Monthly Archives: January 2005

The sad case of Jamie Olis gets even sadder

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This Dallas Morning News article reports that the sad case of Jamie Olis, the mid-level Dynegy executive who was sentenced to a 24 year prison sentence last year for attempting to prove his innocence on accounting fraud charges, has taken what can only be described as a punitive turn for the worse:

First he received 24 years in prison for accounting irregularities that got his plea-bargaining boss a five-year sentence. Now Jamie Olis has been moved to a tougher prison, and his wife has e-mailed friends asking for prayers.
Mr. Olis, 39, a former midlevel accounting executive at Dynegy Inc., has been transferred from a minimum-security lockup at Bastrop, Texas, to a medium-security prison at Oakdale, La., according to U.S. Bureau of Prisons records.
“He is in a place where prison gangs are a necessary part of day-to-day existence and in a population that includes people who are serving multiple life sentences,” Monica Olis wrote in an e-mail to friends.
She has declined to comment to the news media.

Meanwhile, oral argument on Mr. Olis’ appeal of his sentence occurred today at the Fifth Circuit Court of Appeals in New Orleans. David Gerger of Houston is representing Mr. Olis in the appeal. Here is the Chronicle story on the oral argument.
According to the Chronicle story, a substantial part of the oral argument was taken up with questions from the panel to the prosecution regarding the evidence of the financial loss that the accounting scam allegedly caused. That is a key issue because U.S. District Judge Sim Lake relied on an absurdly high financial loss figure in calculating Mr. Olis’ sentence. As noted in this earlier post, even the government expert on financial loss upon whom Judge Lake primarily relied acknowledged that he did not testify that Project Alpha caused the amount of monetary loss that Judge Lake used in sentencing Mr. Olis
Although Mr. Olis is the poster boy of how the federal sentencing guidelines had run amok and needed to be overturned, the darker story is that the case is an egregious example of failed prosecutorial discretion. The conduct of the Justice Department in this case is shameful and the failure of the current Justice Department leaders to do anything about this miscarriage of justice reflects poorly on the Bush Administration. Here’s hoping that the Fifth Circuit uses this opportunity to right a clear wrong.

Pam Prestridge, RIP

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Pamela Adair Prestridge, a well-known Houston attorney and mediator, died suddenly this past Saturday in Houston.
Pam grew up and was educated in Louisiana, but she came to Houston early in her legal career during the early 1980’s where she originally practiced at the old line downtown firm, Hirsch & Westheimer. Over the past decade or so, Pam had been in private practice as a mediator and recently served as a coordinator of Continuing Legal Education for the University of Houston School of Law. Pam was a regular in the Houston Bar Association’s hilarious spoof of the legal profession, “Night Court,” which is annual production and one of the Houston Bar Association’s primary fund raisers.
Pam was a bright light in the Houston legal community and will be sorely missed. Funeral services will be held at 2:00 p.m. Tuesday, February 1, 2005 at Earthman Bellaire Chapel, 6700 Ferris.

Monkey see, monkey do

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This is very interesting. And funny. Hat tip to Instapundit via Slashdot.

Rumbo

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This NY Times article examines one of the most closely watched experiments in the publishing industry.
Rumbo (pronounced “ROOM-boh”) has started four Spanish-language daily newspapers in Texas in the past year, starting in San Antonio before going to Houston, Austin and the Rio Grande Valley. Here is an earlier Houston Press story on Rumbo de Houston’s entry into the local newspaper market.
According to most demographers, Hispanics will become a majority in Texas by 2030 or so and are already the largest ethnic group in several of the state’s largest cities. Edward Schumacher Matos is a former Wall Street Journal editor who founded Rumbo last year with Jonathan Friedland, The Journal’s former Los Angeles bureau chief. Their business plan is to have Rumbo profitable by late 2007 or early 2008. Their bet is that the state’s growing Hispanic population is ready to support a sophisticated daily newspaper in Spanish that mixes coverage of local news and sports with commentary and dispatches from Latin America.
The Hispanic market already supports fast-growing Spanish-language television and radio industries, but Rumbo’s Texas venture is clearly the biggest gamble yet that has been placed on the Hispanic demand for daily news in Spanish. Rumbo’s combined circulation remains small (just under 100,000 a day), but the venture has already generated a market reaction in each of the markets Rumbo entered in recent months. The English language newspaper in each of those markets has reacted to Rumbo by creating or buying newspapers to compete with Rumbo’s tabloids.
As an aside, I am going to be on a panel with Carlos Puig, managing editor of RUMBO de Houston, on February 19 at the Houston Bar Association’s annual Law & the Media Seminar that will be discussing ways in which the media can maintain its independence in the face of legal and economic threats to it.

Disneywar

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First it was the battle to fight off the Comcast bid.
Then, it was the trial of the corporate case of the decade.
Now, it’s the book — Disneywar: The Battle for the Magic Kingdom (Simon & Schuster; 2005) by James B. Stewart, the former Pulitizer Prize winning Wall Street Journal reporter and the author of Den of Thieves, which chronicled the insider trading scandals of the 1980’s. According to this NY Times article, Mr. Stewart’s new book is not going to be particularly complimentary of Disney CEO, Michael D. Eisner.
Regardless of one’s opinion of Mr. Eisner’s performance in running Disney from a business standpoint, everyone must concede that he does have a knack for keeping the company in the news.
Alas, yet another epitaph that few CEO’s envision: “Kept company in the news.”

A diplomatic coup?

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Texan and U.S. Ambassador to Mexico Tony Garza is engaged to marry MarÌa Aramburuzabala, who is reportedly Mexico’s richest woman and who is dubbed “the Beer Queen.”

Big deals brewing

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Following on this post from last week, the boards of San Antonio-based SBC Communications Inc. and AT&T Corp. approved a mostly stock deal under which SBC will acquire AT&T for roughly $16 billion.
SBC’s board approved the transaction Sunday evening, while AT&T’s board approved it just before 1 a.m. Monday. The acquisition remains subject to approval by AT&T’s shareholders and regulatory authorities, and is expected to close by the first half of 2006.
The deal would create the nation’s largest telecommunications company. The merger will end AT&T’s 130-year remarkable run as an independent company, which began with the invention of the telephone.
Meanwhile, the Wall Street Journal ($)is reporting this morning that MetLife Inc. is close to striking a deal for Citigroup Inc.’s Travelers Life & Annuity Co. in a deal that would probably be valued at around $12 billion.
Consolidation within the life insurance industry has been predicted for some time, but the predicted consolidation has not taken place as quickly as many have predicted. If the MetLife-Travelers’ deal makes, that could trigger the predicted round of consolidation in the industry. The theory of the MetLife-Travelers’ deal is that insurance companies can generate better profit margins by serving larger numbers of customers with essentially the same back-office systems and only incrementally larger sales forces.
Both these deals signal that the markets are coming back to the type of big-scale merger deals that had largely disappeared from the business landscape over the past three years.

More clear thinking on reforming corporate governance

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Following on a thread that involved earlier posts here and here, Professor Ribstein expands in this post on his proposal for reforming corporate governance:

My solution to the problems of corporate governance is to put pressure on managers to distribute excess cash by increasing owner distribution and liquidation rights. Ironically, it is the corporate form’s elimination of these partnership-type rights that Margaret Blair argues made modern business possible. I dispute that proposition here. In that article I also argue that thick sophisticated markets have made the giant corporation no longer as important as it once was.
You might well ask, if this is such a good idea, why haven?t we seen more of it ? e.g., partnership type provisions in corporate charters that mandate distributions? Why not more publicly traded LLCs?
My explanation is that the corporate tax and the ?double? tax imposed on corporate distributions reduce owners’ incentives to insist on distributions even if requiring distributions would efficiently reduce managerial agency costs, and therefore be value-increasing in the absence of this tax. So I propose eliminating the bias favoring retained earnings inherent in the our current tax system. Firms would then be freer to move toward more efficient governance forms.

Professor Ribstein’s focus on the detrimental effects of the double taxation of corporate profits raises an interesting incongruity of the related political issue.
The anti-business crowd rails against removal of the double taxation of corporate profits as an unfair concession to the rich capitalist roaders. However, the retention of corporate profits contributes to corporate blunders (such as HP’s acquisition of Compaq) and Enron-type scandals, which the anti-business forces attempt to remedy through bigger government — that is, shareholder lawsuits in the civil justice system, criminalization of questionable corporate actions in the criminal justice system, and greater governmental control in the regulatory system (i.e., Sarbox).
Thus, the anti-business crowd’s opposition to removal of the double taxation on corporate profits has the unintended consequence of promoting bigger businesses and bigger business blunders that, in turn, require bigger government to control. I’m not sure where the anti-business forces want to go with all of this, but my sense is that “bigger in everything” is not the destination that they have in mind.
Also, check out Professor Bainbridge’s additional cogent thoughts in this post on corporate governance issues, and also Professor Ribstein’s follow up post. Likewise, Professor Bainbridge passes along this site where you can download the papers presented at a conference over the weekend that addressed these and other corporate governance issues. These are great resources.

Is it time for Drayton to sell the Stros?

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Drayton McLane has done a pretty darn good job of running the Stros. During his tenure, the club has been in the top tier of performance among Major League teams and a consistent playoff participant or contender. Under his tutelage, the club developed a fine minor league system that has produced a number of solid Major League players. Drayton also did a good job of coordinating the approval and construction of a downtown ballpark that has generated attendance records. Although Drayton has made his share of mistakes, he is unquestionably the best owner that the Stros have had in their 40 year existence.
However, as I noted in previous posts here and here, I have suspected for awhile that Drayton is preparing to sell the Stros. Given that Drayton is the best owner in Stros’ history, I have not heretofore considered rumors of him thinking about selling the club to be particularly good news. But based on developments over this past off-season, I am beginning to think that it may be time for Drayton to sell the club.
As noted in this earlier post, this off-season began with the resignation of Stros’ general manager Gerry Hunsicker. Although I was more measured than some others about Drayton’s failure to retain Hunsicker, it’s certainly not a feather in one’s cap that the best general manager in the club’s history decided to move on after the best decade in the club’s history.
Then came the ill-fated negotiations with free agent Carlos Beltran. With Hunsicker gone and new GM Tim Purpura just gaining his bearings, Drayton allowed Beltran agent Scott Boras to play him like a fiddle during the negotiations rather than making his best offer up front and then placing a relatively short deadline on Boras to consummate a rich deal or risk losing it. Consequently, when Drayton’s initial low-ball offers for Beltran quickly went by the wayside, negotiations dragged on, preventing the Stros from taking care of other business, such as signing cornerstone stars Lance Berkman and Roy Oswalt to long term deals. When Boras gave Drayton only a couple of hours to respond to the Mets’ final offer, Drayton was unprepared to play by Boras’ rules and Beltran was gone. As noted here and here, the Stros are probably better off without Beltran at the price they would have had to pay for him, but that does not excuse Drayton from mishandling the negotiations in a manner that was detrimental to the club overall.
The first fallout from the mishandling of the Beltran negotiations was felt this week as Berkman and the Stros agreed to a one-year deal to settle Berkman’s arbitration case. The failure to lock him up to a long term contract now places the Stros at risk of losing Berkman, who will be a free agent at the end of the upcoming season absent the signing of a new deal. Losing Berkman — who has been one of the best hitters in the Major League Baseball over the past four seasons — would be devastating to the Stros, who now will probably have to pay Berkman far more than they would have had to pay him had they not neglected to sign him to a long term deal earlier.
Just to give you an idea of the market for a player of Berkman’s caliber, take a look at J.D. Drew, who is a player of roughly Berkman’s age and experience, but who is not as durable as Berkman and is not quite as good a hitter as Berkman. Drew recently signed with the Dodgers for $11 million a year over five years. Given that, there is little reason for Berkman to settle for less than $60-$65 million over the same period because, if the Stros aren’t willing to pay it, the Rangers almost certainly will. Chronicle sports columnist Richard Justice speculates that the Stros could have locked Berkman up for $30 million over three years as late as last season.
Meanwhile, the Stros remain at impasse with their best pitcher (Oswalt), whose arbitration demand of $7.8 million appears to be a clear winner over the Stros’ $6 million offer. Absent the signing of a long term deal with the Stros, Oswalt can become a free agent at the end of the 2006 season.
So, after the best season in the club’s history, the Stros now find themselves in turbulent waters. The club’s best two players in history — Bidg and Bags — are closing in on retirement. The club lost out on its attempt to retain Beltran, who would have been one of the building blocks for the future. Meanwhile, the club’s best two young players — Berkman and Oswalt — are at risk of being lost in the near future to the free agent market. Although potentially formidable, the club’s pitching rotation for this upcoming season will nevertheless rely heavily on a 43 year old superstar (the Rocket), another veteran (Andy Pettitte) who is coming off of elbow surgery, and a converted outfielder (Brandon Backe) who has not yet proved that he can pitch effectively over the course of an entire season.
Thus, Drayton has his work cut out for him in steering the Stros through these turbulent waters. Given his handling of the Hunsicker, Beltran, Berkman and Oswalt situations, my sense is that he may be losing his enthusiasm for doing so. If that is the case, then here’s hoping that Drayton sells the club before it is too late for a new owner to solve these quickly accumulating, and increasingly serious, problems.

Now, how did that happen again?

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In what can only be described as the result of an embarrassing lack of oversight, a grand jury in Williamson County indicted six people yesterday for allegedly being involved in a strikingly simple scam of the state’s electricity grid operator, the Electric Reliability Council of Texas (“ERCOT”).
The five former top managers and one contractor at ERCOT billed the organization $2 million for work by shell security and computer-contracting companies that the individuals controlled, even though much of the work was not performed. The activities were first detailed last summer in a series of articles by The Dallas Morning News, which prompted questions around the state about whether anyone involved with ERCOT had ever heard of the concept of “financial controls.”
All of the indicted individuals joined ERCOT as it grew rapidly in response to the introduction of electric competition in Texas in 2002. ERCOT’s mission is to maintain the reliability of the Texas electricity grid and coordinate key pieces of the state’s $20 billion deregulated electricity market. The nonprofit organization’s $127 million annual budget is generated through mandatory fees paid by electricity customers or their power providers.
A state district judge appointed Texas Attorney General Greg Abbott in November, 2004 as special counsel in the case after the findings of an internal ERCOT investigation were disclosed to the Williamson County district attorney. At the same time, the judge impaneled the special grand jury in Williamson County, where ERCOT has its primary control center. ERCOT’s headquarters are in Austin.
In announcing the indictments yesterday, Mr. Abbott said that the case is “far from over” and that additional indictments may be coming down the pike. Indictments make for good publicity, but I’m more interested in the identities of the people in ERCOT management, on the ERCOT Board, and at the Texas Public Utility Commission (ERCOT’s regulator) who were asleep at the switch and missed such a simple scam. Funny how those names tend to get lost in the shuffle of indictments.