Monthly Archives: September 2006

Try to make sense of this

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Fastow20.jpgJamie Olis3.jpgLet’s see if I get this straight.
On one hand, Andrew Fastow — who served up his wife as a sacrifical lamb for his embezzlement of millions from Enron that triggered one of the largest bankruptcy cases in U.S. history, who used the NatWest Three to hide his embezzlement of millions more and then turned on the U.K. bankers to save his skin, who very well may have forged Richard Causey’s initials on the Global Galatic “agreement,” whose bizarre testimony during the Lay-Skilling trial was largely discounted by jurors and who had a large hand in ruining the careers of four innocent Merrill Lynch executives in order to lessen his prison sentence — is sentenced to six years in prison.
On the other hand, Jamie Olis — who worked on a transaction to improve his company’s earnings, did as he was told by his superiors, did not profit from the transaction, defended his company and himself against allegations of wrongdoing with regard to the transaction and did not trigger any type of insolvency case by his company — is sentenced to six years in prison.
These results are not the product of a rational application of our criminal justice system. Ellen Podgor has additional thoughts, particularly how the Fastow sentence may bear on the anticipated life sentence that former Enron CEO Jeff Skilling faces.

An interesting letter to Judge Lake

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Heartland logo.gifThe day before one of the relatively few real Enron criminals is scheduled to be sentenced, an interesting letter to U.S. District Judge Sim Lake became public in regard to the sentencing of former Enron CEO Jeff Skilling.
During and after the Lay-Skilling trial, Heartland Institute economists Paul Fisher and Jim Johnston authored several articles (previous posts here) that challenged the myth that Enron was merely a house of cards propped up through the fraud of its leaders (that myth has been a recurring theme on this blog, see here, here, here, here, here, and here, to cite just a few posts).
Now, in this letter to U.S. District Judge Sim Lake, Fisher and Johnston urge Judge Lake — in connection with the sentencing of Skilling — to take into consideration the huge beneficial impact that Enron had on various important markets. In so doing, Fisher and Johnston remind us once again of the vacuous nature of the real presumption in the Lay-Skilling trial — that is, that Skilling and Lay were rich and Enron collapsed, so they must be guilty of something in connection with Enron’s descent into bankruptcy:

From an economic perspective, the harm [that Skilling and Lay caused] is difficult to calculate. For sure, the collapse caused a huge notional loss to investors and employees in the form of pension and savings plans. However, Ken Lay and Jeff Skilling were not convicted of causing the collapse. They were convicted of lying about Enron’s financial condition (and one count of insider trading [against Skilling]). If the misrepresentation of Enron’s financial condition in 2001 as alleged in the indictment had not occurred, presumably the bad news would have been known earlier. That in turn would have caused the Enron share price to collapse sooner and even less time would have been available for investors and employees to liquidate their holdings.
The implication of this reality is that there was no additional harm done to the investors and employees from the alleged hiding of Enron’s profits and losses. While it may have changed the identity of the losers it did not increase the totality of the losses.
On balance, the benefits created by Ken Lay and Jeffrey Skilling in building Enron seem to us to far outweigh any incremental harm done to investors from the alleged fraud. The economists we know who have carefully studied the risk management practices and techniques developed by Enron agree that they were beneficial and will continue to be so. Not giving this reasonable weight will send a potentially harmful message. That is not to excuse any fraud, but rather to recognize the context of the decision.

Meanwhile, this Carrie Johnson-Brooke Masters/WaPo article explores the dubious reasoning behind prison sentences for businesspersons convicted of fraud that are harsher than those handed down for first-degree murder or treason.

Visiting the Longhorns

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Mac.jpgThis past Saturday, I traveled to Austin for the day with my buddy Jerry Sagehorn to meet my brothers Bud and Mike, and my brother-in-law Gene Acuna to watch the 7th-ranked Texas Longhorns play their Big 12 Conference opener against the Iowa State Cyclones, who are coached by my longtime friend, Dan McCarney.
McCarney — or “Coach Mac” as most everyone calls him — and I grew up together in Iowa City, Iowa, where we were teammates on a championship high school football team at City High in 1970. We have remained close friends over the years, and so I have tried to attend each game that Iowa State plays in Texas since Coach Mac became head coach at ISU in 1994. Coach Mac graciously comes through with a few sideline passes for me to use, and it’s always a great experience attending a game in Austin and College Station.
The Longhorns really have it going these days. After winning their first National Championship last season since 1970, the Horns are re-loading this season with a talented and deep group of players who are not only fast and strong, but also well-motivated. Mac’s Cyclones battled hard and, had a couple of plays turned out differently, could have been in a position to pull an upset over the 24 point-favored Horns at the end. However, the Horns dominated both lines of scrimmage over the final two-thirds of the game and methodically pulled away for a 37-14 victory.
The FilmLoop below contains some of the photographs that I took from the sideline during the game along with my comments about attending a game on the sidelines at D.K. Royal-Texas Memorial Stadium. As with College Station, Austin is one of the great college football venues in the country. I am blessed to have the opportunity to experience it up close and personal, and I am grateful to be able to pass along the experience to you.

They couldn’t pull this off, could they?

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Roger Clemens staring.jpgAfter I wrote off the Stros in my two previous periodic reviews of the club’s season (here and here), the hometown team is making things interesting.
First, the Stros swept the Cardinals in a four-game series over this past weekend (including three straight games in which they won in their last at bat). Then, last night, the club used 25 players — including a franchise record-tying nine pitchers and seven pinch hitters — to nip the Phillies 5-4 in Philadelphia and reach the .500 mark (78-78) for the first time since July 6. The Stros have now won six straight, the Cards have lost six straight and the Stros find themselves only 2.5 games behind the Cards in the National League Central with six games to play (three at Pittsburgh and three at Atlanta). The Cards have seven games remaining at home (two against the Padres, four against the Brewers and a makeup game against the Giants, if necessary). Even if the Stros go 4-2 over the final six games, the Cards only have to win three of their remaining games to win the title outright, so the Stros are still a longshot. However, it’s fun to watch the Cardinals gripping — that’s usually the position that the Stros are in.
By the way, Tory Gattis passes along this hilarious Onion article that places Roger Clemens’ seemingly endless string of final games in the perspective of many opposing baseball fans, particularly those in Boston who thought that Clemens’ last game was going to occur over a decade ago.
Meanwhile, my friend Jim Bob Baker, a University of Oklahoma diehard, passes along the following observation about the lingering effects on the OU fan base of the Oklahoma Sooners’ controversial loss last week at Oregon:

The only phrase that makes people in Oklahoma more nervous these days than “tornado warning” is when they hear “the play is under review . . .”

Demagoging Amaranth

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natural gas terminal.jpgFollowing on this earlier cue, NY Times business columnist Gretchen Morgenson contends in this column (Times Select, registration required) that Amaranth Advisors, LLP’s loss of $6 billion or so last week on the natural gas trading market is conclusive proof that energy markets are in need of more government regulation:

Many of Amaranthís monster trades in the natural gas markets were conducted on over-the-counter markets or with so-called voice brokers and so were not on regulatorsí radar screens.
It is too soon to tell what role Amaranthís gamble had on natural gas prices. But speculators played a significant role in the astonishing rise in energy prices in recent years.
Such is the conclusion of a compelling Congressional report produced in June by the Senateís Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs. The 49-page report detailed the explosion in energy speculation on unregulated trading markets and recommended eliminating the so-called Enron loophole that put electronic energy trading off the regulatory reservation.

See how easy that was? Just associate “Enron” with a company that suddenly lost about 2/3rd’s of its assets and, presto! — you have the need for more government regulation of trading markets without any analysis whatsoever of whether such regulation would ultimately be more expensive than the cost of the allowing markets to allocate loss. Indeed, how one earth would it have helped had Amaranth made filings with the CFTC? Does anyone really think that such a requirement would have prompted Amaranth to modify its trading practices?
As noted earlier here and here, allowing investors to make bets in energy trading markets — although not widely understood by the general public — is tremendously beneficial in forecasting energy prices. Not only will greater regulation of those markets likely undermine those benefits, Morgenson’s dubious assertion that speculation in energy markets has caused an increase in natural gas prices is based upon a Senate report that, as noted earlier here, is a sham that was essentially produced by the regulators to feather their nest.

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Well, at least we were good sports

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Rydercup06logo7.jpgAfter losing the Ryder Cup over the weekend for the fifth time in the last six competitions, the United States team is certainly an easy target for criticism and the golf writers are taking dead aim:
The Houston Chronicle’s golf columnist Steve Campbell channels Dan Jenkins and Jack Burke in this tongue-in-cheek column that preceded the final day’s matches. Campbell follows that column with this fine article on the emotional performance of Euro team member, Darren Clarke.
Lawrence Donegan of the Guardian pretty well summed up the U.S. squad’s effort:

[S]o one-sided was the contest that at times during yesterday’s session of 12 singles matches it seemed the impossible was on the cards – a Ryder Cup without drama.

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2006 Weekly local football review

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Texans sacks.jpgRedskins 31 Texans 15

Oh, my.
It’s only been three games, but let’s face it — the Kubiak Era is looking like an utter disaster. As noted in this earlier post, when Bob McNair replaced former general manager Charley Casserly and head coach Dom Capers, he changed the model of the football operation from a strong GM-field coach model to the strong coach-support GM model. Thus, Kubiak — who had never been a head coach — was a somewhat unusual choice to replace Capers.
Through three games, Kubiak looks like a marginal improvement over the Texans’ previous offensive coordinators, but a fairly disastrous choice as a head coach. Indeed, there is precious little that has occurred in the first three games that indicates that this team is any better overall than the 2-14 team of last season. Although the Texans’ offense has been dreadful in large parts of each of the first three games, the Texans defense is in complete disarray after giving up almost 500 yards for the third straight game and making 36-year old Redskins QB Mark Brunell look like Hall-of-Famer Steve Young. But what’s most distressing is that the Texan defenders don’t even look as if they have ever seen a screen pass or draw play, and don’t appear to have a clue as to situations in the game when those plays are likely to be called. Talent limitations aside, such lack of preparation is a sure sign of bad coaching.
Absent a win next week against a Miami team that has a feckless offense but strong defense, the Texans will likely be 0-6 because, after their bye in Week Five, they play at Dallas and at home against Jacksonville. Thus, the next realistic chance for a victory would be in Week Eight against the Titans. Moreover, based on their performance in the first three games, the Texans appear to have a realistic chance of winning only three or four of their remaining games — my pre-season prediction of six wins is a pipe dream at this point. Bob McNair does not deserve this.

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Declining Texas medical malpractice premiums

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malpractice_title2.jpgThis Ft. Worth Star-Telegram article from about a month ago reports that, since enactment of the Texas Medical Malpractice and Tort Reform Act of 2003, medical malpractice lawsuits in Tarrant and Dallas Counties have been reduced by as much as 60%. A couple of weeks later, this Austin Business Journal article and this PIAA press release report that Texas doctors are enjoying one of the steepest declines in malpractice insurance premiums rates in recent history — almost 30% over the past four years.
Pretty hard to argue that the parallel reduction in lawsuits and insurance premiums are a coincidence.

It’s not Austin, but . . .

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Aggie Tuba pivots.JPGEven when the New York Times provides a generally favorable review of the College Station, Texas — about 100 miles northwest of downtown Houston and the home of Texas A&M University — the newspaper cannot resist making a snarky comment about one of A&M’s most hallowed institutions — the magnificent Fightin’ Texas Aggie Band. In commenting on the experience of attending a football game in College Station, the Times article makes the following observation:

“Donít miss halftime; youíd have to go to North Korea to match the choreographed pageantry of A&Mís band and corps of cadets.”

Jamie Olis Resentenced to Six Years

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U.S. District Judge Sim Lake resentenced Jamie Olis to six years in prison this afternoon (Olis has already served about 2.5 years in prison) in the latest chapter of the three year saga that has become arguably the starkest example government’s dubious criminalization of business during the post-Enron era.

During the hearing, Judge Lake read portions of a lengthy opinion that he has written on the Olis resentencing. Although Judge Lake found that a sentencing guidelines sentence for Olis would be in a range of 151-188 months based on an estimated $79 million damage amount (the intended tax benefit to Dynegy from Project Alpha), he concluded that Olis deserved a non-guidelines sentence because of Olis’ exemplary character, the fact that Olis did not personally gain from Project Alpha, and that Dynegy did not fail as a going concern as a result of the transaction.

Judge Lake also concluded that the extensive publicity relating to Olis’ case and other recent white collar business cases has sufficiently informed the business world of the severity of fraudulent business conduct that principles of general deterrence do not require a guidelines sentence.

Although six years is a harsh sentence, my initial reaction to Judge Lake’s decision (before reading it) is that it would be very difficult to mount an effective appeal on Olis’ behalf to reduce the sentence.

On the other hand, the prosecution — exhibiting a lack of judgment that has become routine during this era of criminalizing business — announced at the end of the hearing that it intends to appeal Judge Lake’s opinion to the Fifth Circuit.

Frankly, I hope the government does appeal the sentence. That utter lack of prosecutorial discretion might be the only way to prompt the Fifth Circuit to take a whack at reducing Olis’ sentence further.

Update: Doug Berman, Ellen Podgor and Larry Ribstein, all of whom have blogged extensively on the Olis case, add their initial thoughts.

Professor Podgor’s point about the disparity between Olis’ sentence and the sentences of his co-defendants who copped pleas is particularly insightful.

Judge Lake notes in this opinion that this disparity in treatment between cooperating defendants and defendants who assert their innocence is a mechanism that Congress has adopted to facilitate cooperation in federal criminal investigations. But what looks good in theory has become ugly in practice.

Given the government’s overwhelming resource advantage and the willingness of prosecutors to appeal to jurors’ resentment to obtain convictions, asserting innocence in white collar criminal cases has become a risk that is too huge to take.