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.

Last Sunday's Oscar presentations

Best Picture: Slumdog Millionaire
Best Actor: Sean Penn, Milk
Best Actress: Kate Winslet, The Reader
Best Supporting Actor: Heath Ledger, The Dark Knight
Best Supporting Actress: Penelope Cruz, Vicky Christina Barcelona.


Five different films honored in the five focal awards. I was just about to write, "that does not usually happen.'

But then I checked into it. (Checking one's presumptions before declaring them as fact. What a concept.)

Actually, this five-way even split among the top awards doesn't seem all that unusual. Last year's winner for Best Picture won only one of the other major awards. The Best Pic was "No Country for Old Men," and Javier Bardem won for supporting actor there.

But the other three biggies last year were split among three very different movies. The best lead actor last year came from "There will be blood." The best lead actress came from La Mome, a biopic on Edith Piaf. And the 2007 Best Supporting Actress ... Tilda Swinton, from "Michael Clayton."

If we go back another year, to the 2006 awards (in February 2007) we get another situation in which the five biggies involve five different movies.

So it isn't all that unusual, though some years some major cultural phenomenon does seem to sweep all before it. Like "Million Dollar Baby," when it won three of the top five of 2005.

Anyway, last Sunday, Slumdog came away as THE winner of the evening. In addition to Best Pic, it won for best song, best original score, best film editing, best sound mixing, best cinematography, and best adapted screenplay.

Everybody seems to be happy about this, and certainly noone could be unhappy with the young boy and girl from Mumbai. They looked thrilled and not-quite overwhelmed. And soooo cute.

Okay, I'm a sentimental fool.

One day between the world wars

It was on February 26, 1935, seventy-four years ago today, that Robert Alexander Watson-Watt first demonstrated a prototype of what would become known as radar.

Watson-Watt demonstrated his ability to track the movements of an RAF bomber, in front of the member of a committee of the Air Ministry. He received a patent on the gizmo in April 2 of that year.

The prototype didn't have much of a range, but the possibility of such bat-like tracking had been established.

By fascinating coincidence, it was on the very same day, February 26, 1935, that Hitler signed a secret order establishing the Reich Luftwaffe, and putting Goering at its head. The order had to be secret because Germany was at this point still claiming to be in compliance with the Versailles treaty, which was blatantly violated by the creation of an air force.

The British headstart on the development of radar would prove of great consequence in the defense of the UK -- and by proxy the defense of civilization -- against the assault of the Luftwaffe in the period 1940-41, so it is a nice novelistic touch that the run-up to that showdown includes these two simultaneous events.

From George Fox' journal

"When the Lord sent me into the world he forbade me to put off my hat to any, high or low: and I was required to 'thee' and 'thou' all men and women, rich or poor, great or small. And as I traveled up and down, I was not to bid people Good-morning, or Good-evening, neither might I bow or scrape with my leg to any one. This made the sects and professions rage. Oh! the rage that was in the priests, magistrates, professors, and people of all sorts: and especially in priests and professors: for though 'thou' to a single person was according to their accidence and grammar rules; and according to the Bible, yet they could not bear to hear it: and because I could not put off my hat to them, it set them all into a rage."

In German, there is one word "you" for both plural and formal use "Sie" and another word "you" for singular and more informal use: "tu."

In English in the 17th century, if I understand correctly, "thou" was like "tu," it was the informal and singular use. The custom, though, was to call aristocrats "You" just as one would call a plural grouping "you."

Fox resisted this, as the above passgae indicates. He called all singulars by the terms "thou" or "thee," reserving "you" for the plural. So he didn't distinguish between aristocrats and peasants in terms of the form of address.

All are God' children, all are worthy of the same form of address.

Madoff wasn't doing ANY trading??

This news comes as a surprise to me, because I thought I had the Madoff situation more-or-less figured out.

I suppose the Socratic virtue, knowledge of my own ignorance, is a product of advancing age.

I thought I had Madoff figured out because I was thinking of him as a ponzi scammer in the line of other recent ponzi scammers, such as the perpetrators of the Bayou funds fraud.

The Bayou funds started out as legitimate investment vehicles. They even started out with a legitimate auditor. But the trading didn't go well, and the managers succumbed to the temptation to pretend they were in fact making money in defiance of the facts. So they started cooking he books, fired their real-world auditor, hired a "new" auditor whom they invented, and the operation evolved by stages into a ponzi scam. But even at the end there was some actual investment going on.

I've covered that and similar episodes in my work as a reporter, and I mentally categorized the Madoff news when it broke in December under the same heading. Bad trader, unwilling to face reality, turned to book-cooker.

That isn't what happened. Or, to be strict about it, if that transition DID take place at some point n Madoff's career, it took place a looong time ago.

Bankruptcy trustee Irving Picard hosted a meeting of the creditors yesterday and gave them the bad, stunning, news. Not only was Madoff making it all up, he had been making it all up since 1994 or thereabouts. He was not only a fraud on a really large scale, which we knew already, he was a fraud through-and-through.

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."

Corn Flake history

On this day, February 19, in 1906, W.K. Kellogg and Charles Bolin incorporated the Battle Creek Toasted Corn Flake Company.

The invention behind the company, the notion that you could sell cereal in the form of toasted flakes suitable a small bowl and softened by milk, had come to Kellogg years before, while he was helping his physician brother run a sanitorium.

One observant guest of the sanitorium in the 1890s was C.W. Post, who was fascinated by the new breakfast idea. C.W. founded Post Cereal in 1895.

It was CW' success that ticked off WK to the point that he left the sanitorium determined to create his own company.

I can't say on the basis of my quite superficial research how Bolin entered the picture. He is usually mentioned as the co-founder but apparently soon dropped out, and the company started calling itself Kellogg.

It seems like a worthy way to be remembered -- marketing inexpensive and nutritous food to the masses. So remember him I do today.

Have a glass of wine with your cornflakes this morning in honor of WK. [Actually, yuuuck. Forget that.]