Marc Dreier: An Attorney's Worst Nightmare

Ohmygodyall, Have you read Dealbreaker’s summary of Marc Dreier’s interview with Vanity Fair? Priceless. And I’m sure his attorneys are basically calling out into the hallway to a group of paralegals, “Hey, just start shredding those Dreier files. We’re not going to need them anymore.”

Either Marc Dreier’s heart has grown three sizes, and now he wants to unburden himself – completely or that motherfucker is an idiot.

Maybe a little of both. But ohmygod, if I were on his payroll as counsel, I would so advise him do not do an interview with Vanity Fair in which you admit that you created a quote-unquote hedgefund. Are you hearin’ me, dawg?

I think the money quote is this one:

For months he brooded over the wreckage of his life. His epiphany, Dreier remembers, came in the summer of 2003, during a long walk he took on the beach near his vacation home, in Westhampton Beach, New York. He experienced a moment of clarity, he says, in which he saw the path he needed to take. It happened one day when he found himself staring at a palatial beachfront home. His own house was inland. He had always wanted one right on the beach.

The beach house, you see, was the key to feeling good again. Marc Dreier was upset because of 9/11 (no, seriously, read the interview) and because his wife left him so he felt like he was destined to be great and it was time to start being great.

So basically, with the beach house in mind, I guess you see now why envy is such a destructive force.

I quote Dealbreaker:

It’d be enough to send anyone to a place where the next logical thing to do would be impersonate hedge fund managers and stage fake conference calls! And honestly, not to insult anyone here, but do you know how easy it is to scam these hedgie guys? Like crazy easy. It almost seems like the crime would be to not scam them, if you think about it.

In his own words:

If he was to become a thief, Dreier reasoned, his target was obvious: hedge funds. It was 2004, and every dinner party he attended seemed to be thronged with young hedge-fund billionaires eager to throw around investment money. “I had to come up with some quote-unquote great idea for a hedge fund,” Dreier remembers. “I couldn’t sell anything tangible. It had to be a financial instrument at some level to sell to a hedge fund. So I came up with the idea of selling debt.”

That quote-unquote is killing me.

“I expect to spend most of the rest of my life in prison,” he tells me. “I hope I don’t die there. I’ve been blessed with good genes, you know.

So we haven’t seen the last of Marc Dreier.

UPDATED
The interview was complete with a photo shoot:

Bottom left is Blue Steele if I’ve ever seen it. The middle bottom is Magnum and the bottom right is Sexyface.

If Joe Hirko Were CFO of Enron Corporation

When Portland General was acquired by Enron Corporation, Joe Hirko was CFO. As CFO, he had a reputation for being honest, scrupulous, and conservative. I wonder if Jeff Skilling had fired Fastow and put Hirko in the CFO chair at Enron Corporation, what would the trajectory look like? When I think of a few pivotal moments that could have changed things, none paint so dramatic a picture as this hypothetical.

Joe Hirko had the trust of Wall Street. When things started getting sketchy after 9/11 and commercial paper was hard to roll (for anyone), I think Hirko could have bolstered confidence. He was known for his good judgement where Fastow was known for his risk-taking. In that post-9/11 environment, the good judgement would have been invaluable. Paper would have rolled; the decline in stock price might have abated somewhat, and Hirko’s assurances would have gone far to soothe nervous counter-parties.

Joe Hirko would not have stolen money – ever, under any circumstances. There would have been no highly publicized firing of the CFO from the company, which would drive prices down even farther. Instead, Hirko would have provided consistent, steady leadership.

With Joe Hirko as CFO, the LJM and Raptors probably would have still existed. There was nothing wrong with them – legally or accounting-wise. But some of the transactions were risky. I am thinking specifically of Osprey – which would trigger the financial collapse. I don’t think Hirko would insure one asset with the price of Enron stock over the long term; that just doesn’t sound like his style. So when the stock price did decline, it would be felt as a pinch, not as a wall of bricks crumbling upon the company.

LJM would have been better managed.

Ben Glisan probably would never have acquired the Treasurer position. That might have kept him out of the Southampton deal.

Sherron Watkins may have never written that memo to Dr. Lay in August 2001. If she had, she would not have been moved from Global Finance to Human Resources to protect her from Andy Fastow. I’m not sure what impact her remaining in Global Finance might have had but I am sure there would have been some effect.

In Enron Broadband Services, Ken Rice would have been full CEO instead of sharing the role with Joe Hirko. I decline to speculate on what might have become of EBS with just Ken Rice at the helm.

In any case, the Enron story would have been completely different. Today, instead of a man condemned to prison for sixteen months, Mr. Hirko might very well be CEO of Enron Corporation. Implying, of course, Enron Corporation would still be here.

How Did You Arrive At That Number?

Some moron is suing Bank of America for – I quote – “1,784 Billion Trillion dollars.” Fun!

Historic Photos of Texas Oil

I recently read a wonderful, quirky picture book called Historic Photos of Texas Oil by Mike Cox. It is a collection of photos of the early oil boom in Texas, which may not sound fascinating but trust me, it is. There is something strangely effecting about the photos – the pictures of skinny workers having ice cream, the iconic pictures of Spindle Top spurting black gold into the air, tiny towns over run with oil rigs in every back yard.

All my life, I wanted to live somewhere ‘special’. People in Los Angeles, or Paris or New York know they are living somewhere kind of interesting; it is part of their culture. Living in Houston, the only interesting thing I ever saw was the Enron building. But after reading the book, I had a new appreciation for this silly little state. There is some romance here, maybe, if you look hard enough. I found myself thrilled by the old Texaco signs. I loved the pictures of trains carrying these huge barrels of oil across vast expanses of flat, empty land. They evoke inexplicable loneliness, which I suppose connects us to the loneliness of the workers who came from far away for a chance to work in the oil patch.

Others who got rich often did so quite accidentally, deciding to plunk a well down and see what happened. Most of the time, not much happened. But once in a while, the Texas hardpan earth was generous, and oil was found, and quickly monetized.

Being from Texas, I suppose it is easy to look out at the oil derricks and overlook the complexity of them. They become background. I remember once when I was very young (four or five, I suppose) my father was driving us from Corpus Christi to Houston. I remember thinking the oil derricks looked like dinosaurs. For some reason my father stopped on the side of the road, and I opened the back door and ran as fast as my tiny legs would carry me to the giant rusted “dinosaur”. My father chased me and caught me but not before I ran into the mud, losing my shoes, and hugged the dinosaur.

I just thought they were interesting. I wanted to see what they were all about.

After reading the book, I know.

Anyone who is interested in Texas history or the oil business should own this book. It gives context to both – and makes you feel pretty special for living in Texas.

Skilling Tells Enron Jury He's Innocent (April 10, 2006)

[I posted this on April 10, 2006. I'm feeling nostalgic, I suppose.]

Former Enron Corp. Chief Executive Jeffrey Skilling told jurors in his fraud and conspiracy trial Monday that he abruptly resigned from the energy trading company a few months before it collapsed because he was worn out and troubled by its falling share price — not because he knew disaster loomed.

“I am absolutely innocent,” Skilling said right after he swore to tell the truth while testifying in his own defense Monday.

Then he let jurors know what’s at stake for him:

“I guess in some ways my life is on the line, so I’m a little nervous.”

As he testified, he became more relaxed and conversational, with no hint of the swaggering bravado for which he was known when he ran what was once the nation’s seventh-largest company. Known for his plainspoken manner as he led Enron’s transformation from a staid pipeline company into an energy giant, Skilling addressed jurors directly, his eyebrows raised slightly, looking earnest and alert.

At times he appeared self-deprecating, even telling jurors that he was admitted to Harvard Business School “by some huge mistake.” [Note, he used that same joke at the 2000 Analyst Conference. He was referring to Rex Shelby at time.]

He repeated what he said twice before congressional panels in 2002, that Enron was “in very good condition in the middle of August when I left.”

His lawyer, Daniel Petrocelli, asked if he had any clue that Enron would flame out in scandal less than four months later.

“Not in my wildest dreams, no. It’s almost inconceivable now what happened,” the ex-CEO said.

“Would you have left if you thought the company was going to experience the events that later transpired?” Petrocelli asked.

“No,” Skilling replied matter-of-factly.

The 52-year-old ex-CEO’s testimony kicked off the 11th week of the federal trial. His co-defendant, Enron founder Kenneth Lay, aims to testify later this month.

Both are accused of repeatedly lying to investors and employees about Enron’s financial health when they allegedly knew fraudulent accounting propped up a facade of success. Enron careened into bankruptcy proceedings in December 2001, six weeks after announcing unprecedented losses and a massive equity writedown that generated intense scrutiny from once-adoring Wall Street and regulators.

The two men say there was no fraud at Enron other than that committed by former Chief Financial Officer Andrew Fastow and a few others, who skimmed millions from secret schemes, and that bad publicity coupled with lost market confidence sank the company.

In staccato fashion, Petrocelli asked Skilling if he ever destroyed documents or computers, set up offshore accounts to hide money, or did anything to hide past behavior or dealings. Each time, Skilling said, “No,” sometimes accentuating his answer by leaning forward.

“Did you leave town?” Petrocelli asked.

“I went to Fredericksburg,” Skilling replied, eliciting courtroom laughter at his referral to a small town a few hours’ drive away.

Skilling is charged with 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy.

If convicted of all counts, Skilling faces a maximum of 275 years in prison and tens of millions of dollars in fines — though an actual prison term would likely exceed two decades. Lay faces a maximum of 45 years in prison if convicted of the six counts against him.

Jurors took copious notes and listened intently as Skilling spoke. His first wife, Susan Skilling, and their daughter and two sons, aged 22, 19 and 15 — watched his testimony, flanked by Skilling’s second wife, former Enron corporate secretary Rebecca Carter.

The ex-CEO described how Enron consumed his life and how, as it grew into a successful company, he decided to move on because he’d neglected his family and his “head wasn’t in it anymore.”

“I guess you could say I was obsessed with Enron,” he said. “Every day was intense, and I had not spent the time I should have spent with my family.”

But he also said he told Lay on “that fateful day, Friday, the 13th of July,” that he wanted to resign after 11 years with the company because he was bothered by Enron’s falling stock.

Skilling told investors on the day his resignation became public that he quit strictly for personal reasons. Several prosecution witnesses said they didn’t know the falling stock helped prompt his resignation until they read his comments about it in a newspaper.

Skilling said he thought Enron’s businesses were in good hands. He took a rafting trip with his youngest son, considered a teaching job, and founded a private investment company.

Yet his attention focused on Enron again when the company announced massive third-quarter losses and a $1.2 billion writedown of shareholder equity in mid-October 2001. A storm of media and regulatory scrutiny followed, particularly regarding partnerships Fastow created and ran to conduct deals with Enron.

Fastow testified that he used the partnerships to help Enron manufacture earnings by pretending to buy its poor assets and investments with Skilling’s knowledge.

Skilling said he didn’t believe there was a bad motive or intent attached to Fastow’s partnerships. He said he called Lay and offered to come back to help right the ship.

“I thought it would show support to the marketplace. Most people know I understand the business. By coming back, I would send a strong signal to the marketplace that I didn’t think anything was wrong,” Skilling said, contradicting his earlier statement that his credibility with Wall Street had waned.

Lay and other managers rejected his offer.

He said he tried to galvanize other ex-top executives to put up a combined $200 million to help reignite investor confidence in Enron, but aborted the effort when one of the chief would-be contributors — former Enron Vice Chairman Cliff Baxter — backed out.

“I was devastated because there’s nothing harder. This had been my life. I was very proud of what we had built, so it was devastating to be so powerless, to not be able to do anything,” he said.

He referred to congressional hearings into Enron’s collapse as “witch hunts,” and said he ignored advice from attorneys to invoke his Fifth Amendment right not to testify. His two defiant appearances set him apart from many other ex-executives who invoked that right, including Lay.

“Someone had to get out and start explaining what had happened before someone else stepped into this vacuum and explained it incorrectly,” he said.

But he clammed up when he learned from SEC investigators that he was a target in the Justice Department’s investigation. He was indicted in February 2004, and said he “never … not once” considered making a deal with prosecutors the way more than a dozen other Enron executives did.

“I will fight those charges until the day I die,” Skilling said.

Enron Primer: Hedging & The Origin of LJM1

[This is a re-post from 2004.]

In this section we’re going to clarify exactly what hedging is and how Enron used hedging in its financial strategy. But first, let’s clarify the very basic terms of securities.

Security positions are referred to as long, short, or flat.

* If you own stock are you are said to be in a “long” position. A long position is positive.
* If you owe stock, you are “short” the stock. A short position is negative.
* If you neither own nor owe the stock, you are said to be “flat”. A flat position is neutral.

A person or company can hedge a trade by taking a small position on the opposite end of the transaction. An example: an airline. You believe the airline industry is going to do well (*snort*, sorry, that cracks me up) so you go long on airline stocks. At the same time, you can go long on fuel stocks or commodities, because if the airlines do well you make money but at the same time, a factor that could cause a depreciation of the value of stock prices (rising fuel costs), could also cause an increase in the other stock (the fuel stocks). As long as you’re long on the fuel, you make money.

This is a rudimentary hedge position. The hedges can become much more complex when you add short stocks. One way to hedge is to use an option.

* Call options give their owners the right to buy stock at a set price.
* Put options give their owners the right to sell stock.

A call option can be bought as a form of insurance that can protect a short term position against a catastrophic loss or protect an already-established profit on a short position. On a short sale, there is, theoretically, no limit to how much an investor can lose: he has borrowed the stock to deliver against his short sale and some day must buy back shares to cover the transaction so that he can return the borrowed shares. There is no way in telling how much what price he will have to pay because, at least in theory, there is no telling how high a price will go. The short seller is facing a huge potential loss. He can protect himself with a call.

Enron had bought a small Portland internet company, Rhythms, for $10 million dollars. A year later it went public and shot past $400 million. With mark-to-market accounting, every one of those dollars would be counted as profit, even though, as standard with IPOs, the stock could not be sold by executives for at least six months. Jeffrey Skilling, CEO of Enron, wanted to find a way to protect these enormous gains with “hedges” – related investments that would go up in value (fuel stocks, so to speak) if Enron’s holdings went down (the airline stocks, so to speak.) If the stock collapsed while Enron was required to hold the shares, the incredible gains in the first quarter would be a huge, unexpected loss in the third.

Enron’s idea was to pay a third party to assume the risk that Rhythms’ price would fall. If Enron could find an investment firm to sell it a put option, then its profits would be locked in. Unfortunately, that was impossible. No investment bank would sell a put option on a volatile, new, thinly traded stock like Rhythms. And more worrisome, such a put option would violate Enron’s agreement with Rhythms.

Andrew Fastow, the CFO of Enron, thought and thought and thought about the problem. And then he solved it.

LJM (named by Fastow after his wife, Lea and his two sons, Jeffrey and Matthew) would act as an off-balance-sheet fund (in other words, completely separate from Enron; it would be a partner to Enron, not an asset of Enron). Enron would contribute its own stock (about $250 million) to some outside fund, which would then sell a put option on Rhythms stock to Enron.

That outside fund, of course, was LJM.

Joe Hirko's Sentencing

Joe Hirko looked exhausted at his hearing this morning. Still good looking, of course, but tired, like he’d been up all night.

I felt like I was still asleep. I just kept thinking… it’s a dream. It isn’t happening.

But it was.

Sixteen months. For approving a press release.

Even now, it seems unreal.

It makes me question not just our justice system but the meta issue of the role of business in society. It seems that Joe Hirko was caught up in the mounting anti-business hysteria that was started, I am ashamed to say, by President Bush and has gained real traction under President Obama. Even if he was guilty – and he’s not, but let’s pretend he is guilty of telling lies in press releases, so what?

What impact could that possibly have in the world? Who the fuck cares?

This is not a crime. Raping a 13 year old child and running away to France is a crime. Giving tax advice to a sex-slave ring is a crime. Failing to pay your taxes is a crime. Dealing drugs and stealing things are crimes.

Lying in a press release is not a crime.

And Joe Hirko is not a criminal. Joe Hirko is the kind of guy you want on your team. He is honest and kind. He has created wealth and opportunity in America. I am thinking of Obama’s bullshit statement that he “created or saved 600,000 jobs” in the last ten minutes or whatever. I think: how many jobs has Joe Hirko created? How much good has he done?

For seven years, he’s not created any jobs because he’s been ensnared in this nightmare. And he won’t create any jobs for 16 more months. And he won’t be productive and he won’t be paying taxes and we all lose. We all lose when Joe Hirko goes to prison.

They’re taking a good man and making it impossible for him to do good. And bad people, bad-intentioned, bad-minded, small, stingy, outright evil, walk around unburdened by the DOJ.

It’s just wrong. And I’ve tried very hard to explain why it is wrong. I’ve angered some people (for that I am truly sorry). I’ve messed up once or twice. But I swear, I swear on everything I hold dear, I swear my intentions have only ever been to show that Joe Hirko and indeed most of Enron, was good. Good for society, good for business and just objectively good.

That’s all I meant to do.

If I have failed, I’ve failed myself more than anyone else.

I am incredibly sad that Mr. Hirko is going to prison. I’m sad that we live in a world where it is even possible.

Joe Hirko Gets 16 Months In Prison

Joe Hirko, CEO of Enron Broadband Services, was sentenced to sixteen months in prison.

I did not want to write this and I have nothing else to say about it right now. Later, when the grey dull sickness passes, maybe I will be angry and maybe I will be better able to articulate why this is such a terrible injustice. But for now, I’m just sick inside.

FBI Destroys Evidence In Caylee Anthony Case

This YouTube video of a Florida newscast shows that the FBI destroyed critical evidence in the Casey Anthony murder case. A small heart sticker that was placed over little Caylee Anthony’s mouth was used for evidence in a search warrant that allowed police and FBI to search Casey Anthony’s arts-and-crafts closet for similar stickers. The original sticker was then destroyed by the FBI when a latent fingerprint examiner underwent the fingerprinting process on the tape where the sticker was affixed.

The FBI also failed to take photographs of the sticker.

While I believe that Casey Anthony is probably guilty of murdering her child, I also think the FBI and prosecutor’s offices should be held to the strictest possible standards. This kind of sloppiness is not unheard of either. In the past four years there were numerous reports of FBI computers being “misplaced” (a startling statistic shows that approximately 3-4 FBI computers get misplaced every month, 166 in the last 44 months). In recent months, FBI wiretaps used to eavesdrop on suspected criminals because of the bureau’s repeated failures to pay bills.

The FBI folks I know are generally good guys when you get to know them personally. But when they have the power of the United States government behind them, and they are trying to build a case these kinds of mistakes are downright terrifying.

Several Enron people told me that the FBI was much worse than the prosecutors because the FBI didn’t know what was important or not. And at least one agent told one witness to lie on the stand.

So there are problems, is what I am saying here.

I hope Casey Anthony gets a fair trial and then is put to death. But the “fair trial” part is the most important, in my opinion.

Today In Enron History

Today in 2006, Andy Fastow, the former CFO of Enron Corp., was sentenced to six years in prison. Fastow pleaded guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud, and forfeited $23.8 million in cash and property. The government dropped 96 other criminal charges in exchange for Fastow’s cooperation and he testified against Dr. Lay and Jeff Skilling.

Originally Mr. Fastow agreed to serve 10 years but in light of his “extraordinary cooperation”, prosecutors asked for, and received, six years.