Monthly Archives: February 2005

Would you like to buy a note on a Houston downtown hotel?

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There is an old saying among investors and insolvency lawyers that a hotel is such a bad investment that no owner makes any money on it until at least three prior owners have gone bust.
Well, it appears that the City of Houston is about ready to experience the truth of that observation. Following on the news from last week that the downtown Hyatt Regency Hotel has been posted for a foreclosure sale, the Chronicle reports that two other hotels — The Magnolia downtown and the Crowne Plaza Hotel in the Medical Center — have defaulted on a total of $15 million in redevelopment loans that the City provided in connection with the recent rehabilitation of the hotels.
It occurs to me that if I were a downtown or Medical Center hotel owner, and the City of Houston had subsidized two competitors of mine with a tax on my business, I’d be rather angry right now.

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Feds start investigating Krispy Kreme

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A couple of weeks ago it was the sale of the corporate jet. This week it’s a federal criminal investigation as formerly high-flying retail doughnut franchisor Krispy Kreme Doughnuts, Inc. moved a step closer to what appears to be an inevitable chapter 11 reorganization.
Krispy Kreme announced yesterday that the U.S. attorney for the Southern District of New York had launched an investigation that appears to be focused on the company’s franchise repurchases and a profit warning that the company issued in May, 2004. As is typical in such announcements, the the Winston-Salem, N.C.-based company said that the company is “cooperating fully” with the investigation. Here are the previous posts over the past year on Krispy Kreme’s mounting troubles.
The investigation deepens the problems facing Krispy Kreme, which is facing a liquidity crisis by the end of March. The company has been struggling with slowing sales and an SEC probe of its accounting practices that began last year. The company is cutting about 25% of its nonstore work force as part of a turnaround plan under Stephen F. Cooper, the Enron restructuring expert who became chief executive at Krispy Kreme in January.
Krispy Kreme stock was trading at $5.36 at the close of New York Stock Exchange composite trading yesterday, leaving the stock at about one-tenth of its peak price in August 2003. The company has also been blasted by multiple shareholder lawsuits over the past several months, which are another reason that chapter 11 appears to be an inevitable part of the company’s reorganization.

Updating the Yukos case — Judge Clark dismisses chapter 11 case

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U.S. Bankruptcy Judge Letitia Z. Clark dismissed OAO Yukos’ controversial chapter 11 case yesterday, concluding that there is inadequate precedent for a major foreign oil company to gain the substantial legal protections of a debtor-in-possession under U.S. bankruptcy law. Here is copy of Judge Clark’s Memorandum Opinion and here are the prior posts over the past couple on months on this interesting international case.
Yukos had contended that the U.S. Bankruptcy Court had an adequate basis for jurisdiction over the company because of private American ownership of part of Yukos, two recently-created Texas bank accounts, and the fact that its chief financial officer had recently begun working out of his home in Houston.
Judge Clark’s ruling sends Yukos back to the Russian and International civil justice system in an attempt to find a forum for its claims that the Russian government acted illegally in forcing the December auction of Yukos’s valuable Yuganskneftegaz (“Yugansk”) production unit. Yukos’ former owner, Mikhail Khodorkovsky, remains in jail in Russia on fraud and tax evasion charges.
Yesterday’s decision also concludes the lawsuits that Yukos filed in the Bankruptcy Court resulting from the auction, including its $20 billion “Hail Mary” against four Russian companies, including the Russian government-owned natural gas company OAO Gazprom and oil company OAO Rosneft. Rosneft purchased the Yukos unit from a shell company that that had won auction for Yugansk.
The dismissal of the Yukos case facilitates the Russian government’s probable liquidation of the remainder of Yukos’ assets to generate proceeds to pay the balance of Yukos alleged tax debt to the Russian government. Moreover, the Russian government will probably proceed with the merger of Gazprom and Rosneft, which had been put on hold after Yukos’ chapter 11 case was filed. That planned merger will raise the Russian government’s holding in Gazprom to above 50 percent, which will then allow foreigners to own shares in Gazprom.

It’s “Go Texan Day!”

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Read about this great Houston tradition here. This year’s calendar of entertainer performances is here.

Lay-Skilling criminal trial will start in January 2006

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Mary Flood of the Houston Chronicle is reporting that U.S. District Judge Sim Lake has scheduled the criminal trial of former Enron chairman Ken Lay, former CEO Jeff Skilling, and former head accountant Richard Causey to begin on January 17, 2006.

Andersen’s opening brief in Supreme Court appeal

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Here is Arthur Andersen’s opening brief in its appeal to the U.S. Supreme Court of the firm’s 2002 criminal conviction in connection with the Enron scandal. The following is an excerpt from the brief’s Statement of the Case:

This case arises out of the conviction of Arthur Andersen, LLP (“Andersen”) for witness tampering. . .
For more than a century, it had been settled law that destruction of documents prior to the initiation of judicial or agency proceedings is not obstruction of justice. The Government accordingly sought to circumvent the limits on the crime of obstruction by indicting Anderson for “witness tampering” under 18 U.S.C. 1512, which prohibits attempts to “kill,” “threaten,” or “corruptly persuade” potential witnesses. In the Government’s view, it was perfectly lawful for Anderson’s employees to comply with the document retention policy themselves, whatever their motive might be, prior to the start of a proceeding. But it was criminal “corrupt persua[sion]” to urge others to comply with the policy if the request was even partially motivated by an intent to “impede the fact-finding ability” of some possible future investigation. . .
That expansive and illogical interpretation of the statutory language criminalizes common conduct undertaken without any consciousness of wrongdoing. . .

The real economics of Hollywood

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This Jonathon V. Last-Daily Standard article reviews Edward Jay Epstein’s new book, The Big Picture (Random House 2005), which examines the fascinating and ever-changing economics of moviemaking. To give you an idea of what’s going on in Hollywood economics, consider this:

In 1947, Hollywood sold 4.7 billion movie tickets. The studios were hugely profitable movie factories.
Times have changed. . . Television came to compete with the movies, as did home video. And despite a population boom, movie-going fell out of favor. In 2003, only 1.57 billion tickets were sold, a third the number 56 years earlier, while the real cost of making movies increased some 1,600 percent.
It wasn’t just production costs that exploded. Today the average movie costs $4.2 million to distribute and nearly $35 million just to advertise. (The comparable 1947 figures, adjusted for inflation, were $550,000 and $300,000.) Such peripheral costs, Epstein explains, have grown so large that “even if the studios had somehow managed to obtain all their movies for free, they would still have lost money on their American releases.”

How did Hollywood respond? Epstein observes that Hollywood transformed itself from a factory for making movies into a clearinghouse for intellectual property, which is at least as profitable as making movies used to be. The result?

The truth is that, even with terrible movies, the studios have to try hard not to make money. In this way, today’s Hollywood is very much like the studio system of old. The two business models are so favorable that the quality of the product is beside the point. The difference, of course, is that the movies from the studio era were often quite good.

Read the entire review. Hat tip to EconoLog for the link to this review.

Big Oil challenges outmoded SEC reserve reporting requirements

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Several big oil companies released a report yesterday that they had commissioned that challeges the way in which U.S. regulators require oil companies to measure how much oil and natural gas the companies have in the ground. Reserve numbers are a critical measure for evaluating the long term health of an oil and gas company. Here is the executive summary of the report.
Cambridge Energy Research Associates prepared the report, and it sharply criticizes the method that the Securities and Exchange Commission requires that oil and gas companies use to assess oil and gas reserves. The report contends that the SEC’s method is obsolescent and that the results of using the method actually mislead investors because it underestimates the oil and gas industry’s success in discovering or tapping new reserves of oil and gas. The results from using the different methods is startling — it can amount to hundreds of millions of barrels of oil at one company alone. As a result, the report recommends that the SEC revise its reserves-accounting methodology to reflect changes in the oil and gas industry since the guideline was implemented 27 years ago.
This is a key issue for the oil and gas industry because because the long term prospects of companies in the industry is largely dependent on their ability each year to find enough new oil and gas reserves to replenish reserves that the company has generated. In short, reserves are akin to a sign of how much money an oil and gas company has in the bank.
Absent from the Big Oil sponsors of the report was Royal Dutch/Shell Group, which has been hammered over the past year by a scandal in which the company admitted that it had massively overstated its reserves. As a result, Shell has revised its reserves by about a third over the past year, and it still faces continued scrutiny from investigators in the U.S. and Europe.

Lea Fastow’s motion to reduce sentence is denied

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The Chronicle’s Mary Flood, who continues to do a fine job of covering the Enron scandal, posted this article today regarding U.S. District Judge David Hittner‘s denial of Lea Fastow‘s motion to reduce her one year sentence for misdemeanor tax fraud to the seven months that she has already served. Here are previous posts on the Lea Fastow case.
Along with the the sad case of Jamie Olis and the Martha Stewart case, Mrs. Fastow’s case is another example of the egregious lack of prosecutorial discretion that exists in today’s “Justice” Department.

The pesky reality of high medical malpractice premiums

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This New York Times article entitled “Behind Those Medical Malpractice Rates” addresses the myth that Bush Administration and Republican Party-fueled propaganda campaigns continue to promote in their quest to limit for damage-limit legislation:

[F]or all the worry over higher medical expenses, legal costs do not seem to be at the root of the recent increase in malpractice insurance premiums. Government and industry data show only a modest rise in malpractice claims over the last decade. And last year, the trend in payments for malpractice claims against doctors and other medical professionals turned sharply downward, falling 8.9 percent, to a nationwide total of $4.6 billion, according to data.

Lawsuits against doctors are just one of several factors that have driven up the cost of malpractice insurance, specialists say. Lately, the more important factors appear to be the declining investment earnings of insurance companies and the changing nature of competition in the industry. The recent spike in premiums – which is now showing signs of steadying – says more about the insurance business than it does about the judicial system.

Even the connection limiting damages and reducing costs for doctors is not even well-established:

[S]ome researchers are skeptical that caps ultimately reduce costs for doctors. Mr. Weiss of Weiss Ratings and researchers at Dartmouth College, who separately studied data on premiums and payouts for medical mistakes in the 1990’s and early 2000’s, said they were unable to find a meaningful link between claims payments by insurers and the prices they charged doctors.
“We didn’t see it,” said Amitabh Chandra, an assistant professor of economics at Dartmouth. “Surprisingly, there appears to be a fairly weak relationship.

The Times article reiterates many of the same points that are made in the June 2003 GAO report entitled Medical Malpractice Insurance: Multiple Factors Have Contributed to Premium Rate Increases and this subsequent August 2004 Congressional testimony of GAO researchers on the same topic.
Make a note of the Times article and the these GAO resources the next time that you hear a demagouge declare that legislative caps on damages will reduce high medical malpractice premiums. Appealing to public bias against unpopular plaintiffs’ lawyers by promoting such legislation as a cure for high malpractice premiums amounts to rearranging the deck chairs on the Titanic. High medical malpractice premiums are a result of America’s broken health care finance system, and until we force our politicians to address the problems in that system, medical malpractice rates will continue to rise.
Hat tip to the HealthCareProf Blog for the links to the GAO resources.
Update: For a critique of the Times article’s conclusions, check out this Walter Olson post and this subsequent post over at the PointofLaw.com.