Here’s a question:  Where do you host your email?

Gersham and I are rather well-known for a business we started in 2002 called Geekmail.  By 2003, we were on the cutting-edge of IMAP-based email hosting and ran thousands of mail accounts on a cluster of 9 servers hosted at Peer1 Network in Vancouver.  We pushed the envelope in anti-spam technologies: combining advanced whitelisting techniques with behavioural, bayesian and heuristic anti-spam technologies and using our own common-sense approaches to deliver very high anti-spam effectiveness with a too-low-to-track false positive rate.

What we achieved, in essence, was a sort of email nirvana.  In those days, giving someone 1GB to store their email on your server was unheard of… but we did it.  Hosting catch-all email accounts was a novel concept … but we did it.  Hosting custom email domains was tough stuff too, even, but we did it.  We also had a hell of a launch party. 

A couple of things conspired to force us to close Geekmail… a situation which I will always regret:  1)  We were taken to court by a fool fellow whom we’d (our mistake) taken on as a business partner, and whose sole objective was to kill the company; and 2)  Google launched Gmail.  The latter was far more significant since it was A)  Free and B)  From the web’s hottest property.

Now, this all is the long way of explaining that I am perhaps something of an email geek.  I’ve used one form of computer-based electronic mail or another since 1985.  I co-founded Geekmail, of course, and also did a considerable amount of strategic work for FrontBridge — the world’s #2 message management service provider before its acquisition by Microsoft in 2005.  BuzMe and RingCentral, two Unified Communications services I helped bring to market, were among the first to deliver voicemail to their users via email (believe me, a novel concept in 1999/2000).

Be that as it may, it rather surprises me that even today GMail (which has been in Beta for 5 years) still pales in a number of key features (including anti-spam) to the technologies and quality of services we provided with Geekmail.  While we didn’t have nearly the scaling issues that Gmail has to deal with (except for in our very early days) we never experienced the kind of multi-hour outages that Gmail regularly hands to its users.  We also focused the users’ experience on Secure IMAP, not a web-based interface (though we had one of those too) and offered lots and lots of storage to go with it.  And in our later version of Geekmail, the anti-spam functions were tweakable: if you didn’t like the default settings, you could turn on and off different techniques that were used to combat spam on your inbox.

When we were forced to let Geekmail die a rapid death, we scrambled around to find a company who could take our subscribers and whose service closely mirrored our own.  The short answer was:  there weren’t any.

It wasn’t until a couple of years later that I began talking with John Capo; founder and operator of Tuffmail.  In addition to being a pretty nice guy, John runs a service that is the closest analog to Geekmail that I can find anywhere.  In my view this ranks Tuffmail as the very best email service provider for email geeks anywhere.  And so it has been for about 4 years that I have blissfully run my personal email address at ianbell.com on this service — and am now at a point where it is so critical to how I do my daily business and live my life that I would be miserable without it.

As these screen shots should reveal, Tuffmail is literally like having your own mail server cluster up in the sky somewhere.  By that I mean practically every aspect of its functioning is customizable to your whims and needs.  I can change how it responds to spam, I can block certain servers from sending me mail, I can blacklist any email sender from connecting to the server, and so much more.  I can also have a catch-all, which many email hosts hate to do because it creates spam honeypots, but which has become a critical means for managing my accounts online.

I don’t do any filtering or routing of email at the client level.  This would be impossible, since I access email from four different devices on a day-to-day basis.  Instead, I have input a complex set of rules into Tuffmail’s extremely robust email rules interface (sorry I can’t show you this — classified!) and all incoming mail is stored in the appropriate folder when I check it from my MacBook Pro, my iPhone, my Mac Pro, or whatever.  Microsoft Exchange, Gmail, yahOo! Mail, your ISP’s Mail Server — they all wither by comparison because they don’t allow this sort of granularity — and because they don’t fully embrace standards-based IMAP email messaging.

I keep all my mail, as well, nearly 5GB at the moment.  So if you said something in 2005, it’s pretty easy for me to find that message in my email clients (this could be the reason why mail.app sucks up most of the free memory on my MacBook Pro) and regurgitate it.  This is extremely handy and it reaffirms email’s rightful place at the fulcrum of my life (sad but true).  This is only possible because I have an enlightened email hosting provider who A) embraces large mailboxes and B) embraces large message sizes, which means I can send around presentations and big graphics files without fear of them bouncing back (unless the receiver’s mail server is a dunce, of course).

I don’t ever receive spam in my InBox anymore, because I have the settings and filters perfectly tweaked to my needs on Tuffmail.  But blocking spam is easy these days.  The real problem is blocking it without also blocking legitimate messages — this is much much harder.  And this is where GMail, which uses the Postini service (which is not directly integrated to GMail), tends to fall over.

Have you ever heard the excuse “Oh, I sent you the email, but maybe it got caught in your spam filter….” before?  Sure you have.  That doesn’t happen to me.  The benefit of the Realtime Reports (screen shot above) is that I can go in to the server logs  and actually see when a message flew through or was rejected by the Tuffmail server hierarchy.  I just view the page, do a Firefox search for the person’s email address, and if they sent a message it’ll be there.  I’ve caught anyone who’s ever made that excuse to me in a white lie… not that I hold it against them.  🙂

There is one downside to all of this, of course… with Tuffmail, I have created a monster.  I have so many settings and tweaks, and I have the spam filters so well-trained, that the pain of moving to another provider would be excruciating.  Most likely, I never will.

I don’t endorse products very frequently (and I never do it for any sort of remuneration) — but Tuffmail is one of those rare birds that truly deserves the kudos.  Email hosting is a tough business and in many ways I’m glad I’m no longer in it.  On the other hand, when I use Tuffmail I get pangs of jealousy and nostalgia.  Ah, what could have been!

There is, in most respects, not much room for the little guy. Still, many companies attempt to eke out a living by raising capital and earning free cash flow on the basis of moving the needle down a couple of stairs in the telecom industry’s giant race to the bottom. Frankly speaking, as consumers, we need these guys … they create the price pressure that leads to market pressure that forces the cabal to lower their prices. Without them we’d all still be paying $1/minute to call one or two counties over. But rarely (and I suspect Bernie Ebbers would verify this) do they ever make any real money over the long-term.

Because of my history as one of Cisco’s early Packet Telephony product managers, and having architected and helped to launch a few different services including BuzMe and RingCentral, I see a lot of VoIP deals. I’ve taken to referring to many of them as “stupid phone tricks” (in a nod to Letterman) which are clearly designed to take advantage of some gap in arbitrage within the telecom industry.

Unfortunately, this has been the model of telecom “innovation” for many, many years. The first Cowboys in the telecom game were of course the CallBack kids. They allowed you to make calls from Brazil to the USA, for example, paying the long-distance rate for calling from the USA to Brazil instead of the other way around by “ringing both ends” of the call after you first dialed their local or toll-free number to instantiate the call. This significant inconvenience was trumped by the massive savings incurred for folks living in Brazil calling to their USA-resident relatives.

With long-distance deregulation came the rise of prepaid calling card services, which did something similar. Again you traded the convenience of just simply dialing the person you wanted to call for having to call a pilot number, entering a complex string of unmemorable digits, and THEN entering the number you wanted to call in order to save a little dough. The services made money, though, because you and I would usually lose our cards or forget our numbers before we fully expended the value in the cards. This model is called “breakage”. To my utter disappointment this represented the larger part of the market I was dealing with while at Cisco.

More than 8 years ago I recall being asked by my boss, Alistair Woodman, to write an opportunity evaluation of the recently-ratified SIP protocol. My response, over the course of weeks of researching and talking to everyone involved, was a breathless vision espousing nothing short of a complete re-think of the entire Telecom industry. SIP has some epic flaws and paradoxes, like its assumption that we’d all be on IPv6 by 2001, and its paradoxical empowerment of edge devices while making no accommodations for firewall/NAT traversal or P2P.

But it was a pretty good stab at unhanding control of telecom from the cabal and placing it in the hands of scrappy innovators. And as the VON shows once attested, there are some pretty feisty and intelligent people lurking within the telecom business. For a time I hoped to have been one of the more noteworthy ones.

With the benefit of hindsight we now know that SIP just hasn’t panned out (certainly not in the way I had hoped it would). It’s become just another signaling protocol in the transport of fairly uninteresting voice calls within the existing structure of telecom. Let me repeat that in another way: The incumbents took a protocol which was conceived and designed to blow them out of the water, and used it to cost-optimize their networks. As a protocol, SIP is incredibly successful in having propagated in Telecom in the less than 7 years it’s been deployable, but I suspect its effects on the industry would today leave its creators a bit cold.

My breathless assertions that thanks to SIP the web geeks would take over Telecom — first derived in 1997 and held by me until at least 2002 — have never even come close to fruition. SIP, because it unbundles signaling from the calling path and especially because it allows for rich metadata to travel through the network with SIP messages, is rife with potential for adding value — but no one, not even Skype (which uses a protocol clearly inspired by SIP but which fixes a lot of its problems) has deployed it in a way that takes complete advantage of this to stimulate innovation.

A few weeks ago I wrote about Cubic Telecom. There’s a small amount of real innovation there, but it largely falls into my “Stupid Phone Tricks” category. It might or might not save you a lot of money making and receiving long-distance calls while you roam on your mobile phone, but does nothing to abate the greater crime that is mobile roaming charges. After I wrote about Cubic, David Pogue of the NY Times was attracted into their orbit, but got burned when others realized Cubic’s rates weren’t quite so attractive as they’d said they were. Controversy erupted and their launch marketing was irreversibly damaged (see here also) by the Streisand Effect of their attempts to correct and adjust perception.

A Googling of “telecom innovation” yields 10,700+ hits but, sadly, no real innovation. What you will read, instead, are examples of creative cost-optimization (Voice Mail was really a way to eliminate the answering machine at home, and the receptionist at the office). You’ll also see some incredibly creative and extravagant attempts to defeat the inconvenience associated with the CallBack model. Cool, but not fundamentally enabling.

What Cubic is presently caught up in is the fact that their dubious cost savings are hampered by the fact that calling mobile phones, for example, in Europe is always going to be expensive and hugely differentiated in terms of pricing from calling land lines in Europe. The rise of draconian mobile pricing models combined with the steep decline in global long-distance calling rates results in a more and more limited opportunity to cost-optimize and more and more pitfalls for the consumer. Unfortunately, Cubic’s a great example of how this happens and how it can bite one in the ass.

There are a number of artificial bottoms in the telecom industry. Long-Distance was the first and most obvious of these: when there was sufficient market pressure from a few successful VoIP guys (and other telco competitors) to reduce costs, the incumbents simply did so. Why? Their costs to provide long distance were arbitrary. Their only consideration was how much margin they could take without losing customers.

There are a couple of false bottoms in mobile at the moment (who am I kidding, there are half a dozen) including roaming, long-distance, and SMS. SMS is a great modern example of this and here’s why:

The cost for a mobile network to transact an SMS message are incalculably small — on par with your ISP handling an email message. Yet it’s become an enormous cash cow for the mobile phone industry — imagine if your ISP charged you a penny for every email sent or received. A small number of companies such as hotxt (now trutap) rose to try and take a notch out of the carriers on this front, but were ultimately thwarted by the fact that they have to take pot shots at the carriers from within their own ecosystem.

It’s not that easy to attack the SMS business model by requiring users to instead install an app and send and receive messages over wireless data, which is also ridiculously expensive.  It’s kind of like borrowing from Peter to pay Paul, and in any case I’m not sure what it accomplishes for the third-party service.  Not fun. And not particularly innovative.

There is encroachment now, by mobile telecom into terrestrial telecom, and subsequently by platforms like the iPhone and OpenMoko and the rumored GPhone. I guess this means there’s some hope for change. But all of them appear to be embracing the traditional approach to telecom and stepping up to milk the cow in collusion with the big carriers. And this, friends, is a shame. Because innovation will only be barely perceptible if we continue to allow Telecom Monopolists to write the rulebook.

-Ian.

Putting a lid on broadband use By John Borland Staff Writer, CNET News.com http://news.com.com/2100-1034-5079624.html

Earlier this month, a Philadelphia Comcast broadband subscriber got a letter from his service provider, telling him he’d been using the Internet too much.

Keith, who asked to keep his full name private, said he’d subscribed to the service for four years and never had a complaint before. Now he was being labeled a network “abuser.”

Worse, he said, Comcast refused to tell him how much downloading was allowed under his contract. A customer service representative had told him there was no specific cap, he said, adding that he might avoid being suspended if he cut his bandwidth usage in half. But even then, the lack of a hard number gave Keith no guarantee.

What’s new: Cable Internet service subscribers are quietly capping the volume of downloading they allow their subscribers to do. So far, it’s only affecting the heaviest users.

Bottom line: As broadband providers strive for ever-speedier and economical service–and bandwidth-hogging features such as video on demand become more popular–these caps may become more common. And they may affect digital subscriber line (DSL) providers as well.

“I don’t mind restrictions, but how can Comcast expect users to stick to a limit when they don’t say what the limit is?” he said. “If they’re going to impose limits, that’s one thing, but at least tell us what they are.”

Keith isn’t alone in his newfound position under the Internet service provider (ISP) microscope. Other high-volume Comcast subscribers have been getting letters since late summer warning them of overuse. A few others have even had their service suspended after the first warning. Comcast spokeswoman Sarah Eder said that its new enforcement policy was barely two months old.

As Keith and other frustrated users found, the company’s warnings to subscribers were not triggered by any “predetermined bandwidth usage threshold,” Eder added. Only about 1 percent of subscribers received letters, which were based on having exceeded average usage patterns rather than a specific number, she said.

For now, this quiet imposition of usage caps affects only a tiny fraction of extraordinarily high-volume users. But it goes to the heart of the competitive decisions cable and telephone companies are making as they struggle for broadband dominance . Comcast in particular is working to provide ever-increasing download speeds , and as result it is struggling to contain busy file swappers and others who are putting stress on their networks.

It is not something the broadband providers are eager to talk about. Even as Comcast sends out letters to its customers targeting high-volume users, the company bristles at the notion that the policy is a cap.

It’s easy to see why: As cable and DSL companies race to bulk up on subscribers, companies tagged as “bandwidth cappers” could be at a disadvantage. The problem is particularly awkward for cable companies, which have tried to avoid a price war with the telephone companies by promising better quality of service.

“The industry is leery of explicit caps, because even people who don’t come anywhere near the caps feel like something is being taken away from them,” Jupiter Research analyst Joe Laszlo said. As consumers grow more used to broadband services and begin understanding what to expect from their connections, companies “can’t claim their service is unlimited if there is some kind of informal limit,” Laszlo added.

Hard caps and fuzzy ones Different ISPs are taking widely different approaches to this issue, although caps seem for now to be limited to the cable companies.

Cox Communications started phasing in hard usage limits in February, and now a majority of that company’s subscribers are limited to downloading 2 gigabytes a day–the equivalent of about two compressed feature-length movies or about 400 MP3 songs. AOL Time Warner’s Road Runner cable modem service has no caps yet, although sources say the idea is being discussed internally.

Comcast’s policy has proven most controversial. The company’s terms of service say only that users cannot “represent (in the sole judgment of Comcast) an unusually large burden on the network.” According to a spokeswoman, the company began sending notes about two months ago to the top 1 percent of the heaviest users–people who collectively use about 28 percent of the company’s bandwidth–telling them they were violating their terms of service.

Eder said there was no specific line crossed by these subscribers, but she added that some of those people were downloading the equivalent of 90 movies in a given month.

Comcast customer Keith, a British immigrant, said he used his cable modem service to watch the BBC, have video conversations and trade DVD-quality home movies with his family in the United Kingdom.

Comcast defended the policy of having the unstated–but still enforceable–limitation on bandwidth use, saying that any hard cap would have to change in any case as high-bandwidth applications such as video on demand became popular.

“The Internet is growing, and there are more broadband applications every day,” Eder said. “If we were to set an arbitrary number today, we could be changing it tomorrow.”

Both Cox and Comcast have a policy of sending warning letters to subscribers before suspending or terminating service. No subscriber would be affected without substantial warning, spokespeople from both companies said.

Some smaller cable companies are imposing much lower caps. Alaska’s GCI Cable , for instance, limits its subscribers to transferring just 5 gigabytes a month.

Telephone companies offering DSL service in the United States say they have no limits in place for their users, unlike Canadian, British or Australian counterparts that routinely cap their subscribers’ usage. Verizon Communications and SBC Communications, the largest DSL providers in the United States, both said their services remain unlimited.

“The customers buy the lines,” SBC spokesman Michael Coe said. “We make whatever bandwidth they need available to them.”

There’s a limit The caps are a small but crucial part in the latest round of skirmishing among broadband companies over price and features. Cable companies have had a lead in the consumer market for years, but they’re now nervously watching telephone companies’ DSL services–particularly co-branded offerings like the SBC Yahoo service–start to close the gap.

Both sides are trying to figure out how best to attract and then support the mainstream dial-up Internet audience, which is finally starting to come to broadband in droves.

DSL companies have brought deeply discounted prices into their arsenal. It’s now rare not to see a $29.95 per month offer from the likes of SBC or Verizon, and that’s helping bring subscribers in quickly. The cable companies, on the other hand, tout faster download speeds and Web surfing than the average DSL connection provides, and they are working to make their networks even faster.

Comcast, leading the way, has promised to double the average Net surfer’s top speeds, from 1.5 megabits per second to 3 megabits per second, and to get even faster in future years. Analysts say the drive to keep very high-volume users under control is necessary if the company is to reach this goal economically.

Most broadband subscribers use their service for some music or video downloading, to send and receive digital photos or for other high-bandwidth applications. But ISPs say that a tiny percentage of people are using an enormous percentage of their total bandwidth. According to Comcast, just 6 percent of subscribers use about 78 percent of the company’s bandwidth.

Cable networks are particularly susceptible to the dangers of this imbalanced usage, because all the homes in a given neighborhood share access to the same local network. One extremely high-volume user can therefore have a Net-slowing impact on his neighbors.

Nor are DSL companies exempt from this issue, despite their rhetorical distain for caps today. Even if their subscribers don’t share their local wires, DSL uploads and downloads do wind up merging into a shared network a little farther upstream, and so heavy users can wind up having a negative impact on others’ speeds.

For this reason, some analysts think that bandwidth usage caps will ultimately be a far more common part of the Net’s daily life, particularly at the lowest tiers of service.

“It’s partly just so the economics make sense,” Jupiter’s Laszlo said. “If you’ve got someone downloading 60 gigabytes a month and paying $29.95, it’s hard to make it work.”

Related News Broadband adoption skyrockets worldwide   September 16, 2003 http://news.com.com/2100-1034-5077230.html

Comcast: Faster downloads by year’s end   September 8, 2003 http://news.com.com/2100-1034-5072641.html

Survey: Users want DSL but can’t get it   August 6, 2003 http://news.com.com/2100-1023-5060701.html

Endless summer of DSL discounts   July 7, 2003 http://news.com.com/2100-1034-1023465.html

Get this story’s “Big Picture”

—- http://www.tuscaloosanews.com/apps/pbcs.dll/article?AID=/20030916/ZNYT01/309160363

SBC Won’t Name Names in File-Sharing Cases*

By SETH SCHIESEL New York Times September 16, 2003

* • Discuss this story <to turn over the names of their customers who are otherwise known only by the murky screen names and numeric Internet Protocol addresses used in cyberspace.

-Ian.

—– http://story.news.yahoo.com/news?tmpl=story&cid04&ncids8&e=6&u=/ washpost/20030724/tc_washpost/a32817_2003jul23 AOL Subscribers Down by 846,000 Thu Jul 24,12:23 AM ET

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By David A. Vise, Washington Post Staff Writer

America Online’s subscriber base plunged by 846,000 in the second quarter, as hundreds of thousands left for cheaper or faster Internet connections and a similar number were dropped because they had been mistakenly counted in the past, AOL Time Warner Inc. disclosed yesterday.

In addition, new disclosures about a federal investigation into improper accounting at Northern Virginia-based America Online Inc. showed that the division’s legal problems are hurting other parts of the AOL Time Warner media empire.

AOL Time Warner said yesterday that the Securities and Exchange Commission ( news -web sites ) would not allow it to spin off a portion of its cable television unit until it resolves a dispute over how to account for hundreds of millions of dollars in questionable revenue from a complex deal with German media firm Bertelsmann AG ( news -web sites ).

AOL Time Warner also said it may restate previously reported profits and sales linked to the Bertelsmann transaction. And the company indicated that it could not determine how long the SEC and Justice Department ( news -web sites ) investigations into its bookkeeping practices will last.

The company said its profit increased to $1.1 billion (23 cents per share) in the second quarter, from $396 million (9 cents) in the second quarter of 2002. Revenue increased about 6 percent, to $10.8 billion. The profit figure included a number of substantial one-time gains from the settlement of a lawsuit with Microsoft Corp. and the sale of various businesses.

Despite solid results in divisions other than America Online, AOL Time Warner shares fell yesterday by $1.14, or 6.8 percent, to $15.71, as analysts and major investors reacted to the continuing uncertainty caused by the SEC investigation, the threat of increasingly costly shareholder lawsuits, the deterioration in America Online’s performance, and disappointment that the strength of AOL Time Warner’s film, publishing and cable television operations did not prompt the company to substantially increase its financial projections.

“Our goal for the remainder of this year is to keep laying the foundation that will enable us to exit 2003 with more momentum than we had when we entered it, with an eye toward achieving, strong sustainable growth next year and beyond,” said Richard D. Parsons, chairman and chief executive of AOL Time Warner.

AOL, the nation’s biggest Internet service provider, has shed a total of 1.2 million subscribers over the past year and now has 25.3 million subscribers in the United States.

The company said the total includes 2.2 million high-speed subscribers, an increase of 300,000 over the past three months. During that period, AOL launched an enhanced high-speed offering and promoted it with an advertising campaign titled, “AOL for Broadband: Welcome to the World Wide Wow.”

In addition to losing dial-up subscribers faster than expected, AOL is predicting that its online advertising revenue will drop about 40 percent in 2003. The decline is occurring even though the total dollars spent on advertising online is growing nationally, a trend that can be seen in the financial results of some of America Online’s competitors, including search engines Yahoo and Google and many specialized Web sites.

AOL Time Warner had sought to persuade SEC investigators that they were mistakenly challenging the accounting for the two-part Bertelsmann deal. But the company said yesterday that the commission has refused to back down.

“The company and its auditors continue to believe the accounting for those transactions is appropriate, but it is possible that the company may learn additional information as a result of its own review, discussions with the SEC and/or the SEC’s ongoing investigation that would lead [AOL Time Warner] to reconsider its views,” the firm disclosed.

The Bertelsmann deal involved AOL’s sale of roughly $400 million in advertising to Bertelsmann in connection with the purchase of Bertelsmann’s stake in AOL Europe.

AOL Time Warner released its second-quarter results prior to the opening of stock trading yesterday morning. Although it cut its projections for America Online, the company beat Wall Street estimates as its cable television, motion picture and publishing businesses thrived.

“Our solid results in this quarter and the first half of the year give us confidence that we can deliver on all of our 2003 financial objectives,” Parsons said. He added that the company is continuing to reduce its hefty debt through the sale of businesses and the spending of billions of dollars of excess cash generated by operations.

The Warner Brothers and New Line Cinema movie units generated $572 million and $239 million, respectively, at the box office in the United States. “The Matrix Reloaded” led the way among new releases, while “Harry Potter ( news -web sites ) and the Chamber of Secrets” boosted DVD and CD sales.

“On balance,” said Deutsche Bank, “we think this report is good news.”

In a conference call with analysts, Parsons said he was no longer counting on the sale of stock in Time Warner Cable to generate cash for debt reduction this year. Instead, he said, the handling of any cable spinoff will be determined by broader issues, including the best way to help that subsidiary grow.

“The specific timetable for executing an IPO will depend on strategic considerations, not balance sheet imperatives, as well as the status of our SEC investigations,” Parsons said.

Wireless and Web Buzz Again as Wifi Catches On Tue May 13, 4:09 PM

/By Christopher Noble/

PARIS (Reuters) – Landgrabbing and takeover frenzy are again dominating technology headlines as if the Internet bubble had never burst and giving old buzzwords a new lease of life.

At the center of it is WiFi, a technology that allows users of laptop computers and other gadgets to access the Internet without the usual struggle with wires and mismatched phone jacks.

France, late to the party, is now jumping aboard with a series of announcements in the last few days.

The race is on around the world to roll out WiFi access points known as “hotspots,” which for some entrepreneurs offer the prospect of turning mobile Internet access into revenue.

Each wireless (news <http://us.rd.yahoo.com/DailyNews/manual/*http://search.news.yahoo.com/search/news?p=%22wireless%22&c=&n &yn=c&c=news&cs=nw> – web sites <largest hotspot in France. A consortium of companies is now putting a WiFi network in the French capital’s subway stations and bus stops.

When Enron needed cash, the company’s chief financial officer had just the answer: a web of companies that would keep the firm’s liabilities off its books – and make him rich. In the second extract from his new book, Robert Bryce describes the rise of ‘a master of creative financing’

Tuesday November 5, 2002 The Guardian

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By mid-1999 Enron had a sticky finance problem. A year earlier, the company had invested $10m (£6.4m) in a fledgling internet service provider called Rhythms NetConnections. In early 1999, Rhythms had gone public and the internet bubble had sent its stock into the stratosphere. On the first day of trading, the company’s stock closed at $69. Suddenly, Enron’s share in the company was worth about $300m. But Enron couldn’t sell it. Under the terms of its original investment, Enron had agreed to hold the shares until the end of 1999.

After thinking about the matter for some time, Andy Fastow, Enron’s cocky young chief financial officer, came up with a convoluted plan to help Enron preserve the value of its Rhythms NetConnections investment. The plan would be executed by a new limited partnership called LJM Cayman, LP, which would be controlled by Fastow. The name had Fastow’s personal stamp on it, created from the initials of Fastow’s wife, Lea, and the couple’s two children.

LJM1 would function as a parking lot for Enron, a place where the company could stow and retrieve assets. Those assets would be hidden from Wall Street and small investors because LJM would not be owned by Enron. Therefore, all of LJM1’s functions and assets would be separate from Enron’s balance sheet. Unlike an earlier off-balance-sheet deal, Whitewing, LJM1 would be controlled by an Enron insider, Fastow. On June 18, 1999, Fastow met with chairman Ken Lay and CEO Jeff Skilling. He proposed to create LJM1 with an investment of $1m of his own money and $15m from two limited partners. Additional capital for the new entity would come from Enron, which would invest 3.4m shares of restricted stock in LJM1. Lay and Skilling apparently thought Fastow’s idea was a good one, even though on the surface it appeared that LJM1 failed to meet the test for off-the-balance-sheet deals. LJM1 was going to be used to move debts and risky investments (including Rhythms) off Enron’s balance sheet. But to do that, LJM1 had to satisfy three requirements:

· At least 3% of the equity had to come from outside (that is, non-Enron) investors.

· The entity could not be controlled by Enron.

· Enron was not liable for any loans or other liabilities.

LJM1 might have qualified under two of the three. But how was Enron going to be able to prove that LJM1 wasn’t controlled by Enron when the company’s CFO was managing all of the investments? It appears that neither Lay nor Skilling thought about it. Nor did Lay consider how much money Fastow might make on the assets he was buying from Enron. After a bit more discussion, Lay agreed to bring Fastow’s proposal to the Enron board of directors at the board meeting on June 28, 1999.

At that board meeting, after a short debate, the company’s board of directors agreed to waive Enron’s ethics policy, which prohibited the company’s officers from doing deals directly with the company, and approved the LJM1 deal. The approval opened the floodgates. And LJM1 became the cornerstone of Fastow’s financial house of cards.

No one at Enron – or anyone else, for that matter – ever accused Fastow of excessive humility. And throughout 2000 and early 2001, the company’s chief financial officer was at the apogee of his self-diagnosed genius. Fastow was fully convinced that his skein of partnerships and off-the-balance-sheet entities, with its mind-numbingly complicated spider’s web of interconnections and interdependent relationships, was the ultimate advance in financial engineering. “I can strip out any risk,” Fastow once bragged to a co-worker.

It is not just his colleagues who were convinced. At the end of 1999, CFO magazine had named him one of their CFOs of the year, giving him its “CFO excellence award for capital structure”, an award given to him for helping make Enron into “a master of creative financing”. The magazine praised Fastow’s work on the financing structure, which he created so that Enron could buy water company Azurix, as well as several power plants, while keeping the debts off its balance sheet. When the award was announced, Skilling praised Fastow to CFO magazine, saying that Enron needed “someone to rethink the entire financing structure at Enron from soup to nuts. Andy has the intelligence and the youthful exuberance to think in new ways. [He] deserves every accolade tossed his way.”

Fastow enjoyed the rewards of his special position too. On top of his salary and earnings from the sale of Enron stock ($33,675,000 between 1998 and 2001), his investments in LJM1 and LJM2 earned him no less than $45m. He was partial to fancy watches: he often wore a Franck Muller model known as a “Master Banker” (no snickering, please), a spiffy analogue watch that showed the time in three different time zones. It cost about $9,000. In late February 2000, he bought a house in the exclusive Houston suburb of River Oaks.

Other Enron big shots already lived in the same 77019 postcode. Ken Lay had been in River Oaks for years. Jeff Skilling also lived there. So it made sense that when Fastow started pulling the big money, he bought a house on Del Monte Drive in the heart of River Oaks.

“Andy wanted to keep up with the things that Skilling was doing. Skilling had a house in River Oaks. For Andy to be at that level, he needed the big house, too,” said one finance executive who worked closely with Fastow.

Fastow’s special-purpose entities became a fast and dirty way for Enron to manufacture additional revenues in a big hurry. In the last 11 days of 1999, Fastow’s companies did seven separate deals with Enron. In addition to a power plant in Poland, Fastow’s LJM2 entities bought a stake in some of Enron’s loans, bought part of Enron’s stake in a natural-gas gathering system in the Gulf of Mexico, bought a stake in a trust Enron had invested in called Yosemite, and bought part of Enron’s stake in a company that provided financing for natural-gas producers.

The advantage Fastow brought to Enron with the off-the-balance-sheet entities was the ability to do deals quickly. Enron was “looking for a quick way to sell assets to generate income,” said one long-time Enron finance person. “If you control both sides of the deal, you can do it very quickly at any price you want. That’s an advantage versus a situation where you’re trying to sell it to a third party, where it might take a year or more. It was a way for them to control the entire process.”

Fastow helped Enron control the process through a flock of entities with names such as Osprey, Osprey Trust, Timberwolf, Bobcat, Egret, Condor, Rawhide, Sundance, Ponderosa, Harrier, Porcupine and Mojave. He also created a quartet of misbegotten entities known as the Raptors.

The sham deals quickly became one of Enron’s main business units. In 1999 alone, Fastow’s deals inflated Enron’s profits by $248m – that’s more than one-fourth of the $893m in profits Enron reported that year. In between September 1999 and July 2001, Fastow’s LJM1 and LJM2 did about 20 different deals with Enron. And Fastow’s flimflam partnerships made a profit on every transaction they did with Enron. It looked as if Fastow could not lose. Using Enron’s stock instead of cash to prop up his financial house of cards seemed like a great idea. Enron’s stock had begun 2000 stuck at about $43. However, thanks to the hype surrounding Enron Broadband Services, it quickly began to climb into the ionosphere. By the middle of the year, it was trading in the $70s. On August 23, 2000, it hit its all-time high – $90 a share. Enron’s stock – it seemed – was better than cash.

Given that rising stock price, Fastow apparently convinced Enron to pledge a total of $1bn worth of its stock to the Raptors. The Enron stock would provide the “capital” that the Raptors needed to do transactions. In return, the Raptors would help Enron lock in tens of millions of dollars in gains on stock it held in newly public companies, like hardware maker Avici Systems and The New Power Company, an energy company that planned to sell electric power to individual homeowners.

While the accountants slept, Enron’s attorneys were starting to worry about the Raptor deals. On September 1, 2000, Stuart Zisman, an attorney who had been looking at the Raptors, sent an email to his superiors in Enron’s legal department that said: “We have discovered that a majority of the investments being introduced into the Raptor Structure are bad ones. This is disconcerting – it might lead one to believe that the financial books at Enron are being ‘cooked’ in order to eliminate a drag on earnings.”

Enron was cooking the books and Fastow was the chef de cuisine. So where was Andersen this whole time? It was, as usual, cashing Enron’s cheques. In exchange for its work on the Raptor deals, Andersen charged Enron a total of $1.3m.

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Associated Press

WASHINGTON — Music companies tried to persuade a judge to let them obtain the names of people suspected of trading music files online without going to court first, a move that could dictate how copyright holders deal with Internet piracy in the future.

Verizon Communications Inc. , the nation’s largest local-phone company which also provides Internet access, is resisting the music industry’s subpoena, saying it could turn Internet-service providers into a turnstile for piracy suits and put innocent customers at risk.

U.S. District Judge John D. Bates, who heard the case, lamented ambiguities in the Digital Millennium Copyright Act, which was enacted to uphold copyright laws on the Internet while shielding technology companies from direct liability.

Congress “could have made this statute clearer,” he said. “This statute is not organized as being consistent with the argument for either side.”

Judge Bates added he would try to rule quickly, but lawyers for both sides had no guess of when a decision might arrive.

The subpoena hearing, which is normally a tame affair, was contentious because the music industry sees it as a test case. If it succeeds, it plans to send reams of cease-and-desist letters to scare file-swappers into taking their collections offline.

Until now, copyright holders have relied on requests sent to ISPs — nearly all of which forbid sharing copyrighted material without permission — to take action on their own against suspected pirates. But that can take a lot of time, and makes copyright holders reliant on ISPs to enforce the law. ISPs don’t always respond as well or as quickly as music and movie publishers would prefer, and they think individual letters from the maker itself might work better.

Verizon said that since the hundreds of songs up for trade by the anonymous Verizon customer at the center of the case sit in the person’s computer rather than Verizon’s network, it isn’t required to automatically give up the subscriber’s name.

“Verizon was a passive conduit at most,” said Eric Holder, a former Justice Department prosecutor who represented Verizon. He added the music industry’s strategy could create a contentious relationship between Verizon and its customers and put the company in the position of handing over names to the music companies without a judicial determination of piracy.

“We also don’t want to be the policeman in this process,” said Mr. Holder.

Lawyers for the recording industry rejected Verizon’s arguments that it had little obligation in the process. Industry lawyer Donald Verrilli said no type of ISP is exempt from having to identify a potential music pirate, no matter where the songs sit.

He also dismissed Verizon’s position that Verizon’s customers have a right to privacy. “You don’t have a first amendment right to steal copyright works,” said Mr. Verrilli.

Judge Bates disagreed with Mr. Verrilli’s assumption that the works were stolen. “Here, there’s only an allegation of infringement,” he said.

The judge gave few hints as to how he might rule, asking many detailed questions of both sides. He called some Verizon positions vague, but showed little patience with other arguments advanced by the music industry and movie studios, which also argued on behalf of music publishers.

Through applications such as Kazaa, Morpheus and Gnutella, a person can find virtually any song or movie — sometimes even before it is released in stores — and download it for free. On a typical afternoon, about three million people were connected on the Kazaa network and sharing more than 500 million files.

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