As foreshadowed the Fifth Circuit’s decision earlier this month to release from prison three of the four former Merrill Lynch executives pending disposition of their appeal in the Enron-related Nigerian Barge case (extensive discussion here), the Fifth Circuit issued this decision vacating the wire fraud and conspiracy convictions of all four Merrill Lynch executives and reversing the conviction altogether of former mid-level Merrill executive William Fuhs.

Oddly, the Fifth Circuit affirmed the conviction of former Merrill head of Strategic Asset and Lease Finance Group, James Brown on perjury and obstruction of justice charges. That part of the decision will almost certainly be subject to further litigation.

Thus, of the four Merrill defendants, Brown still faces the remainder of his 46 month prison sentence and Fuhs appears to be home free, while former head of Merrill’s Global Investment Banking division — Dan Bayly — and Bayly’s associate — Robert Furst — both face a possible retrial on the charges, although the fact that both have served a year of their sentences before being released from prison last month strongly mitigates against the government prosecuting the case against them again. At least one would think so in a reasonably civil society.

The decision is interesting on several fronts, not the least of which is the division on the panel in deciding the case. Judge E. Grady Jolly wrote the majority opinion of the Court, which was joined by Judge Harold DeMoss with regard to the reversal of Fuhs’ conviction and the vacating of Bayly and Furst’s.

However, Judge DeMoss wrote a spirited dissent in which he persuasively argues that the perjury and obstruction charges against Brown should also be reversed, while Judge Thomas Reavley concurred with the reversal of Fuhs’ conviction and the affirmance of the Brown conviction, but pens a dissent in which he contends the Court should have thrown the book at Bayly and Furst on the mail fraud and conspiracy charges.

The entire decision — particularly Judge DeMoss’ dissent — is entertaining reading, but here are a few excerpts that stand out on first reading. First, the gist of the decision:

We reverse the conspiracy and wire-fraud convictions of each of the Defendants on the legal ground that the government’s theory of fraud relating to the deprivation of honest services – one of three theories of fraud charged in the Indictment – is flawed. We further vacate appellant Fuhs’s conviction on the ground that the evidence is insufficient to support his conviction. Finally, we affirm appellant Brown’s convictions of perjury and obstruction of justice.

Turning to its analysis on the Enron Task Force’s flawed deprivation of honest services theory, the Fifth Circuit falls squarely in line with the Second Circuit’s decision in United States v. Rybicki, 354 F.3d 124, (2d Cir. 2003):

[W]e are guided by the leading opinion on honest-services fraud, the Second Circuit en banc decision in Rybicki, supra. Rybicki concluded, and we agree, that cases upholding convictions arguably falling under the honest services rubric can be generally categorized in terms of either bribery and kickbacks or self-dealing. The great weight of cases are clear examples of such behavior.

Applying Rybicki, the Court observes that the nature of the transaction — even if viewed most negatively toward the defendants — did not involve the type of kickback or bribery that would have tipped off the Merrill executives that the Enron employees were depriving their employer of honest services:

Taking a page from the Supreme Court’s decision in the Arthur Andersen case (which reversed the Fifth Circuit’s decision in that case), the Court noted the following about the expansive interpretation that prosecutors are using in regard to criminal statutes:

This opinion should not be read to suggest that no dishonest, fraudulent, wrongful, or criminal act has occurred. We hold only that the alleged conduct is not a federal crime under the honest services theory of fraud specifically. Given our repeated exhortation against expanding federal criminal jurisdiction beyond specific federal statutes to the defining of common-law crimes, we resist the incremental expansion of a statute that is vague and amorphous on its face and depends for its constitutionality on the clarity divined from a jumble of disparate cases. Instead, we apply the rule of lenity and opt for the narrower, reasonable interpretation that here excludes the Defendants’s conduct.

The Court pulls no punches in criticizing the weakness of the Task Force’s case against Fuhs:

Thus, the Government relies solely on the documentary evidence to assert Fuhs’s knowledge of the oral buyback promise and his intent to participate in the scheme to conceal that promise for the purpose of effecting a misaccounting of the overall deal. We find that the documentary evidence fails to sustain the Government’s burden of proof beyond a reasonable doubt. Much of the Government’s evidence consists of e-mails or memos not written or initiated by Fuhs, not directly addressed to him, and in some cases not even copied to him. They neither recognize a secret oral side deal nor imply that the addressees of the correspondence knew of such a secret deal. While they may support the assertion that Fuhs knew Merrill wanted a buyback agreement to protect its investment, and that it was at one point understood to be part of the deal by Fuhs’ subordinate Geoffrey Wilson, the principal documents relied upon by the Government simply do not sustain the inference that Fuhs had knowledge of an oral guarantee that was to be kept out of the written agreement and kept secret in (because it conflicted with) the accounting of the deal.

And in a wonderful passage that could be used to explain the recent prosecution of the late Enron chairman Ken Lay and former chief executive officer Jeff Skilling as well, the Fifth Circuit observes with regard to the Task Force’s case against Fuhs:

As counsel for Fuhs noted at oral argument, if we begin with the assumption that Fuhs is guilty, the documents can be read to support that assumption. But if we begin with the proper presumption that Fuhs is not guilty until proven guilty beyond a reasonable doubt, we must conclude that the evidence is insufficient to prove beyond a reasonable doubt that Fuhs had the knowledge and intent to enter into the fraudulent scheme alleged by the Government.

Before disassembling the perjury and obstruction charges against Brown in his dissent, Judge DeMoss suggests that the deprivation of honest services statute is unconstitutional:

[T]he application of section 1346 to the facts presented in this case is particularly problematic for several reasons, the combination of which poses an even greater harm to future business relationships and transactions than would any one of the problems alone. The Government’s extension of the already ambiguous reach of section 1346 by way of an indictment for conspiracy to commit honest services fraud is especially troublesome. . . . To the extent that . . . case law required a relationship that generated a duty of honest services, such a relationship does not exist in this case between the Defendants, who are employees of Merrill, and Enron or its shareholders, who are the purported victims of the alleged fraud. The limitation of criminal activity to relationships giving rise to a duty of honest services is ignored when any person who negotiates with an employee of another corporation is potentially entangled by the combination of section 1346 with our very broad understanding of conspiracy.

I also believe that a serious problem arises with respect to the Government’s theory of harm in this case. It is absolutely undisputed that Merrill paid $7 million to Enron as a result of the closing of the transaction contemplated by the Engagement Letter of December 29, 1999 that was the final written agreement of the two parties (“the Engagement Letter”). Even granting the Government that Enron paid back $250,000 as the advisory fee to Merrill, Enron still had $6,750,000 more in its bank account as a result of the Engagement Letter than it had before. The Government’s theory of harm would have us ignore the initial gains to Enron and focus solely upon some later loss only tangentially connected to the particular investment transaction that forms the basis of the Indictment.

The cumulative effect of a vague criminal statute, a broad conception of conspiracy, and an unprincipled theory of harm that connects the ultimate demise of Enron to a single transaction is a very real threat, of potentially dramatic proportion, to legitimate and lawful business relationships and the negotiations necessary to the creation of such relationships.

And then Judge DeMoss absolutely nails the utter injustice of Brown’s perjury and obstruction of justice conviction, which is based largely on evidence of terms of the Nigerian Barge transaction that were discussed in negotiations between Enron and Merrill, but never made it into the final contract between the parties:

The conversations preceding the deal are only negotiations, and the ultimate written agreement speaks for itself. Two material facts corroborate this reading: (1) Fastow himself averred to the Government that he, in fact, made only assurances of best efforts to Merrill, not promises or guarantees to take Merrill out of the deal; and (2) in conformance with the written agreement, Merrill actually paid $7 million to Enron, consistent with its purchase of an interest in the barge partnership investment, and therefore had absolutely no legally enforceable claim to be taken out of the deal. The Government mischaracterizes the transaction evidenced by the Engagement Letter when it labels the agreement a “sham” and asserts that Merrill was never “at risk” during the transaction. The Engagement Letter expressly states, “No waiver, amendment, or other modification of this Agreement shall be effective unless in writing and signed by the parties to be bound.” . . . In light of these provisions, Merrill’s $7 million was absolutely at risk. Any oral assurances of a take-out offered to Merrill by any Enron employee would not have been legally binding on Enron. . . .

Merrill could not have enforced Enron’s assurance of its best efforts commitment to remarket the investment interest that Merrill had agreed to purchase; Merrill could only have refused to deal with Enron in the future if the Engagement Letter had resulted in an unsatisfactory business investment. Such negotiations should not be the fodder for criminal indictments. If there is any criminal wrong arising from the facts in this record, and I have serious doubts on that score, it would be in Enron’s employees’ reporting of the transaction described in the Engagement Letter, not in the manner in which Merrill’s employees negotiated the deal.

So, three of the four former Merrill Lynch executives embroiled in the Nigerian Barge case have finally received some reasonable semblance of justice. Although I am happy for these men and their families, let’s not overlook the emotional and financial carnage that has resulted from the Enron Task Force’s dubious decision to criminalize this transaction.

Four successful executives with Merrill Lynch have had their careers badly damaged. The men and their families have had to endure extraordinary stress and pain over the past four years. Lives and careers have been unalterably changed and for what? For having had the misfortune of being involved in a relatively small transaction with the social pariah of the decade, Enron?

Meanwhile, the person most responsible for this damage is doing quite well, thank you.

The prosecution of the Nigerian Barge case was based on resentment and scapegoating, not on justice or any reasonable concept of prosecutorial discretion. This is an increasingly common occurrence in American society and it’s going to take much more than a just reversal in the Nigerian Barge case — or even the deaths of a talented man and an American business institution — to alter this troubling trend of how our government exercises its overwhelming prosecutorial power.

If you don’t believe me, just ask Jim and Nancy Brown.

Update: An insightful reader points out that, with the reversal of the wire fraud and conspiracy conviction, Brown should be in line for a re-sentencing that could reduce his sentence considerably. Inasmuch as U.S. District Judge Ewing Werlein exhibited grace under fire during the original sentencing of the Merrill Four, here’s hoping that Brown’s attorneys can persuade him to reduce Brown’s sentence to time-served (which is well over a year now).