Diane Francis on Business Issues

Friday, June 30, 2006

Pardon Me, Mr. Lay?

Di francis column june 27 National Post


Speculation is that President George Bush will grant a Presidential Pardon in 2008 to former Enron Chair, Kenneth Lay.

"It's certainly a consideration and I'm sure he [Lay] has attorneys working on that," said high profile Houston lawyer Michael J. Wynne in a telephone interview this week.

He's a partner with Houston's Yetter & Warden, LLP, a former prosecutor and white collar crime specialist who sat through the lengthy Enron proceedings.

"Pardons are granted at the end of the Presidential term and Mr. Lay and the President's families are friends," he said.

Several blogs in Washington and Texas have spread the pardon information and the White House has been strangely silent.
"Mr. Lay hasn't been sentenced but there's a good chance that by that time [end of Bush term in 2008] Mr. Lay will have served a couple of years, be an old and broken man and have developed health complications," he said. "And that invites speculation the President may consider a pardon."

Mr. Lay and Skilling were convicted of multiple counts of fraud in relation to the Enron bankruptcy. The Judge in the case, Sim Lake, is a tough conservative who was appointed to the bench by Ronald Reagan and is likely to hand out maximum sentences.

"Personally, I believe a pardon would be an injustice and a shame, considering all the resources spent on this case and considering all the people who were hurt by Mr. Lay's crimes," said Mr. Wynne. "But it's not something to be dismissed because the families were friends and two years from now Enron will be off the radar screen it's on now and the President would have that prerogative."

Pardons are commonplace, even controversial ones.

For instance, former President Bill Clinton besmirched his reputation after he granted pardons to many crooks. He pardoned a convicted friend of his brother-in-law's plus gave another to notorious fugitive Marc Rich, accused of hundreds of millions in tax evasion, but whose former wife was a big financial supporter of President Clinton's.

Another new development is that Mr. Skilling may have burned through tens of millions of dollars set aside for his defense. His own attorney was quoted in Houston newspapers last week as saying he's been owed legal fees for months.

"His lawyer is saying that he's out of money and is asking the courts for permission to get [Skilling] money the government has frozen," said Joel Androphy, a partner with Houston's Berg & Androphy.

"But no one knows what Skilling's financial situation is, or what he is worth, because of all the privacy laws around the world," he added.
Mr. Skilling put up his own millions for bail, but Mr. Lay - a flight risk - had to ask his five children to put their houses and personal assets up as bail to prevent him from fleeing.

The consequences of their convictions will be pretty dire, said Mr. Androphy. He attended much of the trial and believes that the sentences will be lengthy and served in the "Big House".

"The traditional view of this is that they will get 25 and 30 years," he said in an interview. "They won't be in a maximum security prison, but if you get a large number of years, the chance of serving in a minimum security prison are reduced."
Messrs. Lay and Skilling are expected to appeal, and Mr. Skilling last week filed a precursor to that asking that the convictions be thrown out for insufficient evidence.

Mr. Androphy feels the two have little to hope for, either in terms of an appeal or leniency.

"The only hope? If the Democrats win the Presidency in 2008, then everybody on the courts of appeal [in 50 states] resign and the Democratic President appoints all new appellate judges," he said. "This would change the complexion of the court, which is very conservative, but it won't happen."

Mr. Androphy also said an appeal will be difficult because the Enron trial was fair with good representation on both sides.
"I attended a fair amount of the trial and the government satisfied all of the elements. There was plenty of evidence," he said.
The appeals may attack the venue, as being unfair to the accused because it where so many Texans lost their livelihoods and savings.

"It's unlikely an appeal court would entertain reversing the judge who ruled on the venue," said. Mr. Androphy "Besides, both sides expressed satisfaction with the ultimate jury pool when they were chosen."

Saturday, June 24, 2006

Look Out Traditional Stock Exchanges

Diane Francis Saturday June 24:


LONDON -- This week, London's junior exchange, called AIM for Alternative Investment Market, celebrated its 11th birthday and business, and prospects, have never been better.

AIM is starting to shake up the stock market scene around the world. This is because it has a unique governance model which results in lower costs and more research coverage for companies. It's also an "incubator" for the London Stock Exchange which in 2005 attracted more IPOs than NASDAQ and the NYSE combined. This year, so far, IPOs for AIM are nearly double the two American exchanges.

Attempts in post-Enron Corporation America to exempt medium and small cap companies from the costs and burden of Sarbanes-Oxley have failed this year. The result is a flood of interest in AIM from North America as well as other jurisdictions.

It costs US$900,000 to be listed on AIM; US$2 million on NASDAQ and the TSX Venture Exchange is somewhere in the middle in costs, according to Neil Johnson, managing director of Canaccord Adams Limited, the only Canadian player on AIM. Ongoing compliance costs can be as high as US$2.5 million south of the border and less than US$1 million a year on AIM.

Anne Mouliere is the head of Business Development in North America for AIM and talked with Diane Francis last week in London.

Q. How would you gauge current interest in AIM?
A. "We now have 1,650 companies and they are from around the world, China, Russia, Ukraine, Kazakhstan, the Middle East, Canada, Australia and the U.S. In the last two years the success we enjoyed is from international interest and involvement which has totally exploded. We have 35 Canadian companies and get six or seven a year. Most have no listing in Canada."

"We first went to Canada in 2000 and AIM was a different market then than it is today. We went to Canada and Australia first because they had similar securities models to the UK and were commonwealth countries."

Q. How about U.S. companies?
A. "Eighteen months ago we saw U.S. companies starting to do IPOs and now we're seeing alot of interest for IPOs. We have 45 U.S. copanies on AIM now and they are not interlisted anywhere at all. It's also important to note that we are not another NASDAQ or technology exchange. We have technology, biotech, retail and resource companies. We have venture-capital backed companies from California and Boston. AIM companies range in size from US$15 million market capitalization up to US$1 billion, but that's only after they've grown on AIM. The average raise is US$14 million."

Q. How do you prevent AIM from cannibalizing the LSE?
A. "If a company is too big -- such as already US$1 billion in market capitalization -- we suggest they should list on the main market. We now have 15 companies on AIM that are about that size but they have grown on AIM over a few years. We let companies join but always say that when they are compliant to the requirements of the LSE eventually, we expect them to join it. But we wouldn't force them to move."

Q. How quickly is the exchange growing and what's the future?
A. "Last year we had 519 new joiners. In the first quarter of 2006, we have had about 100, so it may be less than 2005's number but they are bigger companies."

Q. How much of a role does the cost of compliance in the U.S. and Sarbanes Oxley play in terms of the exploding interest in AIM?

A. "U.S. interest is high and Sarbanes Oxley plays a part. Companies are saying they can comply with the rules, but the cost and disturbance to management is unaffordable. Legal firms are checking this exchange out in significant numbers. Another benefit for companies who list on AIM is the analyst coverage which is superior to coverage on NASDAQ or other exchanges. This is an advantage that the big exchanges don't provide."

"Each company has a Nominated Advisor, called a NOMAD, which monitors compliance and is there to service the company on an ongoing basis by providing research to institutional investors. Unlike NASDAQ or other exchanges, this means that every listed company has at least one research analyst from day one covering them."

Q. Are there imitators yet in Canada or elsewhere?
A. "Euronext has launched something similar and so has the Dublin Exchange. But the reality is we have a community in London that, for 200 years, has existed to serve small and medium cap companies. It takes time to build a market like AIM."

Q. AIM outsources regulation to NOMADS which some criticize as letting the monkeys guard the bananas. How does the LSE regulate these NOMAD regulators?

A. "First we have a process that takes months before we licence a NOMAD. Their role is to bring the right companies to market. And we are very tough when we regulate NOMADs. We can remove their licences. Impose public sanctions. So they are very careful about who they list. We took three or four licenses away five years ago, but none since. We also want NOMADs who have been established in London for some time. NOMADs need to have a reputation to lose and to be responsible on an ongoing basis."

Saturday, June 03, 2006

Taking on the Big Board

Diane francis column Wednesday Post May 31

NEW YORK CITY - Bay Street maverick Tom Caldwell roughly made his clients C$100 million in profit accumulating seats on the Big Board before it went public this year. But it was a hard-fought battle which pitted Caldwell against the old boys' network which calls itself the New York Stock Exchange.

Now, just weeks after celebrating, (he bought himself a pick-up truck), he finds himself disgruntled again with the New York Stock Exchange management and its board of directors because they have gotten caught up in a trans-Atlantic stock exchange merger fever.

Last week, the NYSE made a US$10.22-billion merger offer with Euronext NV, which runs the smallish Paris, Brussels, Amsterdam and Lisbon Stock Exchanges.

"The timing is not right and the price is not right," said Tom in a telephone interview. "There's not enough industry experience on the NYSE board. It's the same management and there seems to be little understanding of the incredible asset they have which they haven't capitalized on as yet."

By the way, NYSE boards have been mostly populated by members of the old boys' network, former politicians or celebrities. Even Martha Stewart was on the board despite the fact her company was listed. Many of its traders are under investigation as is its former CEO, Dick Grasso, for getting a retirement payout of US$139.2 million.

These days, Tom Caldwell and his clients are the third largest shareholders (with about 3%) in the widely held public company, called NYSE Group Inc. If given a chance to vote on the merger with Euronext, which isn't the case so far, he said he would oppose.

"I would vote no, with the caveat that I've been wrong before," he said. In 1998, he opposed the conversion of the Toronto Stock Exchange into a public company, but admits his mistake. "Those [Toronto] seats went from C$50,000 to C$31 million. It was the deal of a lifetime. And that exchange is really well-managed."

Now a profit-seeking public entity, Toronto's margins are 50% compared with the fledgling public entity in New York with margins of only 3.4%.

That's why a merger is premature because valuations aren't based on realizable margins, he said. After the Toronto home run, Tom searched the globe for exchange investment prospects and first zeroed in on New York. In August 2003, he bought the first seat for a record price of US$2 million, then led the charge to take that exchange public.

During that time, compensation (Grasso's) and trading scandals dogged the place, plunging the value of seats to as low as US$975,000 in early 2005 but the Caldwell group kept acquiring.

"Toronto and London had already gone this route and it was proven," he said. "It was amazing how many people did not see this. A little guy from Toronto shouldn't have been able to go into the heart of capitalism and in 18 months change it. But Wall Street is extremely parochial, full of pride and hubris. They feel that if something does not happen there, it hasn't happened."

The current exchange takeover fever began to spread in 2004 when Germany's Deutsche Borse bid for the London Stock Exchange. Rebuffed, Deutsche then bid this year for Euronext only to be rejected last week in favor of the NYSE offer. In the meantime, NASDAQ approached London, was rejected but has 24% of its stock, an expensive proposition given that it has no access to LSE cash flow. Deutsche Borse operates the Frankfurt and Eurex derivatives exchanges.

The NYSE's pursuit of Euronext frustrates Tom because it took him months and great effort to convince the sleepy NYSE board, management and members to convert seats into shares and go public, only to find that the same sleepy management is now jumping prematurely on a buyout strategy.

"The NYSE is not far enough along in its own development to be doing a merger. The stock is undervalued because management has not realized efficiencies," he said. "This is taking a great asset and reducing it to a good asset."

The NYSE Group Inc. has been talking with the Chicago Mercantile Exchange Holdings Inc. and the company should be pursuing this plus other strategies like regional consolidation and maximization of profitability, he believes.

"I would also like to see this exchange lobby Washington to ease up on the more onerous parts of Sarbanes Oxley, one of the underlying root causes for these cross-border transactions," he said.

Cultural differences will also make matters difficult, he said. "Brussels must approve the deal and is busy trying to regulate the size of bananas. Then there's Paris which thinks its exchange is the center of the universe and then there's the business culture in France where a deal generally lasts as long as you're shaking hands and sitting in the same room."

Caldwell's clients have holdings in Hong Kong, Johannesburg, London, Osaka, Toronto, the Chicago Board Options Exchange and the International Stock Exchange.

"Exchanges are like buying toll roads," he said. "We like them."

Enron Victims Unite

Diane Francis column for Friday Post June 3: (out of New York)


An online gambling giant is offering Enron Corp. victims a chance to recoup losses by betting on the combined sentence that its convicted former CEOs will get in September.

BetUS.com has posted the following odds for punters willing to wager between US$5 and US$1,500 a pop: 15 to 2 odds that Jeff Skilling and Ken Lay get zero jail time. Five to 2 odds that the two net a combined 10 years or less and 7 to 1 odds that they will be hit with 71 years of sentence or more.

"We're mostly a casino and sports-betting site, but we are starting to offer people the chance to make wacky wagers like this one," said spokesman Chris Bennett in a telephone interview this week.

Punters can also bet on whether President George Bush will fall below 30% in popularity. "This was a big one around the Washington DC area," he said.

And most recently, an unannounced thus far, the site began taking bets on Belinda Stronach and Bill Clinton future sightings. This is because of all the hype and buzz around Hillary Clinton running for the Presidency and mentions about Bill-and-Belinda in supermarket tabloids. The odds? 500 to one that Bill and Belinda marry by 2010.

Another "wacky wager" is a bet -- 100,000 to one -- as to whether the world is going to end on June 6, 2006 (the storied 666) as some believe is prophesied in the book of Revelations.

"About two dozen have bet yes that it will end," he said. _Question is, how do they hope to collect their winnings?


The Next Bad Thing

Even though Messrs. Skilling and Lay may face serious slammer time, the plundering of America's ownership class by its managerial class continues apace.

Last week, a timely piece written online by former SEC Chairman Harvey Pitt led this week to precipitous action by The Nasdaq Stock Market Inc.

"Justice has been served to ex-Enron CEOs Kenneth Lay and Jeffery Skilling, but the water isn't safe yet," wrote Mr. Pitt in a U.S. newspaper. He is now CEO of business consultants Kalorama Partners. "There's a new kind of fiduciary misconduct floating around: options backdating."

This involves dating options to insure that executives can profit. If true, this is immoral, and possibly illegal, because options are supposed to be dated and priced sometime in the future to provide incentives to managers to enhance profits and performance.

The exchange is considering delisting companies under investigation for manipulation of stock options, reducing trading and cutting the prices of their shares, according to Bloomberg this week. So far, Altera Corp. and Vitesse Semiconductor Corp. have been sent delisting notices due to late filings and concerns about their stock options. Mercury Interactive Corp. and Nyfix Inc. have been dropped.

Others being considered for delisting include Juniper Networks Inc. of Sunnydale, Calif., the world's No. 2 supplier of equipment to direct Internet traffic; San Jose, Calif.-based KLA-Tencor Corp., the biggest maker of chip-testing equipment; and New York's Comverse Technology Inc., the world's largest manufacturer of voice-mail software. All three trade on the Nasdaq.

"Already, CEOs of several companies have resigned, been discharged or been placed on administrative leave pending the outcome of internal and governmental reviews," wrote Mr. Pitt. "It [backdating] renders a company's proxy materials false and misleading. Backdating also means a corporate document used to permit access to corporate assets has been falsified, a violation of the Foreign Corrupt Practices Act. Moreover, if backdating occurs without the compensation committee's knowledge, illegal insider trading may also have occurred."

There are also tax and accounting implications, he pointed out.

Speaking of Regulatory Issues _Toronto lawyer Felicia Salomon dreaded the countless compliance forms and documents she had to wade through constantly as in-house counsel for a decentralized insurance conglomerate operating in many jurisdictions.

Three years ago, she decided to harness technology to overcome such legal drudgery and started a software-based legal consulting firm called Corporate Responsibility System Technologies Ltd. in Toronto. It just opened an office in New York City.

Her company simplifies the process by boiling down the overlapping regulatory and legal frameworks into simple templates, or modules, be the regulations imposed by a stock exchange, securities commission or financial institutional watchdog.

Among her dozen or so large clients are Royal and SunAlliance, Assurant and Metropolitan Life. _"We aim at cutting your red tape," she said. "Companies still need their law firms for complicated matters or strategy but not for these routine, commoditized compliance processes."

A Critical Lawsuit

Diane Francis column May 31 Post:


The Supreme Court of Canada has decided to hear a case this fall that
has sweeping implications for business, individuals and the legal
profession.

The case pits Stephen Cheikes, an American who ran a movie tax
shelter business in Vancouver, against his former Canadian lawyer Robert Strother as well as against Mr. Strother's former law firm, Davis & Co., the second largest firm in British Columbia.

The Supreme Court of Canada's decision in this matter will determine what duties and loyalties lawyers and their firms owe to their clients.

Mr. Cheikes started Monarch Entertainment Corporation in 1993 and hired the lawyers. It was successful.

Then in 1997, he said Mr. Strother advised him he could not legally operate his tax shelter business because of tax rule changes. So he shut operations down in fall 1997 and asked Mr. Strother to find ways to comply so that Monarch could re-open.

A year later, in 1998, he found out that Mr. Strother had become a 50-per-cent partner in a movie tax shelter business, called Sentinel Hill, and that Davis & Co. were its attorneys.

He also discovered that from 1998 to 2002, Sentinel Hill made C$140 million in total profits, Mr. Strother made C$32 million for himself and that Davis & Co. had been paid C$9 million in fees.

By the time, Monarch discovered this competing enterprise it was too
late to catch up so it sued in early 1999. Mr. Cheikes sued both parties for breach of fiduciary trust as well as breach of an obligation of client confidentiality.

In 2003, the B.C. Supreme Court found no wrongdoing, but in 2005 the British Columbia Court of Appeal overturned that decision and found the lawyer and firm guilty.

Mr. Strother was ordered to pay back the C$32 million he had made and Davis & Co. was ordered to pay back C$7 million of the C$9 million in fees to Mr. Cheikes and his partners.

The high-stakes case was appealed again and the Supreme Court of Canada has granted leave to appeal, likely in October. This is not surprising. The case has been widely circulated and discussed within the legal profession for months. Even the Canadian Bar Association is intervening.

"This is a case of grave consequence to the citizens of this country,"
said Mr. Cheikes in a recent telephone interview.

"To summarize, this is what happened to us," said Mr. Cheikes. "Myself and others created a new business opportunity; we hired a large law firm for five years; that law firm advised us to close down because laws had changed; then that law firm and its lawyer failed to advise us that they were mistaken and that the law would permit us to restart our business; and then our lawyer and our firm got into the same business without telling us."

Clearly, the case is important because a lawyer who ends up in
competition with a client is of great concern to everyone. So are the
issues involved in the previous court decisions.

The lower court agreed with Mr. Strother when he argued that because
Monarch had shut its doors on his advice he had no obligation to correct his mistaken legal advice even though it had led to the shutdown.

The lower court also agreed with Davis & Co. which argued that it should be
able to represent two competitors in a business without being obliged to
tell one what the other is doing.

But the B.C. Appeal Court disagreed.

"Mr. Strother was a lawyer and there are duties which lawyers have to
clients," said Mr. Cheikes. "The Court of Appeal said he had an
obligation to tell us that he was wrong initially in his interpretation
of the Tax Act. Because he didn't, the court ordered him to give us all
his profits. The law firm was ordered to give us only part of the fees
they earned. But they should pay us all fees because we hired the law
firm and we believe that both Strother and the firm should be liable. If this case loses, how can anyone in Canada trust their lawyers?"