The New Breed of SPE’s

This WSJ article about ACA Capital Holding, shows financial firms adeptness in managing their balance sheet. ACA, ostensibly an insurance firm, was undercapitalized from the beginning. Based on the firm’s ‘A’ credit rating, the firm has a veneer of security which fell apart when S&P downgraded them to triple-C in December – a canary in the subprime coalmine. To avoid collapse, the firm is negotiating with the banks to avoid posting collateral.

Why would a bank go to such an undercapitalized firm for insurance? The WSJ gives this answer which sounds very much like SPE’s Enron used before its own collapse:

Investment banks paid ACA annual fees for bearing the risk in their debt securities. This shielded them from the impact of market-price fluctuations, so the banks didn’t have to reflect such fluctuations in their earnings reports.
As long as ACA kept its single-A rating, the banks didn’t require ACA to post collateral even if the securities it insured slipped in value. It’s different if a hedge fund, which doesn’t have a credit rating, is selling the insurance. In that case, each time the security insured falls in value, the hedge fund may be asked to put up more collateral.

Enron followers remember Special Purpose Entities as companies which were used to manage earning and to avoid reporting losses. They weren’t illegal. These related parties met the letter of the law, while violating the spirit and were instrumental in the collapse of the firm.

Essentially, they existed so Enron could avoid posting certain debts and showing less volatility. If the SPE’s had enough outside equity (3%) to be considered independent they did not have to be consolidated on Enron’s balance sheet. Enron crammed the SPE’s full of junk it didn’t want and couldn’t offload anywhere else.

ACA’s performed the same function. If everything is going up, the system works. ACA profits since they don’t have to make good on any policies, and the banks get to move junk (and its volatility) off their balance sheets. But when the market turned sour and all of the subprime securities moved down in unison, the equity was quickly used up and the firm collapsed. As Enron’s SPEs weren’t really independent, ACA was never really an insurance firm.

Nacchio's Quest for Justice

We first talked about his case here.

Yesterday the WSJ law Blog posted a copy of his appeal and this revealing excerpt.

Counsel is aware of no other case where the government has predicated a criminal charge of insider trading on predictions about financial results for future quarters. This prosecution is even more extraordinary in that the government presented no evidence of any internal forecast or any statement by any Qwest executive warning, at the time of Nacchio’s trades, that Qwest would not make its public projections. The prosecution yoked an unprecedented theory to plainly insufficient facts, and hoped, in a bitter and vindictive atmosphere, that it would be enough to win a conviction from a Denver jury. It was.

Why were the feds so eager to nail him? They were sending a message about the consequences of not cooperating:

Among the big telecommunications companies, only Qwest has refused to help the NSA, the sources said. According to multiple sources, Qwest declined to participate because it was uneasy about the legal implications of handing over customer information to the government without warrants.
...
According to sources familiar with the events, Qwest's CEO at the time, Joe Nacchio, was deeply troubled by the NSA's assertion that Qwest didn't need a court order — or approval under FISA — to proceed. Adding to the tension, Qwest was unclear about who, exactly, would have access to its customers' information and how that information might be used.

Under different circumstances he would be considered a civil liberties hero, now he isn't even a martyr.

This is the second great white-collar appellate brief in the last month. Jeff Skilling's one is long but worth the time to read for any Enron followers.

Enron Case Falling Apart

Dealbreaker.com reports what we've been saying from the beginning:

Since the prosecution of former-Enron CEO Jeff Skilling, who is now serving a 24-year and four month jail sentence, also used the "honest services" theory, there has been some speculation that the court's decision might be a sign that it could overturn some of his convictions as well. When the fifth circuit court denied Skilling bail in December, it noted that there were "serious frailties" with his conviction on securities fraud and insider trading convictions.

The decision by the government not to appeal the fifth circuit ruling means that Skilling's appeal before the same court will be able to rely on ruling as controlling law. It may be too early for Skilling to pop the cork on the champagne. But it's probably not too early to start putting some on ice.

An Anon comment in the forums puts it perfectly, abusive law enforcement by state thugs the entire time:

The Enron prosecutions were/are characterized by perp walks, defamatory DOJ press conferences and unbridled use of witness intimidation, while the lynch mob never ceased to shout out its encouragement. You name the prosecutorial power/advantage, and it was abused. These prosecutions appears to be unraveling And if they do, perhaps the use of abuse will have been shown to be a dead end street, the “justice” in the criminal justice system more sturdy than it now appears. Of course, even then how to undo the damage done? As Skilling said, “good people have died.” Several fine men have spent and are spending time in prison on trumped up charges. Others are or will be imprisoned based on false, self-serving pleas. Yet folks like Rudy, who jumped started their careers with such abuse, seem to get along afterwards just fine. I going to listen to Abe's linked song again.

Sarbanes - Unconstitutional? Yes Argues Ken Starr

Its own creator, Mike Oxley, said it was, "hastily written and enacted." In a WSJ Op/Ed Ken Starr says that it may be unconstitutional as well.

The Sarbanes-Oxley Act powerfully illustrates the law of unintended consequences. Due to hasty drafting by Congress in the wake of the Enron and WorldCom scandals, Sarbox has cost the U.S. economy over $1 trillion, according to one study published by the AEI-Brookings Center. To add insult to grievous injury, it is unconstitutional.
...
It is time to call Congress back, both to help our economy and reaffirm that our constitutional system imposes clear limits on the government's urgent desire to "do something." Congress must be reminded that the "solution" is at times worse than the problem.

More Market Freedom? – Regulatory Tide Turning

Remember when Trust Fund Baby Elliot Spitzer tried to shake down H&R Block for the crime of offering retirement accounts for the poor? It was hard to miss since it was front page news everywhere. You may have missed the fact that Spitzers abusive prosecution failed again becuase the only media play it got was the Wall Street Journal Op/Ed Page.

Trust Fund Baby Spitzer is leaving the AG post in disgrace (unfortunately he isn’t disappearing for good) after a long string of embarrassing losses. At the same time regulations from the post Enron era are being rolled back.

Paulson is going after Sarbox, and the “Justice” Department got smacked down yesterday with new restraints being put in place in response to the brutal Thompson Memo. From the NY Times:

Under the revisions, federal prosecutors will no longer have blanket authority to ask routinely that a company under investigation waive the confidentiality of its legal communications or risk being indicted. Instead, they will need written approval for waivers from the deputy attorney general, and can make such requests only rarely.

It may be too late. The US’s burdensome regulations helped London eat our lunch.

Comrade Bloomberg and Schumer say that are going to help. With friends like these…

The Enron Emails

This fantastic link has been floating around for a while http://enron.trampolinesystems.com . It's an archive of over 200k Enron emails fully searchable.

I spent more than a few hours reading through it, here are some of the better ones and some observations:

-No attachments

-Lots of fwd’s. The marriage Before and After and Taliban TV schedule were popular.


-Ken Lay had a lot of email sent to him, most very supportive. Since we know the aftermath they are a depressing read:

http://enron.trampolinesystems.com/show_email/134205 - My wife has been with ENRON for fifteen years eversince she came out of U of H . Our hearts bleed ENRON blood and they were wounded deeply last…We are and still very grateful to all the good things that ENRON has provided to our family ( we have three children) and feel so blessed to be associated with such a caring and generous company .

http://enron.trampolinesystems.com/show_email/176732 - You have more employees behind than you know!! We are all committed to working harder than ever and do whatever it takes to weather this storm.

http://enron.trampolinesystems.com/show_email/223475 - I just wanted to communicate my disappointment with the events over the last couple weeks here at Enron.

http://enron.trampolinesystems.com/show_email/246554 - I don't understand how this could have happened. So many decent, hard working, loyal, honest people are being devastated by the results of questionable management, a lack of leadership and the appearance of abject greed among Enron Sr. executives. This is a truly sad state of affairs that will be the subject of so many "B" school projects most of which will focus on our mistakes.

http://enron.trampolinesystems.com/show_email/149407 - Mr. Lay, the I am not writing this in malice but in hopes that it helps get Enron back the way it used to treat their employees and makes it the number one employer of choice again. I hope you can get back the feeling that I had when I first started there and get the stress level down in your organization for the sake of your employees.

Enron employees had a great sense of humor, this email written in the voice of Andy Fastow was very funny:

http://enron.trampolinesystems.com/show_email/234292 - I have been impressed by your willingness to look forward, stay the course, ignore GAAP requirements, and maintain your stock purchase payments. Your loyalty and naivety have sustained me during some of my darkest moments. I am grateful for friends, family, and the opportunity to live and work in a free and open society, whereas by rights I should be living and working in an open prison.

-This is satire put together Reliant about a merger between Enron and hell along with the Enron response.

http://enron.trampolinesystems.com/show_email/145485

Hey--I thought this was pretty good! Of course we at the evil empire are
proud of being thought of as greedy overbearing SOBs! DF

How Cooperation Agreements Make a Mockery of the Right to Trial by Jury

This is from Ellen Podger at law.com:

The demise of Arthur Andersen demonstrated the high cost incurred when challenging a government prosecution. The Supreme Court's reversal of the conviction didn't help resuscitate the company -- serving instead as a mere postscript on Andersen's tombstone. The government's ability to destroy a company, irrespective of legal accuracy, sent reverberations through the business world, resulting in companies across the United States entering into deferred prosecution agreements with the Department of Justice to avoid an Andersen-like destruction.

...availing oneself of the constitutional right to trial by jury is an incredible gamble, with the stakes raised higher than ever before, as the sentencing guidelines provide for draconian sentences in white-collar cases.

...We have to wonder whether this right is fully realized when so many individual defendants and companies are folding to government demands because of the high risk entailed in proceeding to trial.

The government doesn’t bear the cost of its own screwups. The prosecution had no incentive to be right back then and now they have even less of one now since it would be suicide for any company to risk trial. It’s the Spitzer play book, make wild accusations of wrong doing, leak documents to the press, and threaten prosecution to force a deal and claim victory.

We covered this with Enron here: http://nastybrutishandtall.com/2006/10/skillings-show-trial-has-predictable.html

Skilling’s Show Trial has Predictable Result

Former Enron CEO Jeff Skilling was sentenced today to 24 years. We blogged frequently during the trial about the misguided prosecution who struggled to make their case and yet still ended up winning.( Ken Lay is Innocent, Sean Berkowitz on the Run, Berkowitz Blows It, Ken Lay Falling Short) Although they had no real evidence, the prosecution relied on word games and things unrelated to anything that occurred at Enron (does anyone remember Photofete?) to smear Mr. Skilling. By charging him with dozens of crimes and holding the trial in an unfriendly court the prosecution managed to eke out a victory. The brilliant Jeff Skilling crushed Sean Berkowitz on the stand but the lynch mob wasn’t satisfied with that.

Enron Issues:

The bad guy got away – It wasn’t Dr. Kenneth Lay. It wasn’t genius Jeff Skilling. There was only one repugnant criminal in this entire case; Andrew Fastow. He lied, he stole, he deceived and even got his own wife throw in jail. Somehow this Judas, staying in character, ratted (more accurately blamed) Mr. Skilling for Enron’s issues and got away nearly scot-free. Essentially the prosecutors didn’t have a case unless they could find someone desperate enough to blame Skilling and Lay, so they went to the most dishonest guy they could find and he was willing to do it.

Criminalizing Agency Cost - Skilling brought this up during the trial. History will look back on the Enron trial like the Salem witch trials. Skilling was the victim of a hysterical lynch mob, he wasn’t a criminal. A bankruptcy isn’t a crime. A bad business decision isn’t a crime. A stock market decline isn’t a crime. But logic never works on lynch mobs.

Retroactive Crimes – This paragraph from the New York Times says it all:

His lawyers are arguing that he should be sentenced under the 2000 guidelines because the 2001 guidelines did not take effect until Nov. 1, 2001 — three months after Mr. Skilling resigned his chief executive post and left the company. The jury in the Enron case, however, convicted Mr. Skilling of being part of a conspiracy the government defined as extending through December 2001.

Note: Judge Sim ruled that the gov't did not prove the timeline for conspiracy extended into November of 2001 so the previous sentencing guidelines would apply. It is simply more evidence of a shoddy, abusive type of prosecution that was common during the trial.

Prosecutorial Abuse – Here is how justice works in America: Press hungry prosecutors will indict based on the way the political winds are blowing, regardless of actual crimes taking place. And what better way to get headlines then to attack someone rich and famous? Since the indictment will be based on weak/no evidence the only way to lean on an innocent person is by loading up on the number of charges to force a settlement. Even if an innocent person can afford to fight all of the charges (in Skillings case he spend over $30 million. What kind of justice can a normal person expect?) there is always a chance that one charge might stick. And if not the prosecutors can always use Section 1001, a law so arbitrary that anyone can be turned into a criminal by the State.

Enron as a business may have has some flaws, but the biggest fraud in this case was the political prosecution of Jeff Skilling and Kenneth Lay.

Links:

During the trial the Houston Chronicle Enron Blog was the best source of real-time info, they still put out good updates: http://blogs.chron.com/enrontrialwatch/

Prosecutor Sean Berkowitz gets a Second Chance – The Harassment of Jeff Skilling Continues

Police thugs on a power trip recently arrested former Enron CEO Jeff Skilling for the crime of walking down the street. With the harassment of Skilling still going on maybe Sean Berkowitz will get a chance to win one against him.

You remember Sean right? He was the prosecutor who Skilling ate alive during the Enron trial.

Up next: Justice Dept. vs Skilling in the conspiracy to commit jaywalking trial. Soon to be followed but the prosection of Skilling under section 1001 for lying to federal investigators about jaywalking after they don't find enough evidence to support the conspiracy charge...

Enron Trial – All Bets Are Off

http://www.nypost.com/business/66511.htm

BetCRIS, an online gambling site, decided to stop taking bets on the outcome of the Enron trial after the odds so heavily favored guilty verdicts for ex-chiefs Ken Lay and Jeff Skilling that people began complaining about paying too much to bet on a conviction.

The site closed betting yesterday with odds at 1 to 80 that Lay would be convicted and 1 to 100 that Skilling goes down.

This is not directly comparable to the Tradesports wagers which require a certain number of convictions to pay off. By designing a different contract they could have continued to make a market but instead they chose to pull the contract.

Et Tu Mark? - Hueston Crushes Lay

A sleazy opportunist who would sell his own family out for a dime. Before today that could only refer to the prime villain in the Enron saga, Andy Fastow, but today Hueston revealed that label could apply to Mark Lay as well. Yes, Ken Lays own son.

Lay was understandably shocked to learn that his own son sold short Enron stock, as John Hueston revealed during the cross. Not only that, Mark pressed the head of public affairs Mark Palmer to disclose his father margin call sales to drive the stock down further.

Besides that damaging revelation, Lay's supposedly affable personality has not come out yet. His credibility, the only thing that will get him out of this, is in tatters. John Hueston is showing Sean Berkowitz how the cross should be done. While Sean's traps sounded contrived, Huestons are vicious and on point.

Most important, we have a question for Mark. Why sell short, the puts would have been a much better play.

To catch up on your trial news and get real time updates, The Houston Chronicle is the best source: http://chron.com/news/specials/enron/

Ken Lay Falling Short - John Hueston Is Up

It wasn't supposed to happen like this.

Skilling is supposed to be the sleazy, irritable one and Kenneth Lay the avuncular nice guy. This is third day on the stand for Lay who is now being cross examined by John Hueston. Without his regular council, even in the direct Lay came across as controlling and irritable which is not the impression to give the jury. Because Lay's defense is essentially, "I know nothing" about any wrong doing and "I don't recall" about anything incriminating he needs to be believable. Without any direct evidence, credibility and likeability are essential for Lay to avoid a conviction. He barely showed those traits during the direct and the contracts responded with a several point move pointing toward conviction. Ken fell short of expectations and doesn't have much time to save himself.

Bringing less than your A-game when the prosecutor, "has never lost a single count in any of his cases" is probably not a good idea.

Maybe We'll See Volume Now- Enron Contracts Get Ink

http://www.click2houston.com/news/8832136/detail.html

Unlike the political contracts, which were quoted along side poll numbers, legal contracts are still a novelty. It’s hard to describe the contracts in a sound-bite if you have never seen them before.

"That roughly means that people who don't care about risk think there's a roughly a 68 percent chance. The market as a whole thinks it's 68 percent," said Nat Wilcox, a UH professor of economics.

Wilcox said traders in the futures markets are basically making bets using whatever information they can get.

"Markets are a way of combining lots of people's private information about something," he said.

Why wouldn’t the traders care about risk?

Berkowitz Blows It – Enron Update

Instead of the anticipated sparks Sean Berkowitz finished his cross examination today with a whimper. The most anticipated part of the trail so far left Skilling undamaged and gave the impression the government was struggling to make its case. Berkowitz threw some curve balls especially by bringing up Skilling's investments in Photofete.

The Photofete business was easily refuted by Skilling’s lawyer Petrocelli. The investment involved was so small that Skilling just didn’t remember how much it was. Berkowitz strained to use this to undermine the credibility of the witness but ended up making the governments case look bad. In all the digging and charges there has been no direct evidence against Skilling and the best example they have of wrong doing is a tiny photo shop? It must have been extremely anti-climatic for the jury, but for Berkowitz’s show trial they have to use what they can.

Several news sources made a big deal out of the fact Skilling lost his temper on the stand, but it didn’t come off that way to us. Berkowitz reached for evidence and tried to insinuate that preliminary accounting estimates that were later updated in the actual published financial results were evidence of fraud. Of course thats an absurd idea and Skilling, never one to suffer fools gladly, let him know it. From the exchange it seemed pretty clear that Berkowitz either didn’t understand what was going on or was deliberately making something commonplace seem like fraud.

Berkowitz finished off by throwing in some non sequiturs, asked some questions that didn’t go anywhere and really not doing much of anything. It’s impossible to know what the jury thought of all of it but the Tradesports contracts have no moved a tick since the cross started. All of this bodes very well for Kenneth Lay. If that best Berkowitz can do then Lay is nearly home free.

Tradesports Contract: George Ryan Guilty – Payout Rules Killed This One

George Ryan was found guilty today and the contracts, one of the least traded on the site, didn't move. The total volume was only 20 contracts for what seemed to be an interesting trial. The last time this traded was in November and it never seemed to have any depth on the offers side.

The reason for this was the payoff rules which state that the contract will expire at 100 if: George Ryan is found guilty of at least one of the 22 charges alleging racketeering,corruption, fraud and conspiracy.

One of 22 is all it took to make this contract expire at 100, no wonder there were no offers. Tradesports got smarter with the Enron contracts which will only pay off if Lay and Skilling are convicted of half the charges. Think of it as a point spread for court cases.

By making the contracts more fair for traders they reveal less information about the event. For instance the Cheney.Resign.Dec06 contract trades at 16 currently, but since it can be triggered if Cheney leaves the office for almost any reason, its is actually showing the odds of Cheney resigning or dying and Bush dying since they would all trigger the contract. Clearly that's much less of a sound bite than what the contract appears at first glance. These rules would also make it difficult to use the contracts as a hedge. Would it be useful for Lay to hedge his case when he could still get convicted of three charges and have the contract expire at zero? For news events like Supreme Court nominations contacts are much easier to construct, for guilty convictions it is still a work in progress.

Skilling Guilty….of preparing for the trial – Sean Berkowitz on the run – Enron Update

The two Harvard grads went toe-to-toe, with Skilling winning this round. First Berkowitz couldn't get his A/V exhibits to work and to keep the momentum had to plow through without his visual aids. According to the WSJ law blog this, "seemed to visibly frustrate Berkowitz, possibly throwing him off his game." Off his game is a good explanation for the Berkowitz follies later in the day.

The fact remains that there is no smoking gun evidence from emails or documents that points to Skilling. The prosecution has relied on tainted witnesses to make their case so far. The prosecution's cover for this seems to imply that Skilling has something to hide since there are no documents which implicate him. In other words, Skilling has something to hide because Seanie can't find any evidence against him. That seems a bit tenuous.

Apparently still reeling from the A/V disaster Berkowitz let the jury know the bombshell that Skilling had prepared for the trial by hiring a consultant. Even SHOWING A WEBPAGE THAT'S CONCLUSIVLEY PROVES SKILLING WORKED WITH A TRIAL CONSULTING FIRM! I'm not sure if it was as significant to the jury but it should have been. Working to prove innocence should not be a sign of guilt.

With no real evidence Seanie's main tactic seems to try to "crack" Skilling. The former McKinsey director so far has been too smart to take the bait which isn't stopping Berkowitz from trying.

Showing much less dignity than the average Harvard grad, Seanie is relying on word games and extreme, almost satirical, indignity to make his case. Here are a few of the more amusing gems taken from http://blogs.chron.com/enrontrialwatch/ If you are following the trail you need that link:

Berkowitz continued this tack, giving Skilling little time to answer questions. Finally, Skilling tried to elaborate on the timing of when a study was done on the company's international assets.

Berkowitz wouldn't allow it.

"I don't want to hear speeches, OK?" Berkowitz said sharply.

"I was just.."

"Do you understand?"

"I will try to answer your questions."

Berkowitz continued to question whether Skilling was up front with analysts.

"I think the market knew the nature of our balance sheet," Skilling said, adding that Enron was open about the health of the assets.

"But you didn't tell them what they would sell for, did you?" Berkowitz interrupted.

This followed Skilling's joke about the energy crisis CA brought on itself.:

"You think that's funny?!" Berkowitz said sternly. "You think that was funny?!"

Skilling's smirk disappeared and he tried to explain that the "regulatory environment in California was just like Brazil..."

Berkowitz interrupted.

"You made jokes about (the energy crisis in California)," said Berkowitz pointedly.

Uhh, no Seanie it wasn't that funny, at least not compared with your joke of a cross-examination. I'm still long Skilling and short Lay on Tradesports, so lets hope Sean gets his act together. The contracts have not moved a tic all day.

Enron News Updates

The Houston Chronicle has been by far the best source Enron trial news. Don't get too sucked in or you will spend your days doing nothing but hitting refresh on their blog site: http://blogs.chron.com/enrontrialwatch/

Enron Trial: Ken Lay is Innocent

Well not exactly innocent, but innocent enough to short the contract which is currently trading at 70.

For the contract to pay off at 100, Lay has to be convicted of four of the six (was seven, but one was dropped) charges against him. I don't really care about the case per se, but I do care what the jury will do. Here is why I'm short:

The main reason that Lays contract is too high is in a comparison to the Skilling conviction contract. It is trading at 70, giving him the same odds as Lay for the contract to pay off. To anyone who has been following the case that should raise a red flag. The odds of Skilling being convicted seem to be much higher than for Lay.

A. He was involved in the day-to-day running of the business while Lay would barely have an idea what was happening

B. Although there is no direct evidence to back it up, Fastow testified that Skilling personally approved side deals with LJM. Lay never got his hands dirty with side deals or earnings management.

C. Skilling is not nearly as likeable as Lay. A tremendous amount is riding on how convincing Skilling is for the jury. Lay is affable and relaxed while Skilling is known for bluntly dressing down people he disagreed with, not a personality the will endear him to the jury.

D. Fastow is the guiltiest party in the entire scandal and is Skillings protégé.

What ever level the Lay contract is trading at, Skillings should be at a higher level. Long Skilling and short Lay is a good pairs play. Can Lay beat three charges it will take to have the contract expire at zero? With those weak charges, maybe. Can Skilling beat 12? Its possible but won't be nearly as easy.

The charges against Lay are more tenuous and reaching than the ones against Skilling. For instance Counts 12-13:

Wire fraud, against Lay. Stems from alleged false statements made to Enron employees via the Internet or video teleconference. Prosecutors allege that as Lay assured employees in a September 2001 online forum that third-quarter performance was "looking great" and "we will hit our numbers," he knew Enron in mid-October would announce a massive loss and a $1.2 billion writedown in shareholder equity.

Thats the best the government can do??

Summary of charges here: http://www.msnbc.msn.com/id/12053688/

None of Lays actions leading up to the scandal make him appear guilty. No coverup, no insider selling. If Lay is so innocent, why would he sell his stock, is what outsiders ask. Like Martha Stewart, the government is smearing Lay on what you would think is insider trading but there are no charges of insider trading involved. The indictment seems to imply that Lay made knowingly false statements to prop up the value of Enron stock long enough to cash out and leave the little guy holding the bag. Conspiracy of Fools and the Smartest Guys in the Room both made it clear that Lay believed in Enron till the end. Against the advice of his advisors he refused to diversify and even doubled down when the stock declined. When he ran out of margin he was forced to sell the only asset he had: Enron stock. These were not the actions of a greedy executive, but forced sales necessary to maintain his holdings.

Lays role was far removed from any of the schemes of the CFO. He may have held a title that implied day-to-day involvement in Enron but he was only "playing" chairman. His days consisted of showing up to charity events and hobnobbing with Houston's elite not accounting gimmicks. What we've heard over and over is, "he should have known." Based on his role in the company and lying CFO there is no way he could have. Essentially the case criminalizes bad luck. According to the government anyone that is in charge of a company that fails, regardless of market conditions, government interference or bad luck is a criminal. Lays testimony will make it clear that he had no involvement in any alleged scams and that he believed and still believes that Enron was a solid firm.

The witnesses brought by the prosecution all have "issues". No relevant witness for the prosecution has testified on their own free will. They have all made a deal with the government in exchange for avoiding prosecution or a lighter sentence. Every single one. Also all the witnesses with anything substantive to say are literally criminals as well. This is covered very well here: http://blog.kir.com/archives/002528.asp Is such coercion necessary? Apparently so since there has been no smoking gun evidence linking Lay and Skilling to any crimes. The Defense has made this point over and over. Its such a he said/she said case that the credibility of the witnesses can have a big impact.

The Trade: Short Lay, Long Skilling.

Make or break for Lay and Skilling

Both contracts have fallen as Lay and Skilling have had charges dropped. With Skilling trading at a lower level than Lay if a trade must be made it is short Lay and long Skilling. Here is an analysis on how them taking the stand will play out from Forbes:

Both Lay and Skilling will take the stand and offer a united front. Lay will put on a folksy show, maybe using a bit more twang than colleagues remember. He'll tell the jury that he was originally a "pipeline man" who built the company not with a ledger and a pen but with hard work and determination. He'll remind the jury that he never sold Enron stock and never once thought collapse was imminent.

Skilling will discuss how all the financial decisions he made were vetted through an army of attorneys, accountants and consultants. He will communicate his disgust at former protégé Andrew Fastow in an attempt to empathize with the jury and will say that he delegated the running of the off-book partnerships to subordinates.

Enron Contracts Back Up

The Lay and Skilling Guilty contracts both fell yesterday but are back up to their pre-Fastow testimony levels this morning.

Enron Contracts See Some Movement

"In connection with stealing from Enron," Ramsey asked, "you were just looking Mr. Lay in the face and telling him a lie?"

Fastow has admitted stealing millions of dollars from Enron for himself, partners and a family foundation through a string of schemes he hid from his bosses.

"Yes, I was not loyal to him or Enron when I committed those crimes," Fastow said."

Although the numbers on advanced charting haven't updated it looks like someone came in and swept the market.

Lay's Guilty contract is down 23 with the last trade at 47.5.
Skillings last trade was at 60 a nearly 10 point drop.

The spread is massive but after this it will likely fill in lower.

Fastows statements seem to touch all of Key Lays criminal charges especially 27-30. If the jury finds him not guilty on these, the contract will not pay off. This is the first time since the trail started that they contracts have moved so much. Fastow will not be back but we will update as it happens.

Enron Contracts Update

Fastow says he has, "no record of conversations in which he says he and former chief executive Jeffrey Skilling made secret side deals that helped the company manipulate its earnings."

Skillings contract moves down slightly to 70.

NCAA trading info is coming soon.

The Smartest Guys in the Room Pt. 1 - Where We Stand

The Latest:
The Enron trial is going to have an interesting couple of days with Andrew Fastow on the stand. The former CFO has already pleaded guilty, is the government's star witness and under intense pressure to make the case against Skilling and Lay. Skilling's lawyer was able to discredit a previous witness Kevin Hannon on the stand (this did not move the contract) and will be ruthless in going after Fastow. Fastow was the key architect in all of the SPE's that eventually caused the demise of Enron.

The Contracts:
Lay is facing seven criminal charges and has to be convicted on at least four for the contract to pay off. The wild card charges are 38-41 in the indictment (bank fraud and false statements); these will be decided in a bench trial and are unrelated to the collapse of Enron. They they also have no bearing on the contract so we can ignore them.

Skilling is facing 31 charges and the contract pays off if he is convicted of at least sixteen.

Only the first charge of conspiracy to commit securities and wire fraud is shared by both men yet the contracts so far have moved almost in tandem. This is where the opportunity will eventually present itself as the Lay charges are considerably weaker than the ones facing Skilling (more on this later).

The Lay Guilty Contract hit 72.9 today, a new high, from a low of 46.1 at the beginning of February. The contract, including today's high, it up 8 points since the trial started.

We'll be watching this one. The Trade: Flat for now.