After convicting four former Merrill Lynch executives and a former Enron executive of wire fraud and conspiracy charges yesterday, the jurors in the Enron-related trial known as the Nigerian Barge case heard from opposing expert witnesses today regarding the market effect that the Nigerian Barge transaction had on Enron.
Today’s hearing was held to allow the jury to consider the evidence of market loss that is used in determining sentences under the federal sentencing guidelines. As noted earlier in these posts, the U.S. Supreme Court’s recent decision in Blakely v. Washington has called the Constitutionality of the federal sentencing guidelines into question, particularly if the jury is not allowed to consider the issue of market loss.
Anthony Saunders, chairman of the finance department at New York University testified on behalf of the prosecution and estimated — with a straight face — that Enron’s sham sale of three power-generating barges to Merrill Lynch led to damages suffered by Enron shareholders of about $43.8 million.
Professor Saunders came up with this damage assessment despite the fact that Merrill Lynch booked only a $12 million profit on the deal, Enron lost no money on the transaction, and the alleged sham nature of the transaction was not even discovered until a year and a half after Enron’s equity value had become worthless upon the company filing bankruptcy.
At any rate, Professor Saunders speculated that the 1 cent per share that the barge deal contributed to Enron’s 1999 earnings translated to about 47 cents per share of the company’s stock price of $53.50 at the time the company’s financial result were announced in January 2000. Take that 47 cent figure times the number of outstanding Enron shares at the time and wallah — you get a $43.8 million figure.
Of course, whether that number bears any reasonable resemblance to the value that the barge deal contributed to Enron’s stock price is another issue entirely.
The prosecution’s market effect reasoning here is so flawed that it borders on the preposterous. In reality, the fact that Enron did not account for the Nigerian Barge transaction properly made Enron’s earnings look better than they really were. Thus, that accounting increased Enron’s share value for the benefit of investors who were buying and selling the stock.
Moreover, the prosecution has presented no evidence — because there is none — that he decline in Enron’s share value during its demise into bankruptcy in 2001 had anything to do with revelations regarding the accounting on the barge transaction. This is because the alleged improper accounting for the barge deal was not even discovered until well over a year after Enron went into bankruptcy and its equity value had become essentially worthless.
At any rate, Dan Fischel, a law professor at the University of Chicago who testified for the defense, countered with a more realistic market loss evaluation and concluded that the loss was closer to $120,000. He also noted that Professor Saunders’ methods were “inconsistent with the real world,” and that Professor Saunders’ methodology relied too heavily on academic models that are not generally used in evaluating a company’s value in the business community. That is a charitable understatement, to say the least.
The market loss hearing will conclude on Friday, and the jury is expected to present its findings to U.S. District Judge Ewing Werlein shortly thereafter. If the jury buys Professor Saunders’ absurd market loss calculation, the defendants could be facing the equivalent of life sentences under the applicable federal sentencing guidelines.
If that occurs, then this prosecution will officially cross the line from being a “mere” injustice to becoming a modern day witch hunt.