Daily Archives: January 26, 2006

The difference between theory and reality in regard to SOX

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soxgroup.jpgWhen I first saw this Washington Post article earlier today that assessing the overall effect of Sarbanes-Oxley on corporate governance in the post-Enron era, I thought about posting a piece on it, particularly given that SOX does not really deter what its supporters seem to suggest that it should. However, I got busy with other things and passed on it.
Now, I’m glad I passed on posting about the WaPo article because Larry Ribstein does a far better job than I ever could have. In this devastating post, Larry systematically eviscerates each point that the SOX advocates raise in support of the legislation, and then observes in closing:

What this article is really about, in my view, is the yawning gap between what the promoters of SOX and corporate crime prosecutions are saying about the results of their efforts, and the reality.

The Bagwell non-issue

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JeffBagwell8.jpgThe silliness about the Stros-Jeff Bagwell situation continues over at Richard Justice’s blog:

And the Drayton McLane-Jeff Bagwell dispute is a story with legs. What if the insurance claim is rejected, and Bagwell ends up on the field in spring training?
That will make for some uncomfortable moments when Uncle Drayton does one of his handshake tours of the clubhouse.
He may be doing the right thing from a business standpoint even if his chances of collecting are slim. But players pay attention to how other players are treated.
Next winter’s Roy Oswalt discussions got a lot more interesting this week.

So, Roy O is less likely to re-up with the Stros because of the way Drayton McLane has treated Bags?
Let’s review the very simple landscape.
Everyone concedes that Bags is at least partially disabled from playing Major League Baseball — he can no longer throw a ball effectively. The only question is whether that partial disability allows the Stros to recover about $15.5 million under a disability insurance policy that the club purchased on Bags. The club still owes Bags $24 million for the final year of his contract.
Bags wants the Stros to waive the $15.5 million claim under the insurance policy and let him try to play this season, although Bags acknowledges that he doesn’t know whether he will be able to do so. Meanwhile, Bags has not offered (and probably cannot under the MLB-MLBPA Collective Bargaining Agreement) to restructure his contract to induce the Stros of taking the economic risk of not making a claim on the insurance policy.
In short, the greatest player in Stros history is suggesting that the Stros should walk away from a potential $15.5 million recovery without receiving anything more than a great ballplayer’s goodwill for giving him one last chance at playing ball, probably at the expense of his teammates, who would likely be better off having a non-disabled ballplayer playing instead of Bags.
Frankly, Bagwell is the one being unreasonable here, not Drayton McLane. What should really concern Roy O would be if McLane were to give in to Bagwell’s self-indulgent stance. That he is not reflects that McLane is willing to do the right thing for the rest of the Stros ballplayers, even when doing the right thing is not what the greatest player in club history wants.

Look out, General Counsel

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siemens.jpgJohn over at the Wired GC provides this timely and informative post about the troubling implications of the criminal case against Ellen Roth, the 61-year-old former in-house lawyer at a U.S. subsidiary of German electronics-maker Siemens.
As Peter Lattman noted here, Ms. Roth was indicted last week in Chicago on charges that she helped set up a sham company to facilitate Siemens winning a $49 million radiology contract at a Chicago-area hospital. The indictment alleges that Ms. Roth was ìthe principal corporate decision-maker responsible for creating the legal entityî that established a sham partnership with a minority-owned business, which gave Siemens an advantage in obtaining the contract.
Not only does the case involve the now common problem that corporate officials can no longer rely on any attorney-client privilege of their employer, Larry Ribstein notes in this post that Sarbanes-Oxley could be used to expand the web of criminal liability much further than just the company’s general counsel:

The indictment says that ìSMS [the Siemens sub] relied on Roth to ensure legal compliance with the applicable ordinances.î Might this sort of thing trigger liability of the parent corporation or senior executives, either at the subsidiary or the head office, who certified adequacy of internal controls? Did they see the relevant business organization documents, including the email that the indictment says shows the absence of the requisite profit-sharing arrangement? If not, is the failure to examine or to insist on seeing those documents the absence of an internal control of which management had the requisite knowledge to trigger SEC sanctions under Section 302 and 906 of SOX (the latter includes criminal sanctions), or civil liability under 10(b) or 10b-5?

Lay-Skilling trial is a tough ticket

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ticket line.jpgThe Chronicle’s Claudia Feldman reports on the logistical challenge of accomodating the overflow of media representatives and spectators during the upcoming trial of former key Enron executives Ken Lay and Jeff Skilling. Inasmuch as U.S. District Judge Sim Lake’s courtroom will only accomodate 30 spaces for media, the District Clerk has arranged for a simulcast room at the courthouse that will provide another 120 seats on a first-come basis. The article notes that gibberish from certain of the media has already begun, perhaps best reflected by a BBC reporter’s over-the-top assessment of the case:

“Enron made the ground shake. This was the granddaddy of corporate scandals ó the one that made us doubt what we were being told as investors, the one that made us look at corporations in a whole new light.”

My sense is that the BBC needs to work on its story line a bit. That whole “corporations are evil” thing is so “1980’s/Gordon Gekko,” don’t you think?
Meanwhile, the Chronicle’s Mary Flood reports that the Lay-Skilling defense team are taking an interlocutory appeal to the Fifth Circuit Court of Appeals in New Orleans of Judge Lake’s most recent order denying the defense’s request for a change of venue for the upcoming trial. Inasmuch as the Fifth Circuit will evaluate the appeal under the extremely difficult-to-meet standard of whether Judge Lake abused his discretion in denying the change-of-venue request, the interlocutory appeal is almost a sure loser.
Finally, the NY Times Kurt Eichenwald — whose Conspiracy of Fools (Broadway 2005) remains the best book written to date about the Enron scandal — weighs in with colleague Alexei Barrionuevo in setting the stage for the trial, which includes the following insight into the Enron Task Force’s ever-shifting theory of the case:

The government’s case is built not so much on showing that Enron was destroyed by fraud, but rather on showing that fraud, including the suspected deceptions by Mr. Lay and Mr. Skilling, prevented the marketplace from knowing how badly things were going inside the company.