Monthly Archives: December 2004

Tales of woe from Texas’ third largest city

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We all know that the Cowboys are having horrible season. But it’s really a bad turn of events when the NY Times runs an article about all of the problems that Dallas is having, not the least of which is that San Antonio has overtaken it to become Texas’ second largest city behind Houston:

The losing Cowboys are fixing to defect again, the police chief and city manager were shown the door, a 350-pound gorilla made his own grand exit, and the hometown daily, former employer of the ex-reporter now ensconced in City Hall, is pinning Pulitzer Prize hopes on a pitiless exposÈ of everything gone wrong.
It has been that kind of year for Big D, Texas’s second biggest – oops, third biggest – city; San Antonio gained a 6,000-person edge to slip in with just over 1.2 million, behind Dallas’s longtime archrival, Houston.

The city was humbled in other ways as well, watching sourly as conventioneers thronged Houston’s budding entertainment district while Dallas struggled to begin a master plan study and select a flagship hotel for its own convention hopes, which it did at its final City Council meeting of the year on Wednesday, giving a provisional go-ahead to a developer for a 1,000-room Marriott. (In fairness, the Dallas Convention and Visitors Bureau may have been distracted, some of its executives having been found earlier wooing clients at topless bars.)
Based largely on a wave of property crimes, Dallas once again leads the F.B.I.’s list of high-crime big cities this year. Efforts to cope with a growing homeless population by making it illegal to take a shopping cart off the property of the store it belongs to did not solve the problem, but instead produced bizarre fleets of cannibalized baby strollers and shopping carts. The dramatically slanted City Hall that attracted architectural plaudits when it was completed in 1978 has become a magnet for derelicts.
Dallas officials also spent part of the year trying to figure out how a handful of police narcotics informants were able to plant some 330 kilograms of gypsum and other harmless substances on 30 innocents, mostly Spanish-speaking immigrants, to frame them on drug charges in 2001.

Not to mention that the 6-8 Texans are on course to finish with a better record this season than that 5-9 Cowboys.

The corporate case of the decade

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This NY Times article mostly misses the point about the key issues arising from the ongoing civil trial over the Walt Disney Co. board’s decision to pay Michael Ovitz a rather generous severance package for essentially doing nothing during his short stay at Disney. The Times piece focuses on personalities and the changing nature of the executives who are running big media and entertainment companies, and observes that the days of the autocratic executive treating the corporation as a personal fiefdom are probably over.
However, as noted in this earlier post, the blogosphere has done a much better job of analyzing the larger issues arising from the trial, not the least of which is that any malfeasance of the Disney board in approving the Ovitz severance package pales in comparison to its failure to require Disney CEO Micheal Eisner to adapt Disney’s corporate strategy to maximize value for Disney’s shareholders.
Both Professor Ribstein and Professor Bainbridge have been particularly insightful in discussing the issues arising in the Disney trial. For example, in noting that the case should ultimately turn on the duty of care that the Disney board used in making its decision to ratify the Ovitz severance package, Professor Ribstein observed in this recent post:

The Disney case is also interesting in illustrating the cross-currents of recent corporate history. It was first decided for the board in the pre-Enron era, then allowed to go forward in the post-Enron era, and now may be decided in the post-post-Enron era in which many are having second-thoughts about whether regulation and distrust of business people have gone too far.

And Professor Bainbridge notes in a recent post here:

The facts suggest that Eisner hired his buddy Ovitz, fell out with Ovitz and wanted him gone, cut very lucrative deals for his friend Ovitz both on the way in and on the way out, all the while railroading the deals past a complacent and compliant board. The story that emerges is one of cronyism and backroom deals in which preservation of face was put ahead of the corporation’s best interests. As such, the case does not necessarily presage the emergence of what Allen called “‘”objective’ evaluation of the decision” made by a board. Instead, this looks like another case in which “we have reason to disbelieve the protestations of good faith by directors who reach ‘irrational’ conclusions?” Michael P. Dooley, Fundamentals of Corporation Law 263 (1995). Once again, a seeming inquiry into the rationality of the decision arguably masks an underlying search for conflicted interests and self-dealing.

Finally, Professor Bainbridge provides the bottom line on the case in this post:

If the shareholders win, boards could be held liable “not just for big decisions like mergers but also compensation and other run-of-the-mill decisions.”

Thus, in a business climate in which many companies are having increasing difficulty finding qualified independent board members, the outcome of the Disney trial may provide yet another reason for competent businesspersons to avoid such engagements altogether.

2004 Weekly local football review

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Texans 24 Bears 5

In a game played in -10 wind chill conditions, the Texans’ defense beat up on an utterly incompetent Bears offense as the Texans beat the Bears at Soldier Field in Chicago. The sixth win is the most that the Texans have won in a season during their first three in the NFL.
The tale of this game was turnovers, as the Bears lost four and the Texans none. Neither team could do much offensively under the difficult conditions, but the Bears were particularly atrocious, managing barely 200 yards total offense. The Texans’ David Carr played reasonably well under the circumstances (13-28/208 yds/1 TD) and, most importantly, had no turnovers. Notably, Carr did a good job of throwing passes to wide receivers Jabbar Gaffney and Corey Bradford, which is the only way that the Texans are going to be able to force teams to loosen the now routine double coverage on the Texans’ star receiver, Andre Johnson.
The entire Texans’ defense was impressive, although this Bears offense is truly one of the worst of the past decade in the NFL. Particularly impressive for the Texans is rookie cornerback Dunta Robinson, who was one of the Texans’ first round draft picks in the 2004 draft. This young player plays like a seasoned veteran 14 games into his professional career and, barring injury, looks as if he will hold down one of the Texans’ cornerback positions for the next decade.
The Texans play the Jaguars at Jacksonville on the Sunday after Christmas Day and then play Cleveland at Reliant Stadium to finish up the season. Despite rather substantial problems in both the offensive and defensive lines, and a still unproven quarterback, it is a credit to the Texans’ coaching staff that they have this club in a position to break even on the season.

Eagles 12 Cowboys 7

In perhaps the best reflection of the state of the Cowboys franchise, the Pokes were able to take solace in the fact that they were at least able to keep it close against the Eagles this time, as opposed to the 49-21 Monday Night Football disaster of earlier this season.
What is truly amazing is that the Cowboys were in a position to win this game at all after mustering barely 300 yards total offense and coughing up three turnovers. But the Eagles scored with less than two minutes remaining to seal the win and place the Cowboys in distinct peril of finishing the season with a worse record than the third year Texans. The Pokes wind up the season with the Redskins at home next Sunday and then the Giants the following week at the Meadowlands before beginning what is sure to be an eventful offseason as this once proud franchise faces a formidable rebuilding project.

Russian SPE wins Yukos auction

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A special-purpose vehicle representing unknown Russian interests agreed to pay $9.34 billion for a controlling interest in Yuganskneftegaz (“Yugansk”), which formerly was Russian oil giant OAO Yukos‘ largest production asset. The interest purchased includes all of Yugansk’s voting shares.
Here are the earlier posts on the Yukos chapter 11 case and the related TRO.
OOO Baikal Finance Group made the winning bid at an auction that the Russian Federal Property Fund carried out despite a temporary restraining order that a U.S. Bankruptcy Court in Houston approved in Yukos’ chapter 11 case on Thursday. The TRO enjoined several Western financial institutions from participating in the financing of a bid in such auction.
The winning bid was far below what Yukos contends that its interest in Yugansk was worth. Yugansk constituted 60% of Yukos’s producing output at the time of the auction.
Nothing is known about Baikal, which registered for the auction on Friday after entry of the TRO. The initial speculation is that it is a Russian government controlled entity that relies on domestic Russian financing for its bid.

Updating the Yukos case — Gazprom appeals TRO

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Gazprom, the Russian state-controlled natural gas giant, has appealed and requested a stay of a U.S. Bankruptcy Court’s temporary restraining order that enjoins Western financial institutions from financing Sunday’s scheduled government auction of Yukos‘ main production subsidiary Yuganskneftegaz (“Yugansk”)in Moscow. An extraordinary Saturday afternoon hearing on Gazprom’s motion for stay was scheduled before U.S. District Judge Nancy Atlas in Houston in civil case no. 04-04756. Here are the earlier posts on the fast-breaking Yukos case.
Gazprom, which is the expected to be the winner of Sunday’s auction, may not be able to finance its winning bid after a consortium of Western banks — including Deutsche Bank, ABN Amro, BNP Paribas, and Dresdner Kleinwort Wasserstein — froze a credit line of about $13 billion it had agreed to loan Gazprom for its bid. With huge banking interests in the United States, each of the banks could face legal action if they violated the TRO and went ahead and financed Gazprom’s bid.
Stay turned for late breaking developments in this fast moving case.
Update: Judge Atlas denied Gazprom’s motion for a stay of the TRO.
Meanwhile, the largest shareholder in Yukos is planning a $100 billion lawsuit against various entities involved in the Russian auction of Yukos.

Clifford Chance settles with Brobeck trustee

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London-based Clifford Chance agreed Friday to pay $5.5 million in a global settlement with the trustee of former tech law firm Brobeck, Phleger & Harrison’s bankruptcy estate and retired partners and longtime employees of Brobeck. Houston’s Lanier Law Firm, who represent the plaintiffs in the lawsuit, and Brobeck’s liquidation committee also signed off on the settlement. Here is an earlier post on the rather interesting bidding for Brobeck’s claims against Clifford Chance.
The settlement was finalized as the parties negotiated for three hours in two jury deliberation rooms next to U.S. Bankruptcy Judge Dennis Montali‘s courtroom Friday morning. The settlement mooted the necessity for an auction of Brobeck’s claims against Clifford Chance, which Judge Montali had previously ordered. The KM Group, a coalition of asbestos plaintiff lawyers, had planned to bid against Clifford Chance.
The settlement resolves the lawsuit that retired Brobeck partners and employees had filed against Clifford Chance and former Brobeck Chairman Tower Snow Jr. that sought at least $100 million in damages. The lawsuit basically claimed that Clifford Chance’s and Mr. Snow’s agreement that Mr. Snow and and 16 other Brobeck partners would bolt to Clifford Chance in 2002 triggered Brobeck’s 2003 collapse into bankruptcy.
The agreement also resolves a dispute between the plaintiffs in that lawsuit and the Brobeck trustee over the ownership of the claims against Clifford Chance. The Brobeck trustee had asserted in court pleadings that the claims primarily related to profits Clifford Chance received from unfinished business Brobeck partners had taken with them to the firm and, thus, the claims were property of Brobeck’s estate.
The settlement resolves negotiations that have been ongoing for the past six months. Clifford Chance had agreed to pay $3.75 million to Brobeck’s estate to settle the trustee’s potential claims in July. However, the KM Group emerged and offered the trustee $4 million for the estate’s claims againt Clifford Chance. The trustee then renegotiated the deal with Clifford Chance, which upped the settlement amount to $4.5 million. The KM Group’s desire to increase its offer over that settlement amount had prompted the Bankruptcy Judge to schedule the auction of the Brobeck estate’s claims.

Jenkens & Gilchrist ups settlement offer

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The cost of Dallas-based law firm Jenkens & Gilchrest‘s legal problems resulting from its involvement in advising clients on tax shelters rose considerably yesterday. The the Dallas Morning News is reporting that the firm has increased its offer to a class of former clients to $85 million to settle a lawsuit over the firm’s involvement in the matter. Here are earlier posts on the firm’s involvement in the investigations and lawsuits that have arisen over the firm’s tax shelter advice.

No holiday cards being exchanged between the Universities of Houston and Nebraska

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Twenty-five years ago, the University of Houston football team was preparing to play the University of Nebraska in the Cotton Bowl game on New Year’s Day. Houston won that entertaining game 17-14 on a last minute touchdown pass.
Thus, UH Athletic Director Dave Maggard‘s idea of scheduling a game between Houston and Nebraska at Houston’s Reliant Stadium to open the 2005 football season seemed like a good one. That is, until Nebraska pulled out of the game yesterday in order to schedule a home opener against that traditional college football powerhouse, Maine. Mr. Maggard is not pleased, as the Chronicle reports:

“This is the most unprofessional thing I’ve dealt with in my 30 years in this business. I’m very, very surprised by all this. This is something that doesn’t belong in Division I athletics. I’m very, very angry about this.”
“This is absolutely unprofessional in every way.” It’s gutless. Spineless. They’re going to have to live with it. I’ve lost a tremendous amount of respect for that program. I think that for college athletics, it’s shameful.”
“We’re going to figure out a solution, but they are developing a reputation for hanging people out to dry. I think it’s a sad commentary on the people running that athletic program.”

On the heels of this earlier incident involving a Nebraska football player, this latest development makes one wonder just how low the University of Nebraska football program must fall before it bottoms out?

Fifth Circuit upholds vague Commodity Exchange Act reporting law

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The Fifth Circuit Court of Appeals in New Orleans issued this decision on Friday in the case of former Dynegy trader Michelle Valencia that upholds a controversial law that the Justice Department has used to charge a group of Houston natural gas traders with reporting false information in an alleged scheme to manipulate prices. Here is an earlier post on this particular prosecution.
The Fifth Circuit decision overturns a previous ruling of U.S. District Judge Nancy Atlas of Houston that the law was vague and that someone could be charged in the trader cases with delivering “false and misleading” information even if the person did not know that the data was incorrect.
In January 2003, Ms. Valencia was charged with three counts of false reporting under the Commodity Exchange Act and four counts of wire fraud. The indictment alleges that Valencia fabricated natural gas trades for submission to the publication Inside FERC’s Gas Market Report from November 2000 to February 2001. She pleaded not guilty to the charges.
This past August, a group of former natural gas traders received letters from the U.S. Attorney’s Office in Houston advising them that are targets of a criminal investigation. Then, a couple of months later, four former El Paso traders pleaded guilty to false reporting charges in connection with the probe. Finally, in late November, three more former El Paso workers and a former Reliant trader were charged with false reporting, and Ms. Valencia was also charged with conspiracy and wire fraud charges.
All of these indictments follow a lengthy investigation into alleged efforts to manipulate the trading indexes, which are used to value billions of dollars in gas contracts and derivatives. Industry publications such as the Inside FERC Gas Market Report use data from traders to calculate the index price of natural gas. Accordingly, movement in index prices often affects the level of profits traders can generate. In these particular cases, it remains unclear whether the publication actually used the false information provided. Nevertheless, the government contends that it needs only to prove that fake trades were reported and not that they were actually published or affected the markets.
These cases — along with the recent Enron-related Nigerian Barge criminal case — are at the forefront of the controversial but increasingly common tactic of federal prosecutors and state prosecutors such as Eliot Spitzer criminalizing merely questionable business practices to regulate politically unpopular business interests. As noted in this earlier post, this tactic is resulting in absurdly unjust results, such as Martin Frankel’s 25% shorter sentence than that of Jamie Olis.
Moreover, the inflexibility of the federal sentencing guidelines combined with the public animus toward business that the government’s press releases often provoke, defendants in these cases are often faced with the untenable choice of copping a plea for a short prison term or defending themselves under politically-charged circumstances against a possible prison term that would amount to a life sentence.
With the Yukos bankruptcy filing in Houston this past week, much has been made in news reports regarding the Russian government’s politically-motivated and unjust criminal prosecution of former Yukos CEO Mikhail B. Khodorkovsky. What is not as widely reported is that the current United States Justice Department policy of pursuing questionable criminal prosecutions of politically unpopular businesspersons is not much different.

Baker Hughes gets caught in Oil for Food scandal net

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Houston-based oil services giant Baker Hughes Inc. announced Thursday that it has received a federal grand jury subpoena and a request from the Securities and Exchange Commission to provide information regarding its participation in the United Nations’ oil-for-food program. Here is an earlier post regarding the investigation of other companies and individuals with Houston ties regarding their their involvement in the controversial program.
Among the other companies that have acknowledged receiving subpoenas from the SEC and the grand jury are conglomerate Tyco International Ltd., pharmaceuticals maker Wyeth and Houston-based El Paso Corp. The SEC’s probe is parallel to the other investigations, which include an independent U.N. inquiry being headed by former Federal Reserve Chairman Paul Volcker, the federal grand jury in Manhattan and several congressional committees.
The SEC’s investigative focus is the same as the other investigations — whether any of the companies improperly conducted business with Iraq’s oil-for-food program that Saddam Hussein operated in a typically corrupt manner. Specifically, the investigations are examining whether companies that issue stock or securities in the U.S. paid illegal kickbacks or bribes to politicians or businessmen to get Iraqi business or dealt with companies that may have committed such violations.