Monthly Archives: August 2004

Chuck Watson settles with Dynegy

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Dynegy founder and former chief executive officer Chuck Watson and his chief operating officer — Steve Bergstrom — will receive a combined $32 million in severance payments under a settlement of their severance claims with the company. Mr. Watson will receive approximately $22 million plus interest and legal fees, which is about a quarter less than what he originally demanded from the company. Mr. Bergstrom will receive $10.4 million plus interest and legal fees, which is the full amount that he demanded.
Mr. Watson had been a sterling Houston business success story for the past 15 years until that shine was somewhat dulled by his involvement of Dynegy in a last ditch effort to keep Enron out of bankruptcy in 2001. For years, Mr. Watson led Dynegy successfully as it mirrored many of Enron’s business moves, particularly its involvement in online energy trading.
As Enron spiraled toward bankruptcy in late 2001, Mr. Watson had Dynegy set to take over Enron, but the deal broke down when Dynegy discovered the extent of Enron’s contingent liabilities in connection with its off-balance sheet partnerships. Enron’s subsequent demise almost caused Dynegy to collapse as well, as traders and investors shunned the company over fears that it would become the next Enron. Dynegy’s troubles – a regulatory probe, a share price collapse, a credit downgrade and disappearing trading partners – bore a striking resemblance to the start of Enron’s downfall. However, Dynegy is better capitalized than Enron, as Chevron owns over a quarter of the company’s stock.
Still reeling from the impact of Enron’s demise into insolvency, the Dynegy board pressured Mr. Watson to resign in May, 2002. Mr. Bergstrom inherited the president’s position until he left the company in October 2002 when Dynegy decided to exit the energy trading business for which Mr. Bergstrom had been primarily responsible. The energy trading industry had largely melted down by that time in the wake or Enron’s collapse.
Both Mr. Watson and Mr. Bergstrom objected to the severance packages that Dynegy had offered them upon their resignations from the company and, in early 2003, both demanded arbitration of the disputes. The settlements announced today are the culmination of those proceedings.
As a footnote, the sad case of Jamie Olis involved a deal at Dynegy.

The $100 Terrorist Insurance Plan

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Steven Lansburg is an economist who writes a monthly column for Slate. In his most recent column, Professor Lansburg addresses the controversy over racial profiling of airline passengers and Annie Jacobsen’s recent article in WomensWallStreet about her harrowing experience on a Northwest flight from Detroit to Los Angeles in June.
Jacobsen’s fellow passengers included 14 Syrians, most of whom boarded separately. Once the plane was in the air, Ms. Jacobson contends that the men began gesturing to each other and congregating in large groups near the lavatories. Once there, the men took turns entering the lavatories, sometimes with packages. At one point, seven of the 14 men stood up in unison and all made for the lavatory simultaneously.
Ms. Jacobsen asserts that she, other passengers, and the flight attendants were alarmed by the bizarre behavior of this group. In fact, the men turned out to be a group of Syrian musicians en route to an engagement in San Diego. Nevertheless, U.S. government agencies have issued recent warnings about teams of terrorists conducting dry runs to determine whether they could build bombs in flight from components that they carry on separately.
Accordingly, Ms. Jacobsen asks the very reasonable question: “Since the [the Transportation Security Administration] issued a warning to the airline industry to be wary of groups of five men on a plane who might be trying to build bombs in the bathroom, shouldn’t a group of 14 Middle Eastern men be screened before boarding a flight?”
Professor Landsburg first takes stock of the typical responses:

The government frowns on ethnic profiling for airline passengers, but Jacobsen and the 12 bazillion bloggers who have linked to her story think the feds and the airlines should throw political correctness to the winds and adopt a policy of full-fledged ethnic profiling. Meanwhile, roughly another 12 bazillion bloggers have warned that profiling Arab men will seriously undermine civil liberties.

So, how would an economist resolve the problem? Professor Landsburg answers:

First, detaining 14 Middle Eastern men is neither more nor less an infringement of civil liberties than detaining 14 passengers chosen at random. Either way, 14 people have their liberty infringed.
Is it worth detaining 14 people (or an entire planeload of people) on every flight to see what’s in their McDonald’s bags or to question them closely about their reasons for traveling? I honestly don’t know. But this I’m sure of: If you’re going to detain 14 people, they should at least be the 14 people who are statistically most likely to be worth detaining.
Second, just because you detain particular people, it doesn’t follow that you’ve got to treat them unfairly. Being detained and questioned is a burden; it’s inconvenient and it’s demeaning. But there’s no reason that burden has to be borne entirely by the detainees. To spread the burden, all the airlines have to do is give each detainee a $100 bill for his trouble. If Northwest had had a policy like that on Annie Jacobsen’s flight, it would have paid out $1,400 to the 14 Syrians. Assuming there were another 200 passengers on that board, they could have covered that cost with a $7 hike in ticket prices.

Professor Landsburg then argues persuasively that the economics of such a policy are quite realistic:

I am guessing that Annie Jacobsen would have been thrilled to pay a $7 surcharge for the comfort of knowing that her Syrian co-passengers had been thoroughly vetted before takeoff. The Syrian musicians, in turn, would have picked up a hundred bucks apiece in exchange for, oh, 15 minutes or so of answering questions. How many musicians do you know who would turn down a gig at that hourly rate?

Professor Landsburg points out that his proposed system is similar to the one used in compensating passengers that are bumped from overbooked flights. However, it has zilch chance of ever being proposed politically, much less tried.
Hat tip to Professor Sauer over at the Sports Economist for the link to this article.

Criminalizing business

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Gil Weinrich has a piece at TCS Central that proposes a different approach to punishment of corporate wrongdoers:

Our society does a poor job of penalizing [corporate] crime. . . In the white-collar arena, the unrequited losses endured by victims of financial crime similarly underscore the fecklessness of the system.
Besides the injustice to victims there is an inherent lack of mercy to criminals who are not given an opportunity to make amends. For the sake of the victims of Enron and other white-collar crimes, we need to shift away from a system based on punishment to one based on restitution.

So, what does Weinrich propose?: A financial debtor’s prison:

When Andrew Fastow pleaded guilty early this year, he agreed to surrender $23.8 million in cash and property, including vacation homes in Vermont and Galveston, Texas. That’s a start. He and those who shared in his crime should be apportioned the part of the losses for which a court deems them responsible, including an extra 10 percent to compensate for the unearned return on the victims’ money, and an additional fine to compensate the government if the perpetrator did not cooperate in the investigation of the crime.
The perpetrators should then spend as long as it takes, up to the rest of their lives if necessary, to repay that debt. Andrew Fastow may be a criminal but he is also a financially savvy corporate executive. Surely his vast talents can be put to some good use for some company somewhere. A court could give him an allowance (based on a percentage of his income so that he would always have an incentive to increase his earnings), with the lion’s share (say, 90 percent) devoted to a restitution fund.

Weinrich then proposes a rather elaborate system of ceremonies involving victims and the perpetrators in which they would either discuss the crimes or welcome the perpetrator back from the financial debtor’s prison once the debt is paid off.
I’m an advocate against the criminalization of business in America that has culminated in absurdly long prison sentences such as the one involved in the sad case of Jamie Olis. However, Weinrich’s proposal strikes me as silly. The civil justice system already provides a financial disincentive for corporate wrongdoing. Moreover, the fact that politicians have arranged for absurdly long prison sentences in business cases to appeal to the public passion to punish wealthy people excessively does not mean that there should be no penal system disincentive whatsoever for engaging in corporate crime. One imagines Bialystock & Bloom in “The Producers” blithely continuing to create Ponzi schemes in perpetuity under Weinrich’s proposed system (and so long as Zero Mostel could continue to play Bialystock, that might not be such a bad thing).
Professor Bainbridge agrees with me.

Houston Crime Lab scandal hits the NY Times

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You know that a local scandal has hit the big-time when the New York Times finally notices it.
This NY Times article reports on the embarrassing scandal involving Houston’s Crime Laboratory, which was already relling from the requirement that it retest evidence that it provided in 360 cases, now faces a much larger crisis that could involve many thousands of cases over 25 years. In a report to be filed in a Houston state court on Thursday, six independent forensic scientists said that a crime laboratory officials — because they either lacked basic knowledge of blood typing or gave false testimony — may have offered “false and scientifically unsound” reports and testimony in thousands of criminal cases. The panel called for a comprehensive audit spanning decades to re-examine the results of a broad array of rudimentary tests on blood, semen and other bodily fluids.
Elizabeth A. Johnson, a former director of the DNA laboratory at the Harris County medical examiner’s office in Houston, estimated for the Times article that a conservative number of re-examinations required by the report would probably be 5,000 to 10,000 cases, but if cases involving examination of hair are added, the number of required re-examinations would be “off the board.”
A state audit of the crime laboratory dated December 2002 found that DNA technicians there misinterpreted data, were poorly trained, and kept shoddy records. In many cases, the technicians used up all available evidence, making it impossible for defense experts to refute or verify their results. Even the laboratory’s building was a mess, with a leaky roof contaminating evidence. The DNA unit was shut down soon afterward, and it remains closed.
What a mess. Stay tuned for more.

George Mitchell funds A&M and UT telescope project

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On the heels of this earlier contribution to the University of Texas Medical School, Houston businessman and philanthropist George Mitchell has made a $1.25 million gift to provide initial funding for a massive project involving both UT and Texas A&M University that has a goal of building the world’s largest telescope on the Andes Mountains in Chile by 2015. If successful, the $400 million Giant Magellan Telescope is expected to collect 70 times more light than NASA’s Hubble Space Telescope and could produce images that are 10 times sharper.
The telescope’s six large mirrors will surround a seventh central mirror, all on a single mounting, and its light-collecting area would be twice the diameter of today’s largest telescopes. The world’s two largest optical telescopes ? each 33 feet in diameter ? operate at the W.M. Keck Observatory on the summit of Hawaii’s dormant Mauna Kea volcano.
Mr. Mitchell donated the money to Texas A&M University, which is his alma mater, and The University of Texas at Austin — which runs the McDonald Observatory in the Davis Mountains of far West Texas, which is the third largest telescope in the world — will match Mr. Mitchell’s contribution over the next two years. Other partners in the project are the Carnegie Institution of Washington, Harvard University, the Smithsonian Astrophysical Observatory, the Massachusetts Institute of Technology, the University of Arizona and the University of Michigan.

Randall’s founder dies

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Everyone who has lived in Houston over the past 40 years has shopped at a Randall’s grocery store. Robert Onstead, the co-founder of that grocery store chain, died Wednesday morning while on a trip to Italy.
After Mr. Onstead and his original partners started Randall’s in the early 1960’s, the chain grew steadily through the next three decades and became the premier grocery store chain in the Houston area during the 1980’s (remember those great Randall’s “Flagship” stores?). But then, in the early 1990’s, Randall’s hometown character began to change when it acquired the Dallas-based Tom Thumb grocery store chain and a dozen AppleTree grocery stores in Austin. While that expansion made Randalls one of the largest Texas grocery companies, it also foreshadowed a change in the way Randall’s did business.
By the time Mr. Onstead sold his the Randall’s chain of 117 stores to Safeway for almost $1.5 billion in 1999, Randall’s was beginning to reel under the competitive pressures being exerted by other grocery retailers in Randall’s key markets. Now, Randall’s is becoming an afterthought in the Houston grocery wars as Wal-Mart, Kroger and increasingly H.E.B. take over turf that Randall’s previously dominated.
But Randall’s had a great run, and it was largely due to Mr. Onstead’s vision and leadership. Houston’s business community will miss him.

Braves cruise over Stros

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The Braves’ John Thomson dominated the Stros’ hitters in leading the Braves to a 5-4 victory Wednesday night at the Juice Box.
Thomson threw just 79 pitches in seven innings and gave up two runs on only four singles. Meanwhile, the Stros’ Pete Munro got raked for eight hits and four runs in four and a third innings by a Braves team that is not exactly a hitting juggernaut, either.
Actually, this was one of those games that was not as close as the final score indicates. The Braves were leading comfortably 5-2 with two outs and a runner on in the bottom of the ninth with Smoltz closing when Bags whacked a completely unexpected two run tater to make the score 5-4. Poor Ensberg had to follow Bags to the plate and face a very irritated Smoltz, who proceeded to strike Ensberg out on three quite fast pitches. Game, set, match.
It’s a duel of lefties in the rubber game on Thursday night as Darren Oliver goes for the Stros against ex-Stro Mike Hampton. The Virginia Expos come to town on Friday for the weekend series.

Clemens’ side of the story

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Following on this earlier post about allegedly being thrown out of a youth league game involving one of his sons, Roger Clemens gives his side of the story in this Chronicle article:

Clemens said he didn’t even witness the call in question, one in which Kacy Clemens, who plays for the 10-and-under Katy Cowboys, was called out attempting to steal second base despite an admission from a Bakersfield, Calif., player who said he failed to make the tag.
Clemens said he was standing behind a fence, well away from the action, where he videotaped his son’s base hit and then resumed signing autographs, something he had been doing for most of the afternoon and for the balance of the weekend.
He retreated to his car, per his routine, for a respite from the autograph-seekers.
“They did not ask me to leave,” Clemens said, which conflicts with the account of field supervisor Jim Carpenter, who told the AP he supported the decision to eject Clemens. “I did not even know I was supposedly thrown out. I didn’t see the play my son happened to be involved in. I videoed (taped) his at-bat and when he got a hit and got on first, I put the video camera up and started dealing with the public like I always do.”
Clemens said he was upset no one contacted him or his agent Randy Hendricks to get his version of what happened. Instead, he said, the national media ran with an unsubstantiated story.
Some local media outlets picked up the story, and Clemens said what angered him was the same group of reporters who heralded his return home after he came out of retirement and signed with the Astros on Jan. 12 were quick, in his opinion, to assume the story was correct as reported.
“I’m disappointed in a lot of media because I was only a phone call away, and my agent said anybody could have called up on the story,” Clemens said. “It was reckless the guy that ran the story because I was at the ballpark for at least an hour (after the game ended) signing autographs, and if he had any questions he could have come over and asked me.
“It was reckless by some of the national media that I was able to see comments like I was toe to toe, nose to nose arguing (with the umpire).
“And it’s the same thing here that went on in my hometown. I’m really disappointed because once you guys set these cameras and those pens down, I would think that you would know me a little better than that.”

Annual securities litigation survey

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PricewaterhouseCoopers publishes an annual survey of securities litigation, and it has just released its 2003 Securities Litigation Study. As usual, the review contains a number of interesting findings, including the following:

107 of the 175 securities class action filed in 2003 were accounting-related. In more than half of those cases, the primary allegation related to revenue recognition issues;
The percentage of cases with pension funds as lead plaintiffs has grown steadily from less than 3% in 1996 to over 28% of the cases in 2003;
Average settlements for all cases was up 20% from 2002, and there were more large settlements, including six greater than than $100 million;
After 2002 saw over 40 “triple jeopardy” cases in which companies were subject to securities class actions along with parallel SEC and Justice Department investigations, the number of those cases dropped to eight in 2003, which is above average.

Hat tip to Lyle Roberts over at the 10B-5 Daily for the link to the PwC report.