Monthly Archives: January 2009

Skilling fires back

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Jeff Skilling As noted earlier here, the Fifth Circuit Court of Appeals panel decision in former Enron CEO Jeff Skilling’s appeal of his criminal conviction was unusual in several respects.

For example, even though the three-judge panel reversed Skilling’s sentence and remanded that part of the case to the U.S. District Judge Sim Lake for re-sentencing, the part of the panel’s decision affirming the conviction was oddly superficial in a number of key respects.

In particular, the panel’s decision failed to reconcile its reasoning in upholding Skilling’s conviction for honest services wire-fraud under 18 U.S.C. § 1346 with the Fifth Circuit’s earlier decisions on the same issue in the Nigerian Barge and Kevin Howard cases.

Similarly, despite finding that Judge Lake had improperly failed to grant Skilling a presumption of community prejudice for purposes of establishing the correct venue and in selecting jurors, the panel turned around and affirmed the conviction anyway by reasoning that Skilling had waived his juror argument by failing to object to the seated jurors (except one) and by finding that Judge Lake had overcome the presumption of prejudice against Skilling by conducting an "exemplary" voir dire.

Now it’s time for Skilling’s team to fire back at the Fifth Circuit panel’s decision.

Yesterday, Skilling’s lawyers zeroed in on the unusual aspects of the panel’s decision by filing this Petition for Panel Rehearing and this Petition for Rehearing En Banc in front of the entire Fifth Circuit Court of Appeals (Kristen Hays’ Chronicle article is here). As with the panel’s earlier decision, the copies of Skillings’ petitions provided in this post are bookmarked, key arguments are highlighted, and a few of my comments are included.

The Petition for Rehearing En Banc is the meatier of the two pleadings in analyzing the alleged defects in the panel’s decision.

First, Skilling hammers the panel’s creation of a "following orders" exception to rationalize affirming Skilling’s conviction on the honest services wire-fraud charge even though that decision is inconsistent with the Fifth Circuit’s previous decisions in the Nigerian Barge and Kevin Howard cases and other appellate decisions on the same issue. In short, Skilling argues that the only discernable “rule” that can be gleaned from the Fifth Circuit’s conflicting decisions on the issue is that an employee cannot be convicted for honest services wire fraud if the conduct charged was in furtherance of the corporate interest (Nigerian Barge decision) unless the employee is a senior executive (Skilling decision) except in certain unspecified circumstances (Howard decision).

Skilling rightly asks: How could "any employee .  .  . know under existing circuit precedent what conduct will subject him to prosecution for honest-services fraud?"

Heck, maybe we all ought to be signing up for this.

Moreover, Skilling argues that the panel simply misread the trial record in finding that Skilling had "failed to challenge for cause all but one of the jurors." The panel used that key finding to conclude that Skilling had "waived most of his argument" regarding improper venue and juror bias.

This is important because of the panel’s finding that the District Court committed error in failing to find presumed community prejudice against Skilling. In effect, the panel’s waiver analysis relieved the Enron Task Force of its burden to show that each juror was impartial. Instead, the panel required Skilling to show that each juror was biased, which confuses an actual prejudice case (in which Skilling would bear the burden of proving bias) with a presumed prejudice case, where the prosecution is required to fulfill the tough burden of proving that each juror is impartial.

Inasmuch as Skilling’s appellate petitions specify in the trial record where he challenged the entire jury and objected specifically to at least seven seated jurors, Skilling’s request for rehearing on this ground appears to be solid. Frankly, if it is not clear error for the District Court to have denied Skilling’s motion to change the venue of his trial because of the unprecedented community bias against him, then there is simply no longer a legal basis to change the venue of a trial on that basis within the Fifth Circuit.

Finally, Skilling argues that the panel was wrong to affirm the District Court’s (i) jury charge on the definition of “materiality” for purposes of securities fraud, and (ii) its refusal to dismiss “puffing” statements that are normally dismissed as immaterial in civil securities fraud cases.

It is well-settled in securities law generally that reasonable investors rely on facts in assessing the value of a company’s stock and not mere expressions of optimism from company spokespeople. Consequently, Skilling argues that the panel was wrong to affirm the District Court’s decision that Skilling’s misstatements had to be submitted to the jury even though they were indistinguishable from misstatements that the Fifth Circuit has routinely ruled could not sustain a securities fraud claim. In fact, Skilling relies on a Fifth Circuit decision in a recent Enron-related civil case as support for his argument.

So, where does all this leave Skilling?

Well, on one hand, it’s never easy winning a case on appeal in the best of circumstances, and it’s hard to imagine a worse political climate than the present one for a formerly wealthy businessman to be pursuing sympathy from an appellate court in regard to the way in which he was prosecuted for alleged business crimes.

On the other hand, the prosecution of Skilling stinks to high-Heaven. Moreover, there are a number of Fifth Circuit judges with first-rate business law experience who could very well be uncomfortable with the way in which the Department of Justice is attempting to convict businesspeople such as Skilling by placing the square peg of the honest services wire-fraud charge in the round hole of a non-kickback, non-bribery business crime case.

My bet is that Skilling has a better than normal chance of the full Fifth Circuit taking a good, hard look at his appeal.
Stay tuned.

Reality Bites

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CramerTNThis earlier post made the following point about folks who lost their entire nest egg by investing it with Bernard Madoff:

Although nothing is wrong with compassion for folks who lose money in an investment fraud, it’s important to remember that those investors who lost their nest egg in the Madoff implosion were imprudent in their investment strategy. They should have diversified their Madoff holdings or done some real due diligence into his operation if they were going to bet the farm on it. Even though every one of Madoff investors carry insurance on their homes and cars, one can only speculate why they didn’t attempt to understand the risk of their investment in Madoff’s company better than most did. Most likely, many of the investors simply did not care to truly understand how Madoff claimed to create wealth for them in the first place.  .  .  .

It’s easy to throw Madoff in prison for the rest of his life, simply attribute the investment loss to him and pledge to do a better job of policing the crooks next time. It’s a lot harder to understand how Madoff’s investors could have hedged their risk of Madoff’s fraud. As this WSJ editorial concludes, "expecting the SEC to prevent a determined and crafty con man from separating investors from their money is no more sensible than putting your life savings with a Bernard Madoff."

Professor Antony Davies of Duquesne University in Pittsburgh makes an analogous point in this W$J letter-to-the-editor (H/T Don Boudreaux) about folks who are calling for increased regulation because of losses incurred in their 401(k) retirement accounts:

In the article "Big Slide in 401(k)s Spurs Calls for Change" (page one, Jan. 8), 35-year-old project manager Kristine Gardner says in response to the 44% drop in her 401(k) last year: "There’s just no guarantee that when you’re ready to retire you’re going to have the money."

Newsflash: Higher returns are the compensation for incurring risk, and lower returns are the price of safety. Ms. Gardner’s 401(k) would have been completely safe had she shifted her investment allocations into money markets. As money markets yield a paltry 1%, Ms. Gardner’s real complaint isn’t that 401(k)s are unsafe, but rather that financial markets require her to incur risk in exchange for being compensated for incurring risk.

Retirement consultant Robyn Credico claims that "This is the biggest test that the 401(k) plan has seen . . . and it has failed." Au contraire, 401(k) plans have worked exactly as designed. It is the workers (and their retirement consultants) who have failed.

There is only one reason why the average person close to retirement should have lost 50% of his 401(k): incompetence. Most workers at that age should have long since shifted the bulk of their 401(k)s into bonds and money markets. The 401(k) is a powerful investment tool but can be dangerous when abused.

If you aren’t willing to put forth the effort to learn the principles of investing, that’s your choice. But don’t hobble the rest of us by asking for government regulation of a tool that works perfectly well just so that you can be spared the effort of figuring out how to use it.

As with the security theater in our nation’s airports, increased regulatory control over retirement investment is a fake safety net. It will not protect retirement savings (check out the solvency of the Social Security system if you don’t believe that), and the "protection" of increased regulation will lead many investors to believe that they still do not need to understand the best ways to create wealth and hedge risk in their retirement accounts.

Indulging ignorance is generally not a good reason for increasing governmental power.

An entertaining upcoming week in Houston

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ribstein No one in Houston this week can complain about lack of opportunity for intellectual stimulation.

First, well-known legal blogger and Clear Thinkers favorite Larry Ribstein will be lecturing on Thursday afternoon from noon to 2 p.m. at the University of Houston Law Center as the first speaker of the semester in UH Law Professor Lonny Hoffman‘s “Colloquium” course that brings noted legal scholars from around the country to UH each year to give presentations on the scholar’s work in progress.

Great teachers are a popular topic on this blog (see here and here), so I’m particularly pleased that Professor Ribstein is taking the time out of his busy schedule to visit Houston. As regular HCT readers know, Professor Ribstein is one of the premier business law scholars in the country.

The holder of the Mildred Van Voorhis Jones Chair at the University of Illinois College of Law, Professor Ribstein’s widely-read Ideoblog has been at the forefront of the blawgosphere’s enormous impact on legal analysis and education, literally pushing legal scholarship from what had been mostly closed conversations between fellow academics into a hugely valuable resource that is now readily available to anyone over the Web. Already the leading expert in the U.S. in the area of unincorporated business associations, Professor Ribstein is also one of the blawgosphere’s most insightful thinkers on corporate governance issues and the effects of regulation on markets and business. His blog has contributed as much to the understanding and appreciation of business law issues over the past five years as any resource of which I am aware.

Professor Ribstein’s talk on Thursday will be on this paper that he co-authored with George Mason University law professor Bruce Kobiyashi that examines the empirical factors that influence limited liability companies’ choice of where to organize. Seating for the talk is limited, so contact Professor Hoffman at Lhoffman@central.uh.edu or 713.743.5206 as soon as possible to reserve a seat. The lecture will be held in the Heritage Room of the UH Law Center.

Meanwhile, on Wednesday from 11:30-1:30 p.m., popular author and journalist Malcolm Gladwell will be giving a talk on his new book, Outliers, at the Hilton-Americas Houston hotel (Chron article here). Tickets are $75 and include a copy of the book and the luncheon, which is co-sponsored by Inprint, the Greater Houston Partnership and Brazos Bookstore. Contact Jill Reese at 713.844.3682 or jreese@houston.org to make reservations, the deadline for which is noon on Tuesday.

Finally, author and former Houstonian Larry McMurtry — the pre-eminent Texas writer of the past 30 years — will be giving the lecture on Wednesday evening from 7-8:00 p.m. in Rice University’s Distinguished Lecture series. The lecture will be held in the Grand Hall of Rice’s Ley Student Center and is open to the public.

The Hardest Job in Football

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super-bowl-2008 As you settle in to watch today’s two NFL conference championship games, be sure to check out Mark Bowden’s excellent article in this month’s Atlantic on the enormous human and technological resources that to into the television production of a typical NFL game.

Sort of makes a two-minute offense at the end of a game seem a bit mundane in comparison, wouldn’t you agree?

Hayes Carll on the Battle of Crystal Beach

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Clear Thinkers favorite Hayes Carll sings "I Got a Gig" and tells the humorous story about about his first gigs in Crystal Beach, Texas.

Marathon madness

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chevronmarathon The annual running of the Houston Marathon is this weekend, so the Houston Chronicle is running its typical series of supposedly inspiring stories about various participants.

A couple of days ago, the story was about a couple of folks who had lost huge amounts of weight while training for marathons. Richard Justice wrote this column about some fellow who is so obsessive about running that he has run in "82 marathons across 26 years, four continents and 29 states."

Yesterday’s Chronicle article, however, takes the cake. Check out the headline:

Sunday’s race will be extra special for Stacie Rubin, who will be competing five months after suffering a heart attack

The story goes on to describe a Kingwood mother of four children who has run long distances daily for years. She had a heart attack while training one day and didn’t even go to the doctor’s office for several days because she was so convinced that someone as "healthy" as her could not have anything seriously wrong with her. Even after the heart attack, she was so obsessed about her long-distance training that she was back running again within a couple of weeks of the heart attack and is now planning on running in the marathon this weekend.

The Chronicle article presents all of this as heroic and the epitome of physical fitness.

Frankly, I think these stories are grossly misleading and the people telling them are badly misguided.

In my younger days, I used to run long-distances, too. I even ran a 37 minute flat 10K — 6.2 miles — once. As with most folks in my generation, I bought into the myth that long-distance running was excellent aerobic exercise that allowed me to maintain good health while eating most anything I wanted.

However, about 15 years ago, after falling out of shape during a busy time in my practice, I decided to do some extensive research into exercise protocols and nutrition to put myself back on track. After about six months of research, I concluded that most of my pre-conceived notions about exercise and nutrition were flat-out wrong.

For example, I discovered that long-distance running is neither a particularly healthy form of exercise nor an effective method of weight control.

Note, for example, this abstract from the a study published in the Annals of the New York Academy of Sciences:

Ann N Y Acad Sci. 1977;301:593-619. Related Articles, Links

Coronary heart disease in marathon runners.

Noakes T, Opie L, Beck W, McKechnie J, Benchimol A, Desser K.

Six highly trained marathon runners developed myocardial infarction. One of the two cases of clinically diagnosed myocardial infarction was fatal, and there were four cases of angiographically-proven infarction. Two athletes had significant arterial disease of two major coronary arteries, a third had stenosis of the anterior descending and the fourth of the right coronary artery. All these athletes had warning symptoms. Three of them completed marathon races despite symptoms, one athlete running more than 20 miles after the onset of exertional discomfort to complete the 56 mile Comrades Marathon. In spite of developing chest pain, another athlete who died had continued training for three weeks, including a 40 mile run. Two other athletes also continued to train with chest pain. We conclude that the marathon runners studied were not immune to coronary heart disease, nor to coronary atherosclerosis and that high levels of physical fitness did not guarantee the absence of significant cardiovascular disease. In addition, the relationship of exercise and myocardial infarction was complex because two athletes developed myocardial infarction during marathon running in the absence of complete coronary artery occlusion. We stress that marathon runners, like other sportsmen, should be warned of the serious significance of the development of exertional symptoms. Our conclusions do not reflect on the possible value of exercise in the prevention of coronary heart disease. Rather we refute exaggerated claims that marathon running provides complete immunity from coronary heart disease.

This recent University of Maryland Medical Center study examines another health risk of long-distance running.

Art DeVany — who has been studying physiology and exercise protocols for years — has written a series of blog posts over the years regarding the unhealthy nature and outright dangers of long-distance running. DeVany points out that many endurance runners in fact are not particularly healthy people, often suffering from lack of muscle mass, overuse injuries, dangerous inflammation and dubious nutrition.

Similarly, in this timely article, Mark Sisson lucidly explains why endurance training is hazardous to one’s health. Here is a snippet:

The problem with many, if not most, age group endurance athletes is that the low-level training gets out of hand. They overtrain in their exuberance to excel at racing, and they over consume carbohydrates in an effort to stay fueled. The result is that over the years, their muscle mass, immune function, and testosterone decrease, while their cortisol, insulin and oxidative output increase (unless you work so hard that you actually exhaust the adrenals, introducing an even more disconcerting scenario). Any anti-aging doc will tell you that if you do this long enough, you will hasten, rather than retard, the aging process. Studies have shown an increase in mortality when weekly caloric expenditure exceeds 4,000. [. . .]

Now, what does all this mean for the generation of us who bought into Ken Cooper’s "more aerobics is better" philosophy? Is it too late to get on the anti-aging train? Hey, we’re still probably a lot better off than our college classmates who gained 60 pounds and can’t walk up a flight of stairs. Sure, we may look a little older and move a little slower than we’d like, but there’s still time to readjust the training to fit our DNA blueprint. Maybe just move a little slower, lift some weights, do some yoga and eat right and there’s a good chance you’ll maximize the quality of your remaining years… and look good doing whatever you do.

In this recent post, Sisson describes a weekly method of aerobic exercise that provides most of the health benefit derived from long-distance running at a fraction of the time expenditure and at far less risk of injury. Add in a couple of short (about 20-25 minutes sessions) weight-training sessions per week to maintain your lead body mass, lead an active recreational lifestyle and observe balanced
nutrition, and you are likely to be far healthier than the folks who are spending untold hours beating themselves up running long-distances.

If you are interested in developing such a plan, check out both DeVany and Sisson’s blogs. They provide a wealth of information on how to tailor an efficient exercise and nutrition plan.

Fertitta calls off bid to take Landry’s private, but takes it private, anyway

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Landry's logo Suffice it to say that it’s been an interesting past year and a half for Houston-based Landry’s Restaurants Inc., which owns restaurants such as Landry’s, Rainforest Cafe, Charley’s Crab, The Chart House, and Saltgrass Steak House, as well as the Golden Nugget Hotel & Casino in Las Vegas and Laughlin, Nev.

The saga started in late July of 2007 when the company announced that it was delinquent in its regulatory filings with the SEC and that it was in need of refinancing over $400 million in debt in a rapidly deteriorating debt market.

Shortly thereafter, the company sued some of its bondholders for declaring the company in technical default under their bonds, but the company quickly settled that litigation on not particularly good terms.

A few months later, Landry’s announced in January 2008 that its CEO and major shareholder (39%), Tilman Fertitta, had made an offer to take the company private by buying the other 61% of the company’s stock for $23.50 share, which worked to be a $1.3 billion deal, including debt.

That offer seemed all well and good, particularly given that the proposed purchase price was a 40% premium over the $16.67 share price at the time of the offer.

Unfortunately, a spate of shareholder lawsuits followed Fertitta’s bid. By early March, 2008, it was apparent that Fertitta’s bid was so speculative that he hadn’t even lined up financing for it.

So, the following month, Fertitta lowered his offer to $21 per share because of "tighter credit markets", and Landry’s announced that it had accepted that price in June.

But by the fall, the financial crisis on Wall Street had roiled credit markets even further and Hurricane Ike caused considerable damage to several Landry’s properties. So, in October, Fertitta lowered his offer to $13.50 per share.

Then, on Monday of this week, the company announced that it was terminating the proposed deal with Fertitta. The company contended that the SEC was requiring the company to issue a proxy statement disclosing information about a confidential commitment letter from the lead lenders on the buyout deal. The company is negotiating with those same lenders to refinance the bond indebtedness that the company promised to refinance in connection with October, 2007 litigation settlement noted above. Inasmuch as the lenders’ commitment for financing Fertitta’s buyout required that the terms of the commitment remain confidential, the company elected to terminate the buyout deal rather than risk that the lenders would declare a default for breach of confidentiality and back out of the financing commitment for the buyout, as well as the negotiations on the refinancing of the bond indebtedness.

Oh yeah, amidst all this, Landry’s stock closed at $6.54 per share today.

Meanwhile, what has Fertitta been doing while his take-private bids have languished and the company’s stock has plummeted to historic lows?

He has been buying more Landry’s stock. So much so that he now controls 56.7% of the company’s shares.

That’s right. Landry’s board failed to obtain a standstill agreement from Fertitta while his buyout offers were pending over the past year.

As Steve Davidoff notes, this is "truly worthy of Deal From Hell status." Loren Steffy has the same take.

While Landry’s directors are checking on the amount of the company’s D&O policy, I wonder whether Landry’s lenders will follow through on the refinancing negotiations for the bond indebtedness in light of the market’s hammering of Landry’s share price?

If that refinancing doesn’t happen, then those bondholders who Landry’s sued back in August of 2007 will likely not be easy for the company to deal with.

In that case, maybe Fertitta’s additional purchases of Landry’s stock won’t look so smart after all.

Stay tuned.

Fascinating trend

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Following on this earlier post, isn’t it interesting that companies selling alcoholic beverages are funding some of the most creative product on television?

The Criminalization-of-Business Lottery

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The owners of Long Term Capital Management may have been the earliest winners in the most recent era of what Larry Ribstein has coined the criminalization-of-business lottery.

On the other hand, Jamie Olis may have been the biggest loser.

Martha Stewart lost, but at least never lost her business enterprise. Frank Quattrone also lost, but then he won, although I suspect that he believes that he lost overall.

Subsequently, Theodore Sihpol won while Bill Fuhs and his family lost a year of his life before he won, too. But he and his family will never get that year back.

Then, Ken Lay lost big even though he had a reasonable basis for believing that he should have won. Same with Jeff Skilling.

Meanwhile, mainstream media darlings Steve Jobs and Warren Buffett won, although several of Buffett’s associates did not fare as well. Neither did relative media unknown Greg Reyes.

But General Motors CEO Rick Wagoner appears to be a winner, even though those two Bear Stearns executives probably aren’t.

And who knows about those Lehman Brothers executives — they may be winners, after all? I mean, everyone was doing it, right?

Finally, for awhile, it looked as if David Stockman was going to be a big loser. But in a startling turnaround, Stockman is now a winner.

Just as with a gambling lottery, there is no rhyme or reason as to who wins or loses in the criminalization-of-business lottery.

But in this lottery — which does little or nothing to deter the true business criminals of the world — the losers and their families give up much more than merely money.

A truly civil society would find a better way.

2008 Weekly local football review

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Colt McCoy (previous weekly reviews are here)

Texas Longhorns 24 Ohio State 21

In a not particularly well-played, but nevertheless highly-entertaining Fiesta Bowl last Monday night, the Longhorns (12-1) used some more QB Colt McCoy magic with 16 seconds left to pull out the victory over upset-minded Ohio State (10-3).

After arguably his worst half of the season, McCoy (41-59/414 yds/2 TD/1 INT) rebounded in the second half of the game to lead the Horns to a 17-6 third quarter lead, then engineered the spine-tingling comeback in the final two minutes after the Buckeyes had rallied during the fourth quarter to take the lead. WR Quan Cosby had a monster game (14 receptions for 171 yds and 2 TD’s) and capped his Longhorn career with a spectacular catch and run for the game-clinching TD.

In many respects, this Longhorn team was the product of the best performance by head coach Mack Brown during his tenure at UT. With Oklahoma’s (12-2) loss to Florida in the BCS Championship game, the win over tOSU gave the Horns the best record and the highest national ranking of any Big 12 team. The Horns survived a brutal mid-season stretch of games against highly-ranked teams and came within a dropped interception in the final minute of the Texas Tech game of playing in the BCS Championship game. Given their improvement on defense this season over the 2007 season, the stability of the coaching staff and the return of McCoy next season, UT’s future remains bright, although the failure of a dominant running back to emerge this season is cause for some concern.

UT’s troubles against Ohio State, Texas Tech’s embarrassing loss to Mississippi in the Cotton Bowl, and OU’s loss to Florida reflects a trend of Big 12 teams having problems against top-tier defenses of non-Big 12 teams. The Longhorns’ lack of a consistent rushing attack was a problem against the salty Ohio State defense and that inconsistency could leave the Horns vulnerable next season to the tougher defenses that they will face against a top tier team in a bowl game.

In fact, the lack of top-notch defenses overall in the Big 12 should be at least a moderate concern for conference coaches and officials, who appear to have swung the pendulum too far in favor of the offenses in an effort to create exciting, high-scoring games. Texas Tech’s offensive linemen looked absolutely shocked during the Cotton Bowl when referees from another conference actually called holding against them a couple of times during the game. Tech’s offensive linemen rarely endured holding calls this season from Big 12 referees.

Such small problems aside, things are definitely looking up for the Longhorns next season. With a much more favorable schedule, the Longhorns will begin the 2009 campaign as a consensus top 3 pick in the national polls. Inasmuch as OU will probably have to replace their star QB Sam Bradford, the Horns will probably also be the consensus favorite to win the Big 12 championship.

It’s all good these days in Longhorn Country.