Former New Orleans Major Ray Nagin Found Guilty

You may not have heard about this conviction.  For some reason it got little coverage on NBC, ABC, CBS, MSNBC & CNN.

You might also have gathered (quite accurately) that I believe the Department of Justice is frequently guilty of selective (and/or unethical) prosecution.   I have yet to see a case where Eric Holder’s posse picked on his Democratic cronies when the defendant was innocent.  I would hypothesize that the bias is the other direction.  I distrust the Justice Department.  I believe they are political and are much more likely to chase their enemies than their friends.  And yet based on their actions over the last decade, I could never be confident beyond a reasonable doubt about anything they tell me.

I have not read the transcripts but my guess is that if you and I were on the jury we also would have arrived at the same decision as this jury did - guilty. Here is one report: “Over the course of the two-week trial, prosecutors presented testimony from more than a dozen contractors, city officials and investigators who detailed a series of alleged payoffs involving Mr. Nagin and the granite-countertop business he formed with his sons, Stone Age LLC. His sons weren't charged.” But then again, I don’t know about all the side deals the DOJ extracted to bring forward this evidence.

It is quite possible that Nagin cost the City of New Orleans more through simple incompetence than outright dishonesty.  Not that two negatives make a positive.

I see dishonesty in the private sector every day.  But here is the difference. When an individual or company has been looted or stolen from, they act quickly and decisively to try and claw back some of their damages in civil court.  And the referees maintain a fair game most of the time. This happens less often in the public sector.

Nagin was convicted on February 12 and of course he can still appeal the conviction.  If is conviction holds up, what should the penalty be?

Mayoral corruption is bad, but not quite as serious as judicial, police or prosecutor corruption.

I rate different forms of corruption as follows:

1   1) Judicial corruption (see the Kids for Cash case in North Eastern Pennsylvania).  When a judge is corrupt, he has all the power. There is nothing worse.

     2) Police corruption.  When a policeman or FBI agent is willing to hide evidence or lie then the chance of a fair trial is nil.  When this is discovered, it should be punished severely.

     3) Prosecutor corruption.  When a prosecutor is willing to encourage lies or indict a defendant that she know is innocent (for political reasons),  it is a horrible miscarriage of justice.  Especially if the defendant does not have sufficient resources to fight (most of the time). This is the reason I have become convinced that we should set aside the death penalty.

     4) Political corruption. This is all too common.  Our politicians at a minimum consider each and every day if their next vote/decision/action/statement will help or hurt their chances at reelection.  When the politician is in an executive role (like the former mayor of New Orleans) then the consequences of corruption are even more pronounced.

     5) Regulator corruption.  These people usually get caught.

     6) Private corruption.  Try bribing an honest policeman and you will serve some serious time.

Don’t despair Mr. Nagin.  When you complete your prison term, you can move to Chicago and probably reemerge in Illinois and Chicago politics.

Hate crimes for NFL fans

Steven Colbert on his Feb 11, 2014 show: "Could the NFL have its first openly gay player and if so will rooting against his team be a 'hate crime'?"

I am pro gay rights.  I am also against the entire notion of greater punishment for "hate crimes" than "non-hate crimes".  Let's determine the sentence based on what actually happened rather than the very subjective motive question.

I was lucky. Rex Shelby was not!

I was lucky! Rex Shelby was not!

Cara Ellison’s fascinating, deeply troubling, but well-written account
of the Enron Broadband trials in her new book Blogging Enron, The
Enron Broadband Story, will really annoy and should scare the dickens
out of you.

It is a story of government lies, a guilty-until-proven-innocent media
bias, Big Brother, judicial incompetence, and most importantly
prosecutorial misconduct.  The bad guys and women were the Department
of Justice (DOJ) prosecutors and the biased judge.  Until I see
evidence to the contrary, I will refer to it as the Department of
Injustice (DOI).

Rex Shelby unfortunately became the poster child for the ravages of
this abuse.  It could have been me.

Rex is about my age.  We both have degrees in Math and Computer
Science.  We both spent time in the Air Force (he reached Captain – I
only made it through the second year at the United State Air Force
Academy.) But he continued down the technology route where I moved on
to the energy and ultimately energy trading business.

Let’s go back to January 20, 2000.  It was the annual Enron Analyst
Conference (for those that reported on the company in the financial
community) at the Hyatt Regency in Houston.

Rex had been with Enron for just a few months (after the acquisition
of Modulus Technologies).  I had worked for the company for six plus
years.

I would soon to be appointed Enron Europe CEO in May, 2000 (I was the
Enron Europe President and COO on January 20, 2000). We were both
hard-working, honest innovators at Enron, like the vast majority of
our Enron colleagues.

I made a short presentation (I was one of 19 speakers) about Enron
Europe early in the morning (lucky for me the stock did not move much
during my talk as this would have put a much bigger target on my
forehead.)  But despite my inability to “move the needle” on the stock
price, it was a day I will never forget. (It increased my net worth
substantially. I admit that I care more about putting money in the
bank than Rex does.)

About an hour after my presentation, Louise Kitchen who was heading up
a big project:  “Enron Online”, gave a terrific presentation about an
exciting innovation in the energy world.  Enron Online was an online
trading platform where Enron offered the best price to buy and the
best to sell for commodities all over the world. This definitely got
the audience’s attention; it moved the needle.

Back to Rex.  He had prepared two separate two-minute video
presentation for the January 20, 2000 Enron analyst conference in
Houston.  Only one of the videos was shown.  Rex did not make a
prepared presentation but was there to host Sun Microsystems
executives and then participated in the Enron Broadband Services Q&A.

The Enron Broadband presentation started energizing the room (unlucky
for Rex).  By the end of the day the Enron stock had risen by 26% - in
just one day.

In the next couple of days Rex exercised and sold his vested stock
options and I exercised and sold about 15-20% of mine.  It turns out
that Rex and I would have made much more money if we had waited later
in the year when the price hit a peak of $90 on Aug 23.  After the
2001 Analyst Conference (a year later) the price was in the low $80’s
and after that I sold another 15-20% of my shares as well.  When the
stock price started heading down later that year (remember the dot.com
bubble), I started kicking myself for not having sold it all. I was
lucky I didn’t.

Unlike Rex, I was never dragged into the Houston witch trials. I hope
that I would have had the courage to hold my head up high with as much
perseverance and integrity as Rex and his codefendants. I think I
would have. But I will never know for sure – and hope to never find
out.

This book does an outstanding job of laying out the government’s abuse
of these defendants and all the travesties in the process:

1)      The first federal prosecutor on the case John Kroger, admitted
in his book Convictions (please don’t bother buying it) that the Bush
Administration was pressuring the DOI (that’s not a mistake -
remember, I have replaced the word Justice with Injustice) to “get
scalps quickly”.  In the same book, Kroger said: “Here, the end – the
ultimate convictions of Ken Lay and Jeff Skilling – appeared to
justify our questionable tactics.” In this case “questionable” is a
euphemism for dishonest and unethical.

2)      The judge was over her head and refused to act as a fair and
impartial referee.  In Judge Vanessa Gilmore’s first book in 2010 she
accurately describes herself as a “Judicial Diva”. I don’t know about
you but if I am the defendant in a trial for my life, I want a tough,
fair and knowledgeable judge not an opera singer.

3)      The notion that the Enron defendants could get a fair trial in
Houston where virtually every poll showed that 85% of the population
expressed a view that any Enron defendant charged was automatically
guilty and should be convicted, was ludicrous.  The judge denied the
defense motion without comment.

4)      I used to think the power of the government to cut deals with
some defendants in order to get convictions of others made sense.
This book will convince you otherwise.  The way the DOI threatened 200
unindicted coconspirators with indictments in order to encourage
selective memory and outright lies will absolutely disgust you.

5)      The prosecution did nothing to protect the physical evidence
of the Enron Broadband Operating System even though the DOI’s major
thesis was that it didn’t exist or if it did that it didn’t work very
well.

6)      The government withheld evidence and sometimes delayed handing
over evidence for so long that it became useless for the defense.  How
effective will you be if you have to screen thousands of emails the
night before a big trial?

7)      Once the government did not receive a single guilty decision
on 200 counts in the trial they were bound and determined to force the
defendants to a second trial despite their constitutional protections
against double jeopardy.  Judge Gilmore would have let them get away
with this.  The Court of Appeals would have let the prosecution
trample the defendants’ rights.  Thankfully the US Supreme Court
unanimously said “no” in the case of Scott Yeager.  This should have
been the end of the fight for Rex Shelby but it wasn’t.  And it was
too late for Joe Hirko who had decided the government would never stop
pursuing him and settled for a 16 month prison sentence.

8)      The cost of putting on a defense is in the millions and
sometimes 10’s of millions of dollars. No money – no defense.  It also
takes virtually all of the defendant’s time to engage and participate
in the process – for Rex Shelby that was nine long years.  So unless
one is so wealthy can afford not to work for a decade, he is up a
creek (in a federal penitentiary) without a paddle. The technical
legal term is “screwed”.  And of course the way the prosecution draws
up the indictments and overcharges everyone, if one is convicted then
he/she is facing life in prison.  No wonder so many copped a plea.
Only about 3% of those indicted by the DOI go to trial – the other 97%
are convicted via plea deals.

I hope that if I faced this kind of personal crisis, I would have
worked as hard, kept my head as high, and persisted with my underlying
integrity that has served me so well as the defendants in this case
did.  I can’t say that I might not have slipped; but after reading
this saga, I have recommitted to those principles.

Thanks Rex Shelby!  Thanks Scott Yeager! Thanks Joe Hirko! And thanks
Cara Ellison for all the detailed research and caring enough to
actually dig into the details, ask the right questions and not going
along with the mob.

Here is a link to the Amazon book.

Why would we pay attention to the government statistics?

Why would we pay attention to the government statistics?  We could simply rely on the best non-government stats for:

1)      Unemployment  stats;

2)      Inflation rates;

3)      GDP;

4)      Total government debt;

5)      Total government unfunded liabilities.

Every government has an agenda –generally to make themselves look good.  If they can cheat of the stats, they look a little better.

If you trust the US Justice Department please read this book.

If you trust the US Justice Department please read this book.

The is the story of dishonest and inept government - oh that again. If you thought that the US and the UK were countries that valued the rule of law and due process, then read this riveting tale.

The Natwest Three made a mistake (but didn't break the law) when they didn't disclose their intention to personally buy into a deal that Natwest had just sold. But the US prosecutors amazingly used this "mistake" to claim that these UK citizens working for a UK company in the UK had somehow broken US law? Say again?

Hear firsthand about gross abuse and absolute lies by US prosecutors. We have generally grown to accept that politicians lie on a regular basis. But as long as it is a "good lie" - well that's OK, we will look the other way.

And the same for prosecutors. If it is a lie that helps put Jeff Skilling or Ken Lay in jail then that's a bit messy but good in the long run. But wait there's more. If it brings the big guys to their knees, then why not use the same technique on the little guys (even if they are bankers). No problem as long as it's not you.

The notion seems to be that it is OK for the government and specifically US prosecutors to lie if it is for the greater good - in other words if they "know" that someone is guilty (by virtue of their intuitions and a quick read of the facts) then it is acceptable for the prosecutors to themselves break the law and lie to "catch" the perpetrators.

Spam phone calls

If I get a spam email, I can mark it as spam on most email providers today.  I will probably not hear from that jerk again.  Why don't Verizon and AT&T have the same options for "spam" phone calls?

The Kelly Criterion

Kelly Criterion

One formula that helps avoid Gambler’s Ruin (losing it all), while betting the optimum amount is the Kelly Criterion, first described in 1956 by J.L. Kelly. It is used by some traders and professional gamblers, and I have started considering it when deciding the right amount to bet on any single lawsuit.

This formula comes complete with a mathematical proof and tells a trader, gambler, or investor how much one should optimally bet, based on the probability of winning the bet and the payoff amount if the bet wins.  The formula assumes no ties.

Shown below is the general formula:

Here is an example where you have a chance to bet $1, and collect $2 if you win ($ 1 original bet plus the $1 profit [the variable labeled “b” in the formula]). I call this a “2X” bet. In this example you have a 60% probability of doubling your money; the Kelly Criterion says that you should bet 20% of your bankroll (or your entire net worth, if your net worth were all in the form of cash).

This formula demonstrates quite logically that:

          1) for a 2X bet you should not bet anything unless the probability of winning is above 50%. In fact, if the probability is below 50%, you should try to find a way to take the other side of the bet or trade (go short).

          2) At a 51% probability of winning, Kelly suggests that you should bet 2% of your bankroll.

          3) At an 80% probability of winning, Kelly suggests that you should bet 60% of your bankroll.

Kelly’s original paper made the point that the criterion is only valid when a series of bets are made. Even though the formula says that one should bet 98% of your bankroll when you have a 99% chance of winning a 2X bet, that still leaves you with a 1% chance of going broke—too high for me, at this stage in my life.

Although I am comfortable taking risks and making substantial bets, the Kelly Formula feels more aggressive than my inner voice approves. Obviously, for a lawsuit investment I have to adjust the formula based on the probabilistic estimate of when the bet will pay off, and then adjust it based on my assumed discount rate (the amount that reflects the discount for getting paid later.) And a minor detail is that I never know the exact odds. But even if I did know the exact odds, I can’t conceive of putting 60% of my net worth on the line, even if I had a marvelous 80% probability of winning. So maybe I need to take my own advice and get a little specialized psychotherapy—so I can de-wussify and get on board with making bigger bets.

All-In

Many successful entrepreneurs, traders, and investors take measured and intelligent risks, trying to avoid at almost any cost the all-or-nothing bet. This is after all, the ultimate risk of Gambler’s Ruin. The younger you are the less reckless it is violate this aspect of the rule because you have on average a smaller bankroll and more time to recover if you lose it all. If you are poor, you are likely to have no alternative to the all-in bet. This is why I encourage young people to get started on their entrepreneurial ventures sooner rather than later. I love it when a 14-year-old puts every last dollar he owns into a lawn mower to start his landscaping business—as long as he keeps enough capital to fill up the gas tank.

And the Survey Says…

I wanted to know how my friends and family would answer questions related to the Kelly Criterion. I asked them to complete the following survey:

I have three questions for you about how much of your bankroll you would wager in three different circumstances.

I start with the premise that you are playing an absolutely fair, honest and random game.  For example it is the picking a chip out of a hat.  Some of the chips say “win” and the rest say “you lose”. If you win, you double the amount of your bet; if you lose then your bankroll shrinks by the size of your bet.

You know in advance exactly what the chances are of winning.  In every case, you are 30 years old (please try to adjust your thinking to how you would have played or will play this game at this age.) You have a bankroll of $100,000 which is all the assets you have in this world and your bankroll is all you have to get you have to work with. You have no home, no IRA, no retirement, no job. The random contest you are playing is always in your favor but sometimes it is more in your favor than other times. The three conditions we will consider are 60%, 75% and 90%.  In other words you have either a 60%, 75%, or a 90% chance of doubling the money you bet. Another way of looking at it is that you have a 40%, 25%, or a 10% chance of losing the amount of your bet.

For each of these percentages, what percentage of your bankroll would you bet?  (the choices are between 0% and 100% in 10% increments.) Let’s go.

Question 1) At a 60% probability of doubling your bet, what percentage of your bankroll would you bet?

Question 2) At a 75% probability of doubling your bet, what percentage of your bankroll would you bet?

Question 3) At a 90% probability of doubling your bet, what percentage of your bankroll would you bet?

Discussion of the Survey Results

·       I asked everyone to imagine they were 30 years old, and had a $100,000 cash bankroll that comprised their entire net worth.  I wanted to minimize the bias that as people get older they generally shy away from bigger risks. I was intentionally silent about if the participant had children or “big responsibilities”.

·       Sometimes what people say they will do differs from what they will actually do, when the rubber meets the road.  If I had about $5-10 million dollars I was willing to invest in a real live experiment, I am sure I could have found 50 30 year olds to take the test with real money.  It was not that important to me.

·       For each of these questions, the Kelly Criterion calculates the optimum answer (based on one bet in a long series of bets).  If you know exactly what the probability of winning and the exact amount of the payoff, the Kelly Criterion tells you the optimum amount to bet.  Theoretically, if you always bet this amount, over many opportunities, on average after many bets, you have the greatest chance of having the biggest ending bankroll.

·       If you bet less than the Kelly Criterion amount, you are being “risk averse”, to your detriment.  If you are betting more than this amount, you are taking greater risks that optimum, also to your detriment, on average in the long run.  If you bet zero, when you have a 90% chance of doubling your bet, you are “ultra risk averse”.  If you bet 100% of your stack, you are going “all-in”.

·       I was surprised that the survey results didn’t show a more risk averse average response from my friends and family—maybe I hang around some “weird” folks.

·       The survey results show the “Wisdom of the Crowds”.  Although the responses varied greatly, the average results for each question are reasonably close to the Kelly Criterion—although, some participants were very risk averse and others quite willing to lay it all on the line.  I declare the aggregate results rational, although I might be saying this because my answers were close to the average results.

·       The results showed that on average, the more the bet approached “all-in” or 100% of one’s bankroll, the more conservative the response, relative to the Kelly Criterion.  I consider this reasonable.  The question, as framed, never promised that the participant was going to get to make the decision 1,000 days in a row.

·        The biggest diversity of answers came on the third question.  We had three respondents that said they would not bet a penny (even though they had a 90%) chance of doubling their money, and four that said they would bet their entire bankroll. Slightly different risk tolerances.

Here is a summary of the results:

1. Probability of Win	60%	70%	90%	Total
   Kelly Criterion Percentage	20%	50%	80%
   Survey Average Amount Bet	25.8%	39.26%	59.26%
   # of  Risk Averse	28	49	56	133
   # @ Kelly Percentage	15	14	9	38
   # Greater than Kelly Percentage	38	18	16	72