The business news was awash with articles over the past couple of days about how Amaranth Advisors, LLP lost $5 billion or so by making wrong bets that natural gas prices would rise. Inasmuch as Monday morning quarterbacking is much easier than actually making money in placing such bets, it’s fairly clear what happened. As gas prices fell precipitously because of a storage glut, Amaranth increased bets that would pay off exponentially only if natural-gas prices rebounded in anticipation of a cold winter or as a result of a hurricane hammering natural-gas facilities. That hasn’t happened and so prices have continued to erode.
Meanwhile, Amaranth’s risk management systems apparently did not accurately measure how much downside risk the company faced and did not provide an effective mechanism for hedging that risk. Amaranth’s bets went bad because the company misjudged the spread, which is the movement of the difference between prices for different month contracts. The institutions and wealthy investors that invested with Amaranth knew about that risk, but they took it because of the potential for big gains if Amaranth bet right. Nothing too unusual about that.

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In this earlier post, I noted that KPMG’s resistance to paying its former employees’ defense costs in the KPMG tax shelter criminal case could end up being an element in prompting US District Judge Lewis Kaplan to dismiss the charges because of the government’s prosecutorial misconduct in coercing the firm into that position.
Now, it looks as if KPMG has gone one step further. According to this Lynnlee Browning/NY Times article, KPMG is now suing several of its former employees who are also defendants in the criminal case for damages resulting from their alleged embezzlement from the firm and breach of fiduciary duty to the firm in regard to their involvement with the tax shelters.
That lawsuit — along with the firm’s continued refusal to pay their employees’ defense costs in the criminal case — must be giving current KPMG partners a warm and fuzzy feeling, don’t you think? Also, a note to KPMG — such civil suits have a little process called “discovery,” which often leads to the publication of embarrassing information. As if the firm needs any more bad publicity from this seemingly endless debacle.
Meanwhile, this Wall Street Journal editorial ($) reports that two previously undisclosed IRS memos to KPMG from 2003 and 2004 confirm that the Service didn’t think there was anything wrong with the shelters. The defendants in the criminal case are understandably demanding all government documents relating to such memos, and the prosecution — as is typical in this era of criminalizing business — is resisting those demands. In short, the legality of the KPMG tax shelters was a subject of debate within the IRS, but the Justice Department brought the criminal case anyway before the IRS had even won a court ruling declaring the shelters to be illegal.
So much for due process, eh?

As we await U.S. District Judge Sim Lake’s decision on the re-sentencing of Jamie Olis later this week, this Economist article does an excellent job of summarizing the issues that are at play in determining the all-important market loss issue with regard to Olis re-sentencing.

I particularly enjoyed the last sentence of the article:

“If Judge Lake has been spending the summer getting up to date on economics, perhaps Mr Olis will be out of prison much sooner than he must once have feared.”

David Delainey, former CEO of Enron Energy Services, was sentenced on Monday to 2 and a half year in the pokey in connection with his plea deal in which he pled guilty to insider trading charges and sang like a canary for the prosecution during the criminal trial of former key Enron executives Ken Lay and Jeff Skilling.
Delainey went over-the-top in his testimony against Lay and Skilling, so the Enron Task Force didn’t oppose a lenient sentence for him. Moreover, Delainey’s counsel requested a probated sentence from US District Judge Kenneth Hoyt, who is generally considered a relatively light sentencing judge. As a result, it was expected in the local legal community that Delainey would probably receive a similar sentence to that of Timothy DeSpain.
However, Delainey’s desire to placate prosecutors appears to have backfired as Judge Hoyt commented during the sentencing hearing that his criminal conduct was “a lot deeper and a lot wider, . . . than is expressed in this charge.” Thus, the length of the sentence — and particularly the fact that Delainey was hauled off to jail straight from the courtroom — is mildly surprising. It is also tragic in that Delainey’s testimony during the Lay-Skilling trial was not particularly credible. My sense is that he agreed to the plea bargain solely to hedge the risk of a longer prison sentence on the charges.
By the way, this Kristen Hays/Chronicle article outlines the sentencing schedule for former Enron executives in the upcoming months.

John Hasnas is a professor of ethics and law at Georgetown University’s McDonough School of Business and is the author of the book, Trapped: When Acting Ethically is Against the Law (Cato 2006), which is an adaptation of Professor Hasnas’ article Ethics and the Problem of White Collar Crime. This previous post discussed one of Professor Hasnas’ articles on the perverse effect that implementation of the Department of Justice’s Thompson Memo has had on companies serving up their employees as sacrificial lambs to avoid an Arthur Andersen-like meltdown.
Following on that article, Professor Hasnas authored this WSJ ($) op-ed over the weekend on the real problem that underlies such policies as those implemented under the Thompson Memo:

DOJ policy is merely a symptom of the underlying disease: the untenable standard of corporate criminal liability embodied in federal law. Attempting to reform DOJ policy without changing the law is a bit like treating a lung-cancer patient’s cough. It won’t hurt, but it won’t help that much either.
When should corporations be subject to criminal punishment? Perhaps never. These entities cannot be imprisoned, only fined; and the fines are paid by the corporations’ shareholders. The defining characteristic of the modern publicly traded corporation is the separation of ownership and control: Shareholders do not control the actions of corporate employees. Thus, imposing criminal punishment on a corporation, rather than on the employees who committed the offense, punishes shareholders who are innocent of wrongdoing.

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Apparently, “service” such as that described here, here and here will get you an exceptional service award from the U.S. Department of Justice.
Trampling justice and the rule of law while destroying careers, jobs and wealth is “exceptional” governmental service?
God help us all.