Today In Enron History

By this time in 2001, Enron was begining the fatal descent from which it would never recover. The stock price had begun its final decline. This was fatal to Enron because Andy Fastow had set up his partnerships to depend on the price of Enron’s stock (Enron’s stock was, literally, its bond). In May, the stock price dropped to $59.78, fulfilling the criteria for the company to repay $2.4 billion to investors in Osprey. June unfolded with Jeff Skilling making his Titanic joke in Nevada, then being hit in the face with a pie on a business trip in San Francisco. On July 23, Enron’s stock price closed below $47, a critical point for the Raptors. On July 31, 2001, Enron’s stock price closed at 45.35.

Adding hardship to the company, the Wall Street Journal published critical reports about the oil giant every day from May until it collapsed in December. LJM’s partnership with Enron had come under close scrutiny, and it was on this day that Andy Fastow stepped down as manager of the LJM general partnership. He sold all his financial interests and no longer had any management responsibilities for those entities.

But it was too late for Fastow, and it was too late for Enron. Enron would struggle valiantly. It would do everything right. And it would still collapse – in mere months.

You Too Can Be Jeff Skilling

…or at least try out your mad management skills with a computer game designed to teach leaders about ethics and decision making.

The company’s first product, “Virtual Leader,” simulates a series of company meetings in which the player has to manage a complex network of interpersonal relationships in a work setting. Players are scored based on how well they complete business goals while maintaining relations with customers and co-workers.

I realize that I might be in the minority here, but that, to me, sounds awesome. I would play that all day if somebody let me. I’d play it till the motherboard screamed. I would own that game like Siegfried owns Roy.

The game is based on a “Three-to-One” theory, in which successful leadership depends on effectively managing power and workplace tensions while encouraging a proliferation of ideas. Aldrich says it’s a system that could have benefited some of the latest poster children for corporate malfeasance.

That has nothing to do with Jeff Skilling because Jeff Skilling is an angel who ran his business the way all businesses should be run: ethically and totally awesomely.

Three-to-One is inherently an ethical strategy,” Aldrich said. “We’ve built in a number of ethical choices in the game, and in each case, doing the sleazy thing will come back to bite you…You can try to manipulate the press for example–only show them the undamaged part of your plant–but the truth will come out.”

Oh God. I want this for Christmas.

If you were a midlevel accountant who saw bad things happening at (disgraced accounting giant Arthur) Andersen and you knew Three-to-One, you’d have a more effective approach to dealing with those issues,” Aldrich said. “There were people who knew things were going wrong, but they didn’t have the skills to bring those issues to light.”

Thou shalt not besmirch Arthur Andersen!

Something as seemingly innocent as an employee twiddling a pen can be a vital clue about whether the tension level in the workplace has skipped out of the “productive” zone. The game gives the player a safe way to try different approaches to dealing with other personalities.

A productive zone. A twiddling pen. I’m so there. I AM THERE.

Today In Enron History

Today in 2004, Enron Broadband Services CEO Ken Rice pleaded guilty to securities fraud. As part of his plea agreement, Rice agreed to cooperate with the government in their investigation against other Enron executives. Additionally, he agreed to the forfeiture of $13.7 million. Rice also agreed with the Securities and Exchange Commission to pay an additional fine of $1 million.

Rice entered the guilty plea before Judge Vanessa Gilmore at U.S. District Court in Houston, Texas. He pleaded guilty to one count of securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78(ff) and 15 C.F.R. §§ 240.10b-5 and 240.10b5-1.

The indictment and plea documents signed by Rice state that while at EBS, Rice and others made a series of false statements about the products, services and business performance of EBS in order to mislead investors and others about the success of the company and to inflate artificially the price of Enron stock. As part of his plea agreement, Rice claimed that while serving as EBS’s CEO, he conspired with others to portray falsely the success of EBS to the investing public by, among other things, making false statements about the company’s development of various software capabilities and its fiber-optic network, including at analyst conferences in 2000 and 2001. Rice said that he and others falsely portrayed EBS as a commercial and business success and falsely claimed that EBS had developed a revolutionary network control software known as the “Broadband Operating System” or “BOS”and that the BOS was “up and running” on the EBS network. In fact, as Rice admitted, the BOS software had not progressed beyond the internal development stage.  This was later denied by a software engineer who worked on the system.  Rice also claimed that he failed to the investing public that the company stood to sustain operating losses in 2001 and that it lacked a sustainable customer and commercial base.

Presently Ken Rice is serving his sentence at the Beaumont United States Penitentiary, one hundred miles east of Houston, which is part of the Beaumont Federal Correctional Complex located in Beaumont, Texas. The USP is a high security facility housing male inmates; Rice is housed at a satellite camp that houses minimum security male inmates.

My Favorite CEOs

1. Dick Fuld, Lehman Brothers. I listened to the second quarter earnings statement again today and just loved how he was all over it, not making an excuses for the performance, saying numerous times, “this is my responsibility.” He was emphatic, and he sounded as blown away by the decline in value as his investors felt. Triple A plus.

2. Steve Jobs, Apple. Apple’s continued success is directly related to Jobs leadership. The results issued on July 21 were great: the Company posted revenue of $7.46 billion and net quarterly profit of $1.07 billion, or $1.19 per diluted share. Last year’s second quarter results were $5.41 billion and net quarterly profit of $818 million, or $.92 per diluted share. He’s managed to keep money rolling in, even though Apple has had a few stinkers that nobody’s payingn much attention to (AppleTV and the new iPhone.)

3. Rex Tillerson, ExxonMobil. Exxon Mobil made history in February of 08 when it reported the highest quarterly and annual profits ever for a U.S. company. Their fourth-quarter net income rose 14% to $11.66 billion, or $2.13 per share. The company earned $10.25 billion, or $1.76 per share, in previous year-ago period. Obviously, the man is doing something right.

4. Larry Kellner, Continental Airlines. The fact that he’s slashing his own salary means nothing to me, but I’m sure his employees appreciate the gesture. And he’s always out there, giving interviews – I seem to hear from him a lot more than other CEOs. He’s approachable and hardworking, good qualities to have in a CEO.

The Other Side

 

Former Enron Exec Settles With SEC

Lou Pai, a former top executive of collapsed Enron Corp. is paying $31.5 million to settle federal charges of using inside information to illegally profit from sales of company stock in 2001.

The Securities and Exchange Commission announced the settlement with Lou L. Pai, who was chairman and CEO of Enron Energy Services, the fallen company’s retail energy division.

The SEC says the settlement, which includes a $1.5 million civil fine and $30 million in restitution plus interest, is one of the largest ever with an individual for alleged illegal insider trading. Pai neither admitted nor denied wrongdoing.

Unfortunately, financial settlements are a trend among Enron executives who are harrassed for years, intimidated, threatened, and then (understandably) pay to make the problem go away. I would be curious to know which stock transactions Pai allegedly participated in and with what insider information.

Lehman Brothers Declares Q3 Dividend

Lehman issued a press release yesterday announcing a regular dividend of $0.17 per share of common stock for the third quarter of the 2008 fiscal year.

Cute.

Merrill Races For The Bottom With Another Write-Down of $5.7Billion

Less than two weeks after announcing write-downs of $9.7 billion, Merrill Lynch was hit with some more bad news today when its stock plunged 12 percent to $24.33. The brokerage said it will record $5.7 billion of pretax writedowns in the third quarter because of additional losses on the sale of collateralized debt obligations (ie, mortgages.) In a statement released today, the bank said that it plans to raise $8.5 billion by selling shares in a public offering.

The write-downs will likely push the company into yet another quarterly loss if revenues remain weak.

The company has lost about $19.2 billion in the last year. Merrill has taken write-downs of more than $45 billion on mortgage assets that the bank once pursued with vigor.

Today In Enron History

Today in 2002, the NatWest Three were charged with wire fraud in a transaction involving Enron. The three former employees of National Westminster Bank (Gary Mulgrew, Giles Darby and David Bermingham) were accused of secretly investing in an Enron special purpose entity, Southampton, and siphoning off $7.3 that belonged to National Westminster Bank. The criminal complaint, filed in Houston Texas, alleged that Mulgrew, Darby and Bermingham recommended that an interest in an Enron-related partnership held by Nat West should be sold for $1 million at a time when the defendants were scheming with Enron executives to purchase that interest for themselves for only $250,000, and then liquidating it only weeks later for over $7.3 million. The complaint alleges that the defendants: (i) knew the details of Nat West’s interest because they helped structure it; (ii) were aware that the investment had a minimal value of between $7 million and $9 million in February 2000; (iii) represented to Nat West that $1 million was a fair price; (iv) secretly negotiated their own purchase of Nat West’s interest while still employed at Nat West; (v) along with Enron executives, set up a series of offshore entities to carry out their scheme; and (vi) all the while, were employees of Nat West that had fiduciary duties to Nat West and were subject to its compliance policies.

This was, of course, nonsense.

The NatWest bankers became aware through news reports that the transaction – one of Fastow’s deals – was being investigated for fraud. They did the only conscionable thing to do, and alerted the UK authorities. The UK authorities contacted the SEC, and before even a single US investigator had talked with them, they were named in a criminal complaint.

(If you ever wonder if you should speak up when you believe yourself to have been an unwitting partner in something nefarious, that is your answer.)

Tom Kirkendall has a succinct summary of the transaction:

the case against the NatWest Three is fairly straightforward, at least as Enron-related criminal cases go. The Task Force alleges that the three defrauded their former employer by conspiring with Fastow and Kopper to underpay NatWest for its interest in an entity named Swap Sub, an affiliate of LJM1, the Fastow/Kopper-managed special purpose entity that was created in 1999 to hedge Enron’s valuable but highly volatile interest in a technology company called Rhythms.

Fastow arranged to have an entity called Southhampton that was owned by his family, Kopper and several other Fastow underlings at Enron (including Ben Glisan) buy NatWest’s interest in Swap Sub in March, 2000 for $1 million, which was substantially more than NatWest had that interest valued at the time. After NatWest sold out, Fastow sold a portion of the old NatWest interest in Swap Sub through Southhampton to the three bankers personally for $250,000. About a month and a half later, Fastow and Kopper arranged to have Enron and Swap Sub unwind the hedge on the Rhythms stock, which resulted in Enron purchasing a large chunk of Enron stock from Swap Sub. The NatWest Three’s net share of the Enron stock sales proceeds was $7.3 million.

In short, the Task Force alleges that the NatWest Three’s making $7.3 million on an investment of $250,000 a month and a half earlier violates the “too good to be true” rule. Presumably, Fastow and Kopper are prepared to testify that the NatWest Three knew that Fastow and Kopper had arranged with Enron to unwind the hedge on Rhythms stock with Swap Sub, knew that such unwinding would make Swap Sub worth much more than NatWest had it valued at the time, and that neither Fastow nor the NatWest Three disclosed the situation to NatWest before the bank sold its interest in Swap Sub to Southhampton for a measly $1 million.

For their part, Bermingham, Mulgrew and Darby contend that they knew nothing about Fastow and Kopper’s plan to unwind the Rhythms hedge with Enron, that the $1 million price that Southhampton paid for NatWest’s interest in Swap Sub was substantially more than it was worth at the time, that the $250,000 price they paid for an interest in Swap Sub was similarly reasonable given the risk of the investment, and that they were as pleasantly surprised as anyone on the big return on their investment when Enron and Swap Sub unwound the hedge a month and a half later (remember, all this took place before the bursting of the stock market bubble on tech stocks). Interestingly, despite the fact that all of the foregoing information has been well-known to NatWest for several years now, the bank did not pursue either a civil case or criminal prosecution of the NatWest Three in the UK.

By the way, colorful Houston-based criminal defense attorney Dan Cogdell, who successfully defended former Enron in-house accountant Sheila Kahanek in the Nigerian Barge case, is defending Bermingham. Cogdell’s involvement ratchets up the entertainment value of any case, so stay tuned.

Today the NatWest Three are serving their sentences in prison. Gary Mulgrew is projected to be released on 01-02-2011, Giles Darby on 01-09-2011, and David Bermingham on 01-11-2011. However, with a 15% reduction for good behavior, we can expect them out in the summer of 2010.

Putin’s Comments Drive Company’s Stock Down $6Billion

Speaking at an industry conference this week, Putin, Russia’s former president and now prime minister, spoke five sentences critical of one of his country’s big steel companies, Mechel, and its billionaire chief executive, Igor Zyuzin.

In a sign of Putin’s enduring power in Russia and around the world, that criticism came with a price: about $1.2 billion per sentence in lost shareholder value.

This is a perfect illustration of how sensitive the markets are. When Schumer wrote his nastygram warning against IndyMac, IndyMac failed. When Bethany McLean and cohorts at the Wall Street Journal began publishing nasty Enron-related articles day after day after day, Enron collapsed. When Meredith Whitney wrote an opinion a week ago about Wachovia, Wachovia plummeted to the very brink of bankruptcy. Words matter. One must use them responsibly.

Such is the power of Putin’s words – even after “stepping down” to prime minister in May – that shares in Mechel, a coal mining and steel company, plunged almost 38 percent on the New York Stock Exchange after Putin complained that the company was charging more to its domestic customers than to its foreign ones. The comments wiped out, at least for a day, about $6 billion in stockholder value.

Mechel, which closed Wednesday at $36.61 in New York, tumbled $13.77 on Thursday to close at $22.84, after Putin spoke. The company, which responded Friday, was up $3.15, or 13.8 percent at $25.99 in afternoon trading.

The company’s shares trade as American depository receipts in New York. Putin spoke Thursday evening at the conference in Nizhny Novogorod, southeast of Moscow.

On the heels of the imprisonment of one tycoon and some bare-knuckled corporate raids and renegotiations of large energy contracts under Putin, the market did not take this talk lightly.

Over all, the Russian stock market slid more than 5 percent Friday, on fears that Putin’s comments might presage another attack on a company similar to the destruction of the Yukos oil company in 2004.

The remarks also coincided with the departure of the American chief executive of the British energy company BP’s joint venture in Russia, which is under pressure from its Russian partners and the government, in another glum sign for investors here.

Putin’s speech began simply enough.

“We have a respected company, Mechel,” Putin said in introducing his subject.

“By the way, we invited the owner and director of the company, Igor Vladimirovich Zyusin, to today’s meeting, but he suddenly got sick. Meanwhile, it is known that in the first quarter this year the company exported raw materials abroad at half the domestic, and world, price. And what about the margin tax for the government?”

He added: “Of course, sickness is sickness, but I think Igor Vladimirovich should get better as quick as possible, otherwise we’ll have to send him a doctor.”

Putin’s comments came in the broader context of a discussion of rising raw materials costs and the prospect of imposing high export tariffs on steel as a result.

With inflation soaring in Russia, particularly for manufacturing inputs like steel, government officials are concerned about the impact on a vast infrastructure rebuilding effort that is a centerpiece of Putin’s economic program.

The government is also seeking to diversify the economy away from dependence on raw materials exports, to provide employment and protection against a possible retreat in global commodity prices. Putin has asked business owners to comply with this approach, even at the cost of profits.

In response, the company issued a statement Friday seeking to calm the waters.

“Mechel shares the concerns of the government of the Russian Federation, steel plants and metallurgical industry in regard to the growth of prices for steel and raw materials in the recent time,” the statement said.

“Mechel is ready for cooperation with federal authorities of the Russian Federation and, if required, will provide complete information on any arising issues,” it added.

If there were any doubt over who holds sway over Russia’s oil-fueled economy, the power of Putin’s words could be seen putting that to rest. Indeed, his successor, Dmitri Medvedev, has spoken often of the need to burnish Russia’s investor image and improve the rule of law, so far with little effect.

Terrifying, isn’t it?

FDIC Seized Two More Banks

From AP:

The 28 branches of 1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California, were closed Friday by federal regulators.

The banks, owned by Scottsdale, Ariz.-based First National Bank Holding Co., were scheduled to reopen on Monday as Mutual of Omaha Bank branches, the Federal Deposit Insurance Corp. said.

The FDIC said the takeover of the failed banks was the least costly resolution and all depositors – including those with funds in excess of FDIC insurance limits – will switch to Mutual of Omaha with “the full amount of their deposits.”

Blah blah blah. The rest of the article is typical administrative stuff. The market is brutal sometimes, as we’re seeing here, but it’s always correct.

Bankers Can’t Get Manhattan Apartments

NYThas illuminated the sorrow of the investment banker who canna afford the apartment of his dreams. I am amused because the whole ‘unfortunate banker’ tone seems insincere coming from the NYT. Nevertheless, I found the article uncommonly interesting and it combines two of my favorite subjects: bankers and real estate. It’s worth a read.

Cara Scoops Chron Again On Enron

Chron has an article about Cindy Olson’s Enron memoir – a day after Cara Ellison wrote about it.

I love that some of the Enron executives are finally out there, speaking back against the ridiculous allegations of fraud.

When The Going Gets Tough On Wall Street

Against the current economic slump, Wall Street’s big investment banks are building their restructuring departments in a bid to provide financial advice and financing to companies in distress–and to earn fat fees along the way. But should they just stick to financing instead?

The Deal investigates.

US Stocks Drop As Financials Have Biggest Drop In 8 Years

Bloomberg lays out the bad news like a Christmas buffet:

U.S. stocks tumbled, sending financial shares to their worst drop in eight years, after home sales slid more than forecast and investor Bill Gross predicted the housing slump will cost banks and brokerages $1 trillion.

Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc. retreated and shares of builders posted their biggest decline ever as a report showed sales of previously owned homes fell to the lowest level in a decade.

A decade? Really? Since 1998? Deep in Clinton territory.

Ford Motor Co., the world’s third-largest carmaker, plunged the most since August 2000 after reporting a loss twice as big as analysts estimated.

$8.7 billion to be exact.

“I would feel very uncomfortable for the average investor to get too aggressive in financials,” said Stephen Wood, who helps manage $213 billion as a senior portfolio strategist at Russell Investments in New York. The recovery in the housing market “isn’t going to be coming any time soon.”

Everyone is saying this. They’re saying the same thing about financials too.

The Standard & Poor’s 500 Index dropped the most since June 26, losing 29.65 points, or 2.3 percent, to 1,252.54. The Dow Jones Industrial Average slid 283.1, or 2.4 percent, to 11,349.28. The Nasdaq Composite Index tumbled 45.77, or 2 percent, to 2,280.11. Five stocks retreated for each that gained on the New York Stock Exchange. European shares declined as German business confidence sank, while Asian shares advanced.

Financial stocks in the S&P 500 fell 6.7 percent as a group, the third drop in the past three weeks greater than 5 percent. Today’s slump follows a six-day, 30 percent rally spurred by better-than-estimated earnings reports from Citigroup, JPMorgan and Wells Fargo and legislation to rescue Fannie Mae and Freddie Mac.

The S&P 500 pared its rebound from an almost three-year low on July 15 to 3.1 percent.

Citigroup, the largest U.S. bank by assets, lost 9.8 percent to $19.06. Bank of America, the second-biggest, sank 8.4 percent to $30.64. JPMorgan, the No. 3, retreated 6.7 percent to $39.14. Goldman, the biggest securities firm, slid 4.1 percent to $180.26.

The slump in sales of previously owned U.S. homes signaled weakening consumer confidence is hurting demand. Resales dropped 2.6 percent to a lower-than-forecast 4.86 million annual rate from a 4.99 million pace the prior month, the National Association of Realtors said. The median home price dropped 6.1 percent from June last year.

Washington Mutual Inc. dropped 13 percent to $4.03, bringing the stock’s two-day decline to 31 percent. Gimme Credit LLC said unsecured creditors were “pulling funds” from the biggest U.S. savings and loan, citing a decline in federal funds purchased and commercial paper. The company fell yesterday after Piper Jaffray Cos. advised investors to sell the stock and Merrill Lynch & Co. and Friedman Billings Ramsey Group Inc. analysts said the bank may need more capital.

Washington Mutual said in an e-mailed statement that it does all of its business through banking operations and “does not rely on commercial paper.”

I tend to doubt that statement but I have no proof so it’s worth investigation.

The 28 percent jump in the S&P 500 Financials Index during the five trading days ended July 22 was the biggest one-week advance for any of the S&P 500′s 10 industry groups since daily calculations on the indexes began in 1989, according to Harrison, New York-based research firm Bespoke Investment Group LLC.

An S&P index of 15 homebuilders slumped 12 percent, its biggest drop ever, as 13 of its companies retreated.

Ryland Group Inc., the U.S. homebuilder for first-time buyers, tumbled 19 percent to $21.43 and led the group’s decline after reporting a second-quarter loss that exceeded analysts’ estimates.

A total of $5 trillion of mortgage loans belong to “risky asset categories,” Gross, manager of the world’s largest bond fund at Pacific Investment Management Co., said in commentary posted on the firm’s Web site today.

His $1 trillion forecast implies that credit-market losses are less than halfway over. Since the start of 2007, global financial firms have reported $468.1 billion in losses and writedowns, according to data compiled by Bloomberg News. Firms worldwide have raised $344.6 billion of capital since the third quarter of 2007.

“As long as housing prices go down, no one can say how much the banks are going to lose and how long it will last,” said Charles Knott, who oversees $800 million as chief investment officer at Knott Capital Management in Exton, Pennsylvania.

The number of vacant houses hit an all-time high in the second quarter as the U.S. real estate recession pushed homeowners into foreclosure and lenders seized properties. A total of 18.6 million U.S. homes stood empty, more than at any time in history and 6.9 percent higher than a year earlier, the U.S. Census Bureau said.

Homebuilders, automakers and hotel owners dragged a group of consumer stocks down 2.8 percent as oil rose from a seven-week low on speculation crude’s retreat during past two weeks has been too much. Crude for September delivery added $1.05, or 0.8 percent, to $125.49 a barrel.

Ford tumbled 15 percent to $5.11. Excluding costs the company considers one-time expenses, the loss was $1.38 billion, or 62 cents a share. On that basis, Ford was expected to report a loss of 28 cents a share, the average estimate of 12 analysts surveyed by Bloomberg.

Starwood Hotels & Resorts Worldwide Inc. fell the most since July 2002, tumbling 11 percent to $35.26. The third-largest U.S. lodging company said full-year profit may drop more than analysts estimated as consumers and businesses trim travel spending to cope with a weakened economy and higher gasoline prices.

Marriott International Inc., the biggest hotel chain, slumped 8.7 percent to $26.06.

McDonald’s Corp., the biggest restaurant company, lost 2.2 percent to $58.37. Deutsche Bank analysts led by Jason West cut their recommendation on the shares to “hold” from “buy,” writing that higher beef costs and fewer customer visits may reduce profitability.

AT&T Inc. led phone companies in the S&P 500 to a 3.1 percent drop after JPMorgan Chase & Co. cut the largest U.S. telephone carrier to “neutral” from “outperform” on concern the company’s wireline business will deteriorate. AT&T fell 4.1 percent to $31.70 for the steepest drop since February.

Amazon.com Inc. added the most since in a year, gaining 12 percent to $78.72. Second-quarter profit topped analysts’ estimates after Chief Executive Officer Jeff Bezos promoted free shipping and lower prices to entice U.S. customers. Full-year sales may rise to as much as $20.1 billion, compared with an earlier forecast of as much as $20 billion, the company said.

A bigger-than-forecast increase in jobless claims also weighed on stocks. A government report showed the number of Americans filing first-time claims for unemployment benefits rose last week to 406,000, the highest in almost four months, signaling the slowing economy is weakening the labor market.

“You are starting to see a lot of the problems in the financial area drifting over into more of the real economy,” Tobias Levkovich, the chief U.S. equity strategist at Citigroup Inc. in New York, said in an interview on Bloomberg Television.

Except for Canada, all of the 23 developed nations in the MSCI World Index experienced bear-market plunges of 20 percent or more since September as credit losses increase and record commodity prices stoke inflation. Brazil today became the 23nd out of 25 developing countries in the MSCI Emerging Markets Index to enter a bear market.

Chipotle Mexican Grill Inc. fell the most since McDonald’s sold the company to the public in January 2006, losing 20 percent to $67.30. The fast-food chain reported 0.9 percent less second- quarter profit than analysts estimated, according to Bloomberg data, amid higher costs for beef and cheese.

Qualcomm Inc. surged the most since May 2002, jumping 17 percent to $52.43. The world’s biggest maker of mobile-phone chips increased its 2008 sales and profit targets and settled a patent dispute with handset maker Nokia Oyj.

I need a drink.