the CAMP ENRON Report


CAMP ENRON:
... gateway to the next Progressive Era?

Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew's been smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.


For a brief orientation, see this
Welcome to Camp Enron

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Camp Enron Archives
01/01/2002 - 02/01/2002 02/01/2002 - 03/01/2002 03/01/2002 - 04/01/2002 04/01/2002 - 05/01/2002 05/01/2002 - 06/01/2002 06/01/2002 - 07/01/2002 07/01/2002 - 08/01/2002 08/01/2002 - 09/01/2002 06/01/2003 - 07/01/2003

NOTE to READERS:
(2) All "major" articles of older material have now been imported, some with updates worth perusing. We'll keep it all on the main page for a while, will add a few loose pieces of history, will trim the main page and index the archives for convenience later.


OUR DEPARTMENTS:

the COGENT PROVOCATEUR:
free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English

reading the tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.

More where those came from ... stay tuned.


For brief orientation, see this
Welcome to CP


CAMP ENRON:
... gateway to the next Progressive Era?

For a brief orientation, see this
Welcome to Camp Enron

OTHER GOOD STUFF:
Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Saturday, June 29, 2002

 
--- Column of the Year: Profits Without Honour (FT) ---

John Kay's commentary in the weekend Financial Times slices neatly through the topmost layers of the Bad-AppleTorte we've been puking up with regularity here at Camp Enron. Start with the eye-opening "shareholder value has produced distortions reminiscent of Soviet planning". Kay neatly summarizes some of the "impossibility proofs" I've been harping on for years. Snippets below, but the full text is an easy read, and strongly recommended.
When Soviet production units ... fell seriously short of the plan, managers and their advisers responded by making the numbers up. It is a wry paradox that today's failures of capitalism so closely resemble yesterday's failures of socialism.

... the economy does not grow at 10 per cent a year. How could companies ... have continually increased profits more rapidly than the growth of their underlying business? ... the business sector as a whole could not.

... established companies should grow more slowly ... because new businesses are constantly taking share from them. There is always scope for improving efficiency ... but in a competitive economy the benefits ... go to consumers.

... companies achieved impossible earnings growth by cutting the fat ... these actions increased corporate earnings. We do not know what effect they have on the long-run strength of the business, nor ... do the companies themselves ...

Well established businesses ... take short-term profits at the expense of future growth. Newer companies ... have instead employed legitimate accounting wheezes. ... But these devices require rising stock markets. Acquisition accounting is a drug; you need increasing doses ... you need cash, not options, to pay the grocery bills. In this more hostile environment ... the only way to produce the numbers the markets required was to invent them.

The danger now ... companies would react to each disappointing earnings report with further cost cuts and job reductions ... slicing further into muscle and bone. ...
As I suggested above, this cuts only 3 or 4 layers into a maggot-ridden confection at least ten layers thick ... but it's a sharp cut with a clean knife, and not a bad start.



Friday, June 28, 2002

 
--- Xerox Accounting Scandal: Copy or Original? ---

It's so hard to tell!!!

I thought we did this already. Xerox took a drubbing for "accelerating revenue" (counting your chickens before they hatch), negotiated an SEC settlement in April and paid a world-record $10M civil penalty. That was based on premature recognition of $3B over 4 years.

But PricewaterhouseCoopersRevisedFinancialRestatements -- shredding previous KPMG sign-off's -- now make it $6B over 5 years. (See WSJ on MSNBC)

Xerox's revenue-shifting is not as bad as WorldCom's expense-hiding ... a $B of one only nets out to a few $M of the other ... but still if ya gotta take a bath, wouldn't you take it all at once?

Net current effect on earnings could even be favorable, as revenues previously accelerated into previous periods will now be restated (retarded) into this one.

If you play your cards right in the restatement game, you can always be profitable in the current period ... you just keep stealing profits from future periods, and burying losses in restatements of earlier periods.



Thursday, June 27, 2002

 
--- British Bankers Face Enron-Related Fraud Charges ---

From the Chron
The complaint, filed by the Justice Department's Enron task force, alleges that the former bank officers secretly invested in an Enron entity -- Southampton LP -- through a series of financial transactions.

With the secret investments, the bankers were able to siphon off $7.3 million in income that belonged to their employer, the Justice Department alleges.
And it belonged to their employer because their employer siphoned it out of a deal with Enron? And it belonged to Enron because ...? One of our January predictions confirmed: scammers scamming scammers.

The same three individuals were featured in a WSJ story earlier today.
"They were larger-than-life characters," says Robert Kelsey, who wrote a semifictionalized book entitled "The Pursuit of Happiness: Overpaid, Oversexed and Over There" about his experiences at Greenwich Natwest ... By the time his group had finished explaining the transaction, the client wasn't sure whether "to repay his loan or change onto the Picadilly Line" subway because of the sprawling charts used to illustrate the complexity
Bully! ... Tragicomedic show trials ahead.

[UPDATE:
In a Feb. 20, 2000, e-mail to Mulgrew, Bermingham said he could not guarantee Fastow a $25 million profit on the deal. "I would be the first to be delighted if he has found a way to lock it in and steal a large portion himself," he wrote ( WaPo )
-- from our "Things You Wish You Hadn't Put In Writing" Department.]




 
--- More Bad-Apple Strudel ... and the Portions are So Small! ---

Diehard Andersen defender Lou Dobbs gave the WorldCom matter all of four minutes at the front of CNN Moneyline yesterday, and if the word "Andersen" passed his lips, well ... my ears may have blinked.

Mid-afternoon yesterday, SEC's Harvey Pitt announced a civil suit against WorldCom. Will a billion-dollar fine make anything better? No, not really ... but the move does raise barriers to document destruction, insider bonus bailouts, etc., and it brings a wider array of discovery tools to the job. (This announcement followed within the hour of Senate Majority Leader Daschle's announcement that he really would prefer to see Pitt step down.)

Suddenly it looks like SEC may get a drastically needed funding boost. The Sarbanes bill may move (at least in the Senate). Even the US Chamber of Commerce recognizes chinks in its anti-regulation stonewall. And the WorldCom scamdle already has its own blog!
WorldCom -- like many telecoms an ambidextrous partisan palm-greaser -- slipped $100K into the GOP kitty just last week, as corporate "vice chairman" of the $30M fatcat fundraiser. "... the president does not plan to call on his party to return the $100,000 check". (WaPo) [2002-07-02 UPDATE: They are (no surprise here) returning the check.]

The most remarkable thing about the WorldCom fraud is that it escaped notice for so long. It's like one of those airline security incidents where somebody notices the metal detector has been unplugged all day.

Yes, it was an Andersen gig ... turned over to KPMG about a month ago. It was the least creative of creative accounting schemes ... no wall-chart financial engineering diagram, no offshore conduit entities, no subtle grey-area interpretations ... just blatantly plunking the right numbers in the wrong buckets. Scores of insiders had to know about it, and almost all of 'em had to know it was dead wrong. And WCOM was already under close scrutiny from many angles.

Warren Buffett always said any company that talked EBITDA was trying to sell you a bill of goods ... he won't touch 'em. Now the ebitdarians are getting worked over pretty hard in the back alleys of Wall Street. [WCOM was not even an EBITDA fraud, but WCOM was a leading proponent of "watch the EBITDA birdie" diversions.]


Also while you were out in the alley:
Adelphia took the bankruptcy route.

A number of bankers -- individual bankers at moneycenter banks -- are said to be targets of federal and state investigation in L'Affaire Enron.

SEC gets tough on $1.4B in questionable revenue recognition, and Qwest gets going (going down 57% on the day)

Grocery giant SuperValu -- a bread-and-buter business if there ever was one -- gets kicked down a flight of stairs after disclosing that an employee (make that "former employee") finagled the inventory accounts.

Tyco's Dennis Kozlowski seems to have compounded his sales tax evasion exposure with two counts of evidence tampering.

In Amsterdam there's a three-way swearing contest between failing digital backbone provider KPNQwest, former auditor Andersen, and new auditor Deloitte & Touche (which acquired Andersen's Dutch operations). Also the printer refused to release all but sample copies of KPNQwest's annual report, complaining that it had not been paid. (www.ft.com/telecoms, subscribers only)

At Martha Stewart's banquet of denial, the decorative centerpiece falls apart just as the guests of honor arrive. Stewart stood to escape insider trading charges on technicalities, but may lie in real jeopardy on obstruction of justice, as her broker's assistant flips and retracts his original confirmation of her "stop loss" cover story. Will Ms. Stewart's salad days on CBS go on hiatus?

And let's not forget Enron:
Connecticut finally opens a criminal probe into the $220M Enron/CRRA "stealth lending" fiasco. It's a politically sensitive matter, as major players in both parties are hip deep in finance & accounting industry associations.

A.G. Ashcroft abruptly removed the western states Federal Bankruptcy Trustee, considered an effective advocate for victims in the Great Power Rip-Off. (Sac'to Bee)

Bush nominees to the Commodity Futures Trading Commission include a George Mason protege of (CFTC dereg evangelist, Enron audit committee member, Senate spouse) Wendy Gramm, and a former Senate committee staffer who personally drafted some of Enron's best regulatory loopholes. (Chron)

Senate Finance chiefs Baucus (D-MT) and Grassley (R-IA) are "troubled" by the company's failure to comply with requests to turn over tax opinions and information about Enron's "tax-motivated transactions." ... Enron agreed in March to turn over all tax returns since 1985. (Chron)
For perspective, this timeline benchmark -- Rite Aid's massive restatement came to light just over three years ago ... the Rite-Aid criminal indictments followed, just last week.



Wednesday, June 26, 2002

 
--- Round and Round and Round She Goes, Where She Stops ... ---

... Nobody Knows.

Adding sharp emphasis to our recent "less than half full" analysis, markets are uneasy this morning. WorldCom troubles are compounded by discovery of nearly $4B in accounting fraud (expenses booked to capital accounts over the past five quarters), as first reported by CNBC's David Faber. "Because of its vast overstatement, WorldCom’s 43 percent profit margins were also allegedly a fiction, CNBC’s Faber reported."

Did I say "uneasy"? World financial markets are on the floor this morning, quivering and frothing at the gills.

Yes, it was a flagship enterprise of a flagship sector in the new world economy. Yes, "Our senior management is shocked by these discoveries". Yes, it was an Andersen account. Yes, more stringent audits ahead. Yes, resignations. Yes, restatements. Yes, 17,000 layoffs. Yes, criminal investigations. Yes, WCOM had been under the gun for months already ... and now this? No, no whistleblowers.

On CNBC, Maria "Use the News: How to Separate the Noise from the Investment Nuggets and Make Money in Any Economy" Bartiromo is telling me CSFB revises coverage of WCOM, with a price target of zero.

Across the pond, FT reports an international banking consortium is demanding formal investigation of KPNQwest ... finding large discrepancies, suggesting "The fact that there was so much less cash in this business in late April ...suggests an enormous black hole in the accounts".

The Martha Stewart probe is turning up dustbunnies under the duvets, including suspicions of obstruction of justice

Dynegy downgraded to junk.

Global Crossing now said to have engaged in global shredding.

Please remain in your seats with your seat belts buckled ... we may experience some turbulence as your captain and crew beat cleats to the exits.



Monday, June 24, 2002

 
--- Can't See the Haunted Forest for the Bad Apples? ---

We've reached a collective turning point on the path to Zenron, but we have a long way to go. The "train wreck" theory -- Enron as anomaly -- has given way to the "bad apples" theory of market malaise. [The race is remarkably tight -- Google gave 778 cites for Enron and "train wreck", 777 for Enron and "bad apple(s)" -- but momentum favors Bad Apples down the stretch.]

The Bad Apple is a favorite of regulatory minimalists, championed by Paul O'Neill at Treasury, and now voiced prominently by President Bush.
"Ninety-five percent, or some percentage, huge percentage of the business community are honest ... But there are some bad apples."
A bad apple here, another over there, just random points of rot ... no call for a systemic "Axis of Apples" analysis. (Ironically, the old saw is "one bad apple ruins the barrel". Either rottenness spreads like wildfire, or the evident rottenness in one apple alerts us to the incipient rottenness of its companions.)

But in other circles of elders who live to distinguish between gain and loss in worldly matters, there's a sense the gyros have gone wobbly somewhere in the Great Machine, and old hands are having a second look at the schematics.
"here we find ourselves, a ragged band of Capitalist tools ... puzzling over the bones of a fallen giant, trying to discern what it portends for the rest of us ... saying things out loud to see if they sound right ... fishing for the keys ..." (CampEnron, 2002-01-24)
Does it matter? Preliminary diagnosis skews the course of follow-up tests, shades our diet, exercise regimen and travel plans, suggests what horrors might lie ahead, and steers us toward one or another mode of therapy. If the problem is a few bad apples, pluck them out. If apples are going bad out of moral failing, of their own perverse volition, take a few to the cider press as a deterrent example to others.

On the other hand, if the problem is a full-fledged infestation of apple maggots, we may have to burn whole orchards to cinders, replant with wider separations, inspect for pests more diligently, create favorable habitat for antagonistic predators, or experiment with companion plantings. We may even have to compromise our marketarian ideals of organic farming, and resort to noxious sprays and powders ... or mark up the price of apples and plan on less applesauce in our diet.

In today's excursion, we lay Train Wreck Theory to rest, and nip Bad Apple Theory in the bud. In a later piece we'll present a loose taxonomy and evolutionary reprise of Enronitis theories, and probe the roots of the current methodological tension ... basically a classic left-right fistfight over the merits of retributive justice vs social engineering. (We may return at some later date to recount the hysterical pageant of history ... suffice it to say that as the world of Enron evolved, many great dynasties rose and fell on that river in Egypt.)

In the beginning ... well, there is no proper beginning, so let's just start here:
"We’re bringing a lot of attention to the accounting profession that really isn’t justified based on the examples that are given. We’re worrying about a train wreck, and the first bolt hasn’t flown out of the train to begin with. … In any situation, there are a couple of bad actors and the bad actors usually drive what we do ... ." (Sen. Enzi (R-WY), in re SEC audit rules, 2000-09-28 (thx Charlie Cray)
And so it came to pass that nobody tightened any bolts, lubed any switches or double-checked any signals, and the Enron Express -- the great engine of e-everything growth, the Bullet Train of deregulation, pride of the New Economy line -- cannonballed disastrously into the abyss.

Train Wreck Theory ruled the roost in its time. Things happen, without much rhyme or reason, they don't happen often, and watching a train wreck is no reason you shouldn't get on the next train and ride.

Some even sensed opportunity in the ensuing skittishness. See, for instance, a 2002-04-09 Morningstar piece
"Managers Find Opportunity in Enron's Demise ... investors have the nasty habit of painting every scandal (or in most cases, the mere accusation of scandal) with the same brush."
... going on to describe how savvy money managers were taking advantage of bargains on TYCO (down 56% since 4/9), El Paso (off 54%), Dynegy (74%), Qwest (35%), Verizon (6%), SBC (10%), WorldCom (77%), TECO (13%).

If Enron were a train wreck, this approach should have made money. Even if the problem were a few bad apples, this approach should still have made money ... but a balanced portfolio of the eight recommended "opportunity" stocks would have reaped a 60% loss in the 11 weeks post publication. That's some basket of bad apples.

Is the shortage of Good Apples episodic, or systemic? By our reckoning, the Bad Apple model isn't even in the running as a defensible explanation. Is it as bad as it looks? No, no, it's worse.

Reacting to a decade-long trend toward shameless accountancy, Standard & Poor's revised its standard definition of core operating profits, to take some of the outright goofiness out of last year's model. With respect to the new definitions, aggregate year 2001 operating earnings for the entire S&P 500 were overstated by about 35% across the board. That's not one bad apple, or a few. That's apple blight. And for a number of reasons, even that paints an overly rosy picture of the financial orchard.
Contrary to widespread belief, the S&P 500 is not just a list of 500 top market caps. The list is screened for merit -- quality of earnings and stability of enterprise. Some of the wormier big-name apples don't even make the list.

2001's "500" was already culled by departure of high-flying, hard-crashing dotcom, fiber and energy firms.

By definition, operating earnings excludes nonrecurring losses -- such as goodwill writedowns -- reported elsewhere. And neither category includes real losses yet to be recognized on the books. The boom that went "BOOM!" left us with huge unrecognized capital losses in several important categories, in market-leading sectors.

Reported non-operating earnings still include fiction such as nominal pension fund earnings (despite actual investment losses in the actual funds).

All of the above takes financial statements at face value, and makes no provision whatsoever for over-aggressive accounting, e.g., "mark to market" ... or for outright fraud, e.g., roundtripping.
All told, perhaps 50% of all corporate earnings reported in recent years were fictional. The froth settles, and the glass is less than half full.

But it's worse than that. We cranked exaggerated earnings data into growth rate calculationss, where the resulting errors are magnified. Every "miracle of compound interest" scenario, every benchmark rate-of-return model, every retirement plan is out of whack. The apparent downturn is not a wiggly deviation from trendline, to which we'll necessarily return. It's the evaporation of a mirage. LIke Wile E Coyote, we're off the cliff, holding the anvil, spinning our wheels in thin air, and just starting to look down.

How d'ya like them apples? As Martha Stewart might say, "When life hands you Bad Apples ... make Bad Apple-rosemary-caramel shortcakes"!




 
--- It's Always 'Martha, Martha, Martha'! ---

We tossed off a flip comment some time back re securitization of frippery futures as a sure sign of the end-times, but now it's perpetual silly season ... and when you're grilling a nice fillet of tycoon, you just can't use too much Silly Seasoning.

Take this, from Roll Call's Heard on the Hill.
... House Energy and Commerce Chairman Billy Tauzin (R-La.) ... was stunned by the fact that his office received a phone call last Wednesday from the producers of the show "Martha Stewart Living," saying they planned the following day to run a repeat of an episode the Congressman taped when he was hawking a Cajun cookbook two years ago.

... A cynic might wonder whether Stewart ... was trying to make it look like she’s graciously yukking it up with her chief inquisitor ... Stewart’s television program released an official statement insisting that it was all just a coincidence ... "It was a popular episode, and ‘Martha Stewart Living’ television periodically replays popular episodes."

During Tauzin’s probe of biotech firm ImClone’s former CEO Sam Waksal ... Stewart’s name appeared on one of Waksal’s phone logs. On Dec. 27, Stewart left a message for her friend Waksal (and this is HOH’s favorite part) while on a flight to San Jose Delcabo.

"Something is going on with ImClone and she wants to know what," a Waksal assistant wrote of the message from Stewart, who ended up selling $228,000 worth of the company’s stock Dec. 27, a day before the Food and Drug Administration announced the bad news about the drug.
Ms. Stewart was also seen on air in recent days fielding softballs from Larry King. It was all just a coincidence. It was a popular episode, and 'Larry King Live' periodically replays popular episodes.

NYT's Frank Rich connects the Martha-Merrill-Enron dots. Waksal and Stewart's culture-vulture broker, Peter Bacanovic, put clients in off-book Enron partnerships. ImClone and Enron BoD's shared a member -- M.D. Anderson Cancer Center honcho Dr. John Mendelsohn, even as MDACC took six-figure contributions from Enron, and Mendelsohn got out of the ImClone game $6M ahead. "It's a small world after all, it's a small, small world ..."

If you're among those wallowing in this windfall of schadenfreude, see also MarthStewartLivingInJail.

Still can't get enough? Picture Martha Inc. as the new doyenne of dungeon domesticity, "Martha StewRat". (Check here for indispensible household hints to the sophisticated ratskeeper.)



Tuesday, June 18, 2002

 
--- Sarbanes Bill Notches Surprise Banking Committee Approval ---

In an unanticipated turnaround, the Senate Banking Committee today approved a compromise version of Chairman Paul Sarbanes (D-MD) accounting reform bill (strongly endorsed by erstwhile Andersen White Knight Paul Volcker). The new Sarbanes draft won over ranking member Mike Enzi (R-WY) and was approved by a lopsided 17-4 vote. Lame duck Sen. Phil Gramm (R-TX), continues to oppose the measure.

At last previous report the balance was tilted in Gramm's favor by virtue of resistance from Zell Miller (D-GA), who together with Gramm had threatened to tie up proceedings with over 100 proposed amendments, and reluctant noises from Evan Bayh (D-IN).

One factor breaking gridlock may have been a threatened loss of initiative, in the form of reports suggesting SEC Chair Harvey Pitt's readiness to proceed with creative do-it-yourself regulatory innovation (new accounting oversight board, etc.) under existing statute.

Other motivating factors may include deteriorating financial markets, the Andersen verdict, a gathering storm of Enron-like scandals afflicting unrelated firms, US loss of initiative to EU in promulgation of global accounting standards, vocal criticism of congressional inaction, and a series of incredibly shameless efforts by House Republicans to protect offshore tax loopholes and shut state Attorneys General out of the securities arena. Maybe Martha Stewart was the straw that broke the mossbacks' back ... who can say?

No information at this writing as to what compromises may have been made in the original Sarbanes draft. This measure appears likely to pass the Senate, a perfectly antithetical industry-sponsored measure is likely to pass the House, and we could see a high-stakes showdown in the House/Senate conference committee going into fall elections! "There's battle lines being drawn ..."



Saturday, June 15, 2002

 
--- A Strange and Beautiful Verdict ---

It turns out the jury's "guilty" finding was NOT premised on shredded documents or deleted e-mails. The nexus of unanimity was Andersen in-house counsel Nancy Temple's efforts to sanitize the paper trail behind Enron's Q3 earnings report, in which certain obviously recurring expenses were classified as "non-recurring".
Nancy Temple wrote lead Enron auditor David Duncan that he should remove her name from a memo discussing the company because it would increase "the chances that I might be a witness, which I prefer to avoid."
Strange and beautiful? Not only did the jury rise triumphantly to Hardin's troublesome "Where's Waldo?" challenge, and moot the theoretically problematic jury instruction, but -- by accident or by design -- the "guilty" finding on obstruction rests unmistakenly on a factual finding of "guilty" on a count of fraud (not charged in the current case) ... and not on the arguably picayune matters of document destruction.
"Arthur Andersen did not approve that (earnings release) and Enron went along anyway and (issued) it," said Criner, a computer science professor at Texas Southern University in Houston. "Then Arthur Andersen set about to change things to alter documents to keep that away from the SEC." ( the Chron )
The story behind the verdict also shreds of Andersen's post-trial press release, to the effect that "any company could be prosecuted for following standard document disposal practices".

The SEC says Andersen agreed to cease auditing public companies by August 31, but Andersen promises to go down fighting.

As NYT's Floyd Norris observes, and as we noted at the beginning, the verdict does little to advance the cause of audit reform.
As far as deterrent effect, the case's unpredictable twists and turns do little to set expectations of swift and sure punishment.

As a spur to aggressive prosecution, the almost-whimsical result baffles the calculus of priorities.

As a spur to legislative reform, the effect remains a matter of remote speculation.

Andersen's guilt boosts Enron executives' odds of success with a "professional reliance" defense. ("I ain't no accountant, yer honor, Andy was the accountant.")

A point Norris misses: the demise of Andersen reduces the "Bigs" to such a small number that another takedown would literally crush the existing scheme of external auditing.
It was -- from beginning to end -- a prosecution that could not be expected to do much good ... but to decline prosecution would have made a mockery of the law.




 
--- The Andersen Jury is IN ... ---

... the verdict is GUILTY ... and not a thing is RESOLVED in Andersen's trial on federal obstruction of justice charges.

As we've said from day one, this is a peripheral matter in the web of wrongdoing and institutional failure surrounding Enron, Andersen, and another 1,000 Points of Dark.

CNN's Lou Dobbs is immediately on air by phone, asserting Andersen was doomed from the day of the indictment. Wrong again, Lou, Andersen never had an alter boy's prayer at a NAMBLA retreat. (Dobbs recently went on-air with the erroneous claim that clients began abandoning Andersen only after the indictment.) FOX's Neil Cavuto phones in later with a more realistic perspective.

Unfortunately, today's verdict decides nothing. Defense attorney Rusty Hardin's "uproar" strategy didn't work on the jury (surprising, since it worked like a charm on a released alternate juror), but it leaves plenty on the record for appeal. The larger story has moved on ... it no longer centers on the isolated fates of Enron, it's auditors, executives, employees, creditors and customers ... now entire markets, systems of governance, and Martha Stewart are in the dock defending their credibility, honor and taste.

In a "stranger than fiction" twist of fate, it seemed the jury verdict was to turn on a deviously subtle, enormously controversial -- and immensely fundamental -- point of law. The jury deadlocked after eight days, apparently in unanimous agreement that obstruction had been committed, but not in agreement as to which Andersen employee had been the "corrupt persuader" emphasized in Hardin's "Where's Waldo?" defense.

They put Judge Melinda Harmon in a torturous bind when they passed a note asking whether they all had to finger the same "persuader". It seemed the decision on this unsettled point of law would decide the case, and a wrong decision -- even an unsound argument -- would cinch reversal on appeal. Appeal seemed destined for the Supreme Court, as the question itself is pivotal to the basis of law underlying criminal prosecutions of corporate entities.
Some theorists claim corporations should be exempt from criminal law, arguing that culpability always rests on an identifiable criminal act by an identifiable "natural person" -- a human being. Opposing theorists argue the "corporation as legal person" angle, and pragmatists readily see through to the "fall guy" loopholes in the purist model.
In a double twist, the jury returned to deliberations and apparently came to agreement by identifying the same "persuader"! Where do we go from here? Sentencing calendared for October, appeals to run that off the road, and -- by my reckoning -- sweeping, substantive criminal fraud indictments against Andersen and other enablers ... possibly piercing the veil of Limited Liability Partnership and attempting to separate (former) Andersen partners from their rather considerable personal assets.

It's Saturday morning, top-echelon news crews have the day off, and are filling the air with Gotti biographies, priest/pedophile rehash, and Joey Buttafuco flashbacks. Scandal skeptics are right on one point ... Enron and everything after is mind-numbingly esoteric.



Thursday, June 13, 2002

 
--- It's Not Dead ... It's Not Even Sleeping ---

Camp Enron wakes every day to chirps and murmurs of press distraction, public apathy, political torpor. Monday's NYT detailed the ebb and stanch of Enron-inspired reform in Congress. Tuesday Arianna Huffington told us how "bankers' blackmail had the desired effect ... this is how Enron ends, not with a bang but a whimper -- and a donation." Wednesday morning, Fortune's Jeff Birnbaum on NPR declared Enron is polling at 1%, and the business-as-usual lobby is eating reform advocates' lunch (even as Fortune's cover blares "System Failure").

True, dozens of reform proposals lay dying in the 107th Congress. True, favors for Enron miscreants (PUHCA repeal, liability constraints, statutes of limitation, executive pension provisions) are more likely to pass. All that being the case ... WHAT THE @%$# IS WRONG WITH YOU MEWLING MAGGOTS?!? Doesn't anybody here know the first thing about reform epochs? Who says the mountain has to move by Independence Day? What are you kids smoking, anyway?

A natural progression is unfolding as it should. The essential elements are present, the inevitable reaction will occur ... it just takes time ... and maybe heat ... and a little gentle agitation.

Rome wasn't sacked in a day, desegregation didn't happen overnight, and the Progressive Era was more than a miniseries. We stand comfortably by our 2001-01-18 prediction: Enron will have more effect in the 2012 election cycle than in 2002.


Were you tuned in expecting a classic rematch -- "this time our side wins!" -- as Enron delivers fresh ammo to battleweary reform troopers holding out on ancient trenchlines? The stalemate turns fluid, the balance of forces shifts, progressives recapture a few outposts lost in the Reagan Revolution? And if this shoot-out isn't over by sundown, Enron's fifteen minutes are up and we go on to the next big thing? Isn't this naive, to say the least?


The Enron Affair is, as Josh Marshall pegged it, a meta-scandal ... a timely emblem and trigger for waves of overdue creative destruction. It upsets the prevailing meta-context ... the whole system of understandings, landmarks and counterpoises around which familiar issues and institutions are bred and fed. The implications defy simple extrapolation, and won't be worked out that quickly.

Enron doesn't simply bump along and convey increments of momentum to existing bodies already in motion. It tilts the landscape, transforms the coordinate system, changes the climate, redefines the food chain, rewrites history, strips everyone of their uniforms and decorations. It alters the angle of the sun by which the entire garden of self-interest is enlightened. It changes the locks, reshuffles the deck, reshapes the globe and re-colors the sky.

Please excuse any inconvenience. We appreciate your patience while we make a few needed changes in ... everything under the sun.

Tectonic paradigm shift may be marked by loud bursts of punctuation, but the underlying dynamics are gradual. It doesn't start with a cinematic climax -- the forces of Light heaving a massive reform package through the splintering fortifications of Castle Dark. Like any other movement of historic scale and scope, this history moves not at a steady pace, nor in a straight line.


"Time is nature's way of making sure everything doesn't happen at once" (Woody Allen) ... and there are good reasons for that.
We have no idea where we're going. (Anybody who thinks we do is looking at outdated maps.) Nobody alive today knows how to do financial reporting in the Age of Derivatives ... or market governance in the Age of Globalism ... or democracy in the Electronic Age ... or capitalism in the Information Age ... or taxation in the Age of Mobility. It's not even clear which symptoms are surface manifestations, which are root problems, and which are side effects. Getting oriented is a large-scale, long-term participative exercise.

We're not organized yet -- either progressives or conservatives. The conservative coalition (as always) clusters around society's "haves", who have obvious reasons for thinking the way things have always been is the way things should always be. Few in number (as always), "haves" balance the scales by staking out wedge-issue positions to recruit "have not" auxiliaries. The progressive opposition (as always) does most of its recruiting in the policy space vacated by conservative allies. With the landscape shifting underfoot, both coalitions must redefine, re-identify and renegotiate. Only then can decisive battles be engaged.

We all have other jobs ... other short-run agendas, and other ties that bind us to anchor points in yesterday's landscape. Every aspiring progressive leader is already bought in to entangling positions or constituencies that end up on the wrong side of the new line of scrimmage. Every would-be conservative clings to monkey-trap attachments too doomed to keep and too dear to let go.
Reform epochs follow a certain protocol. First things happen first; later things happen later. The first impulse of reform is reactive, shallow ("the enemy of my enemy is my friend"), and usually infertile.

Reformers take time to discover common threads that connect disparate complaints ... to figure out who they are, what they stand for, what they can get and how to get it. As a standard vocabulary of reform takes shape, it becomes easier for like-minded individuals to recognize one another at first encounter.

Reform's larval stages are hosted by existing organizations. Later, at critical mass, reform factions can opt to take over, split off, or work within. In political parties, a few will gnaw their way onto the ballot, into office, onto committees of jurisdiction and into leadership positions. Likewise, a generation of young "Enron Rangers" -- aggressive public interest lawyers -- will develop formative case experience in litigation and regulatory staff assignments before breaking out as candidates for elective office.

Some of the heirs to yesterday's progressive movements find new life in the new ecosystem, while others fail to adapt. Old doctrines, slogans, anthems will be dusted off and refitted. Some will find better traction than others.


At every stage of this process, better-defined opposition emerges to counter better-defined reform. This interplay helps sharpen the necessary edges. At some point the chasm between ill-gotten-gain loyalists and value-for-value insurgents may gape wide enough to become the dominant axis of polarization, around which most other polarities are then opportunistically force-fit.

Yesterday's in-crowd must then calculate what ground can be held and what must yield, and how the energies of the situation can be harnessed to advantage. As in the civil rights movement, for instance, more adaptive notables see the writing on the wall and re-flag themselves in place, preserving or leveraging their original endowments. Old-guard die-hards close ranks, lay low, wait for the fray to pass them by. In their turn, the insurgents will enjoy opportunities to overreach, create havoc, make fools of themselves, and provoke counterreaction.


The visible history of power normally tracks historic change in the conceptual atmosphere. In the ecology of public discourse, imperceptible shifts in near-ground atmospherics can invert the prevailing gradients of comparative advantage. These shifts have radical implications for climax flora and fauna.

The rise, containment and fall of Communism brought waves of exaggerated alarmist, fundamentalist and triumphalist buzz in little-read opinion journals of the Right. These bled into and eventually dominated mainstream discourse. In like manner, the collapse of Enron (and everything that crawls out from under its disturbed foundation) will create its own meme-storms, seeding and fertilizing the vocabulary of commonplace political expression in the early 21st century.

Typical family diet can shift radically over a generation -- less red meat, more fiber, less catsup, more salsa. Likewise at the kitchen table of public opinion, "Long Live Billionaires, Creators of Jobs" may go the way of "Long Live the King, Protector of the Realm".


Looking to the near future, the 2002 election cycle may pass without a single incumbent nailed to the Cross of Enron. By 2004, we'll have a better idea who the real black hats are, and a few will be taken down. When that happens, fence-sitters in both parties will see the writing on the wall. We won't have to wait for 2006 to see the movement really start moving.

General press and general public will be among the last to know, and among the first to proclaim "We knew it all along". Ironically, almost all today's reformist energy springs from the investing class. They've stopped thinking "this will all blow over" and started realizing "we can't go on like this". [I'll delve deeper in a separate piece to follow shortly.]


By the dictates of Kinsley's Law, the real scandal is what's legal. By that standard, Enron is no ordinary capitalist pigfarm ... and you don't chew your way through a fine herd like this in one sitting.



Saturday, June 08, 2002

 
--- TYCO: The Case of the Killer Tax Shelter? ---

TYCO Chairman/CEO Dennis Kozlowski was abruptly fired last week after being identified in a criminal indictment for evading $1M in NY sales tax (and possibly using Tyco resources and employees to carry out the scam). The scheme included shipping empty crates to tax-free Exeter, while the real artwork allegedly went home with Kozlowski.

Context: Koz was architect of Tyco's growth to multi-giga-global conglomerate eminence. Believers thought of Tyco as another GE. Skeptics never thought Tyco numbers passed the sniff test, and of late -- under "Enronitis" scrutiny -- the wheels have started coming off the Tyco juggernaut. Was it ever a well-managed operating enterprise ... or just a well-oiled acquisition-accounting scheme that parlayed bookkeeping magic into a stream of fabricated earnings? You don't want a known cheat at the helm when you are pushing the "well-managed enterprise" interpretation.

The Koz also enjoys the benefit of an $18M on Tyco's nickel. What's wrong with that? Nothing, necessarily, if it's disclosed to Tyco shareholders, and reported as personal income to the IRS. [That's one of the hitches in a tax model -- don't tax production, just tax consumption -- with considerable ivory-tower appeal ... it's just too easy to mask one type of transaction as the other.] Ooops! Another big-ticket tax evasion, board members were aware of the arrangement, and Tyco appears complicit. It now seems possible this development will queer the deal to spin off Tyco's CIT financial division in an IPO, which could leave the firm strapped for cash and ultimately push then over the edge inot bankruptcy.

Interesting angles here.

First, Tyco is a prime exploiter of the Bermuda tax dodge ... their official HQ is a Bermuda mail drop, while the real work is done in the "other" HQ in Exeter NH. Did Tyco's tax-flouting maneuver make its CEO a priority enforcement target? And if either the state or looming federal case pans out, will it put Kozlowski in the slammer (or in Switzerland hobnobbing with Marc Rich)?

Second, the ink is barely dry on a very favorable severance agreement Kozlowski negotiated with Tyco ... he gets $135M up front (per WSJ) plus a lifetime stream of other valuable considerations if Tyco lets him go ... and they can't fire him unless he's convicted of a felony involving the firm, and even then 3/4 of the board has to agree. Was Kozlowski fired? Apparently he resigned "for personal reasons"? A negotiated settlement of severance claims would seem likely.

Third, who else will get swept up in this particular dragnet? Names. Big names. In new-money billionaire subculture, status symbols are important. Who has the biggest yacht? Who owns the coolest fantasy island? Who has the most exotic collection of collectibles? And who has the slickest tax-avoidance scheme? Like cigar culture, tax schemes are an arena in which moguls vie for connoisseur status. Most take pride in turning favored comrades on to favorite pleasures ... including the joy of beating the taxman.


On another front, El Paso Natural Gas Treasurer Charles Dana Rice died last Sunday of an apparent self-inflicted gunshot wound. Most observers are laying it off to health issues. My Bayesian instincts chafe at that explanation. Fortune 500 treasurers don't blow their brains out every day. Fortune 500 companies don't have the feds double-checking their books every day. (Well, lately they do, but these are not ordinary times.) Improbable events don't usually coincide by coincidence alone.

Context: EP was one of the usual suspects in the western states energy holdup, had recently come under suspicion of roundtripping (which it denies), and just announced a decision to downsize the merchant trading business. Rice had a history of serious health problems, was on dialysis, was looking forward to a kidney transplant, and was due to step down in three weeks.


Former Enron executive Cliff Baxter is still dead by his own hand. We made a lot of prognostications early in the Enron saga, but refrained from predicting suicides ... and refrained from predicting more even after Baxter broke the ice. Executive suicide is now an established motif, and we expect more. (Note Rice's suicide came on the heels of a well-publicized coroner's report on the Baxter case.)

When the tide of easy money goes out, it leaves a lot of ugly stuff rotting on the beach. Muckrakers and official investigators come in, and all kinds of ancillary matters become fair game, and collateral damage piles up.

Official sleuths have lots of volunteer assistance. Enemies, rivals, plaintiffs, journalists, disgruntled employees, blackmailers looking for the opportunity shot. Outright con artists and nutcases angling for a piece of the action using some bizarre story as bait.

Pick a target, tick and foot every penny in or out, and the bad penny often turns up. Tax evasion, stupid "mad money" investments, leveraged investments, undercollateralized borrowing, "white lies" on resumes and loan applications, expense-account padding, kickback schemes, favors traded with unsavory characters.

Big men on the way down miss installment payments on all sorts of high-maintenance habits -- trophy wives, mistresses hidden from their mistresses, slush funds hidden from divorce lawyers. Drugs, gambling addictions, pedophilia, whole secret lives.

Health fails, bad habits run out of control, depression festers over loss of status, loss of self-esteem, loss of opportunities, interminable no-win legal proceedings, audits, public disapproval, loss of professional accreditations ... broken promises to self, to the kids, to favorite charities ... colleagues and proteges left holding the bag ... loss of one's seat at the big table where the big boys play the big game.


So even before we cut their pay and send 'em up the river, better take away their belts and shoelaces ... put the whole kit and kaboodle on suicide watch.



Thursday, June 06, 2002

 
--- Andersen Case Goes to Jury ---

Jury began deliberations in DOJ's case of enterprise-level criminal obstruction of justice against Andersen, and any outcome is possible. (See the Chron.)

Early on, we mused that DOJ must have had an ace up its sleeve to bring this case this early ... and if they ever had it, we haven't seen it played. Maybe they expected any one of three key Andersen witnesses to plead and cooperate, rather than taking the 5th.

Andersen partner David Duncan, who already plead "guilty", lost his religion in mid-trial and seemed uncertain whether he was really guilty of anything. A lot of the supporting testimony couod be read either way -- prosecution witnesses coughing up nuggets for the defense, and vice versa.

For the defense, Rusty Hardin must have thought he had a losing case, since he adopted a deliberate "uproar" strategy -- creating chaos in the courtroom, deliberately needling the trial judge into losing composure, and banking on either
(a) creating a perception of judicial bias on the part of any two or more impressionable jurors, or

(b) provoking Judge Harmon into leaving a trail of reversible error.
It's an odd piece. If DOJ prevails, it doesn't stop here ... it's just the start of years of appeals. If DOJ loses, it doesn't stop here ... the substantive fraud cases still lie ahead, and those missing witnesses are marked for special attention. If it's a hung jury, it doesn't stop here. Hardin's good standing as a member of the bar ... maybe that stops here, who can say?

Again, it's a sideshow ... and inside the Big Top, the circus orchestra is just warming up.



Saturday, June 01, 2002

 
--- Friday NewsBag: A Day in the Life of Camp Enron ---

We don't do play-by-play on a routine basis, for reasons this post may help explain. Consider this a time capsule of items in the news of May 31, 2002. If you're unclear as to the connection between any of these items and the unfolding Enron meta-scandal ... you haven't been paying attention.

FERC orders El Paso Corp to renegotiate natural gas pipeline contracts, arguably removing preferences that arguably enabled it to play withholding games to spike California prices at the heart of the 2000/2001 "energy crisis". (NYT)

FERC denies California's petition to add $2.8B to the existing $8.9 energy overcharge refund proceeding. CA contends the lack of accurate filings by energy companies prejudiced California's ability to file for relief. FERC concludes the energy banditos failed to file required data, and ordered them to file revised reports (more paperwork! that'll teach 'em) but objected to California's A.G. Bill Lockyer's plea as a "collateral attack" on past rulings. (NYT) Well, duh! Some of those past ruling fairly well beg for collateral attack!

"Citigroup Inc. is being drawn into the problems at energy trader Dynegy Inc." (WSJ) Citi helped Dynegy structure and execute "Project Alpha" -- a sci-fi masterpiece of parallel universe financial engineering that enabled Dynegy to boost reported cash flow by $300M, and achieve an $80M tax benefit without actually moving any atoms in our universe.

Peregrine fired KPMG earlier in the week, after firing Andersen a few weeks back. KPMG had discovered $100M in questionable revenue recognition. KPMG traced the problem to Peregrine resellers whose "channel stuffing" teamwork enabled Peregrine to record sales without actually having sold software to customers. On further review, KPMG discovered one of these resellers was ... KPMG! KPMG is now re-reviewing its most recent review of conflict-avoidance protocols, instituted in response to a 2001 SEC cease-and-desist order. (WSJ)

SEC employees rally to protest the agency's 6% pay raise offer. (WSJ) SEC staff are outnumbered and out-compensated, and they don't have full confidence in their top brass, and the casework floodwaters are rising.

In the Houston obstruction of justice trial, Andersen partner Richard Corgel fulminates about lawyers' habit of spinning extraneous notes into damaging evidence ... possible reference to his own "Is this a Ponzi scheme?" note, considered key evidence against Andersen in the last month's Baptist Foundation of Arizona trial. (WSJ)

Europe's leading data-service network will shut down, maybe within days, as KPNQwest's credit structure imploded and takeover prospects failed to gel. KPNQwest -- valued at $36B two years ago -- is the progeny of Qwest (which seems to be well along in its own overbuilding, roundtripping, money-no-longer-grows-on-trees death spiral) and Dutch telecom KPN NV. (FT)

Moody's cuts Qwest credit rating to junk. (NYT)

Moody's warns companies now engaged in energy trading -- their debt may be doomed to junk status unless they achieve substantial restructuring. Options include merger with more stable businesses, creation of more transparent clearing systems, or spinning off flaky trading operations to preserve the credit of conventional lines of business. (WSJ) If energy arbitrage ever stabilizes as a real business (and it probably should) it'd be a low-margin, high-volume business ... which would necessitate access to large sums of low-cost capital.

Heard a voice on CNBC (didn't catch who, or which company) note a landmark US firm's bonds are now trading just two notches above Botswana.

Sixth-largest cable operator Adelphia -- maybe cable's largest pure play -- is in a big heap o' trouble, as is it's founding Rigas family, as may be its auditor Deloitte Touche, as may be the corporate HQ of Coudersport, PA, subsidized by the Rigas's as kind of a small-town nostalgia theme park. The family seems to have engaged in multi-billion-dollar self-dealing, mostly unrecorded on the company's books. Non-family shareholders are fighting for control before Rigas fire-sales the remaining assets. NASDAQ delisted the firm a day earlier, which may put some of its credit arrangements in default. (NYT)

An adverse opinion from JP Morgan Chase -- pulling the string on an earlier expected commitment -- is believed to torpedo two Asian companies' bid for the remains of Global Crossing. (NYT)

Enron accepted resignations of two directors who'd been involved in audit relationships and code-of-ethics waivers, and appointed two new board members. Former director Savage was connected to Alliance Capital Management (target of Florida pension fund litigation for doubling down as Enron fell). Former director Mendelsohn was president of cancer mecca M. D. Anderson Hospitals, beneficiary of lavish Enron contributions. (NYT)

WSJ's Laurie Cohen and Dennis Berman uncork a steaming expose of Salomon Smith Barney's controversial telecom tout Jack Grubman's insider relationship with fiber-optic dark star Global Crossing. In daily contact with GX CEO Gary Winnick, Grubman influenced key hires, helped negotiate major acquisitions, advised Winnick on personal stock sales, and advised GX on corporate strategy ... while publicly lauding GX for "building a truly unique and very valuable strategic asset". Grubman occasionally refrained from writing research reports for brief periods after working directly on GX deals (two months, in one instance, bargained down from Salomon's preferred six months -- at Winnick's insistence!). Grubman seems to have been the power behind the throne, as kingpin Winnick went into the game without benefit of telecom experience. Winnick says "Jack Grubman was the Bruce Springsteen of telecom" ... does that mean he was really the Boss at Global Crossing?

WSJ's Friday evening TV chat show, "Editorial Board with Stuart Varney", offered a grand disjunct from the weeks hard news and analysis. As it turns out, everything's OK! Editor Bartley blithely assures everyone Global's share price collapse proves no corrupt analyst could ever boost prices in the first place. (Grubman finally went "neutral" on GX at $1.07.) Varney opined that stuff happens, The Market clears it, and then it's business as usual again. This view went unchallenged ... no grasp of the market dynamics of unsymmetric information. The Wall Street Journal Editorial Page -- telling moneybags what they wanna hear since 1889. They see each dot, they don't mind if the news-hounds on the other side of the house reports the dots, they love those little half-tone newsmaker thumbnail portraits, but when it comes to abstract pointillism on a "Cristo" scale . . .. ... ..... ........ ............. they just don't get the big picture!

NYT's Floyd Norris notes corporate insider sales outweigh share purchases 4.2-to-1, "more bearish than at any time in years".

In Houston, witnesses recounted conflicts between Enron, Andersen's partners on the Enron engagement, and Andersen's Professional Standards Group. PSG were double-teamed, and lost. Later, they remember being "bothered" by document destruction directed by Andersen in-house counsel Nancy Temple. (And these are the defense witnesses.) (Houston Chronicle)

LA Times reports a new Enron smoking gun memo (dated 2000-10-30, by former Brobeck atty Gary Fergus), apparently a what-if "wargaming" document addressing legal adversities and countermeasures related to trading strategies employed in the tight California energy market. Enron disputes LAT's characterization of the memo and its context.

Texas PUC is investigating Enron spin-off New Power for charging higher fees to electric customers with poor credit. New Power defends the practice ... though it's banned under Texas rules and reg's. (Chron)

At their annual shareholders meeting, CSFB defends it's dealings leading up to Enron's collapse. They face multiple big-ticket lawsuits, and the digging has only just begun. (Chron)

Enron lawyers went to court to get recover part of a $212K luxury suite deposit at Reliant Field. (Chron)

EOTT Energy Partners, 37% owned by Enron, reported net losses for the year, dominated by write-offs of Enron contracts. (Chron)

Alabama pension fund suit will be tried in Alabama courts under Alabama law. This reportedly increases exposure of external accountants, attorneys and financial institutions. (Chron)

Extensive forensic tests and circumstantial evidence confirm: Cliff Baxter is still dead, and it really was suicide as initially believed. (Chron)

IRS has begun a review of Enron's $1B tax reduction transactions. (WP)

Enron tells the judge it is now eager to pay $6M annually for independent manager Fleet Street to administer retirement funds covering 20,000 employees and retirees. Enron has zigged and zagged on this offer, drawing strongly worded reprimands from, well, just about everybody at one time or another. (WP)

And as usual, somewhere, out there, someone is assuring somebody "The Enron story is dead".