Monthly Archives: June 2005

What Killed Arthur Andersen?

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One of the most difficult lessons to learn in becoming a wise counselor is to say “no” to a good client.

In this NY Times op-ed, Times business writer Floyd Norris observes that the demise of Arthur Andersen is attributable to its inability to say “no” to several lucrative clients who were engaging in questionable deals.

He might be right. Certainly the double whammy of damages that a still-in-business Andersen would have probably had to pay in regard to such scandals as WorldCom and Enron would have been huge financial burdens. There is no certainty that the firm could have survived those hits.

But the fact remains that the federal government’s decision to terminate Andersen through criminal prosecution was not only arbitrary and capricious, but bad public policy.

Very few of the 30,000 employees of Andersen were engaged in any wrongdoing, and Andersen was only one of several firms who provided professional advice and services on dubious transactions for WorldCom and Enron.

Nevertheless, Andersen was singled out for criminal prosecution, and the result was economic hardship for thousands of its former employees and less competition for providing audit services for big companies.

As we are now seeing in regard to American International Group Inc. and its auditor, PriceWaterhouseCoopers, the government’s prosecution of Andersen did not deter professionals from helping their clients engage in risky transactions.

That is why such deterrence should be left to the markets, which are much better than the government at efficiently sorting out the type of risk that is good from that which is not.

Sam Wyly, B of A, and the Isle of Man

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samwyly.jpgThis Wall Street Journal ($) article reports that Manhattan District Attorney Robert Morgenthau has launched an investigation in New York of Bank of America, Dallas-based investor Sam Wyly and his brother, and several other institutions in regard to lucrative tax shelters that the Wylys set up in the English tax haven, the Isle of Man. Here is a previous post on the colorful Mr. Wyly, who was also one of President Bush’s biggest campaign contributors in both the 2000 and 2004 election campaigns.
Although legally a possession of the United Kingdom, the Isle of Man operates as an independent country with its own financial laws, the most important of which is that a foreign government cannot enforce in the Isle of Man courts a claim for unpaid taxes against an Isle of Man entity. Thus, tax-shelter promoters often tout the Isle as a convenient tax haven just an hour’s flight from London.
Mr. Morgenthau’s office, and now the Internal Revenue Service and the Securities and Exchange Commission, are investigating a popular stock option that B of A helped the Wylys establish to lock in gains on stock options during the bull market of the 1990’s. The IRS has already determined that the transaction was widely used as a tax shelter, so this new investigation is a part of a larger IRS drive to to identify and punish firms that promoted improper tax shelters.
Under the particular shelter under scrutiny here, wealthy businessmen and U.S. corporations donated options to trusts that they alleged were not under their control. The IRS contends that they retained control of the trusts and that over 40 U.S. corporations and dozens of executives used the arrangement to shelter income and avoid paying more than $700 million in taxes. The Wylys contend that they neither owned nor controlled the trusts, and that they were legitimate vehicles established for the benefit of family members and charities.

Are the Times editors reading Clear Thinkers?

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Yesterday morning, the headline to this Kurt Eichenwald/NY Times article was the following:

“Reversal of Andersen Conviction Not a Declaration of Innocence.”

That headline prompted this yesterday morning post.

Today, the same Times article has the following headline:

“Analysis: Reversal of Andersen Conviction”

H’mm. Coincidence? ;^)

Ripples from the Andersen decision

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This NY Times article reports that former Credit Suisse banker Frank Quattrone, who was convicted of obstruction of justice last year for sending out an email regarding the bank’s document retention policy, is raising new issues on his appeal based on the U.S. Supreme Court’s decision earlier this week in the Arthur Andersen case.

Apparently, the jury instructions used in the Quattrone trial were similar to those used in the Andersen trial. Inasmuch as Quattrone was not charged with any other crime, those jury instructions appear to have become the key issue in his appeal.

Stros 2005 Review: Critiquing the Stros

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stros logo4.jpgAlthough the Stros (20-32) just won their second series in a row, the club is clearly not a contender for a playoff spot this season. Thus, Houston Chronicle sportswriter and fellow blogger Richard Justice and I have been corresponding regarding the mistakes that Stros management made that resulted in this season’s currently last place club. Our friendly exchange is generating some interesting observations.
I initiated the exchange by making the following point in response to one of Richard’s recent posts that seemed to blame the club’s failure this season on Stros management’s failure to sign free agents Jeff Kent and Carlos Beltran during this past off-season:

[A]lthough you and I agree on most things related to the Stros (particularly that they need more hitting), the statistics do not back up your assertion that the Stros should have signed both Kent and Beltran. Even with them this season, this Stros club would be among the worst hitting teams in MLB. Here’s a recent post on my blog that discusses this point.

The reality is that the Stros were not a particularly good hitting team last season even with Kent and Beltran, but the late season surge made most folks overlook the problem. The lack of development of hitters such as Lane, Everett, and Burke — coupled with the downturn of Bags and management’s unwillingness to replace such poor hitters as Ausmus, Chavez, Bruntlett and Viz — has had a much greater impact on the Stros than losing Kent and Beltran.

Here is Richard’s response to my post.
Meanwhile, Brian Goff over at the Sports Economist chimes in with this insightful post in which he points out that it takes a balanced team effort — and not just big stars — for a club to be successful:

Houston offers a dramatic illustration of the fact that to excel in team sports requires a team — not a high-priced superstar or two chewing up the team bankroll (basketball the possible exception with so few players). Clemens ($18M), Bagwell ($18M), and Andy Pettite ($8.5M) make up about 65 percent of the team’s payroll — an amount nearly equal to the Rangers’ entire payroll. Besides Beltran, this $44 million would go a long way in providing another strong position player or two (catcher or SS being big needs) along with pitcher or two. Clemens is a great pitcher but very expensive for a player being used every 5th game. Bagwell’s salary is commensurate with his career peak, not the form of the last three years. Pettite’s salary exceeds Oswalt’s by $2.5 million even though Pettite’s career numbers are not in his league. Once again, I will push the theme that it’s not just the amount of money available that matters but how they spend it.

Although Brian’s argument is valid, I would point out that the situation with the Stros is not as dire as it seems in the thros of a probable last place season. Bags is probably done as a player, so the financial drain of his contract will likely be offset at least to some extent by proceeds from disability insurance. Clemens’ deal — which the Stros entered into only after Beltran signed with the Mets — is for only this season, which leaves only Pettitte’s contract as the Stros’ last big obligation to an aging veteran. As a result, the Stros are in a financial position to begin making the free agent acquisitions and trades necessary to regain contender status. Berkman, Oswalt and Lidge — along with emerging solid players such as Backe and Ensberg — is not a bad nucleus to build around.
By the way, this Newsday report indicates that the Yankees may have some competition for Clemens if he elects to allow the Stros to trade him to a contender.

The Donaldson resignation

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Securities and Exchange Commission Chairman William H. Donaldson announced yesterday that he will resign at the end of the month. President Bush appointed Mr. Donaldson in 2003 in reaction to the wave of hyper-publicized corporate scandals that resulted from the bursting of the stock market bubble in the early part of this decade. Here is the SEC press release on the resignation and an earlier post from late last year on concerns that business interests were expressing over Mr. Donaldson’s performance.
President Bush intends to nominate Republican California Congressman Christopher Cox to replace Mr. Donaldson. Representative Cox was a White House counsel during the Reagan administration and a corporate finance attorney with the law firm of Latham & Watkins. He is in Washington for being one of the Congressional leaders advocating repeal of inheritance and estate taxes.
Mr. Donaldson clearly alienated business interests during his two and a half years at the Commission. He was an advocate of hefty fines for corporate wrongdoers, registration of hedge fund advisers and a requirement that stock marketplaces always give investors the best possible price. Although it was enacted before he was appointed, Mr. Donaldson was the first SEC chairman who was required to deal with enforcement of the landmark Sarbanes-Oxley corporate reform law, which has been no picnic. Most business leaders have criticized the law as another costly governmental regulation of business. Finally, Mr. Donaldson was often at odds with his two fellow Republican commissioners as he increasingly sided with the commission’s two Democrat commissioners in pushing through controversial proposals.
However, the straw that broke the camel’s back was probably the disclosure last week of the Commission’s $48 million budget shortfall stemming from real-estate costs relating to its sparkling new building in Washington and a GAO audit report that found that the agency had failed to institute some of the same financial controls that it requires of public companies. Oops!
Update: Professor Oesterle over at the Business Law Prof Blog notes in this interesting post that the SEC’s abysmal handling of the increased costs resulting from Sarbanes-Oxley was the more than enough to justify Mr. Donaldson’s exit.

More on AIG’s Enronesque experience

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AIG11.jpgAmerican International Group Inc. released its long-delayed annual report yesterday and, as expected, reported a 2.7% hit to the company’s net worth along with cautionary notes about the longer-term cost that AIG is confronting as it deals with multiple governmental investigations. Here are the previous posts on the travails of AIG.
In a particularly important disclosure, AIG noted that credit downgrades over the past several weeks have forced it to post an additional $1.16 billion in collateral for certain financial contracts. Although that amount is manageable for the time being, AIG noted that “additional downgrades could result in requirements for substantial additional collateral, which could have a material effect” on how AIG manages its short-term liquidity needs.
As noted in this earlier post, a failure of trust is what caused Enron’s failure, and credit downgrades and customer trepidation over AIG’s financial difficulties can cause the same downward spiral for that company. In its latest annual report, accounting adjustments reduced AIG’s previously reported net income for 2004 by 12% ($1.32 billion) to $9.73 billion, and reduced AIG’s book value by $2.26 billion to $80.61 billion. Overall, the restatement reduced AIG’s net income from 2000 through 2004 by 10% ($3.9 billion).

The remarkable Rocket

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RogerClemens7.jpgThe Stros pulled out a rare win last night, but the real story this week is that Roger Clemens reached a milestone that reflects that he is the best pitcher that any of us will ever have the pleasure of watching.
As regular readers of this blog know, I am somewhat of a stathead in regard to baseball, and I particularly find that the Lee Sinins-developed statistic — runs saved against average (“RSAA”) — is the best statistic for evaluating a pitcher’s performance.
As with its counterpart for comparing hitters — runs created against average (“RCAA,” explained here) — RSAA is particularly valuable to evaluate pitching because it focuses on the two most important things for a pitcher in winning baseball games — that is, not giving up runs and getting hitters out. RSAA measures the number of runs that a pitcher saves for his team relative to the number of runs that an average pitcher in the league would give up while obtaining an equivalent number of outs for his team (as with RCAA, RSAA is park-adjusted). Inasmuch as the hypothetical average pitcher’s RSAA is always zero, a player can have either an RSAA that is a positive number — which indicates he is an above average pitcher (i.e., Clemens) — or an RSAA that is a negative number, which means he is performing below average (i.e., Brandon Duckworth or Tim Redding)
Moreover, just as RCAA is a valuable tool for comparing hitting ability of hitters from different eras, RSAA is a very good measure for comparing pitchers who played during different eras. Inasmuch as RSAA measures a pitcher’s ability against that of an average pitcher in the pitcher’s league for each particular season, a pitcher’s lifetime RSAA measures how that pitcher performed against an average pitcher in his era, which is really the best way to compare pitchers from different eras. On the other hand, comparing other pitching statistics — such as earned run average, wins and hitting statistics against — is often skewed between pitchers of hitter-friendly eras (i.e., the current era) versus pitchers of pitcher-friendly eras (i.e., such as the late 1960’s and early 70’s).
Well, even though the Stros lost on Monday, Clemens pitched well (8 IP, 4 H, 2 R/ER, 1 BB, 7 K’s) in his 650th career start and, in so doing, set the modern major league record for career RSAA:

1 Roger Clemens 671
2 Lefty Grove 668
3 Walter Johnson 643
4 Greg Maddux 556
5 Grover C Alexander 524
6 Randy Johnson 512
7 Pedro Martinez 488
8 Christy Mathewson 405
9 Tom Seaver 404
10 Carl Hubbell 355

Even including pitchers from the 19th century, Clemens ranks 3rd on the all-time RSAA list:

1 Cy Young 813
2 Kid Nichols 678
3 Roger Clemens 671
4 Lefty Grove 668
5 Walter Johnson 643
6 Greg Maddux 556
7 Grover C Alexander 524
8 Randy Johnson 512
9 John Clarkson 508
10 Pedro Martinez 488

Moreover, during his career, Clemens has led the league (or tied) in RSAA during a season 6 times and finished in the top 5 an incredible thirteen times:

1986 AL T1ST 46
1987 AL 2ND 46
1988 AL 2ND 42
1989 AL T3RD 28
1990 AL 1ST 55
1991 AL 1ST 50
1992 AL 1ST 49
1994 AL T2ND 40
1996 AL 3RD 46
1997 AL 1ST 69
1998 AL 1ST 51
2000 AL 2ND 32
2001 AL T6TH 24
2004 NL 4TH 32

Even more remarkably, Clemens’ 26 RSAA that he has generated to date during the 2005 season is already a major league record for a 42 year olds pitcher:

RSAA YEAR RSAA
1 Roger Clemens 2005 26
2 Jack Quinn 1926 23
T3 Hoyt Wilhelm 1965 21
T3 Nolan Ryan 1989 21
T3 Warren Spahn 1963 21
6 Babe Adams 1924 15
7 Sad Sam Jones 1935 14
8 Doug Jones 1999 13
T9 Connie Marrero 1953 11
T9 Red Ruffing 1946 11
T9 Grover C Alexander 1929 11
T9 Dutch Leonard 1951 11

Finally, after only one and a third seasons with the Stros, Clemens already ranks 7th in career RSAA for Stros pitchers:

1 Roy Oswalt 115
2 Billy Wagner 99
3 Mike Hampton 76
4 Dave Smith 75
5 Octavio Dotel 67
6 Nolan Ryan 60
7 Roger Clemens 58
8 Wade Miller 56
9 Don Wilson 55
10 Joe Sambito 53

Roger Clemens is truly a pitcher for the ages.

Russian and U.S. Prosecutions of Businesspeople

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Former billionaire Russian oil magnate Mikhail Khodorkovsky was sentenced to nine years in prison yesterday by a Russian court in a case that businesspersons from around the world have followed carefully as a sign of the Russian government’s willingness to treat business interests fairly.

Russian governmental officials have presented the case against Mr. Khodorkovsky as a repudiation of the corrupt capitalism in the early days of Russia’s market economy of the 1990s that allowed Mr. Khodorkovsky to win control over Yukos, which was then Russia’s largest oil company.

Thus, the Russian government’s actions against allegedly corrupt business leaders is quite popular among most Russians, who resent Mr. Khodorkovsky and the other Russian tycoons who made fortunes during the 1990’s while most Russians struggled under the new market economy.

Nevetheless, the price that the Russian government will pay for prosecuting Mr. Khodorkovsky may be costly.

Western governments and investors have begun to question the Russian government’s commitment to the rule of law in regard to its treatment of business interests that compete with the government’s business interests.

Moreover, the government’s dismantling of Yukos has made given foreign investors yet another reason to avoid investment in Russian capital markets precisely at a time when Russia’s undercapitalized economy desperately needs that investment.

But lest we in the U.S. get too self-righteous about the Russian government’s handling of Mr. Khodorkovsky’s case, remember that the sentence pursued by U.S. prosecutors and handed down by a U.S. federal court in the sad case of Jamie Olis makes the Russian government’s handling of Mr. Khodorkovsky’s case look downright reasonable.

And if you do not believe that a prosecution of a U.S. business figure could be based on similar political aspirations as those involved in Mr. Khodorkovsky’s case, just watch the upcoming case against Maurice “Hank” Greenberg develop.

What parallel universe are we living in when the U.S. government’s criminalization of business interests appears as bad, if not worse, than that of the Russian government’s?

Declaration of innocence?

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nytimes2.gifThis headline — “Reversal of Andersen Conviction Not a Declaration of Innocence” — to this NY Times/Kurt Eichenwald story about the Supreme Court’s decision in Andersen is revealing of the mainstream media’s mindset in regard to the government’s dubious policy of criminalizing merely questionable business practices.
In reality, the Andersen decision is not a “declaration of innocence” for an entirely different reason than the ones set forth in the article. Indeed, Andersen does not need such a declaration because of a fundamental principle of American jurisprudence that the mainstream media and the government prosecutors routinely overlook while pursuing “justice” in regard to unpopular businesspersons.
Andersen is innocent until proven guilty.