Grundfest Takes on the Sad Case of Jamie Olis

A heavyweight has entered the ring on behalf of Jamie Olis.

The WSJ’s Peter Lattman reports that Joseph A. Grundfest, W.A. Franke Professor of Law at Stanford University and one of the leading securities law experts in the US, is donating his services to Olis on a pro bono basis in regard to the key issue of market loss in Olis’ upcoming September 12th resentencing hearing.

Olis’ case is arguably the most egregious product of the government’s increasing criminalization of business interests in this particular post-bubble era.

In Olis’ most recent sentencing memorandum, Grundfest and Olis appellate attorney David Gerger expand on many of the points that have been raised over the past two and a half years on this blog regarding the flimsy basis of the government’s position that Olis should be imprisoned for at least the next two decades, particularly the government’s disingenuous market loss theory.

As noted in this previous post relating to the Enron-related Nigerian Barge trial, the prosecution misled U.S. District Judge Sim Lake regarding the proper method for calculating the market loss in connection with the original sentencing of Olis, and then has ignored subsequent decisions that have undermined the spurious market loss theory that it has employed in the Olis case.

The prosecution in the Olis case won’t be able to dodge facing the misleading nature of its market loss theory any longer.

In a devastating analysis of the government’s market loss theory, Professor Grundfest’s declaration attached to the Olis’ sentencing memo disassembles the work of the prosecution’s market loss expert, Frank Graves. Professor Grundfest summarizes his critique in the following manner:

The Graves Declaration fails to establish that Project Alpha inflated Dynegy’s stock price on any date by any amount. It also fails to establish that any portion of Dynegy’s stock price decline on April 25, 26, or May 8, 2002 is attributable to Project Alpha. the Graves Declaration’s methodology for measuring price declines caused by Project Alpha is also internally inconsistent with Graves’ prior report in another matter.

It also fails to recognize that Dynegy’s stock price rebounded significantly on April 30 (the second trading day following April 26) when the market was informed that concerns regarding Project Alpha had been exaggerated. It further fails to adjust for the presence of confounding information that entered the market on May 8, 2002.

The Graves Declaration also relies on methodologies that are broadly criticized in the scholarly literature, and repeatedly commits logical errors. The Government has therefore failed to demonstrate through the Graves Declaration that Project Alpha has caused any loss whatsoever to any investor at any time. . . .

The methodologies relied upon by the Graves Declaration to calculate the number of damaged shares have been broadly criticized in the academic literature and have been rejected by several courts. The damage measure relied upon by the Graves Declaration has also been broadly criticized in the academic literature because, even if perfectly applied, it fails to measure the economic loss caused by aftermarket frauds such as Project Alpha. This well-established literature helps explain the Second Circuit’s observation that the methodology applied by the Graves Declaration can lead to “Draconian, exorbitant damages, out of all proportion to the wrong committed . . .” [citation deleted]

Finally, . . . the magnitude of a settlement paid to resolve a private class action lawsuit is not a reliable measure of the loss caused by a fraud.

Other than that, Professor Grundfest would presumably conclude that the Graves analysis is just fine.

Professor Grundfest’s declaration is one of the most thorough and well-reasoned analyses that I have read regarding the vagaries of attempting to attribute huge market losses in a company’s stock to one of a plethora of events and variables that affect that company’s stock price. I recommend reading the entire declaration.

Although the focus of the Olis sentencing memo is market loss, one other part of the memo jumped out at me.

On pp. 5-6, the memo outlines over a dozen company executives, Arthur Andersen accountants, and outside lawyers — almost all of whom were senior in status to Olis — who participated in devising and analyzing the transaction for which Olis was prosecuted.

Nevertheless, only Olis and his two immediate supervisors (who copped pleas and testified against Olis) were prosecuted.

As Larry Ribstein has eloquently contended over the past two years on his blog and most recently in his paper The Perils of Criminalizing Corporate Agency Costs, are we really prepared to throw all corporate actors in prison for participating in the type of risk-taking involved in Project Alpha?:

Disciplining agents also requires pinning responsibility for corporate failure on particular people in the organization.

If someone should be criminally responsible for obscuring Enron’s financial condition, who should it be?:

the midlevel executives who designed the misleading structures,

the executive officers who signed off on them,

the independent directors who failed to object,

the lawyers, accountants, banks and other executives who enabled them,

anybody who knew about them and didn’t speak up,

the whistleblower who told only those within the organization,

Or all of the above?

Unfortunately, in Olis’ case, it turned out to be the junior executive taking directions from superiors who had the audacity to assert his innocence at trial. Chalk it up to the increasingly high price of asserting innocence in business-related prosecutions.

Although Professor Grundfest’s salutary effort on behalf of Olis is heartening and one that should buttress his already exemplary reputation, Olis still faces daunting hurdles to having a just sentence assessed in his case.

Professor Grundfest’s analysis of Graves’ market loss opinion reveals its essential lack of objectivity, so Graves will literally be fighting for his expert witness life in this case. Thus, it should be expected that he will respond to the Grundfest declaration by attempting to bolster his earlier opinion.

Similarly, Judge Lake, who levied the original 24 year sentence against Olis, will be resentencing Olis. Inasmuch as no judge — particularly one as competent as Judge Lake — enjoys being reversed by an appellate court, Olis faces the risk that Judge Lake will attempt to justify his original harsh sentence during the resentencing.

However, similar to his colleague Ewing Werlein, Judge Lake is a man of unusual depth, so my bet is that he will recognize that the prosecution misled him regarding the market loss issue during Olis’ original sentencing and will correct the stark injustice of that sentence.

As Professor Ribstein points out in his post on the Grundfest declaration, “Olis’ sentence has become an important symbol of the excesses of criminal prosecutions in the wake of Enron. Freeing Olis would be a start toward correcting these injustices.”

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