Monthly Archives: January 2006

Getting ready to rumble

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enronlogo20.gifThe Chronicle’s Mary Flood reports on one of the final pre-trial hearings before the commencement of the January 30 criminal trial against former key Enron executives Ken Lay and Jeff Skilling, and while it looks as if U.S. District Judge Sim Lake is going to let the parties put on their respective cases, he left little doubt that monkey business will not be tolerated. Thus, the Task Force won’t be able to use tape recordings Enron traders joking about stealing money from grandmothers during the California energy crisis while the defense won’t be able to bring up key prosecution witness Andrew Fastow’s apparent penchant for viewing pornography on his company computer.
However, the most important ruling that Judge Lake made was denying most of the Task Force’s motion to exclude an impressive group of expert witnesses that the Lay-Skilling defense team has assembled to assist the defense in explaining to the jury their version of what happened to Enron. Given the bias of most mainstream media accounts of what occurred at Enron, Lay and Skilling have already been indicted, tried and convicted by the media outlets that have generated those one-sided accounts. Accordingly, it is vitally important for the Lay-Skilling defense to be able to present independent experts to explain objectively to the jury that there is a far more nuanced story about what happened to Enron than most of the mainstream media accounts provide.
Speaking of which, it’s a bit hard to get a handle on the Task Force’s theory about what happened at Enron at this point. There is little doubt that the Task Force is going to present the case against Lay and Skilling as a material non-disclosure case, but the Task Force appears to be having a bit of a problem getting the rest of its story straight on what went wrong at Enron.
Initially, the prosecution alleged that Lay and Skilling presided over a house of cards at the company that was hidden from the investing public by the fraudulent behavior of Enron management and its auditor, Arthur Andersen. Then, after putting Andersen out of business with an over-the-top prosecution that was later rebuked by a unanimous Supreme Court, the Task Force modified that story to allege that Lay and Skilling had also fooled Andersen about the company’s true nature. More recently, the Task Force’s story has evolved into allegations that Enron was in fact a highly-profitable trading company, but that Lay and particularly Skilling hid the company’s enormous trading profits to fool the investing public into thinking that the company was a stable “logistics” company rather than a volatile trading company.
The Task Force is required to file with the Court today its final statement before trial explaining what charges it actually intends to pursue against Lay and Skilling. One can only wonder at this point which of the above stories about Enron that the Task Force will choose to use. So it goes in the wacky world of criminalizing agency costs.

Lay-Skilling trial no lay up for the Enron Task Force

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skilling and lay6.jpgProfessors Bainbridge and Ribstein point to this Roger Parloff/Fortune magazine article that does a good job of summarizing the problems that confront the Enron Task Force in making its case against former key Enron executives Ken Lay and Jeff Skilling, a point that has been addressed in recent posts here, here, here and here. Professor Ribstein places the particular problems with the Task Force’s case against Lay and Skilling in the larger context of how justice and respect for the rule of law is eroded by such criminalization of corporate agency costs:

Lay and Skilling were not the best managers money could buy. But to apportion guilt in a way that maximizes the law’s deterrence function requires a scalpel, not the bludgeon of the criminal law.
And the moral force of the criminal law should be reserved for the cases that deserve it. Even if Lay and Skilling are convicted, the question wonít turn on, for example, whether they were at the scene of the crime. Of course they were. But the jury has to make a very difficult determination as to the precise positions of their eyes and ears. Years in jail should not hang on such details.

Just as years in jail should not hang on one’s duty to handle the closing of a presumably legal deal or one’s obtaining of an unenforceable oral assurance related to such a deal.
Peter Elkind and Bethany McLean, authors of the Enron book The Smartest Guys in the Room (Portfolio 2003), also weigh in here with a more extensive background piece on the case, which includes numerous examples of their decidedly biased view toward the Lay-Skilling defense. The piece is another example of the conflict of interest in covering the Lay-Skilling case that is common among certain mainstream media sources who have a vested interest in presenting the case in a light that is consistent with the view embraced in their book (that point was addressed earlier here).

A lot about Alito

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Alito4.jpgMost of us don’t have time to watch much of the Senate Judiciary Committee hearing on President Bush’s nomination of Samuel A. Alito, Jr. to the U.S. Supreme Court, so here are a few items to help you catch up on the festitivities.
A Washington Post video of the tasty and testy exchange between Senators Kennedy and Spector over Kennedy’s request to subpoena some documents.
Peggy Noonan’s analysis of the hearing to date, including this recitation (fictional, I hope) of the typical quality of Senator Joe Biden’s questioning (?) of Judge Alito:

What if a fella–I’m just hypothesizing here, Judge Alito–what if a fella said, “Well I don’t want to hire you because I don’t like the kind of eyeglasses you wear,” or something like that. Follow my thinking here. Or what if he says “I won’t hire you because I don’t like it that you wear black silk stockings and a garter belt. And your name is Fred.” Strike that–just joking, trying to lighten this thing up, we can all be too serious. Every 10 years when you see me at one of these hearings I am different from every other member of Judiciary in that I have more hair than the last time. You know why? It’s all the activity in my brain! It breaks through my skull and nourishes my follicles with exciting nutrients! Try to follow me.

Noonan wonders: “How does Judge Alito put up with this?”
Meanwhile, a measured criticism of Judge Alito’s nomination is contained in this Jonathon Turley/USA Today op-ed in which Turley observes as follows:

Despite my agreement with Alito on many issues, I believe that he would be a dangerous addition to the court in already dangerous times for our constitutional system. Alito’s cases reveal an almost reflexive vote in favor of government, a preference based not on some overriding principle but an overriding party.
In my years as an academic and a litigator, I have rarely seen the equal of Alito’s bias in favor of the government. To put it bluntly, when it comes to reviewing government abuse, Samuel Alito is an empty robe.
Alito’s writings and opinions show a jurist who is willing to yield tremendous authority to the government and offer little in terms of judicial review — views repeatedly rejected not only by his appellate colleagues but also by the U.S. Supreme Court.
An independent judiciary means little if our judges are not independently minded. In criminal, immigration and other cases, Alito is one of the government’s most predictable votes on the federal bench. Though his supporters have attempted to portray this as merely a principle of judicial deference, it is a raw form of judicial bias.

Read the entire piece.
Finally, don’t miss the Comedy Central video “Sam’s Club,” particularly the final 1.5 minutes where the current hearing is compared to another senate committee hearing that is familiar to all movie buffs.

The Stros connection to the latest Hall of Fame inductee

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bruce_sutter.jpgFormer MLB relief pitcher Bruce Sutter was voted into Baseball’s Hall of Fame earlier this week, although he probably should not have been. The fact that Sutter won MLB’s National League Cy Young Award (awarded annually to the league’s best pitcher) in 1979 may well tipped the scales in favor of Sutter’s Hall-of-Fame candidacy in some voters’ eyes. But a little known fact is that Sutter did not deserve that Cy Young Award, either, and that voter ignorance in evaluating the value of two former Stros pitchers figured prominently in Sutter winning award that season.
Sutter won the 1979 NL Cy Young Award by taking 77 of a possible 120 points, but he garnered only 10 of the 24 first-place votes. Sutter benefited from an absurd split vote that developed over Stros teammates, Joe Niekro and J.R. Richard, who shared 13 of the other 14 first-place votes.
Despite that split vote, Richard was the superior pitcher that season, particularly over Niekro. Richard pitched far more innings (292.1) than either Niekro (263.2) or Sutter (101.1), and had a more impressive 313/98 strikeout-to-walk ratio as compared with Niekroís 119/107 and Sutter’s 110/32. Moreover, Richard saved 19 more runs for his team than an average National League pitcher would have that season (“RSAA,” explained here) while Niekro had an 8 RSAA and eight fewer complete games than Richard.
So, why was Niekro even in the competition for the Cy Young Award that season with Sutter and Richard? In essence, because he was luckier than Richard. Niekro had a 21-11 won/loss record that season versus Richardís 18-13, a misleading statistic that ended up generating Niekro nine first-place votes to Richardís four. Thus, Sutterís Cy Young Award that season — and quite possibly his Hall of Fame induction this year — is largely attributable to the ignorance of a substantial number of voters in evaluating the performance of these three pitchers during the 1979 season. Under any reasonable interpretation of performance, Richard wins the 1979 NL Cy Young Award easily and a major part of the justification for Sutterís Hall of Fame candidacy — particularly over superior pitchers such as Goose Gossage and Bert Blylevyn — goes by the wayside.
By the way, Richard followed up that great 1979 season with an even better one midway through the 1980 season (20 RSAA, 1.90 ERA and 119/40 strikeout to walk ratio in 113.2 innings) when he was struck down by a tragic stroke that effectively ended his ability to play baseball in the prime of his career (Richard was 30 years old at the time).

J&J ups the ante for Guidant

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guidant_logo_web6.jpgJust when you think Johnson & Johnson might pick up its chips, accept its $625 million breakup fee and go home from the poker game with Boston Scientific Corp. over Guidant Corp., J&J sweetened the pot with a $23.2 billion bid for the Indianapolis-based, heart device maker. Earlier posts on the competition for Guidant can be reviewed here.
J&J’s new bid, which both J&J and Guidant boards have accepted, increased its value to $68.06 for each Guidant share from the $64 per share value of its previous offer. Boston Scientific’s jilted offer was for about $25 billion (or $72 a share), but is not as certain to close and does not have the liquidity features of the J&J bid. The market responded to the news of a possible all-out bidding war by increasing the value of Guidant’s shares over $1 to $70.44 on the New York Stock Exchange.
It’s an incredible turnaround for Guidant. After making a $25.4 billion ($76 per share) offer in December 2004, J&J started crawfishing on the deal last year by lowering its bid to below $22 billion ($63 a share) when Guidant’s market share dropped from about 35 percent to 25 percent amidst reports of patient deaths caused by allegedly defective products. That development induced Boston Scientific to jump into the fray with its competing $25 billion bid and — presto! — Guidant had gone in a matter of days from being worked over the coals by one buyer to being the darling of two.
Although much smaller and more highly-leveraged than J&J, Boston Scientific announced in response to J&J’s increased bid that it is studying whether to increase its competing bid for Guidant. Boston Scientific’s shares have decreased in value more than 40% from their peak value in 2004 as the company continues to rely heavily on sales of its primary product, the Taxus Express cardiac stent. Thus, Boston Scientific continues to have incentive to pursue the acquisition of Guidant, which would diversify Boston Scientific’s product line and provide the basis for greater growth potential. Stay tuned.

George Will nails the GOP

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georgewill.jpgIt’s never pretty for the Republicans when George Will lays the wood to them, this time over the Abramoff scandal:

The national pastime is no longer baseball, it is rent-seeking — bending public power for private advantage. There are two reasons why rent-seeking has become so lurid, but those reasons for today’s dystopian politics are reasons why most suggested cures seem utopian.
The first reason is big government — the regulatory state. This year Washington will disperse $2.6 trillion, which is a small portion of Washington’s economic consequences, considering the costs and benefits distributed by incessant fiddling with the tax code, and by government’s regulatory fidgets.
Second, House Republicans, after 40 years in the minority, have, since 1994, wallowed in the pleasures of power. They have practiced DeLayism, or “K Street conservatism.” This involves exuberantly serving rent-seekers, who hire K Street lobbyists as helpers. For House Republicans the aim of the game is to build political support. But Republicans shed their conservatism in the process of securing their seats in the service, they say, of conservatism.
. . . “K Street conservatism” compounds unseemliness with hypocrisy. Until the Bush administration, with its incontinent spending, unleashed an especially conscienceless Republican control of both political branches, conservatives pretended to believe in limited government. The last five years, during which the number of registered lobbyists more than doubled, have proved that, for some Republicans, conservative virtue was merely the absence of opportunity for vice.

Read the entire piece.

A benign regulation that distracts from mischief

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SEC_SEC2.jpgInasmuch as I am critical of the SEC in this earlier post today, it’s only fair to compliment the agency for one of its regulatory initiatives that could have a beneficial impact.
This NY Times article reviews the SEC’s new proposed rules on disclosure of executive compensation, which — even though the new rules address a problem that probably would not break the top 20 in current corporate governance problems — could work to keep the SEC busy from pursuing more damaging regulatory actions. Larry Ribstein has the most insightful comments on the proposed new rules (here, here and here) and points out the possible mischief-saving nature of the SEC initiative:

By focusing on executive compensation disclosure, [SEC chairman] Cox manages to get a big pile of political capital from the pro-regulatory populists, while at the same time causing relatively little harm compared to many other things he could be doing. . . . .[D]isclosing executive compensation is probably . . . not going to be hugely costly. If it deters abuses, that’s not so bad. Meanwhile, maybe Cox can use the political capital he gains from this move to meaningfully shrink regulation.

What’s exactly so “ugly” about the Bags-Stros situation?

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JeffBagwell6.jpgWhy do some media reporters make up disputes where none exist in connection with an already newsworthy story?
In his most recent column, Chronicle columnist Richard Justice updates the status of Stros firstbaseman and future Hall-of-Famer, Jeff Bagwell. As regular readers of this blog know, the Stros situation with Bags is a tad difficult at this point. Bags is at the end of his career and is a shadow of his former stature due to a chronically arthritic right shoulder that prevents him from throwing a ball effectively. The Stros backloaded Bags’ most recent contract so that he will receive approximately $24 million in this final season of the contract ($17 million in salary and $7 million to buy out an option for next season). That’s far in excess of Bags’ value as a player at this point, but what the heck — you win under some long-term contracts and you lose under others.
Inasmuch as Bags is probably no longer capable of being an every-day player, the Stros prefer to work out a settlement with Bags under which the club would declare Bags disabled under the club’s disability insurance policy, the club and the insurer would either litigate that claim or settle it, the club would pay Bags his $24 million and Bags would retire as the greatest player in club history. Bags, for his part, states publicly that he would prefer to play out this season, but he has to say that because saying that he cannot and retiring is the only way that he would not be entitled to recover the $24 million that the Stros still owe him under his contract. For their part, the Stros have never said or done anything that indicates that they would not pay the balance of Bags’ contract according to its terms.
While discussing all of this, Justice illogically criticizes the Stros’ desire to declare Bags disabled and make a claim on the club’s disability insurance policy, and then observes as follows:

Before this gets ugly ó and it could get ugly as each side presses its case ó the signing of veteran outfielder Preston Wilson indicates where the Astros believe this is headed.

So, what’s “ugly” about the situation? That the Stros prefer to settle up with the best player in club history rather than have him languish on the bench for a season as an over-priced pinch-hitter? What would be ugly would be for the Stros to use a disabled player in their everyday lineup simply because the club doesn’t want to eat his contract. Rather than being critical of the club, Justice should be complimenting the Stros for not doing just that.

The SEC protects Carl Icahn, too

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icahn2.jpgIt’s a pretty sure sign that securities regulators do not have enough to do when they are busy trying to protect the likes of Carl Icahn.
As noted in this earlier post, Icahn was outmaneuvered in late 2004 by New York-based Perry Corporation in connection with Mylan Laboratories’ bid for the generic drug maker, King Pharmaceuticals. Icahn — who owned a bit less than 10% of Mylan — pursued his typical strategy of attempting to extract some ransom from Mylan’s takeover bid by opposing the company’s bid for King.
But Perry’s moves in connection with the proposed deal made Icahn look totally 1980’s in comparison. Perry owned a big chunk of King shares and would have made around $28 million if Mylan’s bid had been successful. However, in making its play, Perry set up an elaborate swap trade with Bear Stearns and Goldman Sachs so that the block of Mylan’s voting equity that Mylan controlled (which was just a tad larger than Icahn’s) had limited exposure to fluctuations in Mylan’s share price. Perry accomplished this by buying its stake in Mylan while having Bear Stearns and Goldman Sachs “short” the same number of shares.
Well, as the earlier post indicated, Perry’s moves outraged Icahn, who filed a lawsuit and started sounding as if he was the spokesman for CALPERS’ shareholder activist committee. Alas, Mylan’s bid for King collapsed, Icahn dropped his lawsuit and most folks thought that was the end of the entertaining match of wits between well-heeled investment types.
But not so fast. Perry disclosed to its investors this week that the SEC recently sent a Wells notice to Perry informing the hedge fund that the agency is considering a civil enforcement action over the fund’s Mylan-King hedging strategy. According to Perry’s disclosure, the SEC’s enforcement division is recommending that the agency accuse Perry of violating the antifraud provisions of securities laws, which require large investors to disclose pertinent financial information about their holdings. Perry is currently preparing a response to the Wells notice — called a “Wells submission” — in which the firm will challenge the basis of the SEC’s proposed action against the firm. That’s not surprising given that Perry’s hedging strategy in regard to Mylan-King deal was utterly transparent and reported in the business sections of virtually every major media outlet.
In the meantime, however, we can all rest more comfortably with the knowledge that the SEC is protecting Mr. Icahn. He has created a tremendous amount of shareholder wealth over his long career. It’s nice to see that the SEC is actively protecting him in his twilight years when he really needs it. ;^)

Picking darkhorses in a new market

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trading floor.jpgMaybe if Enron hadn’t collapsed, it wouldn’t have taken this long for this new market to develop.
Tyler Cowen points us to the The Ticket Reserve, a web-based company that has created an options market for tickets to championship sporting events. An account holder can buy and sell options to purchase tickets at face value to popular sporting events such as NFL playoff games, BCS bowl games, and NCAA Basketball Tournament games.
Thus, you could currently purchase an option to buy two upper deck tickets to the Final Four to see the Texas Longhorns play for $169. If the Horns make it to the Final Four, then you would pay the face value of the tickets ($140), plus the $169 option price. Your risk is that the Horns do not make the Final Four, in which case your option becomes worthless and you would be out the $169 option price. While you wait for the Final Four, you can sell your option for whatever price the market will bear, presumably for more than $169 if the Horns play particularly well or for less if one or two of the Horns’ starters are injured before the NCAA tournament. Thus, if you’re a player in this market, the key would be to pick as many relatively low-valued darkhorse teams as possible early and then ride the speculation that the teams will do well in the NCAA tournament to big profits in the sale of your options during the run-up to the NCAA tournament.
Inasmuch as this type of market is cut out for the Sports Economist, Brad Humphreys also provides his insights.