As the regulators and financial media wait on pins and needles for the next Enronesque experience in business, much attention has recently been focused on the generally unregulated — at least until now — world of hedge funds.
David Skeel recently published this Legal Affairs article (and this follow up discussion with Business Law Prof blogger Dale Oesterle) in which he argues for more regulation of hedge funds because the pressure that hedge funds face to take unreasonable risks and to show over-the-top returns undermines the integrity of the markets, which will hurt the little guy investor. Meanwhile, in anticipation of the new SEC regulations due to take effect in February that require hedge funds managing more than $25 million to register with the SEC, submit to periodic audits and provide detailed information about their trading, the Wall Street Journal reports today that many funds will not be registering with the Securities and Exchange Commission due to loopholes provided by the agency. The entire thrust of the article is “what are these guys hiding?”
Into this fray enters the indomitable Larry Ribstein with this timely post in which he proposes that everyone back off and think about whether the proposed regulations are really a solution to the supposed problem for which they are intended:

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The Chronicle’s Mary Flood reports in this article that the Enron Task Force has obtained three “streamlined” indictments against the five former Enron Broadband executives who were the subject of the previous failed Task Force prosecution over the same subject matter.

As is the Task Force’s policy, they leaked a copy of the superceding indictments to the media before they were filed on the electronic docket of the case, so a copy of the indictment is not yet available. I will post a copy of each indictment when they become available.

As Ms. Flood’s article notes, the five former executives will not be tried together this time around. Kevin Howard, former EBS CFO, and Michael Krautz, former EBS senior accounting director, will be tried together in a trial currently scheduled for May, 2006 on four counts that they conspired to commit wire fraud and falsify books and records relating to the Task Force’s allegation that they created a phony sale of video-on-demand profits in order to inflate EBS earnings.

Next, former EBS executive Scott Yeager will be tried later that summer on a total of 13 counts of insider trading and money laundering.

Finally, former co-CEO of EBS, Joe Hirko, and Rex Shelby, former senior vice president of engineering and operations, will be tried in September, 2006 on conspiracy to commit wire and securities fraud, as well as multiple counts of securities fraud, wire fraud and insider trading.

Of course, all of these trials will be anticlimactic compared with the trial of the Task Force’s legacy case against former Enron executives Ken Lay, Jeff Skilling, and Richard Causey, which will crank up in mid-January, 2006.

Remember Royal Dutch/Shell’s Enronesque experience relating to overstatement of reserves from last year?
Well, the British equivalent of the SEC — the Financial Services Authority, or FSA — announced yesterday that it had concluded its investigation of former senior Shell executives Philip Watts and Walter van de Vijver and found no wrongdoing relating to the executives’ involvement in the company’s overstatement of energy reserves last year. The SEC and the Justice Department are still conducting investigations of the two former executives.
Funny how the FSA’s announcement of yesterday did not get quite as much play in the media as the ouster of the two executives from Shell last year as the company’s overstatement came to light.

Already under the pressure of an SEC investigation into its accounting, beleagured automaker General Motors Corp. announced late yesterday — after the close of New York Stock Exchange trading — that it will restate financial results for 2001 by reducing income generated from accelerated booking of credits from suppliers. The amount of the write-down will be between $300 to $400 million, which represents about 50% of GM’s profit reported at the time. Although the announcement came after the close of trading, GM’s shares yesterday fell to their lowest level in almost 15 years (GM shares are down almost 40% this year) as GM attempts to endure the financial punches that are inevitably associated with losing almost $3 billion this year. Earlier posts on GM’s increasing problems are here.
GM did not disclose yesterday whether its restatement involved transactions with its former parts subsidiary, Delphi Corp. Earlier this year, Delphi disclosed it would need to restate results for several years after an internal investigation revealed improper booking of revenue from technology contracts and rebates that should have been spread over the life of contracts. The issue of how to book rebates and other credits from suppliers has tripped up several troubled businesses, including supermarket chain Royal Ahold NV and retailer Kmart Corp. Demanding credits from suppliers is a common practice in many industries, but if those credits are rebates related to larger orders from suppliers, they are supposed to be booked as income over time and not immediately.
In another ominous sign, GM disclosed in an SEC filing yesterday that it has withdrawn about $2 billion this year from a fund earmarked for paying hourly-wage and retiree employee health benefits to cover ongoing health-care costs as it continues “evaluating the need for additional withdrawals as the cost of health care continues to adversely affect GM’s liquidity.”
Sounding absolutely Enronesque, don’t you think?

The Chronicle’s Mary Flood, back from a well-deserved vacation, is again writing on Enron matters and, in this article, notes that the Fifth Circuit has asked the attorneys involved in the Arthur Andersen criminal case to advise the Court on whether the case should be remanded to District Court for re-trial or simply dismissed altogether after the Supreme Court’s decisive opinion overturning the firm’s conviction. Using prediction skills that have become well-honed from dealing with the Enron Task Force over the past several years, Ms. Flood speculates that the Task Force will request that the Fifth Circuit remand the case to the District Court for a new trial.
Other than providing an annuity for Andersen defense attorney Rusty Hardin, what possible benefit could be derived from a re-trial of a dead accounting firm? The fact that such a re-trial is even being considered reflects that the misguided criminal investigation into Enron has officially gone from being merely abusive and desperate to truly absurd.