive first basemen (currently ninth in hitting among first basemen in the National League) and it is much more likely that his decline will continue (his hitting statistics have been declining for over five straight seasons now) than turn around. Moreover, his continued presence prevents the Stros from retooling their club, including the move of Berkman to first, trying to ink Beltran to a deal, and playing younger players such as Jason Lane in the OF spot that opens by moving Berkman to 1B. Finally, by moving or releasing Bags, perhaps that would have the fringe benefit of prompting the Stros to release Bags’ buddy Brad Ausmus (-18 RCAA, explained here), who is now competing neck and neck with Neifi Perez in the race to become the most unproductive hitter among regular National League ballplayers this season.
The Stros now bus up the West Coast to Dodger Stadium for a four game weekend series with the Dodgers leading up to the All-Star break. The Stros’ starting pitching for the series is a bit up in the air, as the Stros recalled Brandon “Launching Pad” Duckworth (he has given up an incredible 10 yaks in only 25 innings this season) from AAA New Orleans to start one of the games. Andy Pettitte will start the Friday night game.