But for today I'll just offer you a link.
Kinder.
Oh, and the obvious pun: Will history be kind to Kinder?
Showing posts with label Enron. Show all posts
Showing posts with label Enron. Show all posts
22 October 2011
21 October 2011
Enron: Ten Years Ago
The drama of the Enron scandal was playing out in the day-to-day headlines of a decade ago this month.
It was on October 16, 2001, in particular, that Enron issued a dramatic series of announcements. It had a 3d quarter loss of $618 million. It took a $1.2 billion hit against shareholder equity related to the unwinding of a partnership that its Chief Financial Officer, Andrew Fastow, had been running on the side (LJM2). And it acknowledged an after-tax charge against earnings of $544 million ... again, related to LJM2.
On October 17th, the SEC sent Enron a letter. Actually, three letters and three question marks: "WTF???"
On October 22, the existence of an SEC investigation became public knowledge and the price of shares of Enron fell 20 percent.
On October 24, the board finally fired Fastow, replacing him with Jeffrey McMahon, who himself had been deeply involved with many of the very Fastowian transactions that were doing in the company.
By October 29th it was obvious that Moodys was going to downgrade the company's credit status. Ken Lay talked on the phone on that day with President Bush's Commerce Secretary, Donald Evans. Nobody in the administration lifted a finger for Enron -- and I am nobody's idea of a Bushie, but I have to say this was to their credit.
Anyway, all of that provided excitement to the October of 2001. In this October we deal with different crises and the characters as they unfold have different names. Yet "the more things change...."
It was on October 16, 2001, in particular, that Enron issued a dramatic series of announcements. It had a 3d quarter loss of $618 million. It took a $1.2 billion hit against shareholder equity related to the unwinding of a partnership that its Chief Financial Officer, Andrew Fastow, had been running on the side (LJM2). And it acknowledged an after-tax charge against earnings of $544 million ... again, related to LJM2.
On October 17th, the SEC sent Enron a letter. Actually, three letters and three question marks: "WTF???"
On October 22, the existence of an SEC investigation became public knowledge and the price of shares of Enron fell 20 percent.
On October 24, the board finally fired Fastow, replacing him with Jeffrey McMahon, who himself had been deeply involved with many of the very Fastowian transactions that were doing in the company.
By October 29th it was obvious that Moodys was going to downgrade the company's credit status. Ken Lay talked on the phone on that day with President Bush's Commerce Secretary, Donald Evans. Nobody in the administration lifted a finger for Enron -- and I am nobody's idea of a Bushie, but I have to say this was to their credit.
Anyway, all of that provided excitement to the October of 2001. In this October we deal with different crises and the characters as they unfold have different names. Yet "the more things change...."
08 April 2011
Corporate Accountability
Some thoughts toward what will eventually become chapter 8 of my book, Corporations and Accountability.
Actually, that's far too simple for a lot of reasons, and the shares if publicly traded will be worth whatever buyers agree to pay and sellers agree to receive. But in the very simple case described above, one would expect the market prices to cycle around $1.
Sometimes the iffy accounting isn't the result of inflation, honest confusion, or simple self- deception.
Sometimes it is the consequence of blatant fraud -- a corporate management that in cold blood sets out to cheat investors by lying to them about the corporation's prospects.
Enron's use of "special purpose entities" that effectively turned their own stock into a company asset is an example of the blatant lying.
The fundamental equation of accounting is this: assets - liabilities = equity. That is also, not surprisingly, the format for a balance sheet.
What a company is worth to its stockholders consists of everything the company owns, minus everything it owes.
For a company to treat its own stock as one of its assets is in effect a matter of blatant double-counting. Suppose a company owns only a lot of furniture -- $7 million of furniture. Suppose it owes $6 million to various parties. Its equity is, then, $1 million. If it has one million owners with shares of equal value then one would expect the value of each share to be ... $1. Simple enough, right?
Actually, that's far too simple for a lot of reasons, and the shares if publicly traded will be worth whatever buyers agree to pay and sellers agree to receive. But in the very simple case described above, one would expect the market prices to cycle around $1.
To get to the point, though: suppose the company starts treating that $1 million equity as an asset. Aha! so it has now discovered that has assets of $8 million (because this accounting trickery doesn't affect the vaue of the furniture). Subtract $6 million from $8 million and you get ... $2 million. The effect (and most likely the point) is to trick the shareholders into thinking their shares are more valuable than they are.
Likewise, a company cannot use an increase in the value of its own equity to spruce up its income statement, wiuthout producing the same sort of nonsensical circularity.
But Enron found a way around this simple-seeming prohibition. It created special purpose entities (SPE), and supplied these off-book entities with Enron stock. Then it dealt with those entities in ways that spruced up both the balance sheet and the income statement.
The SPE's could be kept off-book, under accounting rules, so long as 3% of theiir equity belongs to someone who was neither Enron nor an Enron "related entity." The 3 percent figure may seem modest under the circumstances. But the point of it was that someone else has to be willing to put that their own investment at risk. (Recall that a defining feature of equity is that it is the residual bearer of risk.)
The ways in which Enron satisfied that 3% requirement were risible. A homosexual relationship with an executive doesn't make one a "related party" because Texas laws don't recognize such relationships, they reasoned.
Beyond such minor points, Enron sometimes entered into explicit side agreement with the parties contributing thaty 3% assuring them it would make good on any losses. So it wasn't really equity at all, and the circle is closed. [Eichenwald pp. 596-97 gives a dramatic scenario of Enron execs redicovering the crucial document, and realizing that they are 'toast'.] Early 2001, Carl Bass, a member of Artrhur Andersen's Professional Standards Group, objected to such practices by Enron and his superiors at AA removed him from that account.When Skilling testified before Congress, in 2002, he tried to justify such trickery by saying in effect that it is no worse than what you, the Congress, have allowed and in fact encouraged as to the non-expensing of stock options.
Implicit in this, "because you have allowed us to deceive ourselves, now we are entitled to deceive others."06 November 2010
The Blundering Herd
Two fine finance reporters, Bethany McLean and Joe Nocera, collaborated on a Merrill Lynch-centric re-working of the story of the financial crisis of 2008, and the result appears in the November issue of Vanity Fair.
McLean has previously distinguished herself by getting the Enron story right before anyone else. She wrote "Is Enron Overpriced," which ran in FORTUNE on March 2001.
That story began with a meditation on the term "it," as in the It Girl in Hollywood talk, or "the It Stock" for Enron at the turn of the millennium. The story proceeded to this:
And the numbers that Enron does present are often extremely complicated. Even quantitatively minded Wall Streeters who scrutinize the company for a living think so. "If you figure it out, let me know," laughs credit analyst Todd Shipman at S&P. "Do you have a year?" asks Ralph Pellecchia, Fitch's credit analyst, in response to the same question.
Nocera? Well, I wrote of him in this very space quite recently and before I knew anything of his collaboration with McLean.
Anyway, you can use the first link above to click on their Vanity Fair article. Please do.
McLean has previously distinguished herself by getting the Enron story right before anyone else. She wrote "Is Enron Overpriced," which ran in FORTUNE on March 2001.
That story began with a meditation on the term "it," as in the It Girl in Hollywood talk, or "the It Stock" for Enron at the turn of the millennium. The story proceeded to this:
And the numbers that Enron does present are often extremely complicated. Even quantitatively minded Wall Streeters who scrutinize the company for a living think so. "If you figure it out, let me know," laughs credit analyst Todd Shipman at S&P. "Do you have a year?" asks Ralph Pellecchia, Fitch's credit analyst, in response to the same question.
Nocera? Well, I wrote of him in this very space quite recently and before I knew anything of his collaboration with McLean.
Anyway, you can use the first link above to click on their Vanity Fair article. Please do.
04 July 2010
This Supreme Court Term
The U.S. Supreme Court has wrapped up another term -- John Paul Stevens' last.
There were several remarkable decisions this year, and I'll pass them in quick review, in no particular order.
JONES v. HARRIS ASSOCIATES concerns mutual funds, and the fees they can charge without violating their fiduciary obligation to their investors. Nobody is sure how it will affect actual mutual fund operations, but there is a general consensus that it is important.
In terms of the standard to be applied, the respondent and the petitioner in the case before SCOTUS agreed. They both wanted the court to endorse for the first time a standard laid down by the second circuit in 1982, in Gartenberg v. Merrill Lynch. The standard since then has been that to be guilty of a breach of fiduciary obligation "the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.”
The matter got to SCOTUS this year because the seventh circuit disagreed with Gartenberg. The seventh circuit then (despite a dissent by Judge Posner) refused to rehear the case en banc.
The original panel's justification for blocking Gartenberg lawsuits was that allowing trial courts to second-guess market rates is a bad idea, and that mutual fund managers can only be said to have violated their duty if it can be shown that they had lied to their directors. Posner's own inclinations are laissez-faire, so I find it impressive that he thought this wrong, that some sort of objective reasonableness standard, as with Gartenberg, is appropriate.
SCOTUS agreed with Posner and embraced Gartenberg rather than the Seventh Circuit approach, and it remanded for further proceedings. Still, it is not clear how big a difference this will prove to make. Will it encourage some disgruntled investors to sue their managers to get their fees back, now that it is clear they can at least get their foot inside the courthouse door? Yes, probably.
Should we be worried about that? I don't believe so. There has after all been no flood of mutual fee related lawsuits over the decades since Gartenberg, even in the 2d Circuit where that decision has been binding.
DOE v. REED denied a request by an organization, "Protect Marriage Washington," to keep the personal information of the signers of a petition private, affirming the constitutionality of a law in that state that requires disclosure in most cases (though allowing for ad hoc exemptions).
It was not a "clean win" for transparency, though. The decision allows PMW to ask the district court in Washington for an exemption from public disclosure.
The lead counsel for PMW said in a statement, "While we wish the Court had agreed with us and found that petition signers speaking on any issue should be protected from having personal information disclosed to the public, we are looking forward to returning to Washington and showing the Court that supporters of traditional marriage should have their personal information protected from disclosure."
SCOTUS voted for this result 8-1, with only Justice Thomas dissenting. Thomas would have held that "compelled disclosure of signed referendum and initiative petitions" is unconstitutional because it chills citizen participation in democratic assembly and speech.
I have no sympathy for the whole protect-traditional-marriage cause, but Thomas' decision seems right to me. I am cynical enough to wonder whether he would have written just this decision had it been a gay rights group on the other side of this issue that was asking for anonymity.
CITIZENS UNITED v. FEDERAL ELECTION COMM'N struck down decisions on what various affected parties, including for-profit corporations, may say during the course of a campaign. Much has been said and written on this subject. I won't add a lot to it.
I will note that this was the decision that provoked President Obama to criticize the Justices during the State of the Union address. The presence of the Justices at the SOTU speech has long been considered a non-controversial formal gesture, which allows for the presence of the top level of all three branches of our federal government in the same room at the same time. But Obama chose to make it an opportunity for face-to-face confrontation.
Justice Alito responded to that by mouthing the words "not true."
Stuffy people have bemoaned that exchange. I think both men acted appropriately. Let's be less stuffy and more honestly confrontational in our politics! It may help us learn to get beyond politics, and beyond the myth of sovereignty -- though I'm sure that idea was far from both of their minds at that YouTube-able moment.
BERGHUIS v. THOMPKINS is the latest example of SCOTUS' long entanglement in the specifics of police interrogation rules. Specifically, two officers of the state police of Michigan interrogated suspect Thompkins, after informing him of his Miranda rights.
For three hours he remained silent, although he did not first say "I invoke my right to remain silent" or "I want a lawyer" or anything of that sort. After 2 hours and three quarters, the police did manage to get him to speak, in a highly incriminating way.
By a 5-4 vote, SCOTUS allowed the statement. "Police are not required to rewarn suspects from time to time. Thompkins’s answer to Helgert’s question about praying to God for forgiveness for shooting the victim was sufficient to show a course of conduct indicating waiver," says Justice Kennedy.
I think Sotomayor, writing for the four dissenters, has the better of the argument, though, and will give her the last word here.
"I cannot agree with the Court’s much broader ruling that a suspect must clearly invoke his right to silence by speaking. Taken together with the Court’s reformulation of the prosecution’s burden of proof as to waiver, today’s novel clear-statement rule for invocation invites police to question a suspect at length—notwithstanding his persistent refusal to answer questions—in the hope of eventually obtaining a single inculpatory response which will suffice to prove waiver of rights. Such a result bears little semblance to the “fully effective” prophylaxis, 384 U. S., at 444, that Miranda requires."
SKILLING v. UNITED STATES granted a partial victory to former Enron CEO Jeffrey Skilling. More important, it trimmed back the overly luxuriant prosecutorial interpretations of the "honest services" statute.
I've discussed this one at length on my other blog, and I'll just link you to that.
Here's another discussion of the case.
BILSKI v. KAPPOS is the much-anticipated decision on "business method" patents and on the machine-or-transformation test of what is or isn't patentable.
Here, too, I have said much on the subject on my other blog, so I will say very little on this one. The good guys won.
To grant this opinion would give Bilski and his partner, Rand Warsaw, a license to file patent-infringement lawsuits in a wide variety of cases of routine commodity hedging, simply because they have reduced to paper a sort of algorithm for that common process. It is a bit like describing the flapping of wings in the hope of suing the birds -- businesses have been hedging their commodity price exposure for as long as anyone can remember.
Still, it is not clear what the court is saying about business method patents as a rule.
I do think Elena Kagan, as our solicitor general, submitted a fine brief in defense of the patent office's refusal to grant Bilski and Warsaw their requested monopoly. Those who are complaining that her experience does not qualify her as a Supreme Courty Justice might want to consider how vastly sup[erior that brief is in its reasoning to any of the three opinions the litigation produced (authored by Justices Kennedy, Breyer, and Stevens.)
There were several remarkable decisions this year, and I'll pass them in quick review, in no particular order.
JONES v. HARRIS ASSOCIATES concerns mutual funds, and the fees they can charge without violating their fiduciary obligation to their investors. Nobody is sure how it will affect actual mutual fund operations, but there is a general consensus that it is important.
In terms of the standard to be applied, the respondent and the petitioner in the case before SCOTUS agreed. They both wanted the court to endorse for the first time a standard laid down by the second circuit in 1982, in Gartenberg v. Merrill Lynch. The standard since then has been that to be guilty of a breach of fiduciary obligation "the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.”
The matter got to SCOTUS this year because the seventh circuit disagreed with Gartenberg. The seventh circuit then (despite a dissent by Judge Posner) refused to rehear the case en banc.
The original panel's justification for blocking Gartenberg lawsuits was that allowing trial courts to second-guess market rates is a bad idea, and that mutual fund managers can only be said to have violated their duty if it can be shown that they had lied to their directors. Posner's own inclinations are laissez-faire, so I find it impressive that he thought this wrong, that some sort of objective reasonableness standard, as with Gartenberg, is appropriate.
SCOTUS agreed with Posner and embraced Gartenberg rather than the Seventh Circuit approach, and it remanded for further proceedings. Still, it is not clear how big a difference this will prove to make. Will it encourage some disgruntled investors to sue their managers to get their fees back, now that it is clear they can at least get their foot inside the courthouse door? Yes, probably.
Should we be worried about that? I don't believe so. There has after all been no flood of mutual fee related lawsuits over the decades since Gartenberg, even in the 2d Circuit where that decision has been binding.
DOE v. REED denied a request by an organization, "Protect Marriage Washington," to keep the personal information of the signers of a petition private, affirming the constitutionality of a law in that state that requires disclosure in most cases (though allowing for ad hoc exemptions).
It was not a "clean win" for transparency, though. The decision allows PMW to ask the district court in Washington for an exemption from public disclosure.
The lead counsel for PMW said in a statement, "While we wish the Court had agreed with us and found that petition signers speaking on any issue should be protected from having personal information disclosed to the public, we are looking forward to returning to Washington and showing the Court that supporters of traditional marriage should have their personal information protected from disclosure."
SCOTUS voted for this result 8-1, with only Justice Thomas dissenting. Thomas would have held that "compelled disclosure of signed referendum and initiative petitions" is unconstitutional because it chills citizen participation in democratic assembly and speech.
I have no sympathy for the whole protect-traditional-marriage cause, but Thomas' decision seems right to me. I am cynical enough to wonder whether he would have written just this decision had it been a gay rights group on the other side of this issue that was asking for anonymity.
CITIZENS UNITED v. FEDERAL ELECTION COMM'N struck down decisions on what various affected parties, including for-profit corporations, may say during the course of a campaign. Much has been said and written on this subject. I won't add a lot to it.
I will note that this was the decision that provoked President Obama to criticize the Justices during the State of the Union address. The presence of the Justices at the SOTU speech has long been considered a non-controversial formal gesture, which allows for the presence of the top level of all three branches of our federal government in the same room at the same time. But Obama chose to make it an opportunity for face-to-face confrontation.
Justice Alito responded to that by mouthing the words "not true."
Stuffy people have bemoaned that exchange. I think both men acted appropriately. Let's be less stuffy and more honestly confrontational in our politics! It may help us learn to get beyond politics, and beyond the myth of sovereignty -- though I'm sure that idea was far from both of their minds at that YouTube-able moment.
BERGHUIS v. THOMPKINS is the latest example of SCOTUS' long entanglement in the specifics of police interrogation rules. Specifically, two officers of the state police of Michigan interrogated suspect Thompkins, after informing him of his Miranda rights.
For three hours he remained silent, although he did not first say "I invoke my right to remain silent" or "I want a lawyer" or anything of that sort. After 2 hours and three quarters, the police did manage to get him to speak, in a highly incriminating way.
By a 5-4 vote, SCOTUS allowed the statement. "Police are not required to rewarn suspects from time to time. Thompkins’s answer to Helgert’s question about praying to God for forgiveness for shooting the victim was sufficient to show a course of conduct indicating waiver," says Justice Kennedy.
I think Sotomayor, writing for the four dissenters, has the better of the argument, though, and will give her the last word here.
"I cannot agree with the Court’s much broader ruling that a suspect must clearly invoke his right to silence by speaking. Taken together with the Court’s reformulation of the prosecution’s burden of proof as to waiver, today’s novel clear-statement rule for invocation invites police to question a suspect at length—notwithstanding his persistent refusal to answer questions—in the hope of eventually obtaining a single inculpatory response which will suffice to prove waiver of rights. Such a result bears little semblance to the “fully effective” prophylaxis, 384 U. S., at 444, that Miranda requires."
SKILLING v. UNITED STATES granted a partial victory to former Enron CEO Jeffrey Skilling. More important, it trimmed back the overly luxuriant prosecutorial interpretations of the "honest services" statute.
I've discussed this one at length on my other blog, and I'll just link you to that.
Here's another discussion of the case.
BILSKI v. KAPPOS is the much-anticipated decision on "business method" patents and on the machine-or-transformation test of what is or isn't patentable.
Here, too, I have said much on the subject on my other blog, so I will say very little on this one. The good guys won.
To grant this opinion would give Bilski and his partner, Rand Warsaw, a license to file patent-infringement lawsuits in a wide variety of cases of routine commodity hedging, simply because they have reduced to paper a sort of algorithm for that common process. It is a bit like describing the flapping of wings in the hope of suing the birds -- businesses have been hedging their commodity price exposure for as long as anyone can remember.
Still, it is not clear what the court is saying about business method patents as a rule.
I do think Elena Kagan, as our solicitor general, submitted a fine brief in defense of the patent office's refusal to grant Bilski and Warsaw their requested monopoly. Those who are complaining that her experience does not qualify her as a Supreme Courty Justice might want to consider how vastly sup[erior that brief is in its reasoning to any of the three opinions the litigation produced (authored by Justices Kennedy, Breyer, and Stevens.)
28 February 2009
The Latest on Jeffrey Skilling
Okay, I'm late on this. Almost two months late. But it's worth noting: on January 6 the 5th circuit issued a lengthy opinion in response to Jeffrey Skilling's appeal from his conviction and sentence.
You'll remember that Skilling is the former chief executive of Enron who in May 2006 was convicted on 19 counts of securities fraud and related matters and sentenced to 292 months imprisonment (twenty four years and four months). He had appealed both the convictions and the severity of the sentence.
A panel of the appellate court upheld the convictions, but agreed with Skilling that there were improprieties in the sentencing. He'll get a new hearing in the trial court on that.
The decision makes for a fascinating read, and although I've read a good deal about Enron over the last eight years, there are certain points that I've never seen laid out as well as they are here. Take the matter of Enron Broadband Services (EBS) for example. The former finance chief of EBS, Kevin Howard, has been tried twice, yet his fate still hangs in the balance. The first jury hung. The second jury brought in a conviction, which was overturned on appeal. A third trial for Howard is expected some time this year.
Yet the appellate panel in Skilling's case ably summarized the EBS aspect of the case as it relates to JS.
Enron Broadband Services was, as the appellate court says, "Enron's attempt to enter the telecommunications industry." In 2000, EBS met its earning targets but only by means that the government considers suspect in two respects: (1) the core business activities failed to meet the target, non-core activities made up the difference, and Enron failed to make this clear to stockholders, (2) some of the non-core earnings came from the sale of a portion of Enron's fiber optics network to LJM2, one of the Fastow creations, a pseudo-third-party, and (3) improper hedging of EBS' investment in Avici, an internet company, through an SPE that was itself "arguably an instrumnent of fraud."
One of Skilling's arguments against his conviction involved the notion of "materiality." The judge properly instructed the jury that false statements or omissions (about EBS' earnings for example) can support a fraud conviction only if they are "material." The judge instructed the jury on what "materiality" means, but Skilling contended that instruction was inadequate.
Skilling's lawyers at trial submitted their own instruction to the judge on this issue, and he rejected their wording. The defense proposal was that the jury be given a "puffery" instruction, i.e. that some statements are "so lacking in specificity, or so clearly [constitute] the opinions of the speaker, that no reasonable investor could find the statement important to the total mix of information he or she would consider when making an investment decision," and that these statements are immaterial as a matter of law.
It does not appear that the statements on which the prosecution relies fit that description at all. On this, I have to say that the court was right to uphold the instruction actually given, and thereby the conviction.
The litigation will rage on. Skilling gets to fight to have his sentence reduced (I'm too lazy right now to write about that aspect of the decision, but you can find the whole thing here) at the trial court level, and he is appealing the panel's decision to the appeals court en banc.
You'll remember that Skilling is the former chief executive of Enron who in May 2006 was convicted on 19 counts of securities fraud and related matters and sentenced to 292 months imprisonment (twenty four years and four months). He had appealed both the convictions and the severity of the sentence.
A panel of the appellate court upheld the convictions, but agreed with Skilling that there were improprieties in the sentencing. He'll get a new hearing in the trial court on that.
The decision makes for a fascinating read, and although I've read a good deal about Enron over the last eight years, there are certain points that I've never seen laid out as well as they are here. Take the matter of Enron Broadband Services (EBS) for example. The former finance chief of EBS, Kevin Howard, has been tried twice, yet his fate still hangs in the balance. The first jury hung. The second jury brought in a conviction, which was overturned on appeal. A third trial for Howard is expected some time this year.
Yet the appellate panel in Skilling's case ably summarized the EBS aspect of the case as it relates to JS.
Enron Broadband Services was, as the appellate court says, "Enron's attempt to enter the telecommunications industry." In 2000, EBS met its earning targets but only by means that the government considers suspect in two respects: (1) the core business activities failed to meet the target, non-core activities made up the difference, and Enron failed to make this clear to stockholders, (2) some of the non-core earnings came from the sale of a portion of Enron's fiber optics network to LJM2, one of the Fastow creations, a pseudo-third-party, and (3) improper hedging of EBS' investment in Avici, an internet company, through an SPE that was itself "arguably an instrumnent of fraud."
One of Skilling's arguments against his conviction involved the notion of "materiality." The judge properly instructed the jury that false statements or omissions (about EBS' earnings for example) can support a fraud conviction only if they are "material." The judge instructed the jury on what "materiality" means, but Skilling contended that instruction was inadequate.
Skilling's lawyers at trial submitted their own instruction to the judge on this issue, and he rejected their wording. The defense proposal was that the jury be given a "puffery" instruction, i.e. that some statements are "so lacking in specificity, or so clearly [constitute] the opinions of the speaker, that no reasonable investor could find the statement important to the total mix of information he or she would consider when making an investment decision," and that these statements are immaterial as a matter of law.
It does not appear that the statements on which the prosecution relies fit that description at all. On this, I have to say that the court was right to uphold the instruction actually given, and thereby the conviction.
The litigation will rage on. Skilling gets to fight to have his sentence reduced (I'm too lazy right now to write about that aspect of the decision, but you can find the whole thing here) at the trial court level, and he is appealing the panel's decision to the appeals court en banc.
20 February 2009
Shorts were right about ArthroCare
Roddy Boyd wrote about AthroCare (a Texas-based supplier of surgical devices) in Fortune about a year ago.
AthroCare's pride and joy is its Coblation technology, which (I quote from its website here), "uses low-temperature radio frequency energy to gently and precisely dissolve rather than burn soft tissue."
Boyd conveyed, rather sympathetically, the complaints of the company bigwigs that they were under an unjustified short-seller's siege. The company "has done admirably" he said, "in nearly every area traditionally used to judge a company's performance."
So why, he wondered aloud, was its stock price going down? Perhaps because short sellers (who "by definition" he reminded his readers "have an interest in a stock's going down" -- do Fortune readers need to be told this?) were spreading misconceptions about its relationship with a particular billings services provider.
The billings company, DiscoCare, was in time acquired by AthroCare. That change in the design of the corporate flow-chart didn't bring an end to the questions. Boyd said artfully that the purchase "made the short sellers go nuts."
If the shorts are wrong about this, Boyd cautioned, then ArthroCare had as of a year ago "lost $700 million in capitalization for no good reason," and there is a "human cost" measured for example in the aggravation felt by the CEO's ill father, who surfs the internet and reads the "innuendos."
This seems to be one of a growing list of cases (Enron itself was one, so was the now-forgotten AremisSoft click here) in which a company starts off criticizing the short sellers for spreading vicious rumors and ends up admitting that, yes, there was some truth to them.
Michael Baker, the CEO who complained to Boyd about the harm the "innuendo" was doing to his sick father, has now vacated that office. The company said Wednesday that it is under formal investigation by the SEC and is the subject of investigations as well by two US Attorney's offices.
The release telling us this also says: "The Company has sent a notice of claim pursuant to the Escrow Agreement established in connection with the Company's acquisition of DiscoCare to the sole selling stockholder of DiscoCare alleging breaches of certain representations and warranties in the stock purchase agreement. The notice of claim is intended to have the effect of preventing the release of $1.5 million in escrow and can lead to further proceedings against the sole selling stockholder. The Company expects the notice of claim to be disputed in arbitration proceedings."
So: "we bought a pig in a poke when we bought DiscoCare" is now the official company position -- it is no longer a possibility stigmatized as "innuendo"!
I am reminded of comments by Jonathan R. Macey, in his recent book Corporate Governance, in which he compares short selling with corporate "whistle blowing" of the Sherron Watkins sort. "Short selling is likely to be a far more credible signal [of real trouble at a company] than whistle-blowing, because the talk involved in whistle-blowing is cheap, while the trading involved in short selling is costly to the short seller whose information about the underlying company is erroneous."
AthroCare's pride and joy is its Coblation technology, which (I quote from its website here), "uses low-temperature radio frequency energy to gently and precisely dissolve rather than burn soft tissue."
Boyd conveyed, rather sympathetically, the complaints of the company bigwigs that they were under an unjustified short-seller's siege. The company "has done admirably" he said, "in nearly every area traditionally used to judge a company's performance."
So why, he wondered aloud, was its stock price going down? Perhaps because short sellers (who "by definition" he reminded his readers "have an interest in a stock's going down" -- do Fortune readers need to be told this?) were spreading misconceptions about its relationship with a particular billings services provider.
The billings company, DiscoCare, was in time acquired by AthroCare. That change in the design of the corporate flow-chart didn't bring an end to the questions. Boyd said artfully that the purchase "made the short sellers go nuts."
If the shorts are wrong about this, Boyd cautioned, then ArthroCare had as of a year ago "lost $700 million in capitalization for no good reason," and there is a "human cost" measured for example in the aggravation felt by the CEO's ill father, who surfs the internet and reads the "innuendos."
This seems to be one of a growing list of cases (Enron itself was one, so was the now-forgotten AremisSoft click here) in which a company starts off criticizing the short sellers for spreading vicious rumors and ends up admitting that, yes, there was some truth to them.
Michael Baker, the CEO who complained to Boyd about the harm the "innuendo" was doing to his sick father, has now vacated that office. The company said Wednesday that it is under formal investigation by the SEC and is the subject of investigations as well by two US Attorney's offices.
The release telling us this also says: "The Company has sent a notice of claim pursuant to the Escrow Agreement established in connection with the Company's acquisition of DiscoCare to the sole selling stockholder of DiscoCare alleging breaches of certain representations and warranties in the stock purchase agreement. The notice of claim is intended to have the effect of preventing the release of $1.5 million in escrow and can lead to further proceedings against the sole selling stockholder. The Company expects the notice of claim to be disputed in arbitration proceedings."
So: "we bought a pig in a poke when we bought DiscoCare" is now the official company position -- it is no longer a possibility stigmatized as "innuendo"!
I am reminded of comments by Jonathan R. Macey, in his recent book Corporate Governance, in which he compares short selling with corporate "whistle blowing" of the Sherron Watkins sort. "Short selling is likely to be a far more credible signal [of real trouble at a company] than whistle-blowing, because the talk involved in whistle-blowing is cheap, while the trading involved in short selling is costly to the short seller whose information about the underlying company is erroneous."
11 December 2008
Recommended Reading
Just a quick link for today.
On getting Beyond Enron in our understanding of energy derivatives trading.
The authors of that piece cite an article of mine in a footnote, so they're to be commended for their good taste.
On getting Beyond Enron in our understanding of energy derivatives trading.
The authors of that piece cite an article of mine in a footnote, so they're to be commended for their good taste.
04 July 2008
Quick notes on white-collar crime
Phil Bennett, subject of yesterday's entry, didn't have a good day in court.
He received a sentence of 16 years. The judge, Naomi Buchwald, seems to have started from a baseline of 20 and then asked herself whether there were any reasons for leniency, bargaining herself down by a fifth of the whole.
Here's a link.
Intriguingly, and despite all the attention Samuel Israel's flight has received in recent days and weeks, Buchwald denied the prosecution's request that Bennett be incarcerated immediately. He's expected to turn himself in on September 4th.
Jeffrey Skilling, former chief executive of Enron, is still in prison. That sentence may sound to some like the evocation of an old Saturday Night Live routine. Generalissimo Franco is, after all, still dead.
But the Skilling thing is worth mentioning because, a week ago, admirers of his were confident that a break, and perhaps even freedom for JS was imminent.
Okay, "admirers" is an excessive word in this context. But Larry Ribstein and those to whom he refers there do believe that Skilling is the victim of prosecutorial misconduct and would like to see him walk. They haven't persuaded me. At any rate, their hopes of an imminent rescue by the fifth circuit are still just ... hopes.
Mel Weiss. A month ago, Mel Weiss, once one of the most prominent class-action attorneys in the US, was sentenced to 30 months in prison for kickbacks, i.e. undisclosed payments to class representatives in class action lawsuits that his firm handled.
He broke the rules and has been punished. Risks you take, etc. But ... what is the evidence such kickbacks do harm? and to whom? to his clients? to the system as a whole? The whole question deserves some serious inquiry.
Unfortunately, its a holiday and in providing you with this three-item list, I've done as much serious stuff as I plan to do today. But I'm open, as always, for comments. Agree, dissent from, or just bloviate about any of the above.
He received a sentence of 16 years. The judge, Naomi Buchwald, seems to have started from a baseline of 20 and then asked herself whether there were any reasons for leniency, bargaining herself down by a fifth of the whole.
Here's a link.
Intriguingly, and despite all the attention Samuel Israel's flight has received in recent days and weeks, Buchwald denied the prosecution's request that Bennett be incarcerated immediately. He's expected to turn himself in on September 4th.
Jeffrey Skilling, former chief executive of Enron, is still in prison. That sentence may sound to some like the evocation of an old Saturday Night Live routine. Generalissimo Franco is, after all, still dead.
But the Skilling thing is worth mentioning because, a week ago, admirers of his were confident that a break, and perhaps even freedom for JS was imminent.
Okay, "admirers" is an excessive word in this context. But Larry Ribstein and those to whom he refers there do believe that Skilling is the victim of prosecutorial misconduct and would like to see him walk. They haven't persuaded me. At any rate, their hopes of an imminent rescue by the fifth circuit are still just ... hopes.
Mel Weiss. A month ago, Mel Weiss, once one of the most prominent class-action attorneys in the US, was sentenced to 30 months in prison for kickbacks, i.e. undisclosed payments to class representatives in class action lawsuits that his firm handled.
He broke the rules and has been punished. Risks you take, etc. But ... what is the evidence such kickbacks do harm? and to whom? to his clients? to the system as a whole? The whole question deserves some serious inquiry.
Unfortunately, its a holiday and in providing you with this three-item list, I've done as much serious stuff as I plan to do today. But I'm open, as always, for comments. Agree, dissent from, or just bloviate about any of the above.
16 February 2008
Revisiting the Enron Docket
Everyone who cares, knows: Ken Lay, the long-time chairman and some time chief executive of defunct energy trading concern Enron, was found guilty of securities fraud and related matters in May 2006, but died before he could be sentenced.
Jeffrey Skilling, the long-time chief operating officer and some time chief executive of the same company, was also convicted. He was sentenced that autumn, and is now serving time in a federal facility in Minnesota.
Criminal litigation continues in regard to less well known figures in the Enron matter. In the matter of Kevin Howard, for example, the prosecutors have recently received a setback at the hands of the fifth circuit court of appeals.
Here, too, it is possible that everyone who cares (a much smaller circle) already knows. Still, I'll bend your cyber-ear about it, because it is possible that prosecutors over-reached.
Kevin Howard was the CFO of an Enron subsidiary, Enron Broadband Services (EBS).
EBS' mission, in partnership with Blockbuster (which had by the late 1990s figured out that the brick-and-mortar model of movie rentals itself would become obsolete in due course) had a plan to stream movies into the desktop computers of Blockbuster customers.
Enron, though, wasn't all that interested in actual execution on such a plan. Their modus vivendi by that time had become: draw up an ambitious plan, book it as if the dream had come true and all the revenue was on the books, let somebody else (like the folks at Blockbuster) sweat the details and move on to something else. Clearly, not a great attitude, but the flaws in such a business model don't by themselves make the case that Mr. Howard should be in prison.
The gist of the criminal case is the government's contention that EBS, inclusive of Mr. Howard, lied to Enron's outside accountant in order to try to book these unrealized profits.
I'm trying not to get bogged down in details here, so simply take my word for it that the "honest services" theory was one of five counts of the indictment against Howard, and the only one to survive previous rounds of appeal-court inquiry. The notion is that if you've been hired to do a job, you've been hired to give your empoyer (Enron's investors in this case) the benefit of your honest services. That "honest service," is , then, one of the forms of value of which you can be found to have fraudulently deprived them.
The problem is that the "honest services" charge would have to stand on its own. The jury was instructed on conspiracyt theories (related to other counts) and the usual instruction is that if Howard was part of a conspiracy then he is responsible for what everybody else who was part of it did. So if any of them deprived Enron of THEIR honest services, and he conspired with them, the jury might well have found h im guilty of the fifth count onthat basis.
Yet with the other counts vacated, the honest services count now has to be understood to require that Howard stole the value of HIS OWN honest services. There's no reason to believe the jury found that. Given the way the prosecution phrased its summation, it didn't clearly ask them to find that.
Here is a link to the write-up on the White Collar Crime blog. From there, you can follow another prominent link to get to the opinion itself.
So Howard will either walk free, or the government will re-try him on count five.
I'm hoping he walks free, so he can direct a movie about the whole ordeal. Assuming he's related in some way to Ron Howard.
Maybe not.
Jeffrey Skilling, the long-time chief operating officer and some time chief executive of the same company, was also convicted. He was sentenced that autumn, and is now serving time in a federal facility in Minnesota.
Criminal litigation continues in regard to less well known figures in the Enron matter. In the matter of Kevin Howard, for example, the prosecutors have recently received a setback at the hands of the fifth circuit court of appeals.
Here, too, it is possible that everyone who cares (a much smaller circle) already knows. Still, I'll bend your cyber-ear about it, because it is possible that prosecutors over-reached.
Kevin Howard was the CFO of an Enron subsidiary, Enron Broadband Services (EBS).
EBS' mission, in partnership with Blockbuster (which had by the late 1990s figured out that the brick-and-mortar model of movie rentals itself would become obsolete in due course) had a plan to stream movies into the desktop computers of Blockbuster customers.
Enron, though, wasn't all that interested in actual execution on such a plan. Their modus vivendi by that time had become: draw up an ambitious plan, book it as if the dream had come true and all the revenue was on the books, let somebody else (like the folks at Blockbuster) sweat the details and move on to something else. Clearly, not a great attitude, but the flaws in such a business model don't by themselves make the case that Mr. Howard should be in prison.
The gist of the criminal case is the government's contention that EBS, inclusive of Mr. Howard, lied to Enron's outside accountant in order to try to book these unrealized profits.
I'm trying not to get bogged down in details here, so simply take my word for it that the "honest services" theory was one of five counts of the indictment against Howard, and the only one to survive previous rounds of appeal-court inquiry. The notion is that if you've been hired to do a job, you've been hired to give your empoyer (Enron's investors in this case) the benefit of your honest services. That "honest service," is , then, one of the forms of value of which you can be found to have fraudulently deprived them.
The problem is that the "honest services" charge would have to stand on its own. The jury was instructed on conspiracyt theories (related to other counts) and the usual instruction is that if Howard was part of a conspiracy then he is responsible for what everybody else who was part of it did. So if any of them deprived Enron of THEIR honest services, and he conspired with them, the jury might well have found h im guilty of the fifth count onthat basis.
Yet with the other counts vacated, the honest services count now has to be understood to require that Howard stole the value of HIS OWN honest services. There's no reason to believe the jury found that. Given the way the prosecution phrased its summation, it didn't clearly ask them to find that.
Here is a link to the write-up on the White Collar Crime blog. From there, you can follow another prominent link to get to the opinion itself.
So Howard will either walk free, or the government will re-try him on count five.
I'm hoping he walks free, so he can direct a movie about the whole ordeal. Assuming he's related in some way to Ron Howard.
Maybe not.
10 November 2007
Documentary Movies
I saw a documentary movie yesterday, "Enron: The Smartest Guys in the Room" -- 2005. For those of you who'd like to know more about it, go here: http://www.imdb.com/title/tt1016268/
It got me to thinking about the documentary as a genre. An ancient critical precept holds that the goal of any art, in any medium, is dual: the please and to teach (to "delight and to instruct," in older translations). If we're not pleased by watching it, we won't. If we're only pleased, if we don't feel that we gain anything from those two hours other than a fleeting uptick in hedonic points, there will come a point pretty quickly when it, too, isn't worthy of our time.
Perhaps the difference between documentaries and other movies is simply that in the former the "teach" part of the old formula is more in-your-face.
Not long ago, I saw an old 1930s movie about Marco Polo. Nobody would confuse it with a documentary. The Italian and Chinese characters both spoke English (which was convenient) and everybody looked Caucasian. But even that movie had some instructive value. Marco Polo discovers pasta and firecrackers, he is on hand when the Khan tries to conquer Japan, etc.
Still, genre boundaries aren't quite that loose. What is the definition of a documentary film, for the purposes say of awarded an Oscar?
There are rules that have to do with the movies' continuing competition with the small screen, television. One of Michael Moore's movies was once ruled inelible for consideration by the academy because he allowed it to be shown on TV in the same year as its theatrical release. Another highly regarded documentary, Grizzly Man, was I understand excluded because the producers relied too much on archival footage. (So what? Film editing is less valuable for a documentarian than the actual photography?)
Upon further consideration, I don't think the Academy is of much help in this matter.
And I'm not really going anywhere with this line of thought so I might as well allow it to peter out right around ....
It got me to thinking about the documentary as a genre. An ancient critical precept holds that the goal of any art, in any medium, is dual: the please and to teach (to "delight and to instruct," in older translations). If we're not pleased by watching it, we won't. If we're only pleased, if we don't feel that we gain anything from those two hours other than a fleeting uptick in hedonic points, there will come a point pretty quickly when it, too, isn't worthy of our time.
Perhaps the difference between documentaries and other movies is simply that in the former the "teach" part of the old formula is more in-your-face.
Not long ago, I saw an old 1930s movie about Marco Polo. Nobody would confuse it with a documentary. The Italian and Chinese characters both spoke English (which was convenient) and everybody looked Caucasian. But even that movie had some instructive value. Marco Polo discovers pasta and firecrackers, he is on hand when the Khan tries to conquer Japan, etc.
Still, genre boundaries aren't quite that loose. What is the definition of a documentary film, for the purposes say of awarded an Oscar?
There are rules that have to do with the movies' continuing competition with the small screen, television. One of Michael Moore's movies was once ruled inelible for consideration by the academy because he allowed it to be shown on TV in the same year as its theatrical release. Another highly regarded documentary, Grizzly Man, was I understand excluded because the producers relied too much on archival footage. (So what? Film editing is less valuable for a documentarian than the actual photography?)
Upon further consideration, I don't think the Academy is of much help in this matter.
And I'm not really going anywhere with this line of thought so I might as well allow it to peter out right around ....
23 June 2007
Bankruptcy as education
The chapter 11 process is and should be a very public, very transparent one. There shouldn't be any secrets about what goes on when a company asks a court to protect it from its creditors, then re-structures its debt and in time, if all goes well, re-emerges from into the marketplace from outside the court's protective wings.
There shouldn't be any secrets for a couple of good reasons. The most obvious is that many of the parties interested in the proceedings are likely to get cheated to the extent back-room deals can be cut. They'll be cheated anyway, in a sense (it is the whole point of the process to cheat somebody!), but the distribution of the losses always shifts to the disadvantage of those who don't have the pull in those back rooms.
That, then, is enough: don't let the players step into the back rooms. Keep everything in the arena.
Still, there's another and a better reason for openness. Corporate bankruptcy proceedings can be a medium whence the public can learn about the nature of the business cycle, and can in time perhaps be roused to do something about these boom and busts that so dislocate our lives.
In boom time, when credit is easy, when the banks not only lower their interest rates and compete with each other but are eager to give away their money, then times are so good for business that managerial sloppiness goes unpunished. People who have no aptitude for business end up running large ones, and they can fool themselves into thinking they have a calling for it so long as the money stays easy.
The problem, of course, is that while they’re fooling themselves and working through these loans, other people come to depend on them: employees, suppliers, creditors. The marginal and the sloppy work themselves into the social fabric. The goodness of such ‘good times’ is deceiving, because rot is building up.
At some point the lenders have to stop being so generous. Whether this takes place with the prodding of a central bank is another question, but a turn will take place.
The more liquid institutions are among the first victims of a turn. As the expansion crawls to a stop, every trader, every brokers, everyone who hangs casually around an exchange building, knows the turn is coming. Somebody will call in a margin that will force somebody else to liquidate. Nobody wants to be the liquidate, so they all become very cautious at the same time, and as counter-parties they all become demanding at the same time.
Long-Term Capital Management goes down before Enron does. Why? Because Enron had assets other than cash – assets that couldn’t be marked immediately to market – pipelines and generators. For the same reason, Enron with its “asset lite” philosophy, had to seek bankruptcy protection before a necessarily asset-heavy firm such as Delphi did.
(Delphi is an auto parts manufacturer that sought chapter 11 refuge in the autumn of 2005 and remains there still.)
The bankruptcy system is the best public forum for the documentation of the boom-bust cycle. Immersion there in could teach people painlessly that the way up is the way down, that the cheap credit that allows for the build-up of the rot is the real cause of the subsequent collapse, even that “irrational enthusiasm” is a central banker’s term for the sort of dislocation that central banking can cause.
There shouldn't be any secrets for a couple of good reasons. The most obvious is that many of the parties interested in the proceedings are likely to get cheated to the extent back-room deals can be cut. They'll be cheated anyway, in a sense (it is the whole point of the process to cheat somebody!), but the distribution of the losses always shifts to the disadvantage of those who don't have the pull in those back rooms.
That, then, is enough: don't let the players step into the back rooms. Keep everything in the arena.
Still, there's another and a better reason for openness. Corporate bankruptcy proceedings can be a medium whence the public can learn about the nature of the business cycle, and can in time perhaps be roused to do something about these boom and busts that so dislocate our lives.
In boom time, when credit is easy, when the banks not only lower their interest rates and compete with each other but are eager to give away their money, then times are so good for business that managerial sloppiness goes unpunished. People who have no aptitude for business end up running large ones, and they can fool themselves into thinking they have a calling for it so long as the money stays easy.
The problem, of course, is that while they’re fooling themselves and working through these loans, other people come to depend on them: employees, suppliers, creditors. The marginal and the sloppy work themselves into the social fabric. The goodness of such ‘good times’ is deceiving, because rot is building up.
At some point the lenders have to stop being so generous. Whether this takes place with the prodding of a central bank is another question, but a turn will take place.
The more liquid institutions are among the first victims of a turn. As the expansion crawls to a stop, every trader, every brokers, everyone who hangs casually around an exchange building, knows the turn is coming. Somebody will call in a margin that will force somebody else to liquidate. Nobody wants to be the liquidate, so they all become very cautious at the same time, and as counter-parties they all become demanding at the same time.
Long-Term Capital Management goes down before Enron does. Why? Because Enron had assets other than cash – assets that couldn’t be marked immediately to market – pipelines and generators. For the same reason, Enron with its “asset lite” philosophy, had to seek bankruptcy protection before a necessarily asset-heavy firm such as Delphi did.
(Delphi is an auto parts manufacturer that sought chapter 11 refuge in the autumn of 2005 and remains there still.)
The bankruptcy system is the best public forum for the documentation of the boom-bust cycle. Immersion there in could teach people painlessly that the way up is the way down, that the cheap credit that allows for the build-up of the rot is the real cause of the subsequent collapse, even that “irrational enthusiasm” is a central banker’s term for the sort of dislocation that central banking can cause.
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