Enronisms

Diane Francis column for Saturday Post April 29:



This week in a Houston courtroom, it has been entertaining to read how Enron Corp.'s Kenneth Lay blames everyone for his firm's collapse except himself and his former CEO Jeff Skilling.

His defense is straight out of Nuremburg, not Houston.

To hear Mr. Lay tell the tale he was just doing his duty and the whole mess was the result of negative press articles, a crooked CFO, short sellers and pessimism.

Of course, the crooked CFO was the reason behind the negative press articles, the short sellers and the pessimism. And, last time anyone checked, the CFO is a person who is appointed by and reports to the CEO and Chair of a company.

What's going on here is Mr. Lay and Skilling are trying to blame everything on Enron's CFO, Andrew Fastow who has already gone to jail. But Mr. Fastow has testified that Messrs. Lay and Skilling knew about troubles and lied to the public, investors, regulators and employees. The two are charged with fraud.

What is pertinent to remember is that no matter how Mr. Lay recasts the facts, one CFO stealing US$45 million does not a US$25-billion fraud make.

Enron was a rotten culture and didn't suddenly hit trouble. The US$45-million that Mr. Fastow stole was a drop in the bucket compared to the tens of billions that were hidden from balance sheets in offshore entities that Lay and Skilling inked.

Take what Enron whistleblower Sherron Watkins said in an interview with me in Banff in 2004. She has already appeared as a prime witness this month at the Houston trial.

"Enron was different than WorldCom where just a few people decided to cook the books," she said. "This was systemic. Ken Lay made everyone use his sister's travel agency. People were co-opted. I can't tell you how many times I heard the phrase from executives 'it's not exactly legal, but I think it'll stand up in a court of law.'"

(This week, Mr. Lay admitted to another "breach" when the prosecutor asked him about a company that he and Mr. Skilling had privately invested in which was doing lots of business with Enron. Under the rules, the two were supposed to tell the board of directors about such "related party transactions", but Mr. Lay admitted this week they did not.)

Sherron Watkins told me she had doubts about Enron for years, but in 2001 came to understand the byzantine nature of Enron's outside activities. In her case, she found out the portfolio of assets she was in charge of were used to pump up earnings, hide losses and camouflage fraud.

"The chief financial officer had set up a paper company he and others owned, which was funded with Enron stock options, to do business with Enron. In other words, he was doing business with himself," she said. "You can't do this."
In spring 2001, she asked for an audience with Mr. Lay after Enron CEO Jeff Skilling suddenly quit, cashing in US$66-million in options, saying he left because he could not keep the stock rising in value.
"It made a bunch of us angry at Enron. We said he didn't call in sick, he called in rich," she said. "It confirmed my fears that something horrible was facing this company."

As a savvy investment banker and accountant, she realized the company and its investors were being defrauded. In summer 2001, she sent an anonymous letter to Mr. Lay, then followed up by describing in detail all of the accounting irregularities to him in a 30-minute meeting that August.

Things didn't change and the company went into bankruptcy in December that year.

She admitted she was naive to think Mr. Lay would do something. By December 2001, the company admitted its US$13-billion in debts were really US$38-billion. Sherron testified before Congress and ended up on the cover of Time Magazine for her courage.

Despite all the evidence about wrongdoing and billions in hidden debt, Mr. Lay actually told the jury this week that Enron had no underlying business problems that a little public relations couldn't have solved.

He also blamed his accountants (defunct Arthur Andersen) for restatements of earnings, never mind that the restatements were needed because of bad business practices.

As for Sherron Watkins' letter and warnings, his memory was fuzzy but he did recall that his accountants and lawyers dismissed its allegations.

Western Canada's Oil Problem

Diane Francis column Post Wednesday April 19:


NEW YORK CITY - Western Canada's oil producers may not capitalize on record-setting oil prices in future because they are solely dependent on the U.S. market, says a British-based oil market expert.

"The problem for Canadian producers is where to market their crude," said Lesley Owens in a recent presentation to investors. She is an economist and partner in oil consultancy CITAC Global LLP in London. "Until Canadian producers find alternative markets their supply will put pressure on prices and that differential [between heavy and light crude oil]. Spreads are lower than normal."

Too much heavy oil from Western Canada to the U.S. fetches lower prices, reducing the viability and profitability of upgrading.

But there are other challenges facing Canadian oil producers such as:

* Supply increases in Canada, announced and underway, have outpaced U.S. refinery investments and this trend will continue to put downward pressure on prices.

* Western Canada's companies have focused on production rather than marketing which hurts prices.

* High natural gas prices have increased oil production costs for Canadian upgraders in the oil sands.

* Canadian dollar increases are also adding to production costs.

* Manpower shortages in Canada, and commodity price increases in steel and other materials, are contributing toward inflation in oil production costs.

Despite Canada's unique issues, oil producers as a whole will continue to enjoy higher prices.

Ms. Owens said that records in oil prices, such as this week's US$70 a barrel, will continue to be set thanks to fundamental trends in supply and demand.

"US$60 a barrel is a solid floor when demand is at its weakest," she said. "If that price slips, OPEC will take action."
Underpinning her price scenario are projections of solid economic growth.

"We are looking at growth worldwide of 3.6% in 2006 and 3.3% in 2007," she said. "Our view is based on the concensus view from several forecasts recently published by the International Monetary Fund and others."

Growth figures dictate that the net increase in demand will total 1.6 million barrels a day in 2006 while her market research has determined that the net increase in supply should tally only 1.3 million barrels per day.

"All this increase in demand is for transportation fuels," she said. Roughly speaking, 70% of all oil is refined into transportation fuels.

China figures greatly in these forecasts. Estimates are that within a decade China will have five times' as many vehicles as now, going from 20 vehicles per 1,000 persons to 100 per 1,000.

(This contrasts with 650 vehicles per 1,000 persons in Europe and 1,100 vehicles per 1,000 Americans.)

On the supply side, OPEC held production steady in 2005 while supplies provided by non-OPEC nations ebbed. Last year, production declines in the U.S., Norway, Britain, Mexico and Canada was slightly greater than production increases in Russia, Angola, Brazil, Azerbaijan, China and others.

This year, Canada's projected supply increases represent a huge turnaround. Inn 2005, production declined by 38,000 barrels a day, but this year it is expected to jump by 250,000 barrels a day, thanks to production from new fields in the oil sands and heavy oil deposits in Alberta and Saskatchewan.

Meanwhile, OPEC will keep production level in 2006 in order to keep upward pressure on prices.

There are supply wild cards which could create huge price increases. Iraq is plagued with terrorist attacks on its oil fields as is Nigeria. And Iran faces United Nations' sanctions over its nuclear ambitions which may result in supply declines.

"If we lose Iranian production [currently 4 million barrels daily], or the equivalent amount, prices could hit US$100 a barrel," she said.

What's perplexed many is that economic growth has remained strong despite increasing oil prices. But energy price increases have not kept pace with inflation or economic growth, in large measure due conservation, alternatives and fuel efficiencies.
Growing popularity of hybrid cars as well as the deployment of clean coal gasification fuels, will keep demand reasonable. China, for instance, is mandating such technologies and other countries may follow suit.

Clearly, Canada is in a great position in future.

Offshore production in the Atlantic is poised to grow from 303,000 barrels daily to 375,000 in 2006 and fetches world prices because of geographic locale.

The west must diversify its customer base by backing a pipeline to B.C.'s coast. By having a Pacific Ocean outlet, customers from anywhere will be able to bid for Canadian crude thus creating an auction for crude in order to guarantee world prices.

It should be an industry priority to address the distribution issue in order for Canada to realize top dollar for this non-renewable resource.

Quattrone: Victim or Perp?

Diane Francis column Saturday April 21:


NEW YORK CITY - The case of technology superstar investment banker, Frank Quattrone, borders on legal harassment or is, as one commentator speculates, a form of inter-coastal rivalry.

Last month, the 2nd Circuit Court of Appeals in New York threw out Mr. Quattrone's 2004 conviction of obstruction of justice because of erroneous jury instructions. The judge in this case did not emphasize to the jury that they must be convinced that Mr. Quattrone intended to obstruct justice.

The appeal court said that meant the conviction was flawed, but in a strange move the court recommended that a third trial be held because they believed there was sufficient evidence of wrongdoing to convict.

Mr. Quattrone is the former head of Credit Suisse First Boston Corp's. technology group. He is accused of sending an email on Dec. 5, 2000 to his Palo Alto colleagues asking them to purge files about initial public offering allocations. Prosecutors say he did this to frustrate evidence gathering underway by a securities as well as a grand jury investigation.

Mr. Quattrone testified that the purge was routine procedure. The prosecution labeled it obstruction of justice by him and Credit Suisse to hide the unfair allocation of IPO shares to favored clients.

The firm paid a fine eventually.

But Mr. Quattrone's first trial in 2003 ended in a hung jury. His second was in 2004 and led to a conviction, just overturned. A third trial, many believe will occur, could take place this year.

"It would be unusual for the government to abandon a criminal conviction, particularly where the Appellate Court, Second Circuit, found the evidence more than adequate to convict," said Columbia University Professor John Coffee in a recent telephone interview. "What they [appeal court judges] agreed on was that the judge was not neutral."

To some this would constitute double, or triple, jeopardy. But this has no basis in law because he appealed the case, won an overturn and now has another chance to disprove allegations, say legal experts. This means he has been able to exercise his right to a fair trial.

However, it does appear to be harassment by anyone's standards even though Mr. Quattrone has been free on bail since charged in 2003. He's been professionally sidelined and fighting bans by various regulatory bodies. A recent ban was overturned.

"He's facing a third trial and yet it's never been clear he's committed any crime whatever," said Jack King in a recent telephone interview. He is spokesman for the National Association of Criminal Defense Lawyers in Washington. "They're just trying to make a professional defendant out of him."

The Association submitted a brief on his behalf.

Ironically, superstar Quattrone would be out of jail now if he had done a "Martha Stewart" and served the 18-month sentence he received in 2004.

Instead, he's spent that 18 months fighting only to face the possibility of another lengthy, expensive trial.

"It would be over but the problem is he would have to live with a conviction the rest of his life," said Ellen Podgor in a phone interview. She is a law professor at the University of Stetson and at Georgia State. "I think prosecutors should drop it. They've already punished Quattrone. They've made their point."

Besides, another trial is not cost effective and the initial prosecutors are now in private practice.

"A third prosecution would not be wise because it was a very tenuous type of case," she added. "Lots rested on one email exchange. At two tries, it makes it very difficult for prosecutions to be successful."

Professor Podgor also thinks the government has sufficiently frightened market players and their employers against destroying documents whenever investigations are underway. (It also frightened people who would fib with its Martha Stewart conviction.)

But another important legal point is at stake here. The appeal court overturned the conviction because the judge failed to require intent. This is the same basis for appeal mounted by Arthur Andersen case, Enron's former accountants, as well as WorldCom's former Chairman Bernie Ebbers. He claims he knew nothing.

And Quattrone is also hanging tough and rich enough to refuse to settle and fight another case. He made a rumored US$120 million.

Still other commentators see him as a martyr being persecuted, not prosecuted, by New York's jealous financial establishment.

For instance, Valley "voice" BigBlog.Com wrote: "His ability to once again move and shake in Silicon Valley - look for him to join a big venture capital firm soon - will be a continuation of the much-denounced dot.com bubble...This is another important chapter in the decade-long fight between Silicon Valley's money guys and the New York financiers. Quattrone has played a starring role in that drama. He's sure to take centre stage again."

Whatever the explanation, the wheels of justice grind slowly and politically. So count on Mr. Quattrone to be harassed in the dock one more time just because so much elsewhere rides on his conviction.