Gas Trader Attempts to Withdraw Plea Deal

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Former Reliant Energy gas trader Jerry Futch — who was arrested and charged under particularly heavy-handed circumstances — has filed a motion to withdraw his prior plea deal with the Justice Department and a motion to dismiss his indictment on four counts of reporting false transaction data to publishers that produce indexes used to value natural gas contracts.

Futch’s surprising motions were the latest developments in a series of controversial criminal cases that the U.S. Attorney’s office for the Southern District of Texas has been pursuing against former traders of natural gas who worked for various Houston-based companies.

The case against Futch is one of about a dozen that the Justice Department has been pursuing in regard to alleged manipulation of natural gas trading indexes, which are used to value billions of dollars in gas contracts and derivatives.

Industry publications such as Inside FERC Gas Market Report use data from traders to calculate the index price of natural gas, which affects the level of profits that traders can generate.

In Futch’s case and in the related trader cases, it remains unclear in what context the allegedly false information was transmitted or whether the publication even used any false information. However, the government’s theory of criminal liability is that it needs only to prove that fake trades were reported to the publications and not that the trades were actually published or affected the markets.

Eleven other former traders have been charged in similar cases, eight of whom (including Futch) have pled guilty. Four others others are currently awaiting trial, including former Dynegy trader Michelle Valencia and former El Paso trader Greg Singleton.

Futch’s motions are particularly interesting in that they assert the argument that Reliant Energy and its Houston-based counsel, Baker & Botts, effectively threw Futch to the wolves in not making him aware that he was a target of the criminal investigation into the false data reporting and that his statements in a Commodities Futures Trading Commission civil investigation could be used against him in the criminal investigation.

As has become typical in this era of the vanishing attorney-client privilege, Reliant Energy entered into a cooperation agreement with the CFTC in November 2003 in which the company agreed to give the government broad access to its employees such as Futch. Although Reliant Energy and Baker & Botts contend that Futch was advised that his statements in the civil investigation could be used against him, Reliant Energy did not provide Futch with independent counsel during the investigation.

“That you didn’t really mean it is why we want to use it”

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LaySkilling4B.jpgEven though most of the action is in the courtroom during the ongoing trial of former key Enron executives Ken Lay and Jeff Skilling, a few interesting tidbits still arise from time to time on the docket of the case.
You may recall this post from awhile back that focused on this rather odd Enron Task Force motion requesting that U.S. District Judge Sim Lake not allow the Lay-Skilling defense to use the Task Force’s own indictment during cross-examination of the Task Force’s witnesses in the trial because, among other things, to do so would risk “unfair prejudice, confusion of the issues [and] misleading the jury. . . ”
Well, as you might expect, the Lay-Skilling is having a little fun with the Task Force’s unusual request. In this opposition, the Lay-Skilling team notes that the Task Force’s motion stands due process of law on its head:

Due process considerations may keep the indictment from going to the jury where publishing it would cause defendant prejudice. . . . Invoking defendants‘ right to keep the indictment from the jury where it contains “inflammatory or pejorative language,” . . . and arguing that asking questions about the indictment may cause prejudice and confusion, the Task Force seeks to prevent defendants from showing the indictment to witnesses and questioning them about its allegations. . . The most efficient and effective means of cross-examining witnesses on certain topics includes asking them if specified allegations in the indictment are, in fact, true. To impose a blanket prohibition on such questions would interfere with defendants’ constitutional rights to present a defense and fully and effectively cross-examine their accusers.

Then, for good measure, the Lay-Skilling team tweaks the Task Force about its sudden change of opinion regarding the quality of the prose in the indictment:

The Task Force argues defendants might cross-examine witnesses about portions of the indictment that are surplusage, thereby confusing the jury. . . [However, the Task Force] previously, and successfully, argued exactly the opposite — that the indictment contained no surplusage — in opposing defendants’ motion to strike [portions of the indictment].

Meanwhile, down the hall from the relative levity of such motion sparring, the defense finished cross-examination of Mark Koenig (who may have unwittingly helped the defense) and the prosecution finished its re-direct on Monday afternoon. Judge Lake is going to allow a limited amount of re-cross of Koenig on Tuesday morning, then it’s time for the next prosecution witness — former Enron Broadband co-CEO, Ken Rice. Direct examination of Rice is expected to last at least the remainder of Tuesday, which means that cross-examination will likely take up the remainder of the week.

Week Three Lay-Skilling trial schedule

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Enron tower.jpgAs second week of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling comes to a lumbering close, the beginning of the third week will bring a new witness and renewed interest in the trial.
My sense is that the remainder of cross and redirect examination of the prosecution’s first witness — former Enron investor relations chief, Mark Koenig — will take the remainder of today and probably a part of Tuesday. Then, former Enron Broadband CEO Ken Rice will take the stand, and expect direct examination of Rice to take at least a day. Inasmuch as cross-examination of Rice will likely take longer than direct examination, expect Rice to remain on the stand for the remainder of this week.

Two interesting interviews

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milton-friedman-1.jpgjack-welch_portrait.jpgEconomist Milton Friedman (previous posts here, here and here) and former General Electric CEO Jack Welch are the subject of a couple of recent interviews and, as usual, both of them have interesting observations to pass along. First, Friedman:

“The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention canít do that. Politics exacerbates and magnifies differences.”

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Dick Harmon visitation and funeral schedule

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DickHarmon_web2.jpgThe funeral arrangements in Houston for well-known local golf professional Dick Harmon, who died unexpectedly this past Friday, have been finalized.
A visitation for friends of Dick and the Harmon family will be held from 2:00-9:00 p.m. on Thursday, February 16 at Geo. H. Lewis & Sons (1010 Bering Drive) , and a Vigil service is scheduled to begin at 7 p.m. that evening in the Jasek Chapel of the funeral home. A funeral mass will be conducted at 10 A.M. on Friday, February 17 at St. Michael’s Catholic Church, 1801 Sage Road. The Houston Chronicle’s electronic guest book for the Harmon famly is here.

Thinking about GM

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gm7.gifThese posts over the past year have chronicled General Motors’ Enronesque slide toward what is increasingly appearing to be an inevitable reorganization case under chapter 11 of the U.S. Bankruptcy Code. That probable fate was reinforced this past week when GM announced a band-aid restructuring plan that is akin to rearranging the deck chairs on the Titanic.
The newest GM plan really is pitiful under the circumstances. GM lost a staggering $8.6 billion last year, and that doesn’t even count another $12 billion of bankrupt Delphi (a part of GM until 1999) losses that GM might have to make up. In the face of this flood of red ink, GM announced that it will cut dividends by $565 million and cut another $900 million in costs through reducing executive salaries and health benefits. The biggest news was that GM CEO Rick Wagoner will take a 50% pay cut to $1.1 million, but there was precious little word on how the company is planning on bridging the rest of its $6 billion or so in losses. Conan O’Brien characterized the plan pretty well when he commented in a monologue that, since General Motors is cutting the salaries of its top executives, the executives will now be earning so little they will be forced to drive GM cars.
Moreover, it’s not as if GM has been a sterling investment over the years. As this Floyd Norris/NY Times article and accompanying chart notes, an investor who bought a share of GM stock at its price of $40.13 at the end of 1960 would have received $127.58 in dividends and received four distributions of stock worth $20.62 at the time those dividends were issued. If all of that had been reinvested in GM stock, then the investor would now own 11.6 shares, which is worth a bit more than $500. That amounts to a return of less than 6 percent compounded for those 45 years, which would be even less once brokerage fees and taxes are included in calculating a true net return.

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Dick Harmon, R.I.P.

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DickHarmon_web.jpgThe Houston and U.S. golfing communities are in shock this morning with the news that Dick Harmon — one of the four brothers who are among the best golf instructors in the United States — died unexpectedly on Friday morning from complications of pneumonia at Eisenhower Hospital in Palm Desert, California after he had been rushed to the hospital early Friday morning. Dick, who was 58 years old at the time of his death, was in Palm Springs working with current PGA Tour player, Lucas Glover.
Dick Harmon’s name is synonomous with golf in Houston. His late father, Claude, was a famous teaching pro at New York’s Winged Foot Golf Club and Florida’s Seminole Golf Club, and Claude was the last teaching pro to win the Master’s Golf Tournament (in 1948). My golf club in Houston — Lochinvar Golf Club — has always had a close relationship with the Harmon family and, in the final ten years of Claude’s life, he was the pro emeritus at Lochinvar. Claude’s green jacket from his Master’s victory still hangs in a special display case in the Lochinvar clubhouse.
After Claude’s death in 1991, Lochinvar attempted to hire Dick away from his longtime position at Houston’s River Oaks Country Club, but when Dick declined, he recommended that the club hire his older brother, Butch Harmon. Lochinvar did so and, seemingly overnight, Butch was using the Lochinvar facilities to teach such phenomenal golfing talents as Tiger Woods (while he was still at Stanford), Greg Norman, Phil Mickelson and many other top professional golfers. Before moving west several years ago to establish a golf school at a Lake Las Vegas resort, Butch parleyed his position at Lochinvar to become Golf Digest’s top-ranked golf instructor in the United States.
However, as good an instructor as Butch is, many golfing enthusiasts in Houston and elsewhere considered Dick Harmon to be an even better golf teacher. Dick was the revered golf pro at River Oaks for nearly a quarter-century before leaving in 2001 to establish his own golf school at Houston’s Redstone Golf Club. During that time, he tutored such extraordinary talents as Fred Couples, Steve Elkington, Lanny Wadkins, Craig Stadler, Blaine McCallister, Billy Ray Brown and current PGA up-and-comer, Glover, to name just a few. For years, Dick’s pro-member golf tournament at River Oaks — held on the Monday after the Shell Houston Open — would often attract more prominent professional golfers than the Houston Open.
As noted above, Dick and Butch are two of four Harmon brothers who are among the best golf teachers in the United States. Craig Harmon is the long-time head pro at Oak Hill Country Club in Rochester, N.Y., site of the 1956, 1968 and 1989 U.S. Opens, the 1995 Ryder Cub matches, and the 2003 PGA Championship. Moreover, youngest Harmon brother, Bill, is Director of Golf at Toscana Country Club in Palm Desert, California and the noted tutor of ageless PGA Tour veteran, Jay Haas.
A personal anecdote about Dick will give you a glimpse into his wonderful nature. About ten years ago, while Dick was still at River Oaks, a client of mine who was a River Oaks member asked Dick to fit me for a set of irons as an expression of gratitude for my work on a case. Not only did Dick fit me for the clubs personally, he had one of his assistant pros videotape my swing during the fitting process. Afterward, Dick pulled me into his office and analyzed my swing as we watched the video, and I still haven’t recovered from the humiliation of watching my swing on video while Dick superimposed Elkington’s perfect swing over mine.
But after the video-analysis, knowing that I am a big fan of the author Dan Jenkins, Dick proceeded to show me a videotape of a hilarious dinner roast of Jenkins in which a number of prominent Tour pros such as Ben Crenshaw, Tom Kite, and Peter Jacobsen provided salutations to Jenkins around the theme that “everything really was better in golf back when Hogan was playing.” The highlight was Jenkins getting up and giving it right back to the pros by excoriating them for their sponsorship of golf courses built into housing subdivisions or, as Jenkins put it derisively, “those damn dirt deals.” Dick and I were doubled over like a couple of school boys watching the video of Jenkins and the pros go at each other. From that time on, whenever Dick and I would see each other, we’d chuckle and inquire of each other whether there were any new “dirt deals” in the area.
Thus, Dick Harmon — who leaves his beloved wife Nancy, four children and two grandchildren — was truly a special man. Utilizing a gentle nature, dry wit and keen insight, his contributions to the Houston community were considerable. Nevertheless, he always felt as if his contributions were merely a small token of his appreciation for the tremendous opportunites that Houston provided to his family and him. Dick Harmon was the type of person that makes Houston such a special place. He will be sorely missed.
2 Feb. 2006 Update: The schedule for the visitation and funeral is here.

The trade deficit ruse

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trade deficit.jpgThis WSJ ($) article reports ominously that the U.S. trade deficit widened by over $100 billion last year to $726 billion from $618 billion in 2004.
In this TCS Central article, Don Boudreaux lucidly explains why we shouldn’t worry much about it.
A far greater problem than the trade deficit is the widespread misunderstanding of it that often results in demagogic appeals for counterproductive protectionist policies.

End of the line for the talented Mr. Munitz

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munitz8.jpgFollowing on earlier posts here, here and here addressed the mercurial career and current troubles of former University of Houston president and current Getty Trust president Barry J. Munitz, this NY Times article (LA Times article here) reports that Munitz resigned under pressure yesterday amid growing questions about his personal use of the trust’s money and resources.
As a part of his resignation deal with the trust, Munitz will not receive a severance package and he will be required to repay the trust $250,000, which is a ballpark estimate of the amount that the trust believes that Munitz improperly charged charged the trust for personal expenses during his eight-year tenure. However, Munitz’s resignation has no direct impact on the California attorney general’s investigation, which apparently is focusing on several instances in which Mr. Munitz used the trust’s money without proper authorization on pet projects that had nothing to do with the trust’s mission.
No word on whether Munitz will keep the lease on the Porsche Cayenne.

Third time a charm?

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forbes.gifThe criminal case against former Cendant Corp. Chairman Walter Forbes has now lasted eight years. Yesterday, the second trial against Forbes on charges of securities fraud, conspiracy and two counts of lying to the Securities and Exchange Commission ended in a mistrial (NY Times article here) with the jury deadlocked after 27 days of deliberations. The first trial of Forbes in 2004 also ended in a deadlocked jury.
After running a company that merged with another to form Cendant in 1997, Forbes became Cendant’s chairman and heir apparent for the CEO position. But the accounting fraud came to light in 1998 and Cendant’s market cap plummeted by $14 billion in one day, which prompted the indictment against Forbes. Mounting a similar defense to that of former HealthSouth CEO Richard Scrushy, Forbes contended that subordinates betrayed him and then concealed the scheme. One of Forbes’ underlings — Cosmo Corigliano, the chief financial officer of Forbes’ company that was used to form Cendant — copped a plea on conspiracy and fraud charges and was the main government witness against Forbes during the trial.