Enron trader cops plea

John Forney, former manager of Enron Corp.’s online trading desk, pleaded guilty today to charges in California that he manipulated energy markets during California’s power crisis.
Mr. Forney, who is 42, is the third Enron executive to plead guilty to manipulating electricity prices from Enron’s now-defunct trading office in Portland, Ore. Former Enron executives Timothy N. Belden and Jeffrey S. Richter pled guilty last year and have been cooperating with the Justice Department in its continuing investigation into Enron.
As a part of the plea bargain, Mr. Forney is expected to cooperate with the ongoing investigation into Enron’s trading desk and how other energy firms may have played a role in manipulating energy markets. Four employees of Reliant Corp. have already been charged with deliberately shutting down power plants to increase the price of California electricity.
Over two and a half years after Enron collapsed into bankruptcy, the first criminal trial involving former Enron executives is currently scheduled to begin in Houston on August 16 before U.S. District Judge Ewing Werlein in the case known as “The Nigerian Barge case.”

Enron goes nuclear on the PBGC

Enron Corp. has forcefully asked the New York Bankruptcy Court overseeing its chapter 11 case to enjoin the Pension Benefit Guaranty Corp.’s lawsuit in Houston to take over four of Enron’s retirement plans.
In pleadings filed Wednesday, Enron accused the PBGC of, among other things, forum shopping, attempting to frustrate its reorganization plan, and usurping the Bankruptcy Court’s authority to consider claims against the company. Not bad for starters.
In short, Enron accused the PBGC of trying to obtain in the Houston U.S. District Court what it could accomplish in the New York Bankruptcy Court during the confirmation hearing on Enron’s plan. The Bankruptcy Court previously denied the PBGC’s objection to Enron’s plan, which the Bankruptcy Court confirmed on July 15.
The PBGC — which provides a measure of subsidy for defunct private-sector pensions — is trying to proceed with a lawsuit that it filed June 3 in U.S. District Court in Houston to terminate Enron’s four woefully underfunded pension plans.
By pursuing the termination action in Houston federal court, Enron asserts that the PBGC is trying to avoid Enron’s plan treatment for its unliquidated and contested claims and elevate those claims over those of similarly situated creditors. The PBGC has asserted claims against Enron totaling over $300 million for the Enron-related pension plans — the Enron Corp. Cash Balance Plan, Garden State Paper Pension Plan, Enron Financial Services Pension Plan, and San Juan Gas Co. Pension Plan. Those four plans have approximately 17,000 participants.
As long as the agency’s claims remain unresolved, Enron is required to reserve under its reorganization plan for the full amount of the PBGC’s claims. If the PBGC claims are disallowed or reduced, then the amount Enron will have to pay to terminate the four pension plans will likely be substantially less than the amount that the the PBGC seeks in its termination action. Enron contends that the Bankruptcy Court must determine the amount of the PBGC claims before the termination action can proceed and, thus, asserts that the Bankruptcy Court should enjoin the PBGC from proceeding with the termination action in Houston federal court.

Chuck Watson settles with Dynegy

Dynegy founder and former chief executive officer Chuck Watson and his chief operating officer — Steve Bergstromwill 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

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

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

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

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.