Posted by Tom at 12:01 AM | Comments (0) |

June 30, 2010

Financial Ed 101

It�s good to see that James Surowiecki has come around to my way of thinking that better investor education is far more likely to hedge the risk of future financial scandals than throwing a few business executives in prison:

The government�s new consumer-protection agency has the authority to �review and streamline� financial literacy programs, but that�s not enough. We really need something more like a financial equivalent of drivers� ed. There�s evidence that just improving basic calculation skills and inculcating a few key concepts could make a significant difference. One study of the few states that have mandated financial education in schools found that it had a surprisingly large impact on savings rates.   .   .   .The point isn�t to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that.

Surowiecki is spot-on with his observation (as is this TGR post on Surowiecki's article), but the promoters of the Greed Narrative continue to protest -- what about the innocent victims who lost their nest eggs as a result of the collapse of a company such as Enron?

Well, one of the main reasons that those victims' nest eggs ever had value in the first place was because innovative executives such as Jeff Skilling and Ken Lay transformed Enron into the world's leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers.

Although it�s fine to feel sorry for someone who loses money on an investment, the Greed Narrative ignores the fact that most of those "victims" who lost their nest eggs were imprudent in their investment strategy. Taking Enron as an example, those investors should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron's stock price while being protected by a floor in that share price if it fell below a certain value. Those are the type of precautions that a prudent � and well-educated � investor would take in regard investing in a trust-based business.

Incongruously, while virtually all of those Enron "victims" hedged the risk of their investment in their homes by purchasing homeowner's insurance, few of them hedged the risk of their investment in Enron stock. Most of them simply did not understand how Enron's risk management services created their nest egg in the first place. Thus, when those nest eggs evaporated during the bank run on Enron, those investors didn't even try to understand what truly had occurred. They simply embraced the easy-to-understand Greed Narrative.

The Greed Narrative's devastating impact is that it obscures the true nature of investment risk and fuels the myth that investment loss results primarily from someone else's misconduct. As Larry Ribstein has been asking for years, do we really want to be sending a message to investors that risk is bad when it often leads to valuable innovation and wealth creation?

Do we really want to allow prosecutors and regulators to paint such beneficial transactions as frauds and then manipulate the public's ignorance to demonize innovative risk-takers?

At a time when America desperately needs innovators and entrepreneurs to create jobs and wealth, better education for investors makes much more sense than the paths we have been taking.

Posted by Tom at 12:01 AM | Comments (3) |

June 26, 2010

The Wall Street Journal’s inadequate apology

It's as if the nation's leading business newspaper doesn't want to face the ugly reality of what it helped create.

This Wall Street Journal editorial applauds the U.S. Supreme Court's opinion reversing Jeff Skilling's conviction on honest services wire fraud charges. But when it comes to the WSJ's role in fanning the flames of public disdain toward business executives that helped to allow this injustice to occur, the WSJ apologizes only to Conrad Black:

The Black and Skilling cases are precisely the kind involving high-profile, unsympathetic defendants in which willful prosecutors like Mr. Fitzgerald are inclined to abuse the honest services law. They know the media won't write about the legal complexities, and they know juries are often inclined to find a rich CEO guilty of something. We regret that in the case of Mr. Black, that failure of media oversight included us.

But what about an apology to Mr. Skilling? Take it from me WSJ, that lack of media oversight also included you in regard to the Skilling and other Enron-related criminal cases.

Indeed, four years ago the WSJ editorial board was patting the Enron Task Force on the back despite the fact that it was clear at the time that the Task Force had improperly applied the honest services wire fraud statute and engaged in massive prosecutorial misconduct in regard to the Skilling prosecution and numerous other Enron-related criminal prosecutions.

The WSJ's failure to admit its egregious failures in its coverage of Enron reminds me of a point that John Carney raised several years ago in regard to Eliot Spitzer's odious tenure as New York Attorney General:

Why didn't [the mainstream media covering Spitzer's investigation of Grasso] reveal the slimy tactics of the Spitzer squad? We suspect part of the problem was the fear of being "cut off" of access. Reporters compete for scoops, and often those scoops depend on sources who will leak information to them. In the NYSE case, reporters assigned to the story were largely at the mercy of the investigators, who could cut-off uncooperative reporters, leaving them without copy to bring to their editors while their competitors filed stories with the newest dirt. They probably felt - not unrealistically - that their very jobs were on the line.

This reveals an unfortunate state of affairs. Playing bugle boy while government officials call the tunes from behind a veil of anonymity is not investigative journalism - it's hardly journalism at all. It's closer to propaganda. It would have been far better had the journalists turned their backs on the Spitzer squad, or even revealed these tactics to the public. Sure they may have lost some "good" stories but they could have painted a truer picture of what was going on. But that's probably too much to hope for.

The same type of mainstream media dissonance went on in regard to the Enron-related prosecutions.

In point of fact, this Ayn Rand Institute press release that was issued in 2006 just a couple of months after the WSJ patted the Enron Task Force on the back is remarkably prescient in regard to the mainstream media's abysmal coverage of Enron in general and Skilling's trial, in particular:

The Media's Mistreatment of Jeff Skilling

Upon hearing the news that former Enron CEO Jeffrey Skilling was sentenced to 24 years, most Americans, trusting the newspaper articles and books they have read on Enron, think that justice has been served. But, said Alex Epstein, a junior fellow at the Ayn Rand Institute, "Jeff Skilling has not gotten justice, and the media bear a major portion of the blame.

"Few Americans know that during Skilling's trial, the prosecution came nowhere near proving its central allegation that Jeff Skilling engineered a conspiracy to defraud investors. Few know that Skilling, upon leaving Enron five months before its collapse, destroyed no documents, nor did anything else resembling a criminal cover-up. Few know that the prosecution, unable to prove a conspiracy, spent huge swaths of the trial taking pot-shots at Skilling with issues not even mentioned in the indictment, such as the failure of Skilling, a multi-millionaire many times over, to disclose a failed $50,000 investment to Enron's board.

"The media's mis-portrayal of the case against Skilling long predates the trial. Ever since the fall of Enron, most of the media have treated as fact every conceivable smear against Skilling made by ax-grinding prosecutors or ex-Enron employees, while treating as absurd Skilling's claim that he neither engineered a conspiracy nor lied to investors.

"There can be no doubt that the media's treatment of Skilling contributed to his conviction for a phantom conspiracy--and to the outrageous 24-year sentence that he has now received. And the mistreatment of Skilling is part of a broader trend: the trend of treating businessmen as guilty until proven innocent. Our journalists and intellectuals, accepting the idea that the pursuit of profit is morally tainted, assume that whenever anything goes wrong in business, it is the result of crooked behavior by greedy, rich CEOs--and slant their coverage accordingly. This practice is putting numerous innocent men in jail, and instilling terror throughout corporate America.

"During Skilling's appeal, let us call for the media to start treating Skilling--and all businessmen--fairly."

The WSJ was right to apologize to Lord Black. But it also owes one to Jeff Skilling, as well as to its readers.

Posted by Tom at 12:01 AM | Comments (3) |

June 25, 2010

Skilling wins at the Supreme Court

The U.S. Supreme Court vacated Jeff Skilling's criminal conviction yesterday on the charge of conspiracy to commit wire fraud under 18 U.S.C. 1346 ("Section 1346"), throwing his entire conviction on nineteen counts into question.

The Supreme Court also reversed Conrad Black's conviction on the same issue, as well as Bruce Weyhrauch's. Lyle Dennison has this excellent summary of the Court's opinion, while Larry Ribstein and Stephen Bainbridge provide their usual spot-on analysis of the opinion from a public policy standpoint.

Interestingly, most of the 114 page opinion deals with an issue on which the Court ruled against Skilling - i.e., that the trial should have been moved out of Houston because inflammatory media coverage made it impossible for Skilling to receive a fair trial.

Nonetheless, the Court's opinion was a resounding victory for Skilling as all nine justices agreed that Skilling did not commit honest services wire fraud. The only difference is that Justices Scalia, Thomas and Kennedy would have struck down Section 1346 entirely, while the majority simply restricted it's application to bribery and kickback cases.

The Court remanded the case to the Fifth Circuit Court of Appeals for further disposition consistent with the Court's opinion, primarily to determine whether the Skilling's conviction on the honest services wire fraud charge should lead to a reversal of most or all of the other counts of his conviction. As the Court notes in footnote 47 on page 50, the Fifth Circuit has already indicated that Skilling's conviction should be set aside in its entirety if any of its three bases ((1) honest services wire fraud, (2) money-or-property wire fraud and (3) securities fraud) is reversed, but the Supreme Court ordered the Fifth Circuit to review that issue again. In view of the fact that the Enron Task Force prosecution heavily relied on the honest services wire fraud charge in presenting its case to the jury against Skilling, my sense is that the Skilling team has the decidedly better argument that the prosecution's mistake in prosecuting him on that charge was not harmless error and that most or all of the rest of his conviction must be reversed.

Moreover, even though a majority of the Court ruled against Skilling on the issue of whether the trial court erred in not moving the trial away from Houston, Justice Sotomayor's lively dissent on that issue is the best part of the decision. Justice Sotomayor -- who is the most experienced trial judge on the Supreme Court at this time -- is clearly appalled at the trial court's screening of prospective jurors in the face of the overwhelmingly adverse media treatment of Skilling. Here are a few snippets [all citations to the record deleted]:

In concluding that the voir dire "adequately detect[ed]and defuse[d] juror bias," the Court downplays the extent of the community's antipathy toward Skilling and exaggerates the rigor of the jury selection process. The devastating impact of Enron's collapse and the relentless media coverage demanded exceptional care on the part of the District Court to ensure the seating of an impartial jury. While the procedures employed by the District Court might have been adequate in the typical high profile case, they did not suffice in the extraordinary circumstances of this case to safeguard Skilling's constitutional right to a fair trial before an impartial jury.[ .  .  .]

These deficiencies in the form and content of the voir dire questions contributed to a deeper problem: The District Court failed to make a sufficiently critical assessment of prospective jurors' assurances of impartiality. Although the Court insists otherwise, ante, at 26, the voir dire transcript indicates that the District Court essentially took jurors at their word when they promised to be fair. Indeed, the court declined to dismiss for cause any prospective juror who ultimately gave a clear assurance of impartiality, no matter how much equivocation preceded it.

Juror 29, for instance, wrote on her questionnaire that Skilling was "not an honest man." During questioning, she acknowledged having previously thought the defendants were guilty, and she disclosed that she lost $50,000 - $60,000 in her 401(k) as a result of Enron's collapse. But she ultimately agreed that she would be able to presume innocence. Noting that she "blame[d] Enron for the loss of her money" and appeared to have "unshakeable bias," Skilling's counsel challenged her for cause. The court, however, declined to remove her, stating that "she answered candidly she's going to have an open mind now" and "agree[ing] with the Government's assertion that we have to take her at her word/" As this Court has made plain, jurors' assurances of impartiality simply are not entitled to this sort of talismanic significance.   .   .  [.  .  .]

Indeed, the District Court's anemic questioning did little to dispel similar doubts about the impartiality of numerous other seated jurors and alternates. In my estimation, more than half of those seated made written and oral comments suggesting active antipathy toward the defendants. The majority thus misses the mark when it asserts that "Skilling's seated jurors . . . exhibited nothing like the display of bias shown in Irvin." 

Juror 10, for instance, reported on his written questionnaire that he knew several co-workers who owned Enron stock; that he personally may have owned Enron stock through a mutual fund; that he heard and read about the Enron cases from the "Houston Chronicle, all three Houston news channels, Fox news, talking with friends [and] co-workers, [and]Texas Lawyer Magazine"; that he believed Enron's collapse "was due to greed and mismanagement"; that "[i]f[Lay] did not know what was going on in his company, he was really a poor manager/leader"; and that the defendants were "suspect." During questioning, he said he "th[ought]" he could presume innocence and "believe[d]" he could put the Government to its proof, but he also acknowledged that he might have "some hesitancy" in telling people the government didn't prove its case.

[Footnote 21] The majority also notes that about two-thirds of the seated jurors and alternates (11 of 16) had no personal Enron connection. This means, of course, that five of the seated jurors and alternates did have connections to friends or colleagues who had lost jobs or money as a result of Enron's collapse -- a fact that does not strike me as particularly reassuring.

Meanwhile, the government's case against Skilling continues to look shaky in other respects. Largely overshadowed by the Supreme Court's decision is the fact that the Fifth Circuit's previous opinion invited Skilling to file a motion for new trial in the District Court based on issues of prosecutorial misconduct that Skilling raised after discovering the evidence after the trial. Specifically, the Fifth Circuit was particularly concerned about the failure of the Enron Task Force to comply with federal rules requiring the disclosure of exculpatory evidence to the defense from the Task Force's pre-trial interviews with main Skilling accuser and admitted felon, former Enron CFO Andrew Fastow.

Fastow testified at trial that he told Skilling about the Global Galactic agreement, which purportedly documented a series of illegal "side deals" between Fastow and former Enron chief accountant Richard Causey that guaranteed Fastow would not lose money on certain special purpose entities that he was managing. Skilling denied any knowledge of the purported agreement.

After Skilling's conviction, the Skilling defense team discovered Fastow interview notes that the Enron Task Force had failed to disclose to the Skilling team prior to trial. Among other things, those notes revealed that Fastow had told the Task Force lawyers that he didn't think he had told Skilling about the Global Galactic agreement. The Fifth Circuit characterized the Task Force's non-disclosure as "troubling" in inviting Skilling to file a motion for new trial with the District Court.

So, despite his resounding Supreme Court victory, Skilling's legal battles are not over. But slowly the truth about Enron and Skilling's role there is emerging from the cloud of prejudice under which he was tried, both in court and in the mainstream media.

The truth about Enron is that no massive conspiracy existed. In reality, Skilling and the late Ken Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation. Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst choppy post-bubble, post-9/11 conditions when the markets were spooked by revelations of the embezzlement of millions of dollars by Fastow and a few of his minions.

That Jeff Skilling did not predict that Enron would fail under those conditions does not make him a criminal. Unlike his main accusers Fastow and Ben Glisan, Skilling didn't embezzle a dime from Enron. Did he tirelessly advocate this highly-leveraged but innovative company that was dealing with difficult market conditions during 2001? You bet. But since when is it a crime for a CEO to be optimistic -- even overly-optimistic -- about his company?

Beyond the shattered lives and families, the real tragedy here is that the mainstream media's demonization of Skilling has distracted us from examining the tougher issues of what really caused Enron's demise and understanding the how such a company can be structured to survive in even the worst market conditions. It's a lot easier just to throw a good and decent man such as Jeff Skilling in jail and simply conclude that it was all his fault. But examining objectively what really occurred at Enron is far more likely to result in real justice.

Who knows? Such an approach might have even prepared us better to deal with this.

Posted by Tom at 12:01 AM | Comments (6) |

June 21, 2010

Visiting a prison cell

The troubling U.S. incarceration rate and the dubious governmental policy of overcriminalization have been frequent topics on this blog. The toll of the overcriminalization policy on citizens and their families is incalculable.

Part of the problem in modifying this destructive policy is that the constituency of current and former prisoners and their families is not powerful politically. But another aspect of the problem is that most well-meaning citizens who could make a difference on this issue politically have never experienced the hell that is most prisons in the United States. It�s human nature to avoid addressing even an important issue that one has never had to confront personally.

That�s why this A Public Defender post is important � it provides penetrating insight into the destructive nature of our government�s overcriminalization policy:

I sat in a prison cell yesterday.  .   .   .

There was a bed � a small bed � that was the length of the room. At the foot of the bed a metal toilet, with no cover. Just beyond that the heavy metal door, with a slit for a window. The door was maybe 3 feet wide, if that. At the head of the bed, if you were laying on your right side, you�d be about half a foot away from an ugly metal desk with holes that pretended to be drawers. This could not have been more than a foot long. The bed was flush with one wall. The desk with the opposite.

The bed looked hard, cold and dirty. And that�s it. This particular cell happened to have a window at the head of the bed. A window looking out onto nothing. Any future inhabitant of this particular cell would have it good. It was a single. Across the narrow passageway from this cell was another, identical in every respect except two: it was a double cell and there was no window. (Here�s a post I wrote a while ago about a different take on prisons in a foreign country.) [.  .  .]

I willed myself to stand there, though, for a minute. To look around at the bare walls, the bare desk, the dirty toilet and imagine someone �living� there.

I even briefly closed my eyes and tried to picture myself there, day in and day out, for months, which turned into years, which turned into decades.

Would I survive? How does anyone? Would I give up and stop bathing, shaving, eating? Would I maintain my sanity or would I quickly decompensate? How long would it be before I�d want to kill myself? [.  .  .]

People in cells are lucky, though. The next portion of the tour took me to the dorm-style housing. Which is nothing like any dorm you�ve ever lived in. Imagine instead the makeshift MASH hospitals, or perhaps the busiest train station in your neighborhood at rush hour, except instead of standing, people are milling about a hundred bunk beds on that tiny platform.

There is no privacy, there is no solitude, there is no being left alone. You are part of a large crowd. You are in someone�s face and they are in yours. You are a collective. Day in and day out. You share your bedroom with 125 other people.

Leaving the prison, I asked my colleague: cell or dorm? There�s no debate. Cell. I�d rather lose my sanity by myself.

A truly civilized society would find a better way.

Posted by Tom at 12:01 AM | Comments (3) |

May 24, 2010

The human cost of the criminalization of business

In the news and public relations business, Friday afternoon is a good time to float news that someone involved doesn't want many folks to notice. News tends to die over the weekend. Monday brings new news. Friday's news is already old.

This past Friday's news along those lines was that Joseph Cassano and other former American International Group executives involved in the AIG meltdown that almost brought the world's financial system to its knees would not be subjected to criminal prosecution.

Inasmuch as the same thing that happened to Enron in late 2001 happened to AIG in late 2008 (as I predicted it could happen in 2005), it's not particularly surprising that the federal government would like the news that it has elected not to pursue criminal charges against former AIG executives to die over the weekend news cycle. I mean, really. Other than acknowledging the randomness of the criminalization of business lottery, how could anyone rationalize the government's decision not to prosecute AIG executives, on one hand, with the government's brutal treatment of business executives involved in Enron-related business, on the other?

Well, some would say at least the government finally got the decision right in regard to the AIG executives. Better late than never, right? Cassano and the other AIG executives are still subject to multiple civil class action lawsuits in which the responsibility for AIG's meltdown will be allocated among all of the multiple parties involved. That's the way this type of thing should be handled, right?

Well, yes, except that all of the mainstream media reports that I read about the government's decision not to prosecute the AIG executives failed to mention that multiple business executives who did nothing other than be involved in transactions with AIG have already had their careers ruined and their lives uprooted by dubious criminal prosecutions.

Why weren't these men and their families spared the trauma of facing the brute force of a federal criminal prosecution and a prolonged prison sentence? Likewise, why were these men forced to endure the incalculable human cost of the government's criminalization-of-business policy?

Meanwhile, the human cost or that dubious policy continues to mount.

This past week, Joe Hirko, the former Enron Broadband executive who copped a plea bargain in the face of a draconian trial penalty, was visited by his wife Kathleen in the California prison where he is serving his sentence. During her visit, Mrs. Hirko was stricken by either a heart attack or stroke and died, leaving her husband, three children and four grandchildren to pick up the pieces of their lives. Unlike the news about the government's decision not to prosecute the AIG executives, Kathleen Hirko's tragic death did not even register a blip on the mainstream media's radar screen.

I wonder how much the past seven years of prosecutorial hell that the Hirko family endured contributed to Kathleen Hirko's death? And what beneficial public purpose did the infliction of that hell achieve?

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (9) |

May 19, 2010

So much for the presumption of innocence

This post from late last year noted this self-righteous NY Times Magazine piece  in which Andrew Meier decried the Russian government's unjust prosecution and treatment of former Yukos chairman, Mikhail Khodorkovsky.

Meanwhile, the Times and most of the rest of the mainstream media have largely ignored the United States Government's unconscionable treatment of R. Allen Stanford, who is still awaiting trial in downtown Houston's Federal Detention Center. Stanford's current legal team -- which includes Harvard Law professor Alan Dershowitz -- has filed another motion seeking Stanford's release, this time on Constitutional grounds.

The deprivation of due process and other Constitutional arguments contained in Stanford's latest motion are interesting, but what is even more compelling is the description of what the government has done to Stanford while he is presumed to be innocent of the charges asserted against him:

Mr. Stanford, a man who is presumed to be innocent, is being, and has been, subjected to substantial and undeniable punishment long before the trial of his case has even begun. He has been physically assaulted; he has suffered significant medical injury and psychological debilitation; he was held in solitary confinement two separate times for a total of 40 days; he has been subjected to 335 days of pretrial incarceration as of May 18, 2010; and before his scheduled trial concludes, he will predictably serve another nonspeculative 439 days.

Pivotally, he has, and will continue to have his constitutional rights compromised, including his fundamental right to assist counsel in the preparation of his defense, to personally review even a small fraction of the evidence that is material to his prosecution, to locate exculpatory evidence, and to have his core cognitive faculties undiminished by unnecessary conditions of confinement in a high-security prison which, in a myriad of ways .   .  . have prevented and will prevent him from preparing for trial.  .  .  . [T]he conditions of confinement to which Mr. Stanford has been subjected have been and continue to be manifestly punitive. [.  .  .]

On June 18, 2009, when Mr. Stanford surrendered to authorities, he was a healthy 59 year-old man, with no substantial physical or mental health issues. Now, nearly one year in detention later, Mr. Stanford's pretrial incarceration has reduced him to a wreck of a man: he has suffered potentially life-impairing illnesses; he has been so savagely beaten that he has lost all feeling in the right side of his face and has lost near field vision in his right eye. The major injuries from his assault while in prison required reconstructive surgery under general anesthesia and was performed while he was under restraint.

Rather than placed in medical isolation or the general population to recover, immediately post-operation, Mr. Stanford was placed in the maximum security Special Housing Unit ("SHU") area of the prison where he remained detained in solitary confinement for roughly 23 days, and denied all outside human contact with the exception of his attorneys; extreme measures which are generally reserved for only the most violent of convicted criminals.

Mr. Stanford has experienced, according to the Declarations attached hereto, a precipitate, severe, and ongoing deterioration of his mental and emotional health caused by the conditions of his confinement. Mr. Stanford has, moreover, been denied his Sixth Amendment right to counsel, to assist counsel in the preparation of his defense, and has been for the entire 335 days of his ongoing critical pretrial period deprived of the requisite confidentiality of his discussions with his attorneys by enforced institutional review of every document which his attorneys wished to discuss with him during their meetings.

Trial of this case is not scheduled to begin until January 24, 2011, and is expected to last six months, bringing the total, non-speculative, duration of pretrial detention to a minimum of 774 days; well over two full years without a determination that he is guilty of any crime.

And just to make sure that Stanford will never be of any meaningful assistance to his defense counsel, get a load of the routine that Stanford faces each day of his expected six-month trial if he continues to be incarcerated during the trial:

Mr. Stanford's inability to assist counsel during trial will be magnified by the reality of the system for bringing detained defendants to court, which forces defendants to undergo procedures which result in elapsed time of 14-17 hours between wake-up in the morning and return to cell in the evening. The physically and mentally exhausting and degrading procedures which Mr. Stanford would be forced to endure day in and day out during the six month trial if he remains incarcerated -- procedures which leave insufficient time for sleep and virtually no time for additional preparation -- are roughly as follows:

The inmates are awakened at around 4:00 to 4:30 AM. A body search is done before leaving the cell.

They are then taken to a receiving area where they have to strip naked, go through another body search, and then given a set of green clothes.

The inmates are then placed in a concrete holding cell where they may sit for 2 to 3 hours. GEO guards come into the holding cell where they shackle the inmates' hands to a chain around their waist and shackle the ankles.

After they are shackled, the inmates are taken down to the first floor and placed in a van. After about a 30 minute wait, they are driven to the U.S. Marshal's office at the Federal Courthouse.

The inmates are then searched by the U.S. Marshals and placed in a steel cell where they wait until they are called and taken to their hearing. Mr. Stanford stated that he goes to the hearing with his shackles in place.

After the hearing, the inmates are taken back to the steel holding cell and they remain there until everyone is done with their hearing.

By the time all the hearings are done it can be anywhere from 5:00 to 7:00 PM. At that time, the inmates are taken to the van and driven back to the FDC.

At the FDC, the inmates strip naked, undergo a body search, and change back into their regular jail garb.

The inmates remain in the holding cell while a counselor spends 5 minutes with each inmate asking what happened at their hearing, whether they feel suicidal, etc. After everyone is interviewed, the inmates are taken back to their cells somewhere around 7:00 to 9:30 PM.

For years, we watched as an out-of-control federal task force - egged on by a vacuous media members - rode roughshod over local citizens' Constitutional protections. Now, before our eyes, the presumption of innocence has been eviscerated in the Stanford case with nary a peep of protest other than from Stanford's attorneys and a few bloggers.

"When the last law was down, and the Devil turned 'round on you, where would you hide, the laws all being flat? .  .  .[D]o you really thing you could stand upright in the winds that would blow then?"

Posted by Tom at 12:01 AM | Comments (4) |

May 15, 2010

Robert Furst's nightmare ends

So, after seven years, the Department of Justice finally rolled over with nary a whimper and agreed to end the absurdly unjust prosecution of former Merrill Lynch banker Robert Furst. As usual, the deal to dismiss all charges against Furst will receive a small fraction of the publicity that the mainstream media trumpeted for his tainted conviction. The deferred prosecution agreement is below.

Although surely a relief, the agreement must be bittersweet for Furst. His business career is badly damaged and has been effectively put on hold for the better part of a decade. And for what purpose?

That�s the question that we should be asking as we get ready for yet another round of the same type of senseless prosecutions than ensnared Furst.

UH Law Professor Geraldine Szott Moohr reminded us this week in the context of Jeff Skilling's pending Supreme Court appeal of the foreboding nature of the government's overwhelming prosecutorial power. As Sir Thomas More teaches us, "when the last law was down, and the Devil turned 'round on you, where would you hide, the laws all being flat? . . . do you really thing you could stand upright in the winds that would blow then?"

A truly civil society would find a better way.

Posted by Tom at 12:00 AM | Comments (7) |

May 5, 2010

The beneficial nature of derivatives

I don't watch much television news. But when I catch a glimpse these days, it always seems as if some politician is loudly declaring the need for more governmental financial regulation.

Mostly, the politicos contend that financial derivatives are dangerous instruments that are contrary to sound public policy. We have to protect those poor souls who bet against John Paulson, don't you see?

But the proponents of this view simply do not want to understand the nature of derivatives, just as most of the same ones didn't want to understand the valuable nature of the risk management of natural gas prices that Ken Lay and Jeff Skilling contributed to markets 20 years ago.

Derivatives are simply a way for an investor to warn by trading - that is, by putting his money where his mouth is - that he has information about an upcoming shift in the markets. That facilitates a transparent and well-informed marketplace.

However, heavily regulating traders from taking advantage of that valuable source of information only makes it more difficult for valuable information about market shifts to reach the marketplace. How is that good for investors seeking as transparent and well-informed marketplace as possible?

An underappreciated cause of the Wall Street crisis was the underlying information failure. As opposed to restricting trading, we ought to be finding ways to bring more information to the market faster so that prices can be adjusted promptly. Rather than demonizing folks who bet their money in bringing information to the marketplace, we ought to be encouraging them.

I won't hold my breath waiting for that to happen.

Posted by Tom at 12:01 AM | Comments (2) |

May 3, 2010

The next victim of the criminalization-of-business lottery?

Although it really shouldn't have surprised anyone, the big business news at the end of last week was the the Department of Justice had opened up a criminal probe of Goldman Sachs well before the filing of the SEC's lawsuit a couple of weeks ago.

Craig Pirrong provides his typically lucid perspective toward the news, while the Epicurean Dealmaker insightfully notes a dynamic involved in the growing cascade against Goldman Sachs that should concern us all. Interestingly, that dynamic is the same one that was involved in the prosecution to death of former Enron chairman, Ken Lay.

Frankly, after almost a decade of misdirected prosecutions of businesspeople, it's confounding that many citizens believe that a prosecution of Goldman Sachs would serve any useful public interest.

It is indisputable that government cannot possibly discover or prosecute all business fraud. But government policies that purport to prevent fraud by prosecuting simply prompt private parties to be less careful in detecting or avoiding fraud in the first place.

Moreover, the utter randomness of the criminalization-of-business policy undermines the public's respect for the rule of law. For example, who can possibly keep up with all the rules that government has invoked in determining whether an important businessperson gets prosecuted for a supposed business crime?

First, there was the Apple Rule, which was quickly followed by the Dell Rule.

Then there was the Buffett Rule, closely followed by the GM Rule.

And who could forget the Geithner Rule?

Frankly, the rule of law has been replaced by what Larry Ribstein has coined the criminalization-of-business lottery where winning or losing becomes random.

For instance, the owners of Long Term Capital Management may have been the earliest winners in the most recent era. On the other hand, Jamie Olis may have been the earliest big loser.

Martha Stewart lost, but at least never lost her business enterprise. Frank Quattrone also lost, but then he won, although I suspect that he believes that he lost overall.

Subsequently, Theodore Sihpol won while Bill Fuhs and his family lost a year of his life before he won, too. But he and his family will never get that year back.

And no one lost bigger than Jeff Skilling.

Meanwhile, although mainstream media darlings Steve Jobs and Warren Buffett won, several of Buffett's associates did not fare as well. Neither did Greg Reyes.

And who knows about those Lehman Brothers executives -- they may be winners, after all? I mean, everyone was doing it, right? But you never know for sure.

Finally, who possibly can justify what Bill Furst has been through?

Just as with a gambling lottery, there is no rhyme or reason as to who wins or loses in the criminalization-of-business lottery. But in this lottery -- which does little or nothing to deter the true business criminals of the world -- the losers and their families give up much more than merely money.

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (1) |

April 19, 2010

Goldman in the crosshairs

The inevitable SEC action against Goldman Sachs took the financial system by storm on Friday, so the weekend has been a feast of blogosphere analysis on the implications of the lawsuit. The best way to follow daily developments in the case is over at Clusterstock where Joe Weisenthal and Henry Blodget have their fingers on the blogosphere�s pulse in regard to the SEC lawsuit.

The best analysis of the lawsuit that I�ve read in the blogosphere to date comes from Larry Ribstein, Erik Gerding and UH�s Craig Pirrong. Read their posts and you will have a good understanding of the issues involved in the case.

Frankly, the SEC action against Goldman looks a lot more about public relations than effective regulation. As Blodget pointed out on Friday morning, the timing of the filing pushed the highly embarrassing SEC Inspector�s report on the SEC�s bungling of the investigation into Stanford Financial off the public�s radar screen. One would hope that the SEC�s due diligence in regard to its action against Goldman is better than its research into Stanford Financial, which was widely known in Houston financial and legal circles to be a sketchy outfit for over a decade before it blew up last year.

The key to the SEC's case is that Goldman apparently did not disclose to ACA nor IKB and ABN knew that uber-mortgage short specialist John Paulson was placing bets against the underlying securities upon which the synthetic CDO was based at the same time as Paulson was helping Goldman and ACA choose the underlying securities.

Thus, the theory goes, Paulson presumably had an incentive to enhance the failure of the securities. Accordingly, the SEC contends that Goldman and Paulson structured the deal to lose, that Goldman knew the investors wouldn't buy if they knew that, and that Goldman didn't disclose those details because it was making fees all over the place.

My sense is that the case is far from a slam dunk (see also here and here) for the SEC, but it probably doesn't make any difference. If Goldman defends itself and loses, then the trial penalty is that private civil lawsuits by other investors will use the judgment in favor of the SEC to establish liability against Goldman (interestingly, Goldman elected not to disclose its receipt of the Wells Notices related to the SEC lawsuit). Although Goldman could manage the payment of an SEC fine, damages in those civil lawsuits could seriously harm the firm.

Thus, my sense is that Goldman has to settle with the SEC, and probably for a good chunk of change to make the SEC look good. That will likely suit Goldman just fine because it would continue to distract the public from the far larger travesty, which was the way in which the federal government bailed Goldman out from its massive risk of loss in regard to AIG.

From a policy standpoint, the SEC action is a part of the Obama Administration's public relations campaign to promote federal regulation of the derivatives markets, a point that Professor Ribstein makes in this post:

In other words, the SEC, under pressure to come up with something on the eve of Congress's final push toward financial regulation comes with a case that the complaint makes clear is much more about the creation of systemic risk than about securities fraud.

This reflects, in part, the new Wall Street, more than three quarters of a century after the securities laws were enacted. Financial regulation is now much more about sophisticated market intermediaries than about individual investors who need somebody to ensure they have the truth about securities.

This is not to say that securities fraud is irrelevant. However, the SEC has struggled on that front � the Bank of America settlement, Madoff, Stanford.

And so now we are left with . . . Goldman.

Inasmuch as such regulation will allow federal regulators to exercise the same judgment in regard to derivatives regulation that it applied to regulating the likes of Stanford Financial and Bernie Madoff, count me as decidedly unconvinced that this development constitutes progress.

However, one positive aspect about the SEC�s complaint is that it provides a stark reminder to investors of the risk of doing business with the likes of Goldman. As Arnold Kling has been saying for years, perhaps it wouldn�t be such a bad thing if investors didn�t rely so much on the chauffered investment bankers of Wall Street and their friends in government.

Posted by Tom at 12:01 AM | Comments (1) |

April 8, 2010

Good bye and good riddance

Do New York Times reporters even bother to research the subject of their articles at all?

Take this A.G Sulzberger/NY Times puff piece on the departure of current U.S. Attorney for the Southern District of New York, Benton J. Campbell.

You may remember Campbell. He was the lead prosecutor on the Enron-related criminal trial known in these parts as the first Enron Broadband trial, which ended in an embarrassing loss for Enron Task Force after the prosecution was caught threatening defense witnesses (see also here) and propounding false testimony from one of its key witnesses. Sort of what you would expect from a trial in which the Task Force advocated an unwarranted expansion of a criminal law intended to punish kickbacks and bribes against business executives who didn�t take any.

Then, as if that wasn�t enough, Campbell proceeded to lead the prosecution (unsuccessfully, thank goodness) that attempted to make refusing to throw in the towel a crime. Given that he decided to become a prosecutor while watching Rudolph W. Guiliani, who could be surprised by such appalling lack of judgment?

Sort of makes one wonder just how much unwarranted destruction of lives one has to be involved in before the Times notices?

Posted by Tom at 12:01 AM | Comments (1) |

March 30, 2010

The criminalization-of-business lottery continues

So, after having been tried and convicted once in 2007, and having that conviction subsequently overturned because of prosecutorial misconduct, former Brocade Communications CEO executive Greg Reyes was convicted again last week on nine counts of securities fraud and making false statements in connection with his involvement in backdating stock options.

Alas, the criminalization-of-business lottery continues in regard to another business practice that simply should not be a crime. Frankly, Reyes� real crime appears to be that he is not Steve Jobs.

Unfortunately, the publicity surrounding this recent disclosure � which took place during Reyes� trial � probably didn�t help Reyes much.

It probably won�t help Robert Furst, either, who is the next unlucky executive who will be put on the merry-go-round of an utterly baseless and random prosecution.

Meanwhile, the different trajectories of these two lives really makes one wonder about the purpose of all this?

Back in 2006, Larry Ribstein was the first blogger to challenge the backdating prosecutions. The utter vacuity of those prosecutions proved that his skepticism was correct. I cannot improve upon Professor Ribstein�s characterization of the true scandal relating to the backdating of stock options:

�The real backdating scandal is not the one that has been generally reported. It is, instead, the woeful inadequacy of mainstream business reporting compounded by prosecutorial misconduct.�

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (0) |

March 16, 2010

My Lehman Bullshit

Mike over at the Crime and Federalism blog (a good blog, by the way) thinks my explanation yesterday of Lehman Brothers� controversial repo 105 transactions is bullshit.

Well, I�m as full of bullshit as anyone, but my sense is that Mike�s analysis is flawed. That�s not to say that the folks involved in reporting Lehman�s earnings to the marketplace after those repo 105 transactions didn�t commit fraud. I don�t know enough about the facts to know one way or the other.

The main point of my post is that a whole bunch of of executives, accountants, auditors, counterparties and governmental officials were swirling around Lehman at the time of these repo 105 transactions. As a result, the responsibility for any fraud is better allocated among the responsible parties in the civil justice system than in the criminal justice system, where guilt is adjudicated with a sledgehammer when a scalpel is more appropriate.

But one of the interesting aspects about Mike�s post is that he is very sure that he understands that Lehman committed fraud. So, let�s take a look at his example of what he thinks happened with regard to Lehman and the repo 105 transactions (my observations are in italics below each of his statements):

I ask you to invest $100,000 in my new business. You ask me how much money I have in my business account. I only have $5,000, but do not tell you this.

Okay, as my prior post noted, I concede that Lehman may have misrepresented its true liquidity position through the repo 105 deals.

I can sell everything the business owns (including all of our inventory) to a pawn shop for $100,000.

If Mike can sell all the assets of the business to a pawn shop for $100,000, then the business owns much more than $100,000 in assets. Pawn shops - much like the financial institutions with whom Lehman was dealing � do not engage in repo 105 transactions unless they are darn sure that they can liquidate the assets that they purchase for more than they paid if the seller breaches his obligation to repurchase the assets.

The pawn shop will sell me everything back for $105,000 if I come up with the money within 48 hours.  They won't even take possession of the property if I pay them within 48 hours.

I do not know of any pawn shop � or financial institution for that matter � that would be willing to leave property that they purchased in the hands of a financially-troubled seller, even for just 48 hours. Moreover, my understanding of the repo 105 transactions is that Lehman was not obligated to repurchase the asset for the sale price plus 5%. My understanding is that the �105� in repo 105 relates to the fact that financial institutions require property at least worth 105% of the purchase price that the financial institution pays the seller for the asset. I�m sure that Lehman�s counterparties required a steep fee for engaging in the repo 105 sales, but not 5% of the purchase price.

I make the "sale" to the pawn shop. I show you a copy of my bank statement. You can see that I have $105,000 cash in my bank account. I'm, in other words, liquid 100 grand. You loan me $100,000.

Here is where Mike is confused. Prior to taking the $100,000 loan, his company�s balance sheet actually looks a bit worse because of his sale to the pawn shop. The company has sold assets worth more than $100,000 in order to increase its liquidity to $105,000. No rational investor would make a $100,000 unsecured loan to a company with assets of only $105,000 cash that the investor would not have been willing to make when the company had $5,000 cash and over a $100,000 in non-liquid assets. But , let�s play along with Mike to get to his main point. After the loan, his company now has $205,000 in cash with a $100,000 liability.

I buy my stuff back for $105,000. I now have, thanks to you and some quick accounting fraud, $95,000.

No, that�s only part of it. The company now has repurchased its assets that are worth over $100,000, it has cash of $100,000 and a $100,000 liability. So, the company�s balance sheet is pretty much the same had the investor made his loan when the company only had $5,000 cash and over $100,000 of non-liquid assets. The only difference is that the investor feels deceived because he would not have made the loan under those circumstances.

So, maybe Mike�s investor in the example above has a good fraud case against the company (I�m not sure that�s the best way for the investor to recover his loan, but that�s another issue). But maybe not, too. And the situation that Lehman faced was far more complex than Mike�s hypothetical and involved a large number of well-intentioned people who were attempting to find any loophole available to save Lehman.

And that�s no bullshit.

Posted by Tom at 12:01 AM | Comments (0) |

March 15, 2010

The Enronization of Lehman Brothers

The big news in the business world at the end of last week and over the weekend was the publication of the examiner's report in the Lehman Brothers bankruptcy case.

The mainstream media jumped all over the report as a precursor to criminal indictments of former Lehman executives because of allegations in the report (that's all they are at this point) that Lehman used repo 105 transactions at the end of several quarters to make its balance sheet look more attractive than it really was. Fancy that, executives trying to stem a run on a trust-based business!

Despite the gathering MSM lynch mob, the truth is that the examiner's report is shaky grounds, at best, for criminal indictments against former Lehman executives. As folks who are experienced in bankruptcy realize -- but those who aren't don't -- an examiner's report is hardly an objective analysis of a debtor's affairs. Bankruptcy examiners are highly incentivized to recommend as many legal actions against the debtor's insiders and counterparties as possible. The fruits of those legal actions inure to the benefit of the bankruptcy debtor's creditors, which is really the only constituency in most bankruptcy cases that really can effectively challenge an examiner's compensation. As a result, feather nesting is not an unusual tactic of bankruptcy examiners.

Moreover, examiner's reports in bankruptcy cases are far from dispositive. I haven't read the Lehman examiner's report yet, but I'm skeptical of the MSM's initial rave reviews. The Enron examiner's report met with similar early favorable reaction, but it turned out to be chock full of plain factual errors and dubious conclusions based on those errors.

For example, the MSM's reporting of the examiner's conclusions regarding the timing of the repo 105 transactions doesn't make sense to me. As I understand those transactions, they improved Lehman's balance sheet by increasing its liquidity position at the end of several quarters through converting non-liquid assets to cash. When Lehman repurchased the assets after the date of the financial statement, the balance sheet didn't change much except for showing less liquidity because the repurchased asset - which went back on the balance sheet after the repurchase - was probably worth more than the liquidity used to repurchase it (I seriously doubt that the sharpies who were dealing with Lehman as it was going down in flames were consenting to using Lehman's trash assets in the repo deals).

At any rate, Peter Henning and Larry Ribstein have both done a good job of analyzing the main problem facing the Lehman insiders from a criminal standpoint. It is different and potentially more troublesome than the honest services wire fraud theory that was the basis of most Enron-related prosecutions. That is, the Lehman executives are subject to the provisions in the Sarbanes-Oxley legislation enacted after Enron's bankruptcy that impose criminal liability on executives who falsely certify the (i) accuracy of the financial statements and (ii) absence of deficiencies in internal controls regarding the preparation of the financial statements.

By the way, although Henning's analysis is quite good, his analogy of the repo 105 transactions to the Nigerian Barge transaction in the Enron-related criminal prosecutions is a stretch. The Nigerian Barge transaction was a relatively small deal in which Enron -- about an $80 billion market cap company at the time -- sold its interest in the Nigerian barges to Merrill Lynch to make a $12 million profit at the end of the particular quarter. On the other hand, the examiner alleges that Lehman was using repo 105 transactions to raise $35 - $50 billion of liquidity at the end of several quarters. Big difference.

Also, flying beneath the radar (as usual) is current Treasury Secretary Timothy Geithner and former Treasury Secretary Hank Paulson's role in all of this. As closely as Geithner (as head of the New York Federal Reserve) and Paulson (as Treasury Secretary) were monitoring Lehman during much of this time, it strains credulity that Geithner and Paulson didn't have at least some idea of what Lehman was doing to make its balance sheet as attractive as possible. Both Geithner and Paulson were intimately involved in attempting to broker a Bear Stearns-type bailout of Lehman.

So, if Geithner and Paulson knew what was going on, then how on earth is the federal government going to single out Richard Fuld and other former Lehman executives for criminal conduct?

Which brings us to the real lesson of all this -- that is, the inherently fragile nature of a trust-based business (related posts here) and the misguided nature of the notion that more governmental regulation will somehow protect investors from the next bust of such a business.

Larry Ribstein has been insightfully pointing out for years that more regulation of those businesses will not prevent the next meltdown, just as the more stringent regulations added under Sarbanes-Oxley after Enron's collapse did not prevent Lehman Brothers from failing. More responsive forms of business ownership certainly are a hedge to the inherent risk of investment in a trust-based business. But also helpful would be better investor understanding of the wisdom of hedging that risk and the importance of short sellers in providing information on troubled companies to the marketplace.

And as for criminal prosecutions? Unless there is evidence beyond a reasonable doubt of a crime, far better to allow the civil justice system allocate responsibility for Lehman's failure among the multitude of potentially responsible parties. Professor Ribstein nails this point in the final paragraph of his post:

The lesson here is that pursuing high-profile criminal prosecutions in Lehman after the problems with such prosecutions in these situations proved so manifest in Enron would prove that after a decade of hugely costly trials and a massive new law that was supposed to change everything, we still haven't learned a thing about the unsuitability of criminal liability for these kinds of cases.

Finally, Lawrence Kudlow and John Carney have an excellent seven-minute discussion below of the failure of governmental regulation in regard to Lehman:

Posted by Tom at 12:01 AM | Comments (4) |

March 12, 2010

Exposing the myth of American exceptionalism

Conrad Black�s prison routine allows him time to think and write, which is a good thing in view of the enormous waste that results from his dubious imprisonment.

This week Lord Black takes aim at the myth of American exceptionalism promoted in this recent Richard Lowry and Ramesh Ponnurus essay (Walter McDougall has examined the origins of this myth in detail in the first two books of his fine three-part series on American history). In challenging the myth, Lord Black takes dead aim at a common topic on this blog � the overcriminalization of American life:

The wages of this [Cold War] victory have included the stale-dating of the authors� claim that America �is freer, more individualistic, more democratic, and more open and dynamic than any other nation on earth.� It is more dynamic because of its size, the torpor of Europe and Japan, and the shambles of Russia.

But Americans do not do themselves a favor by not recognizing the terrible erosion of their country�s education, justice, and political systems, the shortcomings of U.S. health care, the collapse of its financial industry, the flight of most of its manufacturing, and the steep and generally unlamented decline of its prestige.

.   .    .   Rampaging and often lawless prosecutors win 95 percent of their cases (compared to 55 percent in Canada), by softening the pursuit of some in exchange for inculpatory perjury against others, in the plea-bargain system. The U.S. has six to fourteen times as many imprisoned people as other advanced prosperous democracies, and they languish in a corrupt carceral system that retains as many people as possible for as long as possible. There are an astounding 47 million Americans with a �record,� and the country glories with unseemly glee in the joys of the death penalty. Due process and the other guarantees of individual rights of the Fifth, Sixth, and Eighth Amendments (such as the grand jury as any sort of assurance against capricious prosecution) scarcely exist in practice.

Most of the Congress is an infestation of paid-for legislators from rotten boroughs, representing the interests that finance their elections and exchanging earmarks with their colleagues like casbah hucksters.  .   .   .

Lord Black can sure still turn a phrase -- �casbah hucksters.� Ha!

Posted by Tom at 12:01 AM | Comments (9) |

February 23, 2010

Gearing up for the Skilling SCOTUS argument

Oral argument on Jeff Skilling's appeal of his criminal conviction to the United States Supreme Court is next Monday afternoon, so the Skilling legal team warmed up for the occasion by filing the brief below in response to the Department of Justice's brief on the merits.

If you want to read the entire brief, then I recommend downloading it so that you will be have the version bookmarked in Adobe Acrobat that facilitates review.

As noted in the previous post on the DOJ's brief, the DOJ's case against Skilling has shrunk considerably, which is highlighted by the following Skilling reply brief passage on the DOJ's tepid defense of Skilling's conviction for honest services wire fraud under 18 U.S.C. 1346:

The Government's application of its proposed self-dealing category to Skilling's case demonstrates the continued manipulability of the statute under the Government's approach. In Black and Weyhrauch, the Government expressed the view that 1346 prohibits only bribes/kickbacks and self dealing, and that the latter category is implicated only when conflicting financial interests are "undisclosed." [references omitted]. That statement suggested that the Government would concede that Skilling did not commit honest-services fraud, because Skilling's only alleged personal financial interests arose from Enron's linking of his compensation to Enron's stock value, an interest that was fully disclosed.

But the Government nevertheless argues that Skilling committed honest-services fraud. To bring Skilling's case within the statute's compass, the Government creates a third category of honest services fraud, one that involves disclosed personal financial interests. The Government's cursory explanation of Skilling's honest-services liability (GB50) is hardly clear, but it appears to contend that while Skilling's "personal financial interests" were disclosed and generally aligned with Enron's interests, he put those interests in conflict when he took actions pursuant to his own disclosed compensation interest that were allegedly contrary to Enron's.

Accordingly, in this new category, what the defendant apparently fails to disclose is his scheme to put his own compensation interests ahead of his employer's distinct interests. Not only is that standard itself vague on its own terms, but the Government's repeated acknowledgement that Skilling's case has no precedent in pre-McNally case law (GB17, 49) confirms that this special crime is its own new category, created for the first time in the Government's brief in this Court.

It is time for prosecutors to stop making up crimes under this statute. If 1346 is not invalidated altogether, it should be limited to the single category of conduct universally recognized in the case law and hence largely immune from manipulation quid pro quo bribes and kickbacks.

Stated simply, the Enron Task Force prosecuted Skilling for business judgments that he made that turned out badly for Enron viewed through the clarity of hindsight bias. But Skilling didn't steal a dime from Enron and never took a kickback or a bribe. Those latter acts are crimes. Taking business risks that turn out badly is not.

At a time in which the U.S. economy desperately needs risk-takers to generate jobs and create wealth, here's hoping that the Supreme Court understands the difference.

Posted by Tom at 12:01 AM | Comments (3) |

January 29, 2010

Tales of Two Lives

Wednesday�s Congressional testimony of Treasury Secretary Timothy Geithner and the Department of Justice�s incredible shrinking case against former Enron CEO Jeff Skilling got me to thinking.

Geithner has made his share of dubious decisions over the past several years. I think he was wrong not to allow the markets to allocate the risk that many financial institutions took, particularly in regard to American Insurance Group. As a result of these decisions, I don�t think he should be the Secretary of the Treasury.

But I do not think it is fair to question that Geithner honestly believed that the actions he took were necessary to save the U.S. and world financial systems from chaos. You, like me, may not believe he was right about that, but there is little question that he honestly believed that he was mitigating the risk of a financial tsunami.

Turning to Skilling, the DOJ�s case against Skilling now boils down to several alleged misrepresentations that Skilling approved regarding a couple of financially-troubled divisions of Enron. But the overwhelming evidence at trial was that Skilling truly believed that the statements he approved regarding those divisions were accurate.

For example, one of those divisions � Enron Broadband � was attempting to develop and deliver the video-on-demand service that is now a popular and profitable product of digital television and such gadgets as Apple's iPod. These systems are a creative accommodation to copyrighted music and video programming that has generated enormous wealth for artists and shareholders of companies in the business.

Skilling testified at trial about his optimism regarding Broadband:

�And one last thing -- I'll make the last one argument for Broadband because people criticize me about Broadband, and I will take the criticism. We -- certainly, we made a mistake. But it wasn't big. I mean, it was a billion dollars. We invested a billion dollars in the Broadband business. If it had worked, it could have been worth $30 billion. It didn't work. We lost a billion dollars, but if you can make those kinds of bets, that's the kind of the risk you [should be taking] as a corporation. And if you do a lot of [deals with a] downside of a billion and upside of 30 [billion], you're doing a good job for your shareholders in the long run, in my opinion. This one didn't work.�

Given the current value of video-on-demand technology, Skilling's valuation of Enron's Broadband business opportunity was probably low. But regardless of the wisdom of Enron�s timing in investing in that technology, there is little question that Skilling honestly believed that Enron Broadband could generate enormous wealth for Enron�s shareholders.

Geithner will probably leave the Treasury soon and return to a Wall Street firm to make his fortune. Skilling lost his fortune and remains in a Colorado prison, where he is enduring a 24-year prison sentence.

I submit that no rational basis exists for the radically different futures of these two men.

Posted by Tom at 12:01 AM | Comments (2) |

January 28, 2010

The DOJ’s Merits Brief in the Skilling Appeal

On the heels of last month�s filing with the U.S. Supreme Court of Jeff Skilling�s brief on the merits of his appeal to the U.S. Supreme Court, the Department of Justice filed its brief on the merits of Skilling�s appeal earlier this week.

A copy of the brief is below, but I recommend downloading it so that you will have the version bookmarked in Adobe Acrobat that facilitates review of the brief.

The DOJ�s brief is surprising in a couple of key respects.

First, the DOJ�s case against Skilling has shrunk dramatically. The DOJ now bases its entire case on Skilling�s involvement in alleged misrepresentations that were made to the market regarding two Enron divisions, Enron Broadband Services and Enron Energy Services. Nothing in regard to the dubious Nigerian Barge transaction. No mention of the theory that Enron�s earnings were lagging in 1999 and that�s why the reason why Skilling supposedly had former CFO Andrew Fastow engineer the allegedly corrupt LJM special purpose entity. Heck, there is not even a mention of the supposedly key Global Galactic Agreement. I mean really � is the DOJ even talking about the same case that it tried?

Stated simply, has the DOJ�s entire case against Skilling now been reduced to his optimistic statements about those two divisions?

The other surprising aspect of the brief is the DOJ�s apparent surrender on the lack of private gain issue in regard to Skilling�s conviction on honest services wire fraud. Check out this reasoning from p. 50 of the brief:

Petitioner had, and acted upon, his personal financial interests, which conflicted with those of the shareholders to whom he owed a fiduciary duty. The company and its shareholders attempted to align their long-term interests with petitioner�s by linking his compensation to stock price. But the obvious premise of that arrangement was that petitioner would act to maximize shareholder wealth. Petitioner subverted that premise, and placed his interests in conflict with that of the shareholders,when, for his own financial benefit, he engaged in an undisclosed scheme to artificially inflate the stock�s price by deceiving the shareholders and others about the company�s true financial condition. That conduct constituted fraud. The only question here is whether the public nature of petitioner�s compensation scheme prevents his conduct from constituting honest services fraud. It does not. Although petitioner�s basic compensation scheme was public, his scheme to artificially inflate the company�s stock price by misrepresenting its financial condition, in order to derive additional personal benefits at the expense of shareholders, was not. Petitioner�s deception deprived shareholders of the information they needed to make informed decisions and thereby defrauded them of his honest services.

So, what about the shareholders who sold stock at the allegedly inflated price resulting from Skilling�s supposed deceptions? Did Skilling defraud them, too? If so, I can think of quite a few investors who wouldn�t mind being defrauded like that.

And what about Skilling himself, who continued to acquire large amounts of Enron stock right up to the time he resigned from the company several months before its collapse. Did Skilling�s alleged �deception deprive [Skilling] of the information [he] needed to make informed decisions and thereby defrauded [himself] of his honest services.�

I�ll bet that reasoning will raise a few questions during oral argument, which is currently scheduled for the afternoon of March 1st.

DOJ Merits Brief in Skilling Appeal

Posted by Tom at 12:01 AM | Comments (1) |

January 21, 2010

We sure have progressed, haven’t we?

Larry Ribstein points us to the abstract of a new Peter Leeson paper, Ordeals:

For 400 years the most sophisticated persons in Europe decided difficult criminal cases by asking the defendant to thrust his arm into a cauldron of boiling water and fish out a ring. If his arm was unharmed, he was exonerated. If not, he was convicted. Alternatively, a priest dunked the defendant in a pool. Sinking proved his innocence; floating proved his guilt. People called these trials ordeals.

No one alive today believes ordeals were a good way to decide defendants' guilt. But maybe they should. This paper investigates the law and economics of ordeals. I argue that ordeals accurately assigned accused criminals' guilt and innocence. They did this by leveraging a medieval superstition called iudicium Dei. According to this superstition, God condemned the guilty and exonerated the innocent through clergy conducted physical tests.

It sure is comforting to know that we sophisticated modern folk no longer believe that such ordeals are a good way to decide the guilt of a defendant.

On the other hand .   .   .

Posted by Tom at 12:01 AM | Comments (0) |

January 20, 2010

The growing threat of prosecutorial power

A frequent topic on this blog is the overcriminalization of American life, particularly in regard to taking business risks that create jobs for communities and wealth for citizens.

One of the most lucid writers on this disturbing trend is William Anderson (prior posts here), an economics professor at Frostburg State in Maryland. In this recent Regulation magazine article for the Cato Institute, Professor Anderson provides an excellent overview of how the federal government has gradually imposed police state-type laws on us that allow prosecutors to target citizens for a criminal case and then rationalize a crime from any number of vague criminal statutes:

The numbers tell a harsh story. In 1980, there were about 1,500 federal prosecutors and approximately 20,000 federal prisoners. Today, there are more than 7,500 U.S. attorneys and more than 200,000 federal prisoners, according to an October 2009 count. About 52 percent of federal prisoners are drug offenders, reflecting the emphasis of the �War on Drugs,� and while there is no specific �white collar� crime category, one estimates, using Federal Bureau of Prisons statistics, that about 5 to 10 percent of the federal prison population consists of people convicted of white collar crimes.

The federal criminal code is growing. In the early days of the republic, there were three federal crimes: piracy, treason, and counterfeiting. Today, there are more than 4,000 federal criminal laws and more than 10,000 regulations that prosecutors easily can fold into the criminal statutes.  .   .  .

In surveying this sad state of affairs, Anderson notes one of the perverse incentives driving these dubious prosecutions:

The resulting near-free reign that prosecutors have in federal court is an open invitation to abuse of the law and the legal system. To make matters worse, federal prosecutors enjoy almost total legal immunity and are unlikely to face any sanctions no matter how dishonest or abusive their behavior might be; the rules that apply to everyone else do not apply to U.S. attorneys. [.  .  .]

The only thing that stands between almost any American and doing a stretch in federal prison is the choice of whom prosecutors will target. This is a serious problem that shows no signs of disappearing.

The fact that one such prosecutor in Massachusetts was even seriously considered by many in that state for a position in the U.S. Senate reflects that citizens still have not grasped the extent of this awful trend in American society.

It makes one wonder what it�s going to take for Americans to stand up and put a stop to this?

Posted by Tom at 12:01 AM | Comments (0) |

January 18, 2010

So, you want to be a big-firm deal lawyer?

Continuing to fly well beneath the radar screen -- probably because lawyers don't want to talk about it except in hushed tones -- is the seven-year prison sentence that former Mayer Brown partner Joseph P. Collins was handed late last week.

As this earlier post explains in detail, Collins was the former outside deal lawyer for Refco, Inc., which unraveled back in 2005 under the weight of public disclosure of a series of insider transactions that were apparently designed to hide millions in liabilities from customers and investors.

As the earlier post notes and as the Memorandum of Law in support of a new trial for Collins explains, whether Collins even knew about the allegedly fraudulent nature of the transactions is highly questionable and whether he hid those transactions from anyone is even more dubious. But that hardly matters in this era of "let's hammer the white-collar defendant."

Meanwhile, Collins' family will be deprived of the presence of their father for seven years.

What is it going to take for this madness to stop? A truly civilized society would find a better way.

Memorandum of Law in Support of New Trial for former Refco, Inc outside counsel, Joseph P. Collins

Posted by Tom at 12:01 AM | Comments (0) |

January 15, 2010

One step forward, a big step back

Well, so finally the Department of Justice did the right thing and dismissed the remaining criminal charges against former Merrill Lynch banker, Dan Bayly, in connection with the shameful Enron-related Nigerian Barge prosecution.

Even in the heavily-littered landscape of failed Enron-related prosecutions, the Nigerian Barge prosecution stood out for its sheer brazen nature. As noted in this post from over five years ago (!), the Nigerian Barge prosecution was baseless from the start and, as later developments revealed, trumped-up to boot.

After prosecuting Arthur Andersen out of business in the intensely anti-business post-Enron climate of Houston in 2004, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which it did by offering Mr. Bayly, Robert Furst, James Brown and William Fuhs.

Through a deferred prosecution agreement with Merrill, the Task Force then proceeded to hamstring the Merrill defendants' defense by limiting access to other Merrill Lynch executives who were involved in the barge transaction. To make matters worse, the Task Force then intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the Merrill defendants� defense.

Thus, after bludgeoning a couple of plea deals from former key witnesses Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the defendants, which was good enough to obtain convictions.

Of course, most of the convictions were vacated on appeal (and in Fuhs' case, thrown out completely), but not before each of the Merrill defendants had served over a year in prison and their families had incurred the incalculable human cost of these misguided prosecutions.

Incredibly, over the past couple of years, the Department of Justice (the Enron Task Force has, mercifully, been disbanded) actually has been threatening to pursue a re-trial of the Merrill defendants. Accordingly, the dismissal of the remaining charges against Mr. Bayly was good news. A similar dismissal of charges against his remaining co-defendants - Messrs. Furst and Brown � would certainly follow, right?

Apparently not, at least for the time being. Inexplicably, the DOJ announced yesterday that it is continuing to pursue charges against Mr. Furst.

So, Mr. Furst unloaded on the DOJ yesterday with the filing of this motion to dismiss on the grounds of pervasive and egregious prosecutorial misconduct. You can review the motion here, but if you go ahead and download it, then you can review a version of the motion that is bookmarked in Adobe Acrobat to facilitate ease of review. Inasmuch as the 45 page motion includes about 350 pages of exhibits, bookmarks are helpful.

The summary of the motion gets right to the shocking point:

The American criminal justice system is built upon the principle that the government�s interest �is not that it shall win a case, but that justice shall be done.� Berger v. United States, 295 U.S. 78, 88 (1935). The Enron Task Force (the �ETF�)�a team of prosecutors and investigators formed in 2002 to address the public demand for individual accountability in the aftermath of Enron�s collapse�investigated, indicted, and prosecuted Defendant Robert Furst and his co-defendants with the goal to win at all costs. And the ETF �won��Mr. Furst spent almost a year in prison before his conviction was overturned on appeal.

But to secure victory, the ETF engaged in a campaign of misconduct which violated Mr. Furst�s constitutional rights to due process and a fair trial. This misconduct was necessary because the case the ETF indicted and hoped to prosecute, which would involve a sordid tale of a well-organized conspiracy to defraud Enron and its shareholders, was not supported by the facts.

The ETF could not prove that Enron or its shareholders lost any money in the barge transaction, because they did not. The form and mechanics of the transaction were thoroughly vetted through hundreds of hours of negotiation by dozens of highly-competent attorneys. Witnesses interviewed by the ETF undercut its theory of the case. In short, the barge transaction had all the markings of a legitimate business transaction, because it was.

But legitimate business transactions do not generate convictions, and the ETF needed convictions. So, in order to ensure victory, the ETF:

? withheld volumes of exculpatory, case-dispositive evidence which nullified its theory of criminal liability;

? manipulated and misstated exculpatory testimony in pretrial disclosures to make it appear inculpatory;

? silenced witnesses by indiscriminately designating nearly all material witnesses as unindicted co-conspirators; and

? sponsored inculpatory testimony that it knew was false.

The ETF�s conduct did not end with the return of the verdict. After trial, but before sentencing, the ETF received additional case-dispositive, exculpatory evidence from one of the key witnesses in the case. This evidence further nullified the ETF�s theory of criminal liability, and exculpated Mr. Furst.

Rather than disclosing this evidence to the Court, the ETF instead withheld the evidence and brazenly asked this Court to enhance Mr. Furst�s sentence for conduct which was negated by this and other evidence in the ETF�s possession. This misconduct eliminates all faith in the integrity of the jury�s verdict and warrants dismissal of the Indictment.  .   .   .

The mess that is the Nigerian Barge prosecution is a quintessential example of what happens when government is given the leeway to bastardize charges to criminalize a merely questionable business transaction and then appeal to juror resentment against wealthy businesspeople to procure politically popular convictions.

The damage to the defendants, their careers and their families that this abuse of power has caused is bad enough. But the carnage to justice and respect for the rule of law is even more ominous. Does anyone really think that they could stand upright in the winds of such abusive governmental power if that gale turned toward them?

The remaining charges against Messrs. Furst and Brown should be dismissed. Not only for their protection, but for ours, too.

Posted by Tom at 12:01 AM | Comments (0) |

January 5, 2010

Understanding Adoption

One of the most discouraging aspects of the societal tide of resentment and scapegoating that has permeated the corporate criminal prosecutions since the demise of Enron has been the utter lack of perspective regarding the horrendous human cost of those prosecutions.

Even the horrendous financial cost of those prosecutions seems easier to confront.

A stark example of the human cost is what happened to Ken Lay's family, who endured the decline of a loving father and grandfather as he defended himself against dubious charges that in a less-heated climate would likely never have been pursued.

Equally barbaric is the reprehensible 24-year prison sentence assessed to former Enron CEO Jeff Skilling, whose family has been deprived of their father for over three years now and is threatened to be without him for most of the rest of his life.

But the family that arguably paid the steepest cost from the wave of unjust corporate prosecutions was the family of Jamie Olis, the former mid-level Dynegy executive who was thrown to the prosecutorial wolves by his employer and then sentenced to a ludicrously excessive 24 plus-year prison term for his involvement in a structured finance transaction for which he profited not one dime.

The Fifth Circuit Court of Appeals ultimately threw out that sentence, which resulted in a still-too-harsh six-year re-sentencing. Olis was finally paroled last year and reunited with his wife and young daughter, who literally grew up visiting her father in prison.

But even in the face of such inhumanity, the human spirit perseveres.

Throughout the Olis family's ordeal, Jamie's father -- Bill Olis -- stood out as a rock of stability and common sense.

Whether it was attending the myriad of hearings in Jamie's case in Houston, or escorting Jamie's wife and daughter the hundreds of miles to visit Jamie in far-off prisons, or lending moral support to other families who were enduring similar injustices, Bill Olis projected a sense of calm perspective that was contagious to all who came in contact with him.

He had much to be bitter about in regard to what the federal government did to his son and family, but Bill Olis never gave in to bitterness. He was a quintessential Christian gentleman and nothing that the government did to his family could change that.

Throughout his son's darkest times, Bill remained confident that he and his family would ultimately be reunited with Jamie. Yeah, the government is powerful, but no earthly force was going to destroy Bill Olis' family.

As a result, Ellen Podgor of the White Collar Crime Prof Blog re-named her "Collar for the Best Parent Award" to the "Bill Olis Best Parent Award" because -- in the category of a parent supporting an imprisoned child -- "no one comes close to Bill Olis."

What was not well known through all of this was that Bill Olis was slowly fading away physically during his son's imprisonment. Bill had an oxygen unit with him almost constantly as he tended to his family's needs throughout their ordeal. No big deal for Bill. Mere failing health was not going to stop Bill Olis from being present when his son was released from prison last year. He was there embracing Jamie with the rest of the family, oxygen tank and all.

With the work of reuniting his son with his family done, Bill Olis died over this past weekend. I understand from a family friend that Jamie was able to spend most of Bill's final two weeks with him, which I know Bill enjoyed immensely. He adored his son.

The Olis family story is a remarkable one and frankly far more interesting than the government's dishonest case against Jamie. Years ago, Bill Olis married a single Korean mother and adopted her young son. He provided his wife and son a stable and loving home, and the family flourished. His son excelled in school, obtained advanced degrees in both business and law, and embarked upon a successful career in corporate finance. And when the government targeted the son as a sacrificial lamb for the anti-business mob, Bill Olis spent his last days in this world supporting his son every step of the way and making sure that he returned to his wife and daughter.

Then he passed away.

A Christian minister friend once observed to me that a good way to embrace what is good about the Christian spirit is through understanding the nature of adoption.

Bill Olis was living proof of the truth of that observation.

Posted by Tom at 12:01 AM | Comments (0) |

December 26, 2009

Again, why bother with a trial?

The popular view is that R. Allen Stanford is a crook and should spend the rest of his life in prison.

But doesn't the U.S. Constitution -- not to speak of simple human decency -- provide him with the opportunity to contest the government's charges against him fairly?

These earlier posts (here, too) touched on the indefensible prison conditions that the federal government has imposed on R. Allen Stanford as he awaits trial on criminal fraud charges arising from the demise of Stanford Financial Group.

Last week, Stanford's lawyers filed the motion below requesting that U.S. District Judge David Hittner release Stanford on strict conditions pending his trial that would make it virtually impossible for him to go to the corner drug store without the U.S. Marshals being notified immediately.

Judge Hittner promptly denied the motion without comment, which is next to inexplicable given what is contained in the motion. Here is a mere sampling:

Mr. Stanford has been incarcerated since June 18, 2009 and was moved to the [Federal Detention Center] on September 29, 2009. Immediately upon his arrival at the FDC, he underwent general anesthesia surgery due to injuries that were inflicted upon him at the Joe Corley Detention Facility. He was then immediately taken from surgery and placed in the Maximum Security Section — known as the “Special Housing Unit” (SHU) — in a 7' x 6 1/2' solitary cell. He was kept there, 24 hours a day, unless visited by his lawyers. No other visitors were permitted, nor was he permitted to make or receive telephone calls. He had virtually no contact with other human beings, except for guards or his lawyers.

When he was taken from his cell, even for legal visits, he was forced to put his hands behind his back and place them through a small opening in the door. He then was handcuffed, with his arms behind his back, and removed from his cell. After being searched, he was escorted to the attorney visiting room down the hall from his cell; he was placed in the room and then the guards locked the heavy steel door. He was required, again, to back up to the door and place his shackled hands through the opening, so that the handcuffs could be removed. At the conclusion of his legal visits, he was handcuffed through the steel door, again, and then taken to a different cell where he was once again required to back up to the cell door to have his handcuffs removed and then forced to remove all of his clothing. Once he was nude, the guards then conducted a complete, external and internal search of his body, including his anus and genitalia. He was then shackled and returned to his cell. In his cell there was neither a television nor a radio and only minimal reading material  was made available to him. He remained there in complete solitude and isolation until the next time his lawyers returned for a visit.

In short, Mr. Stanford was confined under the same maximum security conditions as a convicted death row prisoner, even though the allegations against him are for white collar, non-violent offenses. He is certainly not viewed as someone who poses a threat to other persons or the community, nevertheless, he has been deprived of human contact, communication with family and friends, and was incarcerated under conditions reserved for the most violent of convicted criminals. Officials at the FDC informed counsel that this was for Mr. Stanford’s “own protection” and to minimize their liability.  .  .  .

The U.S. criminal justice system used to be an institution that distinguished a free society from those that endured under oppressive regimes.

But with cases such as Stanford's, it's sure getting hard to tell the difference between the U.S. system and the supposedly more oppressive ones.

Mtn for Reconsideration of Detention Order

Posted by Tom at 12:01 AM | Comments (0) |

December 18, 2009

They got how much? For doing what?

Just when it looked as if progress was being made, the harsh reality of the severe trial penalty and the absurd severity of punishment parameters in white collar criminal cases reared its ugly head.

This time its the harsh sentences that U.S. District Judge Melinda Harmon handed down on Thursday to three former El Paso Natural Gas Company natural gas traders -- 14 years to one defendant and 11 years and 3 months to the other two. They were convicted of multiple counts fraud and false reporting in connection with what has become known in Houston as "the trader cases."

The severity of the sentences is mind-boggling when compared with the nature of the alleged "crime."

The government alleged that the three traders provided false information to natural gas industry publications such as the Inside FERC Gas Market Report, which use data from traders to calculate an index price of natural gas.

Inasmuch as movement in index prices can theoretically affect the level of profits that traders can generate, the government's theory was that the defendants provided false information so that they and El Paso could reap higher profits on their trades.

However, the government never proved that the magazines actually used the false information that the defendants provided to them or that the information actually affected the natural gas markets at all. Indeed, a myriad of market factors affect natural gas prices, as with the price of any commodity.

That was no problem for prosecutors, though. The government contended that the market effect of providing the false information was irrelevant and that the prosecution needed only to prove that false information was reported to the magazines in order to make a gain a conviction of the defendants. And they got away with it.

So, key point to all businesspeople -- don't ever provide any information to a publication about your business that could be construed to be false. It really doesn't make any difference whether the false information affects your company. The government contends that the mere transmittal of the false information is the crime.

Meanwhile, three relatively young men (the oldest is 49) with families and promising careers are now facing over a decade of imprisonment for the "crime" of reporting false price information to a magazine.

Just what is the purpose of this?

Posted by Tom at 12:01 AM | Comments (1) |

December 17, 2009

"Mr. Ruehle, you are a free man"

Larry Ribstein and the WSJ's Holman Jenkins -- both of whom exposed the vacuity of the federal government's backdating witch hunt from the very beginning -- provided their usual insightful perspective on U.S. District Judge Cormac Carney's decision earlier this week to dismiss the government's remaining criminal charges against former Broadcom CFO William J. Ruehle and Broadcom's co-founder, Henry Nicholas, III. A copy of the transcript of Judge Carney's inspiring ruling is below.

Given the excellence of Professor Ribstein and Mr. Jenkins' analysis of the corrupt nature of the backdating prosecutions, there is really nothing to add in that regard. The bottom line is that the unchecked prosecutorial power of the state does enormous damage to lives, families, and careers, as well as job and wealth creation.

But as I read the transcript below and the motion to dismiss that prompted it, imagine my surprise to discover that one of the prosecutors involved in the Broadcom misconduct was a member of the Enron Task Force that engaged in similar conduct in connection with the prosecution of former Enron CEO Jeff Skilling and chairman Ken Lay. Frankly, as bad as the prosecutorial misconduct was in the criminal case against Mr. Ruehle and the other Broadcom executives, it pales in comparison to what prosecutors made Skilling and Lay endure.

Judge Carney provided in the Broadcom prosecutions a perspective of fairness and wisdom that was sadly lacking in the Enron cases. He reminds us that the line between freedom and oppression in civil society is often razor-thin.

His final declaration in the transcript below is one that we should all embrace:

"I don't think anything needs to be said further other than, Mr. Ruehle, you are a free man."

Download Transcript of Judge Carney's Ruling

Posted by Tom at 12:01 AM | Comments (0) |

December 16, 2009

Criminalizing the neighborhood pharmacist

This blog has long addressed the enormous cost to American society of overcriminalization generally and particularly with regard to business and risk-taking.

But lest we think that the problem is limited to such things as business and victimless crimes, think again says Bob Wachter:

Along comes another case involving jail time for a medical mistake, this one featuring an Ohio pharmacist named Eric Cropp.

Eric was the lead pharmacist at Cleveland’s Rainbow Babies and Children’s Hospital on February 26, 2006. The pharmacy, understaffed that day, received a rush order for chemotherapy for a 2-year-old girl, Emily Jerry, who was undergoing treatment for a spinal malignancy.

An unlicensed and distracted (by press accounts, she was planning her wedding on the day of the event) pharmacy technician mistakenly mixed the chemo with 23% saline rather than the intended 0.9%. Eric, working in cramped quarters and rushed for time, gave final approval to the mixture, partly because, after seeing a spent bag of 0.9% saline next to the mixed solution, he assumed that it had gone into the solution.

In other words, the case was a classic illustration of James Reason’s Swiss cheese model, in which numerous safety checks failed due to a confluence of systems and human errors. Tragically, little Emily died from the hypertonic saline infusion.

On hearing of the error, a Cuyahoga County DA decided that the case merited criminal prosecution, even though Eric had no history of errors in his pharmacy career and root cause analysis of the case confirmed that its cause was simple human error compounded by systems problems. At trial, fearing even harsher penalties, Eric pleaded guilty to involuntary manslaughter, and was sentenced to 6 months in the state prison, 6 months of home confinement, 3 years of probation, 400 hours of community service, and a $5,000 fine. Moreover, the Ohio pharmacy board permanently stripped him of his license, depriving him of his livelihood – forever.  .  .  .

During last week’s webcast, Mike Cohen described visiting Eric in prison. “Like a scene out of a movie,” he recalled, with Eric in his orange jumpsuit, speaking to visitors through a glass wall, other felons – including violent offenders – milling about. As he related the visit, Mike choked up with emotion, clearly seeing this tale as both powerfully tragic and cautionary.

How has it come to the point where the criminal justice system exacerbates the tragedy of a young girl's accidental death by ruining a career and inflicting enormous damage on an innocent family? At least the young girl's family recovered substantial financial damages resulting from the pharmacist's negligence. Where does the young pharmacist's family turn for help?

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (0) |

December 15, 2009

How many felonies did you commit today?

Overcriminalization of daily life, particularly as it relates to punishing taking risks necessary to create jobs and wealth, are common topics on this blog.

Longtime Boston attorney Harvey A. Silverglate is an expert on this troubling trend in American jurisprudence. His recent book -- Three Felonies a Day: How the Feds Target the Innocent (Encounter Books, 2009) -- examines how pliable politicians have expanded the criminal laws to the point where the freedom of virtually anyone who attempts to take risks to create jobs and wealth is subject to the whims of often avaricious prosecutors.

Silverglate is currently guest-posting over at The Volokh Conspiracy where, in this post, he examines how the crime of honest services wire fraud involved in the Skilling case has allowed prosecutors pretty much to choose whether to indict and prosecute business people at their discretion:

Because of the vague terminology increasingly used in the ever-expanding federal criminal code, combined with the erosion of intent as a requirement for conduct to be considered prosecutable, the average citizen can easily commit several felonies in any given day.  .  .  .

“Honest services” fraud is an instructive example of this trend, but the federal law books are cluttered with countless others. Creative interpretations of the Computer Fraud and Abuse Act, obstruction of justice statutes, and controversial Patriot Act provisions—to name a few—have turned honest citizens into federal defendants and even convicted felons. [.  .  .]

This dangerous trend is exacerbated by the “win at all costs” mentality of the Justice Department. Colleagues are turned into stool pigeons as prosecutors offer deals for testimony that often bears little resemblance to the truth. (As my colleague Alan Dershowitz colorfully but all-too-accurately puts it, “prosecutors can pressure witnesses not only to sing, but also to compose.”)

Faced with the prospect of a long prison sentence, enormous costs of defense counsel, and frequent threats to indict family members who are thus held hostage, defendants often choose, to parody an old cigarette commercial, to switch rather than fight.

At some point, shouldn't we be asking the question -- why are we doing this to ourselves?

Posted by Tom at 12:01 AM | Comments (0) |

December 12, 2009

The Skilling Merits Brief

On the heels of the U.S. Supreme Court's hearing earlier this week in Conrad Black's appeal of his criminal conviction on honest services wire-fraud charges under 18 U.S.C. § 1346 ("Section 1346), former Enron CEO Jeff Skilling filed his brief on the merits of his similar appeal with the Supreme Court yesterday.  Oral argument on Skilling's appeal will take place on March1st of next year at 1 p.m.

A copy of the Skilling's merits brief is below. The sections of that copy are bookmarked in Adobe Acrobat to facilitate ease of review, so download a copy to take advantage of those features.

This earlier post and Lyle Denniston's ScotusBlog post on the Skilling merits brief provide thorough analysis of the issues involved in Skilling's appeal, which differ a bit from Lord Black's appeal. So, I won't reiterate those points here.

However, the following are some highlights of the brief, which is well-written and forceful. Citations to the appellate record that are contained in the brief are deleted in the following excerpts.

The following excerpts get to the heart of the appeal:

Skilling not only was tried by jurors drawn from a community passionately committed to convicting him, but he was prosecuted under a vague statute that virtually ensured jurors would vindicate that objective.

Section 1346 is an unconstitutionally vague statute. A federal criminal statute must define the conduct it proscribes so that ordinary persons have notice of what is prohibited, and prosecutors are constrained in what they can prosecute. But everyone agrees that § 1346 on its face says nothing about the conduct it proscribes. To identify its meaning, one must consult almost two decades worth of Federal Reports, searching for cases describing or enforcing the judicially-created crime of honest-services fraud, before this Court rejected them all as exceeding the judicial function in McNally v. U.S., 483 U.S. 350 (1987).

But those cases reflect only the same morass of conflict and confusion that, in part, led this Court to require that Congress define the crime clearly in the first place. Congress did not do so. And it is beyond the judicial function to identify, through common-law exegesis of pre-McNally precedents, the crime that Congress failed to define. [.  .  .]

The Government’s theory is not that Skilling received bribes or kickbacks, or that he directed money or property to an entity in which he had a personal interest, or indeed that he acted for any private gain that was distinct from his ordinary compensation incentives. The Government openly conceded at trial that Skilling stole no money from Enron, that the case against Skilling was not about “greed,” that Skilling sought to pursue Enron’s “best interests,” and that every act for which he was prosecuted was undertaken for the purpose of protecting Enron and promoting its share value.

The Government proceeded on the theory that Skilling nonetheless committed honest-services fraud simply because he took on too much risk for the long-term good of Enron, and improperly touted the company. It did not seek an instruction requiring jurors to find that Skilling acted pursuant to undisclosed personal financial interests in conflict with Enron’s. Instead the Government urged the jury to send Skilling to prison simply because he breached his “duty to do [his] job and do it appropriately.” That theory of honest-services fraud has no grounding in pre-McNally caselaw, and is totally at odds with the Government’s current conception of the statute.

The implications of that theory, moreover, extend far beyond what Congress reasonably could have intended when it enacted § 1346 to overrule McNally, a public-official kickback case. In the private sector, corporate officers are expected to take business risks and cheerlead for their enterprises. A rule that criminalizes every business decision that seems imprudent to prosecutors or lay jurors in hindsight — but does not involve the corrupt pursuit of private gain— would force officers to proceed at their peril in making everyday business judgments. Fortunately, the theory of honest-services fraud the Government advanced below is not the law, as the Government now recognizes.

In that regard, Skilling reminds the Court of the chillingly scant basis of the "crime" the Enron Task Force prosecutors told the jury that Skilling had committed:

In closing argument, the Government declared that Skilling and Lay committed honest-services fraud because they violated a duty to Enron’s “employees” — one prosecutors described as “a duty of good faith and honest services, a duty to be truthful, and a duty to do their job … and do it appropriately.” [.  .  .]

[The Enron Task Force's] consistent position in this case has been that the evidence needed only to show—and did only show—“a material violation of a fiduciary duty that defendants owed to Enron and its shareholders.”

In other words, making a bad decision or doing a poor job in running a business is a crime. Almost nothing else need be said in explaining why the Skilling appeal is of paramount importance to the protection of taking risk and creating wealth in the American business community.

On the issue of why Skilling should have never been tried in Houston, check out part of the brief's summary of the community prejudice against Skilling that the leader of the mob promoted:

What follows is a sampling of the searing media attacks. One column in the Houston Chronicle, entitled “Your Tar and Feathers Ready? Mine Are,” demanded a “witch hunt.” Houstonians maintained that Skilling and Lay had “stole[n] money from investors,” “ripped off their stockholders for billions,” and “destroyed a great corporation.”

Skilling and Lay were compared to Al Qaeda, Hitler, Satan, child molesters, rapists, embezzlers, and terrorists and encouraged to “go to jail” and “to hell.” Some suggested they should face “the old time Code of the West.” A local rap song (entitled “Drop the S Off Skilling”) threatened Skilling’s murder. Polling showed that Houstonians routinely labeled Skilling a “pig,” “snake,” “crook,” “thief,” “fraud,” “asshole,” “criminal,” “bastard,” “scoundrel,” “liar,” “weasel,” “economic terrorist,” “evil,” “deceitful,” “dishonest,” “greedy,” “devious,” “lecherous,” “despicable,” “equivalent [to] an axe murderer,” and a man who had “no conscience,” “stole from employees,” and “swindled a lot of people.” Skilling’s picture was “used as a dartboard” and placed on “Wanted” posters next to Osama bin Laden. When Skilling was indicted, the Chronicle proclaimed: “Most Agree: Indictment Overdue.” The paper’s negative coverage extended to articles on sports, education, music, and more.

After detailing how potential jurors' pre-trial questionnaire answers about the case mirrored the foregoing community prejudice, Skilling describes U.S. District Judge Sim Lake's nominal questioning of the jurors that was hopelessly inadequate to overcome the presumption of community prejudice:

Skilling sought extensive, non-public, individualized voir dire to try to screen out all the potentially biased jurors—especially in light of the questionnaire responses exposing specific prejudices. But the court took the opposite tack, holding voir dire before throngs of reporters in a ceremonial courtroom, limiting it to just five hours, and twice chastising defense counsel for asking too many questions about potential prejudice because the court had prohibited “individual voir dire.” Just 46 people were questioned—eight more than the minimum necessary—and only for a few minutes each. Only seven were struck for cause, with one excused for hardship.

Skilling then explains what should have happened in the face of such clear bias:

[I]f the [District Court] had presumed prejudice among all potential jurors, it could not have refused to permit probing inquiry into each individual juror’s biases. To the contrary, the Government would have been forced to make detailed inquiries of each juror in order to prove each juror’s impartiality beyond a reasonable doubt, and of course the defense would have been entitled to pursue similar lines to smoke out concealed or latent prejudices.

None of that happened here. Instead the district court satisfied itself that Skilling failed to prove actual prejudice for little reason other than the court looked jurors “in the eye” and decided to credit their promises of fairness. If the presumption of prejudice can be rebutted on that kind of showing, the presumption has no meaning at all.

As I've noted many times previously, a humane and civil society would find a better way than what was done to Jeff Skilling to hold people responsible for their errors in business judgment while they are attempting to create jobs for communities and wealth for investors. I remain hopeful that the U.S. Supreme Court will agree.

Jeff Skilling's Merits Brief at SCOTUS

Posted by Tom at 12:01 AM | Comments (0) |

November 28, 2009

Noticing injustice

Following on a point made in these earlier posts, the Chron's Mary Flood reports on the indefensible conditions that the federal government has imposed on R. Allen Stanford as he awaits trial on criminal fraud charges arising from the demise of Stanford Financial Group.

Sort of reminds you of the way in which certain other countries handle the prosecution of business executives, doesn't it?

Ironically, while rightfully questioning whether Stanford is being given a fair shake, the Chron continues to avoid examining its equally dubious record in creating a presumption of community prejudice against Jeff Skilling.

Witch hunts do not reflect well on the participants.

Posted by Tom at 12:01 AM | Comments (0) |

November 25, 2009

"People get put in jail for importing lobsters"

The disturbing trend of an increasingly powerful federal government criminalizing all sorts of conduct that should not be criminalized has been a frequent topic (see also here) on this blog.

Adam Liptak of the NY Times, who has written extensively about the over-criminalization of American society, reports that a bipartisan group is finally organizing to do something about it:

“It’s a remarkable phenomenon,” said Norman L. Reimer, executive director of the National Association of Criminal Defense Lawyers. “The left and the right have bent to the point where they are now in agreement on many issues. In the area of criminal justice, the whole idea of less government, less intrusion, less regulation has taken hold.”

Edwin Meese III, who was known as a fervent supporter of law and order as attorney general in the Reagan administration, now spends much of his time criticizing what he calls the astounding number and vagueness of federal criminal laws.[.  .  .]

There are, the [Heritage Foundation] says, more than 4,400 criminal offenses in the federal code, many of them lacking a requirement that prosecutors prove traditional kinds of criminal intent.

“It’s a violation of federal law to give a false weather report,” Mr. Meese said.

“People get put in jail for importing lobsters.”

Nice quote from Meese, but Radley Balko points out that his involvement in the movement would mean more if he admitted his past involvement in the problem.

Posted by Tom at 12:01 AM | Comments (0) |

November 24, 2009

Who fears freeing whom?

In this lengthy NY Times Magazine piece from this past weekend, Andrew Meier decries the Russian government's unjust prosecution and treatment of former Yukos chairman, Mikhail Khodorkovsky:

Many can’t quite embrace an oligarch as a prisoner of conscience. He is a titan who fell from favor, some say, not a dissident physicist or a novelist arrested for a subversive manuscript. Whatever his sins, though, Khodorkovsky was not jailed for breaking the law. His courting of the Bush White House and pursuit of oil partners at home and abroad infuriated the Kremlin. But his gravest error was to challenge Putin. The reason behind his imprisonment, Khodorkovsky claims, “is well known and widely discussed. It was my constant support of opposition parties and the Kremlin’s desire to deprive them of an independent source of financing. As for the more base reason, it was the desire to seize someone else’s efficient company.”

His motives may have been mercenary, but Khodorkovsky in his cell has come to embody the fiat of the state, its arbitrary and boundless power. To date, the authorities have brought charges against 43 former Yukos employees and associates, conducted more than 100 raids .   .   .

Meanwhile, the Times and most of the rest of the mainstream media have largely ignored -- and often promoted -- similar mistreatment and persecution of business executives in our own country.

Yeah, Russian criminal justice system is corrupt, America's is far superior.

Old narratives die hard.

Posted by Tom at 12:01 AM | Comments (1) |

November 11, 2009

Refusing to throw in the towel is not a crime

Thank goodness.

Despite the government's sordid expansion of crimes against business people over the past decade, at least it's not a crime to decline to throw in the towel on a business venture simply because there are signs that it might fail. As John Carney eloquently points out, that's in all of our best interests.

Sort of makes one wonder what would have happened if Jeff Skilling had been tried in even a reasonably fair environment?

And the government's response of putting Messrs. Cioffi and Tannin through hell over the past year?:

"Of course, we are disappointed by the outcome in this case, but the jurors have spoken, and we accept their verdict," said Benton Campbell, the U.S. Attorney for the Eastern District of New York, in a written statement.

Of course, the off-the-record response was a tad less diplomatic toward the jury. But at least Campbell should know about failed prosecutions. Is a result such as this the reason why he insists on continuing to bring them?

Update: Frostburg State Economics Professor William Anderson, who has written extensively on the adverse economic impact of the government's criminalization of business policy, followed the trial closely and provides this insightful postscript, which includes the following insightful observation about the obstacles that defendants face even in the face of a weak prosecution:

If anything, the slanderous and dishonest post-acquittal remarks by prosecutors drive home just how contemptuous federal prosecutors are of everyone else. The jury did not acquit because they were too stupid and vapid to understand the clarity of the prosecution�s case; they acquitted because they did understand that the government�s simple, clear presentation was not true, or, at very best, did not do a good job of meeting the "reasonable doubt" standards.

I was not surprised at the acquittal, given what I knew was presented in court and given what my sources had been telling me. My only fear was a federal jury being, well, a federal jury that throws sops to those poor, underpaid prosecutors who claim they only are trying to do justice.

In the end, however, the jury did its job, and judge did his job, the defendants were innocent, and the prosecution continued to lie. Oh, and the media will continue to be the media. Like the Bourbons, they "learn nothing and they forget nothing."

Posted by Tom at 12:01 AM | Comments (4) |

October 27, 2009

Ellen Podgor on the trial penalty

Stetson College of Law Professor Ellen S. Podgor, who authors the popular White Collar Crime Prof Blog, has written an important law review article on a key issue that is confronting defense attorneys and courts in this age of criminalizing merely unpopular business people and practices -- the onerous trial penalty that a defendant faces for electing to exercise the right to force the government to prove guilt beyond a reasonable doubt:

This Article  .  .  . shows that innocence is no longer the key determinant in some aspects of the federal criminal justice system, even for those charged with white collar offenses. Rather, our existing legal system places the risk of going to trial, and in some cases even being charged with a crime, so high, that innocence and guilt no longer become the real considerations. This is especially true for upper level white collar offenders like CEOs3 and corporate entities. In these cases maneuvering the system to receive the least onerous consequences may ensure the best result for the accused party, regardless of innocence.

Arthur Andersen LLP, Jamie Olis, and Jeffrey Skilling proceeded to trial after criminal charges were brought against them. In contrast, KPMG, Gene Foster, and Andrew Fastow secured plea agreements or deferred prosecution agreements with reduced sentences and finite results. As one might imagine, the latter group's sentences or fines were significantly below those of the individuals and entities that proceeded to trial. The pronounced gap between those risking trial and those securing pleas is what raises concerns here. [.  .   .]

The reward of a "not guilty" verdict at trial comes at a high cost. There is the high cost of going to trial, a cost that far exceeds the typical street crime because of the long investigation and trial and in large part be-cause these cases are predominantly a product of documents. It can also be a short-lived verdict when the government decides to proceed against the individual with a second prosecution, even after a not guilty finding. [.  .  .]

This means that innocence or guilt does not frame the judicial process in white collar cases. The risk of trial becomes so great that in order to minimize the possible consequences innocence becomes an irrelevancy. Although the plea bargain to trial differential existed for many years in crimes outside the white collar crime context, the high sentences now being given to individuals and entities charged with white collar crimes place those crimes in comparable stead with street crimes. This gives pause to whether the next phase of wrongful convictions might move beyond street crimes into the white collar world.

My sense is that many prosecutors these days have come to the conclusion that merely obtaining an indictment in a business-related case means that they probably won't have to bother with a trial -- the trial penalty that the defendant faces will almost always prompt a plea bargain. Thus, the indictment itself has become the punishment for risky business behavior that prosecutors simply do not like.

We live in scary times indeed.

Posted by Tom at 12:01 AM | Comments (2) |

October 22, 2009

More thoughts on business "crimes"

Clear Thinkers favorite Holman Jenkins has yet another excellent column this week entitled When Bad Luck is a Crime (or, stated another way, the new crime of violating the obligation to throw in the towel).

Among other points, Jenkins notes that the mainstream media to date has done a poor job of resisting hindsight bias in reporting on business failures:

When it comes to cheering CEOs, booing them or throwing them in jail, a consideration that ought to be nagging is whether we're reacting to luck or design.

Ken Lay, to cite a notorious example, was prosecuted not for the sins that brought down Enron, but for failing to tell investors the company was predestined to fail even as he tried to save it. Exactly the same treatment is now being meted out to two ex-Bear Stearns hedge- fund managers on trial in New York this week. Then there's Ken Lewis, the Bank of America chief, who hasn't been indicted (yet) but is being roundly booed in the media because his acquisition of Merrill Lynch is deemed in retrospect to have been a mistake.

Now we might be tempted to say journalists are especially susceptible to the hindsight fallacy. But a truer statement is that we thrive on it, are its avenging angels, forever treating every bad outcome as proof of incompetence if not malfeasance, and every good outcome as the result of far-seeing excellence. [.  .  .]

.  .  .  Here, journalism, and perhaps only journalism, can unpack the final puzzle—albeit a journalism that properly understands the role of luck in determining the outcomes that so excite journalists and sometimes prosecutors in the first place.

Meanwhile, Stephen Bainbridge and Larry Ribstein -- both of whom have been pre-eminent blogosphere leaders in educating the public about business law issues -- provide insightful analysis of the legal and policy issues involved in the Galleon insider trading case that the Department of Justice initiated late last week.

As noted here before, criminalizing insider trading risks harming legal and socially beneficial trading. The line is thin indeed between illegal insider trading, on one hand, and an entirely legal and productive hedge fund operation on the other.

Sort of makes one wonder whether the criminalization of insider trading does more harm than good?

Posted by Tom at 12:01 AM | Comments (0) |

October 21, 2009

An Enron Task Force-induced nightmare ends

So, the Fifth Circuit followed the instructions of the U.S. Supreme Court and finally directed the U.S. District Court in Houston to dismiss all remaining charges against former Enron Broadband executive, Scott Yeager. The appellate court's order effectively ends a prosecution that was an abomination from the very beginning.

No convictions from trial resulted from the Enron Broadband criminal case. The prosecution generated only a few plea bargains (see also here and here) that were clearly motivated by the onerous trial penalty and expense of defending against the government's intransigent pressing of its dubious theory of criminal liability. The Houston Chronicle's Mary Flood interviewed Yeager and touches on the pressures he endured in fighting the charges.

Meanwhile, Jeff Skilling has now served over three years in prison because of a flawed conviction based on a similarly dubious theory of criminality. And Jamie Olis lost six years of his life away from his young family as a result of an equally bogus prosecution.

The prosecutors who pursued these cases ruined careers and harmed families by abusing the state's overwhelming prosecutorial power. They remind me of Ayn Rand's observation about socialists who use state power to further their supposedly altruistic goals:

"[T]he truth about their souls is worse than the obscene excuse you have allowed them, the excuse that the end justifies the means and that the horrors they practice are means to nobler ends."

"The truth is that those horrors are their ends."

Posted by Tom at 12:01 AM | Comments (2) |

October 15, 2009

The Leader of the Mob reacts

You know, it's not every day that a federal appellate court concludes that a newspaper's coverage of a particular event was a major factor in the creation of a presumption of community prejudice.

But that's precisely what the Fifth Circuit Court of Appeals did with regard to the Houston Chronicle's coverage of the demise of Enron generally and the prosecution of Jeff Skilling specifically  (see pp. 41-45 of the Fifth Circuit decision).

And now the Supreme Court has decided to review the Fifth Circuit's refusal to grant a Skilling a new trial in another venue because of that presumption of community prejudice. That almost never happens.

So, what does Loren Steffy -- the Chronicle's main business columnist and one of the main leaders of the mob against Skilling (see here, here, here, here and here) -- have to say about the Supreme Court's decision to review his handiwork?:

More surprising was the court's decision to review the venue issues. The district court never gave much credence to the argument that pretrial publicity and Enron's stature in Houston tainted potential jurors, and Skilling's attorney, Dan Petrocelli, never mentioned it his is argument before the appeals court.

As I've said before, the media coverage issue is especially interesting, given that someone from Skilling's legal team apparently was actively engaging in the media coverage by making anonymous posts on Chronicle blogs, including this one.

So, let's review. Houston's only daily newspaper reports on the demise of one the city's largest employers in such a biased fashion that an appellate court uses it as a basis for finding a presumption of community prejudice in the criminal trial of one of the company's leading executives. Then, the Supreme Court of the United States finds the issue so troubling that it decides to review it, which rarely happens in regard to this particular issue.

And the leader of the mob's reaction to all this?:

(1) That "the district court never gave much credence" to the issue?

Well, the Fifth Circuit has already decided that the district court was wrong about that.

(ii) That Skilling's lawyer "never mentioned it" during oral argument?

Oral argument is driven by the appellate judges' questions to the lawyers, which in this case were directed to the honest services wire-fraud issue. A substantial part of Skilling's appellate briefs addressed the community prejudice issue.

(iii) That the Chronicle's biased coverage was no big deal because someone from Skilling's team attempted to provide at least a small dose of balance to the Chronicle's biased coverage of the Skilling trial by commenting on Chronicle blog sites?

So much for fair and balanced reporting, eh?

Meanwhile, over the past couple of years, precisely what happened to Enron has also taken down numerous trust-based Wall Street firms and substantial evidence has arisen that the Enron Task Force engaged in widespread prosecutorial misconduct in prosecuting Skilling.

The Chronicle has not even acknowledged the former, while it has soft-pedaled coverage of the serious scandal represented by the latter.

Wouldn't it be ironic if that, in its haste to lead the mob against Skilling and Enron, the Chronicle misses what Larry Ribstein has characterized as the real crime in regard to Enron -- the prosecution of Skilling?

Posted by Tom at 12:01 AM | Comments (5) |

October 14, 2009

The reeling prosecution in the Skilling case

On the heels of the U.S. Supreme Court's decision earlier this year to hear Conrad Black's appeal of his criminal conviction on honest services wire-fraud charges under 18 U.S.C. § 1346 ("Section 1346), the Court yesterday granted former Enron CEO Jeff Skilling's appeal on similar grounds. A copy of the Skilling's cert petition and its appendix, which are bookmarked in Adobe Acrobat to facilitate ease of review, can be downloaded here.

My sense is that Skilling has a good chance of having the Supreme Court overturn his conviction. Here's why.

The Fifth Circuit Court of Appeal's decision in Skilling's appeal -- which is looking by the minute similar to the Fifth Circuit's decision in the Arthur Andersen case that was overturned by a unanimous Supreme Court -- made a mess of two key issues:

(i) application of the honest services wire-fraud statute to Skilling's actions, and

(ii) application of the standard for deciding the proper venue for Skilling's trial in the face of a presumption of community prejudice against Skilling.

As noted previously, the Fifth Circuit panel's decision in Skilling's appeal failed to reconcile the reasoning in upholding Skilling's conviction for honest services wire-fraud with earlier Fifth Circuit panel decisions on the same issue in the Nigerian Barge and Kevin Howard cases. Inasmuch as there is now a split between Fifth Circuit decisions and several other circuit appellate courts on the scope of honest services wire-fraud, the issue is ripe for Supreme Court consideration. Indeed, Justice Antonin Scalia earlier this year urged the Supreme Court to take up the issue in his dissent from denial of certiorari in Sorich, et al v. U.S., 129 S.Ct. 1308, 1310 (2009):

"Without some coherent limiting principle to define what ‘the intangible right of honest services’ is, whence it derives, and how it is violated, this expansive phrase invites abuse by headline grabbing prosecutors in pursuit of local officials, state legislators, and corporate CEOs who engage in any manner of unappealing or ethically questionable conduct.  .   .   . Indeed, it seems to me quite irresponsible to let the current chaos prevail.”

Since Justice Scalia's dissent in Sorich, at least four other Justices (the number it takes to grant an appeal to the Supreme Court) have repeatedly voted over the objection of the Department of Justice to confront the meaning and constitutionality of Section 1346, first in the Black appeal, again in another case in June (Weyhrauch v. U.S.) and now in the Skilling appeal.

As I've noted many times over the years, the Enron Task Force's use of honest services wire-fraud charges to criminalize Enron executives has been the legal equivalent of trying to stick a square peg in a round hole.

Honest services wire-fraud under Section 1346 was intended by Congress to penalize corporate executives and governmental officials for accepting bribes and kickbacks and for engaging in self-dealing at the expense of the employer-- i.e., the private gain requirement of the crime.

The Task Force faced a big problem with prosecuting Skilling at all because he never stole a dime from Enron (that is, no private gain). In fact, the Task Force conceded at trial that, not only did Skilling not embezzle any money from Enron, the case against him was not about “greed,” that Skilling always sought to pursue Enron’s “best interests,” and that every act for which he was being prosecuted was undertaken for the purpose of protecting Enron and promoting its share price.

Despite the foregoing, the Task Force persuaded U.S. District Judge Sim Lake to allow the prosecution to proceed against Skilling on a much broader honest services theory -- that is, that Skilling simply took on too much risk for the long-term good of Enron and improperly touted the company to the markets.

However, all corporate executives take business risks and promote their companies, so a rule that criminalizes any business decision that seems imprudent to prosecutors or lay jurors operating with hindsight bias -- even if if the executive was pursuing the interest of the company -- would force corporate executives to proceed at peril of criminal liability in making day-to-day business judgments. Indeed, in a civil case, Skilling would have had the protection of the "business judgment rule" for his business decisions,  but the Enron Task Force's theory of honest services in Skilling’s case provided for no such defense. Instead, the Task Force lawyers urged the jury to send Skilling to prison effectively for life simply because he breached his duty to do his job and do it appropriately.

Thus, the essence of Skilling's appeal on the honest services wire-fraud issue is that bribes, kickbacks, and self-dealing is what Congress intended to criminalize under Section 1346, not lapses in business judgment. Where a corporate executive has not sought private gain, his conduct -- no matter how questionable, unwise, or wrongful -- should not be subject to prosecution under Section 1346, but should be left to assessment for damages that it caused in a civil lawsuit in which responsibility can be assessed to all potentially responsible parties.

The Supreme Court will also consider Skilling's arguments that (i) if Section 1346 is not limited as described above, it must be struck down entirely as unconstitutionally vague, and (ii) strongly negative publicity about Enron and Skilling in Houston made it impossible for him to be tried by an impartial jury. 

On that latter issue, Skilling argues that the Fifth Circuit improperly allowed Judge Lake to rebut a presumption of community prejudice against Skilling through a superficial voir dire of individual jurors even though the Fifth Circuit concluded that Judge Lake had improperly failed to apply the presumption of community prejudice against Skilling. Frankly, given the extensive evidence of both pervasive local media bias and prospective juror bias against Skilling, if the Supreme Court allows the Fifth Circuit's decision to stand on the venue issue, then a denial of a motion to change the venue of a trial within the Fifth Circuit will effectively no longer be grounds for an appeal.

Accordingly, the Supreme Court's review of Section 1346 in the Skilling appeal and the two related cases directly confronts how avaricious prosecutors have abused the open-ended nature of the statute. The amicus brief of the National Association of Criminal Defense Attorneys in the Skilling appeal sums it up well:

[T]e time has come to resolve the confusion that engulfs the honest services statute. [.  .  .] [The fundamental issue is] whether courts have the power to engraft limiting principles -- none of which has any strong textual basis -- on the vague language of Sec. 1346.  If federal judges lack that power, then the Court must decide whether the honest services statute, shorn of judge-created limiting principles, is void for vagueness  .   .   . The effort by courts to infuse meaning into Sec. 1346 collides .  .  . with the principle that there is no federal common law of crimes.   .    . Federal crimes are defined by statute rather than by common law.

Meanwhile, back down in the trial court part of the Skilling case, things are looking even worse for the prosecution.

First, the Fifth Circuit ordered Judge Lake to re-sentence Skilling because of an error that was made in applying a sentencing enhancement in assessing Skilling's 24-year sentence. The District Court's  docket of Skilling's criminal case reveals that Judge Lake originally scheduled Skilling's re-sentencing for July 30th but that Skilling and the prosecution filed a joint motion requesting Judge Lake to put off the re-sentencing indefinitely pending the filing of Skilling's motion for a new trial, the prosecution's response to that motion, and the Court's disposition of the motion.

In that regard, the Fifth Circuit decision invited Skilling to file a motion for new trial based on issues of prosecutorial misconduct that Skilling raised in the appeal after discovering the evidence post-trial. Specifically, the Fifth Circuit was particularly concerned about the failure of the Enron Task Force to comply with federal rules requiring the disclosure of exculpatory evidence to the defense from the Task Force's pre-trial interviews with main Skilling accuser, former Enron CFO Andrew Fastow.

Fastow testified at trial that he told Skilling about the Global Galactic agreement, which purportedly documented a series of illegal "side deals" between Fastow and former Enron chief accountant Richard Causey that guaranteed Fastow would not lose money on certain special purpose entities that he was managing. Skilling denied any knowledge of the purported agreement.

After Skilling's conviction, the Skilling defense team discovered Fastow interview notes that the Enron Task Force had failed to disclose to the Skilling team prior to trial. Among other things, those notes revealed that Fastow had told the Task Force lawyers that he didn't think he had told Skilling about the Global Galactic agreement. The Fifth Circuit characterized the Task Force's non-disclosure as "troubling" in inviting Skilling to file a motion for new trial with the District Court.

Interestingly, the docket reflects that the parties have requested that the deadline for Skilling's motion for a new trial be pushed back several times over the past six months. The deadline is now in mid-November and, as a result of the Supreme decision to review of Skilling's appeal, will probably be pushed back until after the Supreme Court rules.

So, what is going on here?

Could it be that Skilling's team has discovered even more exculpatory evidence that the Task Force failed to disclose to the Skilling defense prior to the trial?

Could it be that the government's current lawyers -- who were not members of the now-disbanded Task Force --  are now finding themselves dealing with a serious failure of the Task Force members to comply with rules requiring the disclosure of exculpatory evidence to the defense in Skilling's case and have little incentive to cover for their predecessors?

In short, could the Skilling case in the trial court be turning into something similar to this?

Finally, as if to remind us how little we have learned from the Enron debacle, on the same day that the Supreme Court announced that it would consider Skilling's appeal, the parties began picking a jury in the criminal case against two Bear Stearns executives who are accused of committing the "crime" of violating the obligation to throw in the towel on their business venture. Larry Ribstein has more.

A humane and civil society would find a better way to hold people responsible for their errors in business judgment while creating jobs for communities and wealth for investors. I am hopeful that the Supreme Court will agree.

Posted by Tom at 12:01 AM | Comments (1) |

October 8, 2009

The mind of a true thief

Disgraced New York City attorney Marc Dreier's letter to his sentencing judge was quite interesting. His recent 60 Minutes interview is just as fascinating.

Dreier -- who unquestionably stole over $400 million -- received a lighter prison sentence than former Enron CEO Jeff Skilling, who didn't steal a dime.

There is a huge difference between what Marc Dreier did and what Jeff Skilling did. It reflects poorly on us that our criminal justice system cannot distinguish between the two.

Posted by Tom at 12:01 AM | Comments (0) |

September 16, 2009

While you're at it, Judge Rakoff

The legal and business communities are still buzzing over U.S. District Judge Jed Rakoff's scathing refusal earlier in the week to approve the proposed $33 million "settlement" (i.e., sweep under the rug) between the SEC and Bank of America over that the Bank's failure (at least transparently) to disclose to its shareholders the billions in bonuses that the Bank agreed that an insolvent Merrill Lynch was allowed to pay to its employees.

The 12-page decision is certainly worth a read. Judge Rakoff tears into into the SEC for contradicting its own guidelines in penalizing BofA shareholders rather than the executives and lawyers who supposedly approved the lack of disclosure. The settlement "does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct." The Judge didn't buy the SEC's contention that this punishment will result in better management, characterizing it as "absurd." Sort of like the notion that the SEC can really police this type of thing in the first place.

Judge Rakoff goes on in his opinion to raise at least another half-dozen or so good questions about the proposed settlement. But there's a couple more that I wish he'd asked.

A few years ago, former Enron chairman Ken Lay was prosecuted to death for promoting Enron to its shareholders even though he had a reasonable basis for believing that what he was saying about his company was true.

In contrast, the BofA executives and lawyers could not even offer the defense in a criminal fraud trial that the bad things they intentionally failed to tell BofA shareholders about the Merrill Lynch deal were immaterial.

So, isn't it about time that somebody in the federal government acknowledge that it was a mistake to prosecute Ken Lay to death? And isn't it about time that the government do something about this barbaric injustice?

Posted by Tom at 12:01 AM | Comments (0) |

August 28, 2009

A real head scratcher

The Stanford Financial Group scandal has been anything but typical, but yesterday's developments may have been the most bizarre yet.

The big news, other than the hospitalization of R. Allen Stanford, was the guilty plea that Stanford's right-hand man and long-time friend, James Davis, entered in connection with a plea bargain that he worked out with federal prosecutors.

The background section of the plea deal makes for some entertaining reading (bribes to, and a blood oath with, an Antiguan bank regulator?). But the more interesting aspect is that Davis' plea is the latest chapter in a most curious defense strategy.

From almost the outset of the Stanford Financial scandal, Davis' attorney -- Dallas-based attorney David Finn -- has been telling any media outlet that was willing to quote him that his client was guilty of a huge fraud on Stanford investors and that Davis was going to plead guilty to charges as soon as he could work out details of a plea deal with federal prosecutors. Even the most rabid prosecutors would never risk making such public statements, so effectively Finn has been doing much of the prosecutors' public relations work for them.

And now we finally know the terms of the plea deal between the prosecutors and Davis.

On one hand, David pled guilty “in exchange for” a Level 43 under the Sentencing Guidelines (reduced from a Level 46 -- do the Sentencing Guidelines even go up that high?!) “with acceptance” deal. Based on my understanding, that means that Davis has agreed to a prison sentence of 30 years to life. Davis is 60, so assuming that he gets the full benefit of the the traditional 1/3rd off under the guidelines for being a good snitch (no cinch bet in Judge Hittner's court), Davis will do 20 years and be 80 by the time he shuffles out of prison.

On the other hand, the prosecution "gets” Davis as their primary witness, who -- according to the prosecution's own theory of the case -- was one of the key participants in a six billion dollar scam from the beginning. If, as prosecutors alleged during the hearing, Stanford Financial was a “giant house of cards," then why cut a “deal” with the guy who was one of the lead architects of the scam?

Well, we now have the answer to that question. The plea deal is not a "deal" at all. It's total surrender.

Davis is reportedly working as a day laborer at $10 per hour to pay his legal fees. From the looks of it, he is getting the quality of representation that he is currently capable of paying for.

Posted by Tom at 12:01 AM | Comments (0) |

August 17, 2009

Where is the outrage?

A couple of stories caught my eye over the weekend.

The first was the one involving Bob Dylan being pulled over by a couple of young cops while taking a walk in a New Jersey neighborhood a few hours before his show that evening. The theme of the story is how funny it is that neither of the 20-something year-old policeman recognized the iconic musician.

However, my thought was the same as Radley Balko's -- how sad it is that a 68 year-old grandfather cannot go for a walk in a neighborhood without being confronted by a couple of policeman and ultimately escorted back to his hotel. Dylan was doing nothing wrong and there was no report of a crime in the area, yet he is pulled over and taken off the street simply because he left his ID back at the hotel. As with the Gates affair, the primary reason that police are getting away with treating citizens in such a manner is that most of the public is simply making light of it when it happens to someone else.

Meanwhile, the Dylan affair received more publicity than even a greater outrage -- that is, the guilty plea to racketeering charges of Gary S. Kaplan, who did nothing other than create and help run the publicly-owned internet gambling company named BetOnSports (previous posts here).

You may remember this lurid case from 2006. Avaricious federal prosecutors, with apparently nothing else to do, indicted BetOnSports, Kaplan and several other of the company's executives were arrested while changing planes in the U.S. despite the fact that the company was not accused of doing anything dishonest toward its customers, who simply enjoyed placing bets online. As a result of the arrests and the indictment, BetOnSports ultimately liquidated, resulting in hundreds of millions of dollars in losses for American customers.

In essence, Kaplan and his associates were thrown in U.S. jails for years before trial and told that a business that they believed was legal was a criminal enterprise even though it was being run in the open and publicly-traded on the London Stock Exchange. Apparently, U.S. prosecutors now believe they can enforce even ambiguous U.S. laws on any business, wherever based, solely because some of the customers of the business happen to be Americans. The legal theory is bad enough, but the imprisonment of foreign businessmen passing through the U.S., while at the same time causing American citizens to suffer undeserved financial losses, reflects a serious lack of adult supervision at the Department of Justice.

Sure, Dylan is a funny old man now. And who cares about a few foreign businessmen who get inconvenienced by the American criminal justice system?

But as Sir Thomas More reminds us, "when the last law was down, and the Devil turned 'round on you, where would you hide, the laws all being flat? .   .  . do you really thing you could stand upright in the winds that would blow then?"

One of the clearest lessons of the 20th century is that large governments, unrestrained by their citizenry, have the capacity to cause unspeakable evil. As injustices such as the foregoing unfold with nary a protest from citizens, is that lesson already forgotten?

Posted by Tom at 12:01 AM | Comments (5) |

August 13, 2009

The Stanford D&O Policy

This earlier post noted that alleged Ponzi-schemer R. Allen Stanford has been denied use of proceeds of a director's and officer's insurance policy to pay his defense costs because of claims made on that policy by the receiver appointed in the SEC's civil lawsuit against Stanford Financial Group.

Inasmuch as Stanford's personal assets have been frozen in that civil lawsuit, the lack of insurance coverage under the D&O policy has effectively prevented Stanford from finalizing arrangements for his defense in the criminal case. That state of affairs has certainly contributed to this unfortunate situation.

Thus, the issue of who is entitled to the proceeds of the Stanford D&O policy is extremely important, and Kevin LaCroix over at The D&O Diary has done this excellent analysis of the issues involved. It looks to me as if the Stanford officers have the better case than the receiver to the proceeds, but what do I know?

At any rate, if I am right, then Stanford and other Stanford Financial Group officers are being severely damaged as a result of the insurers declining to pay claims under the policy pending resolution of the receiver's claim to the policy proceeds.

It sure doesn't look as if anyone in the judiciary cares about that much.

Posted by Tom at 12:01 AM | Comments (6) |

August 10, 2009

Reflecting on astonishing abuses of power

As Congress contemplates an historic extension of governmental control in regard to health care finance, a couple of stories relating to the growth of unrestrained exercise of governmental power in another area grabbed my attention.

First, former Dynegy executive Jamie Olis was formally released from federal prison on Friday. Along with the egregious prosecution of Arthur Andersen, the prosecution and barbaric sentencing of Olis represents a festering wound for anyone who believes in principles of limited government and innocence until proven guilty. That the judicial system allowed the executive branch to bully Dynegy into serving Olis up as the initial sacrificial lamb of business corruption in the wake of Enron's collapse is a frightening example of how little protection citizens have from dubious prosecutions. For whatever purpose, Olis remains on probation for another three years.

Meanwhile, reinforcing the point made above, Mary Flood reports that the Department of Justice -- apparently with not enough to do in investigating the meltdown on Wall Street over the past year and a half -- is actually considering another Enron-related prosecution of the disgraceful Nigerian Barge case, which has already resulted in the unjust imprisonment of four former Merrill Lynch executives for over a year before the Fifth Circuit Court of Appeals threw out their convictions.  As noted in this post from over four years ago (!), the Nigerian Barge prosecution was baseless from the start and, as later developments revealed, trumped-up to boot. That this outrage is allowed to continue is yet another indication that the judiciary has ceded its role as an effective check on executive branch excesses.

Finally, the docket of the prosecution of former Enron CEO Jeff Skilling now reflects that the deadline for Skilling's motion for new trial based on pervasive prosecutorial misconduct has been extended to September 9th. As noted in this previous post, a reasonable interpretation of the reason for the extensions of the deadline for Skilling's motion is that the government has turned over massive amounts of exculpatory evidence that the Enron Task Force illegally withheld from Skilling's defense team during the prosecution of Skilling and the late Ken Lay. Skilling's Fifth Circuit-ordered re-sentencing that will reduce his inhumane 24-year sentence has been put off indefinitely pending disposition of his motion for a new trial.

The Olis, Nigerian Barge and Skilling prosecutions are the other side of the coin of what happened to Professor Gates. What protection do we have that the same won't happen to you and me?

Posted by Tom at 12:01 AM | Comments (1) |

August 7, 2009

The increasing cost of public equity

Frank Quattrone, the former CSFB investment banker who has an interesting perspective, notes a dynamic of the now almost decade-long criminalization of business that I have been warning business owners and lawyers about for quite some time now -- the increasing cost of public equity:

[W]hy did [public offerings] disappear in the first place?

One reason is the heightened bar for small companies to go public, Mr. Quattrone said. Throughout his career, he said, some of the greatest companies he was associated with had $30 million to $50 million in revenue when they went public. Today, he said, bankers require companies to have $100 million or even $200 million in revenue.

Part of the underappreciated societal impact of prosecutors such as those on the Enron Task Force implementing the criminalization of business lottery is that the days of small companies tapping public equity for relatively cheap venture capital are gone. Moreover, the supply of executives who are willing to work for public companies is smaller because many of the best and the brightest simply do not consider the risk of operating in the public domain worth the draconian downside. The result is that investment alternatives for investors in public markets are declining.

Not exactly a policy to encourage economic revival, now is it?

Update: Along the same lines, Larry Ribstein reviews the destruction of public equity wealth in regard to AIG that resulted in no small part from Eliot Spitzer's machinations. It's a risk that I first noted in regard to AIG way back in early 2005. When will we learn?

Posted by Tom at 12:01 AM | Comments (2) |

August 5, 2009

What's the purpose of the Madoff sentence?

When Bernie Madoff was sentenced a few weeks ago, my reaction was that it is utterly absurd to imprison a 72 year-old white collar criminal for 150 years. I mean, really -- what's the point?

Herb Hoelter agrees:

Bernie Madoff's 150-year prison sentence was an affront to the federal criminal justice system.  .  .  .

I've been a professional federal sentencing consultant for more than 32 years. I have worked with hundreds of white-collar offenders over the past 25 years - Madoff, most recently - whose punishments dramatically increased in direct proportion to the government trumpets of justice, punishment and deterrence. Having lived through the past two decades of federal sentencing guidelines (no longer to be "presumed reasonable," ruled the Supreme Court this year), I know that the Madoff sentence was the crown jewel for the government.

In imposing sentence, however, the court ignored virtually all statutory sentencing principles and trumped the defunct federal sentencing guidelines. The sentence was imposed, acknowledged Judge Denny Chin, for symbolic purposes, which violates the supposed blindfolds of our nation's justice system.

The sentence was, of course, within the law. But being within the law does not always mean a sentence is appropriate. Legal scholars will be hard-pressed to find a first-offender sentence of Madoff proportions - the maximum statutory term imposed on each count, to be served consecutively. [.  .  .]

The court's responsibility is to deliver justice, not respond to emotional tactics. The Madoff sentence - with its "symbolic" justification - failed a big test.   .   .   .

In the meantime, this even more egregious sentence of a man who didn't steal a dime from his company or investors continues to fade from our society's consciousness.

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (6) |

July 28, 2009

Why bother with a trial?

This earlier post noted the troubling indications that R. Allen Stanford and that the federal judiciary to date is doing precious little to check the prosecutorial power of the executive branch as it applies to Stanford. This is not the first time that the prosecutorial power has run amok in a Stanford case.

Now, the motion below reveals that the Department of Justice has placed Stanford under jail conditions that are roughly comparable to those that prisoners endure in third world prisons.

Meanwhile, Stanford essentially has no ability to assist his counsel in the defense of a complicated white collar criminal case.

Increasingly, the U.S. criminal justice system is resembling this one. Yet, after the judiciary and the local media allowed the Enron Task Force to get away with various outrages against Jeff Skilling and various other former Enron executives, it's as if even the most overreaching actions of the executive branch are now considered acceptable. Or at least not worth the effort of an objection. Or serious media scrutiny.

We live in scary times.

Stanford Mtn Re Jail Conditions

Posted by Tom at 12:01 AM | Comments (1) |

July 10, 2009

Marc Dreier's letter to his sentencing judge

It will take awhile before you will read a more interesting -- and really quite extraordinary -- letter from a defendant to a sentencing judge than the one below that disgraced New York lawyer Marc Dreier wrote.

It's hard to imagine, much less understand, the personal hell that Dreier created for himself. Dreier's letter provides a glimpse of how it happened.

The webs we weave.

Posted by Tom at 12:01 AM | Comments (0) |

July 9, 2009

Is Allen Stanford being railroaded?

I recognize that he is not the most popular fellow in Houston investment circles these days, but is anyone else but me a tad uncomfotable that the federal government is running roughshod over R. Allen Stanford?

As everyone following the Stanford Financial Group scandal knows by now, at the request of the Department of Justice, U.S. District Judge David Hittner overruled a federal magistrate's order last week that would have allowed Stanford to remain free on bond pending his trial on business fraud charges. As a result, Stanford is imprisoned in Houston's Federal Detention Center pending his trial, which will probably not occur until sometime next year.

Meanwhile, the DOJ, the SEC, a federal court-appointed receiver and a British receiver operating in Antigua have frozen all of Stanford's personal assets, as well as the assets of the Stanford Financial empire. Consequently, Stanford has no funds with which to retain counsel.

And now he doesn't even have the freedom to help his attorneys prepare his defense.

However, it's now become reasonably clear that the DOJ and the SEC's repeated public allegations that Stanford was running a Ponzi Scheme through Stanford Financial are, if not outright false, at least misleading and irresponsible.

Stanford Financial clearly owned substantial assets, including the Antiguan Bank that also owned substantial assets itself. Perhaps those assets were over-valued and perhaps Stanford and his associates misled investors on the bank's capability of repaying the certificates of deposit that the company promoted and sold. But that's a far cry from running a Ponzi Scheme.

Moreover, the government's efforts to prevent Stanford from paying for defense counsel are downright scary.

The fact that Stanford Financial is not in a position to pay them is not particularly surprising. The company would probably be in bankruptcy if it were not already in receivership, and it's unlikely that either a bankruptcy judge or a U.S. district judge would allow the company to pay for Stanford's criminal defense.

But putting aside for the moment the issue of Stanford not being allowed to use his personal assets to defend himself, Stanford Financial has a Director's & Officer's insurance policy that provides for payment of at least a portion of Stanford's defense However,  the Stanford Financial receiver has threatened to seek contempt charges against the insurer (Lloyds) if it pays Stanford's defense costs as it is contractually obligated to do under the policy. At the same time, the receiver, the DOJ, and the receiver are spending millions in preparing the case against Stanford. My conservative estimate is that the government's tab is more than $25 million already (the receiver alone has a pending request for $20 million in fees).

Finally, Stanford has exhibited absolutely no inclination to flee from the charges against him. He has numerous family ties to Texas and the Houston area, and he has no prior criminal record. And it's not as if Stanford can just walk away from the charges if he is allowed out on bond. He has no passport and, with the GPS tracking device that the U.S. Marshal's Office requires criminal defendants to wear these days, the U.S. Marshals know immediately when a defendant is going somewhere that he is not supposed to be.

It's easy to look the other way when this type of concerted effort by the federal government essentially strips an unpopular businessman of the capacity to defend himself against charges that could imprison him for the rest of his life.

But remember -- if it can happen to R. Allen Stanford, then it can certainly happen to you and me.

A copy of Stanford's motions seeking release of funds for his defense and for reconsideration of his detention order are below.

Stanford Mtn to Release Funds

Posted by Tom at 12:01 AM | Comments (11) |

July 2, 2009

The Chronicle's continuing Enron hypocrisy

Being generally an optimistic sort, I keep thinking that the financial crisis of the past year or so will eventually prompt the Houston Chronicle to reconsider its generally biased coverage of the demise of Enron over the past seven years. After all, it's not every day that the Fifth Circuit Court of Appeals concludes that a newspaper's coverage of a particular event was a major factor in the creation of a presumption of community prejudice.

Nevertheless, the local paper's recent coverage of disgraced financiers R. Allen Stanford and Bernard Madoff reflects that no such soul-searching is likely to emerge anytime soon down on Texas Avenue.

Take this recent Loren Steffy column in which he asks the following: "Why, then, does Madoff get a sentence six times that of [former WorldCom CEO Bernie] Ebbers or Enron’s Jeff Skilling?"

I mean, really. Is the answer to that question all that difficult?

Madoff turns himself in and admits from the outset that he was stealing money from investors for years by running a Ponzi scheme. Any wonder why he was hammered by the sentencing judge?

Ebbers was essentially convicted of covering up accounting fraud at WorldCom, but he at least put up a colorable defense that he was not responsible for such matters and had no knowledge of the fraud.

Moreover, Skilling wasn't even accused of accounting fraud. He was convicted essentially of making too many rose-colored statements about Enron, notwithstanding that his belief in the truth of those statements was never seriously challenged.

Finally, neither Ebbers nor Skilling stole a dime from the investors of their respective companies. Yet, Steffy insists upon comparing them with the larcenous Madoff. who essentially stole tens of millions. The Greed Narrative prevails again.

But here's my main point. Now that what happened to Enron has happened to numerous other trust-based Wall Street firms, shouldn't the Chronicle be advocating that similarly aggressive criminal prosecutions be mounted against numerous executives of the Wall Street firms who made the same type of rosy statements about their wobbling companies as Skilling made about Enron?

Now, I don't believe that there was widespread criminal fraud at Enron. The only true criminal fraud there was relatively small and isolated in Andrew Fastow's Global Finance unit. Similarly, I don't believe that there was widespread criminal fraud at the Wall Street firms that endured the same downward spiral that engulfed Enron.

But inasmuch as the Chronicle fanned the flames of criminal prosecutions against dozens of Enron executives and others involved in transactions with them, shouldn't the Chronicle be taking the same position with regard to executives at the similarly-situated Wall Street firms? Or at least shouldn't the Chronicle be explaining why it threw dozens of Enron executives under the bus even though it now fails to advocate similar treatment for executives of the failed Wall Street firms?

It seems like the least that the local newspaper can do.

Posted by Tom at 12:01 AM | Comments (0) |

June 12, 2009

Not a good week for freedom

First, in the face of a duplicitous government prosecution and a draconian trial penalty, Kevin Howard was forced to plead guilty to a crime that he did not commit.

Then, the executive branch of the federal government, unchecked by feckless legislative and judicial branches, undermined the U.S. Bankruptcy Code by preferring certain Chrysler creditors over others while improperly using the TARP legislation (see also here) -- which was expressly limited to financial institutions -- as a basis to loan billions to Chrysler. Moreover, the government's shots in regard to such matters are being called by a rank rookie.

Finally, the federal government seized $34 million of American citizens' funds without notice or judicial process simply because those citizens enjoy playing poker.

One of the clearest lessons of the 20th century is that large governments have the capacity to cause unspeakable evil. As these injustices unfold with nary a protest from our leaders, is that important lesson already forgotten?

Posted by Tom at 12:01 AM | Comments (7) |

June 9, 2009

The thin line of business criminality

In this earlier post regarding former Enron Broadband CFO Kevin Howard's recent plea deal, I predicted that the factual basis for the plea deal would barely describe wrongdoing, much less criminality.

Turns out I was right. Check out paragraph 14 of the plea agreement at the bottom of page 6, which sets forth the factual basis of the deal.

That paragraph describes that Enron had told the market that its Broadband unit had great potential, but that it expected to lose at least $60 million for the year. Inasmuch as Enron's prediction was turning out to be correct, Howard helped arrange a joint venture transaction that monetized a portion of Broadband's lucrative deal with Blockbuster. Nothing unusual about that.

So, what's the problem, you ask? Essentially, the factual basis provides that Howard did not disclose to Enron's auditor (Arthur Andersen) that Enron's joint venture partner was not expecting to be a long-term partner in the joint venture, even though the partner verified by signing the joint venture agreement that it was not relying on any such expectation in connection with entering into the venture. Nevertheless, if Andersen had known that the partner was really not expecting to be in the venture for the long haul despite the terms of the written agreement, suggests the factual statement, then the auditor may not have allowed Enron to account for the deal in a way that reduced the Broadband unit's losses to the $60 million level that the company had projected and ultimately reported.

That's the basis for a crime?

Frankly, U.S. District Judge Vanessa Gilmore should have the same reaction to Howard's proposed plea deal that U.S. District Judge Lynn Hughes had to the equally vacuous deal that Enron Task Force prosecutors crammed down the throat of former Enron mid-level executive Chris Calger back in 2005. At least the DOJ ultimately threw in the towel on the stinky Calger plea deal.

Based on the foregoing, any business executive who engages in a transaction for the purpose of helping his company achieve earning projections is at risk of being indicted and convicted of a crime, and sentenced to a long prison sentence.

And by a long prison sentence, I don't mean the 4-12 months of home confinement to which Howard agreed in his deal.

Remember, the foregoing transaction is one for which Jeff Skilling is currently serving 24 years in prison.

We live in truly perilous times.

Posted by Tom at 12:01 AM | Comments (2) |

June 2, 2009

Chalk up another trial penalty deal

With no valid case against former Enron Broadband CFO Kevin Howard, what was the Department of Justice to do?

Rattle the saber of the trial penalty and cut a deal.

On one hand, the deal appears to be an extraordinarily good one for Howard. The DOJ has already run him through two financially and emotionally draining trials and related appeals, both of which resulted in embarrassing defeats for the DOJ. Had the DOJ been able to persuade a jury to make even a small portion of the charges stick (not particularly difficult in this climate), Howard would probably have been looking at doing between 5-10 years of prison time while appealing his convictions (believe me, there is precedent for that in the Enron-related criminal cases). So, serving four to 12 months of probation or home confinement doesn't look too bad in comparison.

But on another level, the deal that Howard was forced to take stinks.

As with Jeff Skilling, Kevin Howard didn't steal a dime from Enron and was simply trying to do the best job he could of preserving value in the company's broadband unit under difficult market conditions.

Moreover, it's not as if the unit didn't have potential -- Enron's joint venture with Blockbuster was intended to bring video on demand to millions of households. Almost a decade later, this technology exists on cable and is quite similar to the technology used in Apple Computer's popular iPod. This latter system is a elegant accommodation to copyrighted music and video programming in which artists are compensated and consumers have tremendously enhanced access to information and entertainment.

As Skilling testified during his trial, although Enron's investment in its broadband unit turned out to be a loser, Enron's bet on broadband had been the right one to make:

"And one last thing -- I'll make the last one argument for Broadband because people criticize me about Broadband, and I will take the criticism. We -- certainly, we made a mistake. But it wasn't big. I mean, it was a billion dollars. We invested a billion dollars in the Broadband business. If it had worked, it could have been worth $30 billion. It didn't work. We lost a billion dollars, but if you can make those kinds of bets, that's the kind of the risk you [should be taking] as a corporation. And if you do a lot of [deals with a] downside of a billion and upside of $30 [billion], you're doing a good job for your shareholders in the long run, in my opinion. This one didn't work."

That, as Skilling noted, is the type of risk that management needs the freedom to take in order to create wealth for shareholders. Criminalizing those types of failed bets is a sure way to dampen the climate for wealth creation.

Thus, confronted with no evidence of criminal wrongdoing outside of Andrew Fastow's relatively small Enron circle of friends, and under heavy political pressure to identify some Enron scapegoats, the Enron Task Force made up a crime against Howard and others. It turned out to be violation of the honest services wire-fraud statute under 18 U.S.C. § 1346. 

However, there was a problem with the Task Force's theory of criminal liability. Honest services wire-fraud is normally supposed to address the situation where a business executive takes a kickback or a bribe in violation of his fiduciary duty to his company. Howard wasn't even accused of doing any such thing. In Howard's case -- as with the case against Skilling -- the Task Force simply used those inapplicable charges as a means to appeal to juror resentment (see also here) against anything having to do with Enron.

In reality, Howard was involved in representing Enron in the negotiation of legitimate business transactions that were evidenced by written agreements that provided that all agreements or representations between the parties that are not contained in the written agreements were void and unenforceable.

But that's not what really happened, contended the prosecution -- Howard entered into "secret side deals" that changed the risk allocation of the written agreements and eviscerated Enron's accounting treatment of the transactions. The prosecution "paid" a couple of witnesses to testify against Howard by cutting favorable plea deals with them and "presto" -- the DOJ had a colorable criminal case to pursue against Howard. Who cares whether the statute under which the prosecution is brought has nothing to do with the alleged crime?

Now, two expensive trials and related appeals later, Howard was confronted with the choice of, on one hand, admitting to a crime that he did not commit and a soft sentence or, on the other, a third trial and a draconian trial penalty.

Howard's dilemma sheds light on the disparate burdens on civil and criminal defendants in business misconduct cases. While a defendant in a civil business misconduct lawsuit has protections against another party's vexatious litigation tactics, those protections do not exist in a criminal business misconduct case against an unpopular businessman-defendant. Indeed, many of the Enron Task Force prosecutors who promoted these failed Enron-related prosecutions have gone on to lucrative careers in private practice.

Meanwhile, the damaged lives, ruined career, and destroyed wealth that lie in the wake of the prosecutions of Kevin Howard is tangible evidence of the enormous cost of such prosecutions.

The statement of facts upon which Howard's plea is based is still not available online; I will post it when it is filed with the District Court. But my bet is that most of the statement will not even describe wrongdoing, much less criminal conduct.

During a time in which we ought to be thinking about how to create incentives for generating wealth and jobs, a truly civilized society would find a better way.

Posted by Tom at 12:01 AM | Comments (2) |

May 19, 2009

SCOTUS takes up the honest services issue

Well now, that certainly did not take long, now did it?

Just a week after former Enron CEO Jeff Skilling appealed his criminal conviction and monstrous 24-year prison sentence to the U.S. Supreme Court on an allegedly erroneous application of the honest services wire-fraud statute (18 U.S.C. § 1346), the Supreme Court agreed to hear the appeal of former Hollinger International chairman Conrad Black on similar grounds. The briefs in support and opposition to Black's petition for certiorari to the Supreme Court can be reviewed here.

Black's conviction revolves around allegations that he diverted about $6 million from Hollinger International, which owned the Sun-Times and a number of other newspapers. He and two other former executives whose appeals will also be heard by the Supreme Court -- former Hollinger CFO John Boultbee and corporate counsel Mark Kipnis -- were convicted of three counts of mail fraud based on the theory that they improperly arranged the transfer of $5.5 million from a Hollinger subsidiary under sham non-compete agreements.

The high court's decision to hear Black's appeal on the honest services wire fraud issue leaves the Skilling petition somewhat in limbo. Although Skilling's appeal arguably frames the issue better than Black's, the Court could simply carry Skilling's petition along with Black's appeal and then remand Skilling's case to the Fifth Circuit once it has adjudicated Black's appeal.

But regardless whether the Supreme Court grants cert in Skilling's appeal, the Court's decision to hear Black's appeal is very good news for Skilling.

By the way, as if on cue, Lord Black from his prison cell provides this entertaining evisceration of the forces that prevented him from selling for the benefit of shareholders the now bankrupt and worthless Chicago Sun-Times. Here's a taste of Lord Black's analysis of the situation:

[Former Bush I administration SEC chairman Richard] Breeden, whose career highlights include whitewashing George W. Bush on his lucrative insider trade in Harken Energy shares before the Gulf War in 1991, while he was Bush Sr.'s SEC chairman, and his immensely well-paid stints as special monitor or counsel of KPMG, WorldCom, and Fannie Mae, produced his special committee report in August 2005. (He has since, with no background at all, set up an offshore hedge fund and has promptly lost more than half his investors' money.)

The report had cost over $100 million, accused us of a $500 million kleptocracy, and promised a future of unheard-of profitability for the company. On this, Breeden has delivered, as no profit has been heard of since he usurped the management. He also promised $1 billion of recoveries for the shareholders, and has instead wiped them out; $2 billion from the pockets and retirement and college funds of scores of thousands of people.

His report did fulfill his objective of generating criminal charges that, if substantially successful, could vacate or at least mitigate my $1 billion libel suits against him, the largest defamation claims in Canadian history.

Lord Black is a genuine piece of work.

Posted by Tom at 12:01 AM | Comments (0) |

May 13, 2009

The state of the Skilling case

The attorneys for former Enron CEO Jeff Skilling filed a petition for a writ of certiorari with the U.S. Supreme Court yesterday, which is quite interesting and is being widely reported in the mainstream media.

However, as interesting as a Supreme Court appeal is, that is not the most interesting aspect of the Skilling case right now.

But first the petition. As usual, Skilling's legal team at O'Melveny & Myers did an outstanding job in lucidly presenting why the Supreme Court should consider Skilling's appeal. A copy of the petition and its appendix, bookmarked in Adobe Acrobat to facilitate ease of review, can be downloaded here.

In short, Skilling's petition contends that the Fifth Circuit Court of Appeal's decision in Skilling's appeal made a mess of two key issues:

(i) application of the honest services wire fraud statute (18 U.S.C. § 1346) to Skilling's actions, and

(ii) application of the standard for deciding the proper venue for Skilling's trial in the face of a presumption of community prejudice against Skilling.

As noted previously, the Fifth Circuit panel's decision in Skilling's appeal failed to reconcile its reasoning in upholding Skilling's conviction for honest services wire-fraud under 18 U.S.C. § 1346 with earlier Fifth Circuit panel decisions on the same issue in the Nigerian Barge and Kevin Howard cases. Inasmuch as there is now a clear split between Fifth Circuit decisions and other circuit appellate courts on the scope of honest services wire-fraud, the issue appears ripe for Supreme Court consideration. Indeed, Skilling's petition notes Supreme Court Justice Scalia's recent observation about the need for the high court to take up the issue:

"Without some coherent limiting principle to define what ‘the intangible right of honest services’ is, whence it derives, and how it is violated, this expansive phrase invites abuse by headline grabbing prosecutors in pursuit of local officials, state legislators, and corporate CEOs who engage in any manner of unappealing or ethically questionable conduct.” Sorich v. U.S., 129 S.Ct. 1308, 1310 (2009). [.  .  .]

There is a “serious argument” that, as Justice Scalia put it, “a freestanding, open-ended duty to provide ‘honest services’—with the details to be worked out case-by-case”—amounts to “nothing more than an invitation for federal courts to develop a common-law crime of unethical conduct.” Sorich, 129 S.Ct. at 1310. And because the notion that courts can “discover[]” whether conduct is criminal using common-law reasoning is “utterly anathema,” [cite deleted] there is an equally serious argument that § 1346 is unconstitutionally vague. [cite deleted[.

It should not be the task of federal courts to save a facially vague and unenforceable statute from itself. Only Congress can properly demarcate the boundaries of honest-services fraud. .  .  .

Yeah, we know all about those "headline grabbing prosecutors," don't we?

The venue issue is even simpler. Skilling argues that the Fifth Circuit improperly allowed U.S. District Judge Sim Lake to rebut a presumption of community prejudice against Skilling through a superficial voir dire of individual jurors even though the Fifth Circuit concluded that Judge Lake had improperly failed to apply the presumption of community prejudice against Skilling. The Fifth Circuit's ruling is at odds with several other circuit courts decisions that maintain that such a presumption simply cannot be rebutted, so that conflict between the circuits tees up another Supreme Court issue.

Frankly, given the extensive evidence of both pervasive media bias and prospective juror bias against Skilling, if the Supreme Court allows the Fifth Circuit's decision to stand on the venue issue, then a denial of a motion to change the venue of a trial within the Fifth Circuit will no longer be grounds for an appeal.

But now for the more interesting developments in Skilling's case.

Flying almost completely under the radar screen is the fact that the Fifth Circuit decision remanded a portion of Skilling's case for two reasons.

First, the Fifth Circuit ordered Judge Lake to re-sentence Skilling because of an error that was made in applying a sentencing enhancement in assessing Skilling's 24-year sentence.

Moreover, the Fifth Circuit decision invited Skilling to file a motion for new trial based on issues of prosecutorial misconduct. Specifically, the Fifth Circuit was particularly concerned about the failure of the Enron Task Force to comply with federal rules requiring the disclosure of exculpatory evidence to the defense from the Task Force's pre-trial interviews with main Skilling accuser, former Enron CFO Andrew Fastow.

Fastow testified at trial that he told Skilling about the Global Galactic agreement, which purportedly documented a series of illegal "side deals" between Fastow and former Enron chief accountant Richard Causey that guaranteed Fastow would not lose money on certain special purpose entities that he was managing. Skilling denied any knowledge of the purported agreement.

After Skilling's conviction, the Skilling defense team discovered Fastow interview notes that the Enron Task Force had failed to disclose to the Skilling team prior to trial. Among other things, those notes revealed that Fastow had told the Task Force lawyers that he didn't think he had told Skilling about the Global Galactic agreement. The Fifth Circuit characterized the Task Force's non-disclosure as "troubling" in inviting Skilling to file a motion for new trial with the District Court.

So, where does the Fifth Circuit's remand of the Skilling appeal stand in the District Court?

Well, a review of the District Court docket of Skilling's criminal case reveals that Judge Lake originally scheduled Skilling's resentencing for July 30th.

However, in a highly unusual move, Skilling and the prosecution filed a joint motion requesting Judge Lake to put off the re-sentencing indefinitely pending the filing of Skilling's motion for a new trial, the prosecution's response to that motion, and the Court's disposition of the motion. Moreover, the parties requested that the deadline for Skilling's motion be pushed back to July 10th, which Judge Lake approved.

So, what is going on here?

Could it be that Skilling's team has discovered even more exculpatory evidence that the Task Force failed to disclose to the Skilling defense prior to the trial?

Could it be that the government's current lawyers -- who were not members of the now disbanded Task Force and who have little incentive to cover for their predecessors -- are now finding themselves dealing with a serious failure of the Task Force members to comply with rules requiring the disclosure of exculpatory evidence to the defense in Skilling's case?

Could the Skilling case be turning into something similar to this?

Stay tuned.

Posted by Tom at 12:01 AM | Comments (2) |

April 29, 2009

Permanent Enron myopia

Inasmuch as what took place with regard to Enron earlier in the decade has now happened to much of Wall Street, the vacuity of the Houston Chronicle's coverage of Enron-related matters has become clear.

Nevertheless, Chronicle business columnist Loren Steffy still cannot work himself out of his small Enron shell.

Most recently, Steffy wrote this column in which he compares Sir Allen Stanford of the beleaguered Stanford Financial Group to former Enron executives, Ken Lay and Jeff Skilling:

All this finger pointing should bring a strong sense of déjà vu to Houstonians, who watched Enron’s meteoric rise and fall, as well as the unsuccessful efforts of the late company chairman Ken Lay and CEO Jeff Skilling to plead ignorance of the company’s fraudulent accounting practices and blame any criminal behavior on the chief financial officer, Andy Fastow.  .  .  .

If Stanford is any indication, the “I’m not a crook, I’m an idiot” defense for CEOs remains alive and well. For those who buy the idea that people who construct and direct massive financial enterprises are really dunces who haven’t a clue how they function, we’ve got a truckload of Enron shares to sell.

Of course, the foregoing is a complete misrepresentation of Skilling and Lay's defense. Rather than contending that he did not know what was going on at Enron, Skilling contended that he was a hand's-on manager over virtually all facets of Enron's far-flung business operations. Similarly, Lay contended that he became intimately involved in day-to-day management of the company after re-taking the Enron CEO role when Skilling resigned unexpectedly in August, 2001. Thus, Skilling and Lay's position was that they were totally engaged in Enron's massive business operations, that there was no wide-ranging fraud, and that Enron's trust-based business model failed when skittish post-9/11 markets became spooked over conflict-of-interest allegations regarding Fastow's role in generally legitimate special purpose entities.

That's a bit different than Sir Allen's defense that "he left all the financial stuff" to Stanford Capital's CFO James Davis, don't you think?

Steffy has done this before in regard to Enron-related matters, so another misrepresentation isn't really surprising. But what is troubling is the Chronicle's continued promotion of Steffy's simplistic world view in which most troubled businesses are seen as merely a vehicle by which greedy and unethical executives exploit helpless investors. Indeed, Steffy's fatuous viewpoint casts complex business events as merely struggles by honest investors against bad executives. Not only does this viewpoint ignore reality, it provides Steffy comfort by allowing himself to feel morally certain and superior to those he is belittling, while saving himself from the hard work of performing any serious analysis.

Morality plays are comfortable and easy to tell. The truth is more nuanced and harder to explain. In choosing to take the easy way out, the Chronicle and Steffy have forfeited the opportunity to provide a valuable service to investors and businesspeople by furthering understanding on such key subjects as the importance of hedging risk and the fragile nature of trust-based businesses.

That type of understanding sure would have come in handy for many investors in Wall Street firms over the past couple of years.

April 30, 2009 Update: Loren Steffy responds here and points out that the quote that I used above is from a Chronicle editorial that he did not write. For that error, I apologize.

However, Steffy's related column here makes the same misrepresentation regarding Ken Lay's defense and Steffy's blog post continues to fail to respond to the misrepresentation.

Some things never change.

Posted by Tom at 12:01 AM | Comments (5) |

April 24, 2009

Remember Ken Lay?

Joe Weisenthal and Henry Blodget over at Clusterstock have been all over the breaking story yesterday that, as many of us suspected, former Treasury Secretary Henry Paulson and perhaps other governmental officials threatened Bank of America CEO Ken Lewis and the BofA board if the bank exercised its right to terminate the Merrill Lynch acquisition based on a material change in Merrill Lynch's financial condition.

Of course, this is not the story that Lewis and Paulson were telling to BofA shareholders. They were assuring the shareholders that the Merrill Lynch acquisition was a great deal for BofA.

A few years ago, former Enron chairman Ken Lay was prosecuted to death for promoting Enron even though he had a reasonable basis for believing that what he was saying about his company was true. In contrast, neither Lewis nor Paulson could even offer the defense in a criminal fraud trial that they thought that the good things that they were telling BofA shareholders about the Merrill Lynch deal were true. We now know that they knew that the assurances were false.

This is not to suggest that Paulson or Lewis should be prosecuted for criminal fraud. They were in an extremely difficult situation -- they and others were concerned that the U.S. and world financial system might collapse if the markets became spooked by BofA backing out of the Merrill Lynch deal. I didn't agree with that concern, but I understood the position of those that did. They may have been correct. At this point, we'll never know for sure.

However, regardless of whether that view was correct, neither Paulson nor Lewis should be prosecuted for a violation of criminal law for their actions. Although they made intentionally false statements to the markets regarding BofA's acquisition of Merrill Lynch, there is no question that they thought what they were doing was essential to saving the financial system and firms such as BofA. If their actions make them responsible for damages to BofA shareholders, then let that liability be sorted out in civil court where liability can be allocated fairly to everyone who had a hand in causing those damages. What's to be gained by throwing them in prison? They simply were not operating on the same fraud plane as Bernie Madoff.

But here is my other point -- Ken Lay was prosecuted to death for conduct that was not even intentional. Now that what happened to Enron has happened to many of the biggest and most prestigious Wall Street firms, isn't it about time that somebody in the federal government acknowledges that what was done to Ken Lay was a massive injustice?

And in the meantime, isn't it about time that this barbaric injustice be rectified, too?

Posted by Tom at 12:01 AM | Comments (1) |

April 14, 2009

The Chronicle's Enron myopia

Even when it is on the right side of an issue, the Chronicle reminds us of its failings.

As noted earlier here, it has become fashionable among the Old Media to support the recent decision of the Justice Department to request dismissal of the criminal case against former Alaska senator Ted Stevens because of the DOJ's misconduct in handling the prosecution. The Chronicle chimed in last week with this self-righteous editorial.

Of course, for anyone paying attention, prosecutorial misconduct by the DOJ is not unusual. U.S. District Judge Lewis Kaplan sanctioned the DOJ by dismissing indictments against 13 former KPMG partners. Federal prosecutors in Miami are in hot water with a federal judge there over abusive tactics in a criminal drug case against a local doctor. There even appears to be a connection between the prosecutorial misconduct in the Steven case and the dubious case against former Vice-Presidential aide, Scooter Libby.

As the always-insightful Larry Ribstein points out, could it be that there are agency costs in managing corporate criminal prosecutions just as there are in managing corporations? Along the same lines, Doug Berman suggests that an insidious culture within the DOJ has produced the abuse of power.

But the most galling aspect of the Chronicle's emergent awareness of abusive state power is that it has virtually ignored the egregious examples of prosecutorial misconduct in its own hometown, particularly in the case against Jeff Skilling that resulted in a barbaric and indefensible 24-year prison sentence.

As conflicted publications such as the Wall Street Journal promoted Enron myths and the demonization of Enron executives, the Chronicle could have provided a valuable public service by providing balanced reporting and analysis of what really caused Enron's demise and how such a company can be better-structured to survive in even the most adverse market conditions. When clear evidence of prosecutorial misconduct emerged early in the Enron-related criminal cases, the Chronicle could have provided an even greater public service by taking a strong stand against such dangerous abuse of state power. It's certainly not hard to find historical reminders of the injustice that results from such abuse.

So, what did the Chronicle do instead? It embraced the Enron Myth and led the mob in demonizing Enron executives. From the beginning of the Enron-related criminal cases, the Chronicle editorial staff simply elected to ignore mounting evidence of prosecutorial misconduct in favor of the easier approach of leading the angry mob. The Chronicle's coverage of the Skilling prosecution was so inflammatory and biased that the Fifth Circuit Court of Appeals made the highly unusual finding that the Chronicle created a presumption of community prejudice against Skilling (see pp. 41-45 of the Fifth Circuit decision).

Even now, despite the legacy of prosecutorial misconduct in the Enron-related criminal cases and the fact that what happened to Enron has now happened to many big Wall Street firms, the Chronicle stubbornly clings to the Enron Myth and refuses even to acknowledge that the evidence of prosecutorial abuse in the Enron-related cases is worse than what caused the dismissal of the Stevens case.

As with most Old Media newspapers these days, the Chronicle is struggling to survive. Winning that first Pulitzer Prize sure would sure provide a boost to the Chronicle's flagging spirits.

Wouldn't it be the ultimate irony if the decision to lead the angry mob against Enron distracted the Chronicle from a truly enthralling story of prosecutorial misconduct that could have won the newspaper that elusive Pulitzer?

Posted by Tom at 12:01 AM | Comments (0) |

April 1, 2009

The Wavering Rule of Law

So, because of prosecutorial misconduct, the Justice Department decides to move for dismissal of the political corruption case against former Alaska senator Ted Stevens (previous posts here and here).

Meanwhile, Jeff Skilling, who created billions of dollars in wealth and thousands of jobs by revolutionizing risk management of natural gas prices for producers and industrial consumers, sits in a Colorado prison cell under the weight of a barbaric 24-year prison sentence. Skilling's conviction involved even more egregious prosecutorial misconduct than the Stevens case. The criminal case against Skilling was materially weaker than the case against Stevens, too.

It is a sad reflection of the current state of American rule of law that the DOJ readily concedes prosecutorial misconduct against an arguably corrupt legislator, but ignores it in a shaky case against a businessperson who created many jobs and great wealth.

And how bizarre is it that America's primary business newspaper rightly decries the government's abuse of Stevens' due process rights but continues to ignore even worse abuses with regard to a creative and productive businessperson?

Update: Larry Ribstein chimes in, too.

Posted by Tom at 12:01 AM | Comments (1) |

March 26, 2009

Losing the grip on AIG

The business blogosphere was abuzz yesterday over publication of AIG executive Jake DeSantis' remarkable resignation letter to AIG CEO, Ed Liddy.

But what was even more remarkable was the reaction of some commentators that makes abundantly clear that common sense often evaporates in the face of big money.

DeSantis is a longtime AIG executive who worked for one of AIG's profitable units. When AIG was going down the tubes last year because of losses incurred in the company's untethered CDS trading unit, DeSantis agreed to stay on at a nominal salary and continue making profits in his unit in return for a substantial, but not over-market, bonus.

Such arrangements are not unusual for financially-troubled companies and might very well have been arranged even had AIG gone into a chapter 11 reorganization rather than become the subject of an ill-advised government bailout. In short, it's a good thing for creditors of AIG -- including now U.S. taxpayers -- that the company retain people such as DeSantis who might make the company profitable and valuable again.

Or course, we all know what happened when AIG disclosed publicly that it had made the bonus payments to DeSantis and other AIG executives. They were demonized in a manner that has not been seen since Enron.

DeSantis' resignation letter lays this all out and notes the indisputable hypocrisy of AIG executives and government officials who knew about these compensation arrangements, but who flamed the public uproar rather than provide the quite simple and reasonable explanation for the bonuses.

I mean really. Who could argue that DeSantis and the other similarly-situated AIG executives were treated in an abominable manner?

Well, up to the plate steps one Brian Montopoli, a CBSNews.com political reporter, who establishes beyond any doubt that he needs to remain a political, rather than business, reporter:

Mr. DeSantis is not a plumber. He is a Wall Street executive who has made millions of dollars. And it’s safe to assume that most plumbers don’t believe he has gotten a bad deal, AIG scandal notwithstanding.

In essence, Montopoli reasons that other people are working just as hard as DeSantis and they would gladly trade places with him if they could have made as much scratch as he has earned over the years. Given that DeSantis made a lot of money while he was at AIG, Montopoli thinks he is "tone deaf" for pointing out the injustice of being unfairly demonized and cheated out of the compensation that was promised to him in return for staying on at AIG under extremely difficult circumstances.

In short, those evil capitalist roaders deserve most of our scorn and they should just shut the hell up.

In the face of such addled reasoning, it's hard to know where to begin. But let's start by pointing out that Montopoli ignores the rather important fact that no one has stopped him or anyone else from attempting to compete with DeSantis in his area of business and make just as much money as he has over the years. The reality is that there are relatively few people who do what DeSantis does well. That's why he commands a larger salary than most of us.

The fact that DeSantis makes more money than we do doesn't mean that it's OK to screw him out of his compensation or that he shouldn't be heard to set the record straight when such an injustice takes place.

Posted by Tom at 12:01 AM | Comments (9) |

March 11, 2009

Trampling Stanford

As most folks following the upfolding Stanford Financial Group scandal know by now, Laura Pendergest-Holt was the first Stanford executive arrested in connection with the scandal.

If only a few of the allegations contained in the motion below are true, it looks as if the Justice Department and the SEC are well on their way to trampling the Constitutional rights of Ms. Pendergest-Holt, R. Allen Stanford and the other targeted Stanford executives in a manner that we've seen before.

Posted by Tom at 12:01 AM | Comments (2) |

March 3, 2009

An uncivilized routine

Former Hollinger International chairman and CEO Conrad Black's daily routine these days is not quite as civilized as the one followed by Winston Churchill, wouldn't you agree?:

I get up just after 7 except on the weekends and holidays when it is possible to sleep in. I eat some granola and go to my workplace where I tutor high school-leaving candidates, one-on-one, though sometimes I have to deal with up to four at a time, around my desk, and talk with fellow tutors and other convivial people. I lunch around 11 with friends from education, work on e-mails, play the piano for 30 to 60 minutes, return to my tutoring tasks by 1, return to my unit at 3, deal with more e-mails, rest from 4 to 6, eat dinner in the unit then, and go for a walk in the compound or recreation yard for a couple of hours, drinking coffee well-made by Colombian fellow-residents, and come back into the residence about 8:30, deal with e-mails and whatever, have my shower etc., around midnight, read until 1-1:30 a.m. and go to sleep. On the weekends it is pretty open. [.  .  .]

The days and weeks tend to resemble each other. Time does go by quickly but a bit imperceptibly. I have quite a lot of e-mail and correspondence and limited telephone traffic. Essentially, I try to keep as well in touch with people and events as possible and I am lucky that many friends outside want to correspond. I psychologically live outside this facility most of the time.

Posted by Tom at 12:01 AM | Comments (1) |

February 28, 2009

The Price of Progress

As noted here last fall, one of the key dynamics that is delaying the recovery of financial markets is the resistance of many societal forces to allow the markets to allocate the risk of loss among the various investors in failed businesses.

Inasmuch as private capital will not invest in even a potentially viable business until that company's financial condition is likely to reward such an investment, the liquidation of unviable companies is an essential part of the process that has allowed market-based economies to generate the most wealth and jobs throughout modern history.

Despite the foregoing, the beneficial aspects of liquidating unprofitable businesses remains often unappreciated. A scene from the 1991 Norman Jewison film "Other's People Money" illustrates this truth wonderfully, first as Gregory Peck's character demonizes the forces of liquidation and then as Danny DeVito's "Larry the Liquidator" shatters the myths upon which such demonizing rests. Enjoy.

Posted by Tom at 12:01 AM | Comments (2) |

February 23, 2009

The Journal's curious case of myopia

Bully for the Wall Street Journal for running this editorial last week decrying the prosecutorial misconduct of the Justice Department in obtaining the conviction of former Alaska Senator Ted Stevens on ethics charges (Mike over at the Crime and Federalism blog has posted a copy of the defense motion describing the prosecutorial misconduct here).

However, where was the nation's leading business newspaper when even more egregious prosecutorial misconduct was involved in criminal cases that the DOJ brought in regard to Enron, particularly the prosecution of Jeff Skilling?

Could it be that the Journal was invested in the DOJ's myth regarding Enron?

How ironic that the WSJ condemns prosecutorial misconduct with regard to the case against a politician, but largely ignores it in cases against businesspeople.

Posted by Tom at 12:01 AM | Comments (0) |

February 18, 2009

Stanford blows up

Well, that certainly didn't take long, now did it?

As noted here this past Sunday, R. Allen Stanford's Stanford Financial Group has been well-known around Houston as a smoke-and-mirrors investment outfit for quite awhile. Joe Weisenthal over at Clusterstock has the best overview of Stanford's collapse, while Felix Salmon does a good job of summarizing the SEC complaint and asking the right questions about the principals of the firm. The Chron's Kristen Hays and Tom Fowler provide the local angle here.

Meanwhile, the Chronicle's business columnist Loren Steffy bemoans the fact that government regulators -- who have been investigating Stanford for at least the past four years -- were again behind the knowledge curve in protecting investors from Stanford's apparent investment fraud.

However, Steffy's expectations are simply misplaced. A government regulatory body will rarely be as effective or efficient as the information marketplace in preventing or mitigating investment fraud loss. Had the investors in Stanford relied on Houston's information market in deciding on whether to invest in the company, they wouldn't have needed the "protection" of government regulation.

Posted by Tom at 12:01 AM | Comments (1) |

January 30, 2009

Considering the whole man

Over the years, I've written quite a bit (for example, here, here and here) on the questionable nature of the prosecutions of the executives who were involved in the AIG/General Re finite risk transaction that prompted Eliot Spitzer to demonize Hank Greenberg.

However, I've never written as eloquently about the injustice of those prosecutions as Anthony O'Donnell does in this I&T post about the sentencing of former AIG vice-president of reinsurance, Christian Milton.

As noted previously here, the human toll of the criminalization-of-business lottery is incalculable. Careers destroyed while lives and families are shattered.

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (0) |

January 27, 2009

The potential consequences of being tricky

It's rarely pleasant for a businessman to have his personal affairs splashed across the front page of the New York Times business section.

But it has to be particularly unsettling for the businessman when he is already the target of numerous civil lawsuits and, quite possibly, a criminal prosecution.

Frankly, I've never understood the reasoning of lawyers who advise their clients at the center of such a litigation firestorm to transfer assets to their family members. Fuld and his wife are reportedly quite wealthy, so maybe they have legitimate estate planning reasons for Fuld to transfer his interest in a multi-million dollar home to his wife for nominal consideration.

But Fuld is also subject to numerous civil lawsuits in connection with the Lehman Brothers meltdown. Those lawsuits seek hundreds of millions in damages, and the company's officers and directors' insurance likely will not come close to covering those damages. Thus, the fact that Fuld is transferring a valuable interest in an asset to his wife for nominal consideration at this particular time will be of more than passing interest to the plaintiffs in those lawsuits.

Inasmuch as Fuld is the only person in his family who has any civil liability in those lawsuits, why subject other family members to possible fraudulent transfer liability?

Similarly, in the unlikely -- but certainly possible -- event that Fuld's litigation problems force him into a personal bankruptcy case, why take the risk that his legal right to a discharge of personal liability for claims against him would be denied because of the transfer to his wife?

However, beyond the civil liability concerns, the main reason that Fuld should not have engaged in this type of transfer under his particular circumstances is simply that it looks bad. Real bad. Not only to potential creditors, but more importantly, to prosecutors who will make the decision on whether to indict Fuld. And, most importantly, to jurors who will decide Fuld's fate.

For example, remember the criminal case against former Enron chairman, Ken Lay? The prosecutors conceded (bragged?) afterward that it was a very weak case. So, rather than focus on the supposed criminal conduct, the prosecutors hammered away on Lay's indiscrete use of his personal line of credit with the company. As noted in my concluding post on the seventeen-week trial:

[I]f there was a defining moment in the trial that sealed the defendants' fate, then it likely came in Week Fourteen during Task Force prosecutor John Hueston's cross-examination of Lay over the use of his company line of credit.

Although Lay's line of credit was legal and the company disclosed his use of it in accordance with applicable law, Lay's repayment of the large draws on the line with Enron stock at a time when he was encouraging employees and the market to buy company stock was an apparent contradiction that the jurors could easily grasp.

Similarly, Lay's decision to draw down $1 million on the line five days before Enron's bankruptcy [to help pay off the mortgage on Lay's condominium] was a disastrous decision for the defense. Although done on advice of counsel, Lay's last-minute draw as the company was sinking into insolvency looked so bad that reference to that testimony by leaders of the jury during deliberations was probably enough to seal any wavering non-leader juror's view on whether to convict.

If Fuld is indicted, then you can rest assured that prosecutors will bring his recent transfer to his wife to the attention of the judge during proceedings over the amount of his bond pending trial. And although the transfer has nothing to do with the probable criminal charges against Fuld (i.e., violating the obligation to throw in the towel), prosecutors will try to use it anyway to make him look tricky in the eyes of jurors.

You see, such a transfer plays right into the real presumption these days in business crime prosecutions -- Fuld is wealthy and his company collapsed, so he must be guilty of some crime in connection with his company's demise.

Sadly, being proven greedy is often enough to be convicted of a crime.

Posted by Tom at 12:01 AM | Comments (2) |

January 26, 2009

Making bad policy

It sure is getting hard to keep up with all the rules involved in determining whether an important person gets prosecuted for an alleged business crime.

First, there was the Apple Rule, which was quickly followed by the Dell Rule.

Next, there was the Buffett Rule.

And then we had the GM Rule.

Now, Larry Ribstein reports that we have the Geithner Rule.

None of which is likely to help Wachovia's Bob Steel, who the SEC apparently believes violated the obligation to throw in the towel.

Does anyone really believe that all these rules and the criminalization-of-business lottery constitutes a coherent policy for regulating questionable business deals?

Posted by Tom at 12:01 AM | Comments (0) |

January 13, 2009

The criminalization-of-business lottery

The owners of Long Term Capital Management may have been the earliest winners in the most recent era of what Larry Ribstein has coined the criminalization-of-business lottery.

On the other hand, Jamie Olis may have been the earliest big loser.

Martha Stewart lost, but at least never lost her business enterprise. Frank Quattrone also lost, but then he won, although I suspect that he believes that he lost overall.

Subsequently, Theodore Sihpol won while Bill Fuhs and his family lost a year of his life before he won, too. But he and his family will never get that year back.

Then, Ken Lay lost big even though he had a reasonable basis for believing that he should have won. Same with Jeff Skilling.

Meanwhile, mainstream media darlings Steve Jobs and Warren Buffett won, although several of Buffett's associates did not fare as well. Neither did relative media unknown Greg Reyes.

But General Motors CEO Rick Wagoner appears to be a winner, even though those two Bear Stearns executives probably aren't.

And who knows about those Lehman Brothers executives -- they may be winners, after all? I mean, everyone was doing it, right?

Finally, for awhile, it looked as if David Stockman was going to be a big loser. But in a startling turnaround, Stockman is now a winner.

Just as with a gambling lottery, there is no rhyme or reason as to who wins or loses in the criminalization-of-business lottery. But in this lottery -- which does little or nothing to deter the true business criminals of the world -- the losers and their families give up much more than merely money.

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (3) |

January 8, 2009

Another Angry Mob

The Fifth Circuit's decision yesterday reminded us of the angry mob that lynched Jeff Skilling.

Now, as this timely Roger Parloff/Fortune article notes, an even larger mob is gathering to lynch the businesspeople who were attempting to save their companies in the wake of last year's financial meltdown on Wall Street:

The level of fury surrounding these inquiries is of a different order from what we saw with, say, the backdating scandals or the Enron and WorldCom failures. Today's credit collapse has already vaporized about $9 trillion in investment capital, while ripping another trillion in assorted bailout money from the pockets of enraged taxpayers - also sometimes known as "jurors."

Based on the Fifth Circuit's Skilling decision, those targeted businesspeople would be wise not to rely on the courts for protection from the mob.

Posted by Tom at 12:01 AM | Comments (1) |

January 7, 2009

The Fifth Circuit rules in the Skilling appeal

In this current anti-business climate, not many folks were expecting that the Fifth Circuit Court of Appeals would set aside former Enron CEO Jeff Skilling's conviction.

On the other hand, not many folks expected this decision, either.

In the curiously detached 104 page opinion, the Fifth Circuit affirmed Skilling's conviction, but reversed his sentence and remanded that part of the case to U.S. District Judge Sim Lake for resentencing based on the appellate court's rejection of Judge Lake's four level enhancement under the sentencing guidelines for for "substantially jeopardizing a financial institution."

Based on my rough calculations, I think that means that the range for Skilling sentence would be reduced from 292-365 months to 188-235 months. If Judge Lake resentences Skilling at the bottom of new range, then Skilling's 24 year sentence would be reduced by 104 months, which computes to an 8.5 year reduction.

That's certainly better than nothing.

In reading the opinion, I gathered the impression that the Fifth Circuit panel really did not have its heart in it. Despite the 104 page length, the opinion mostly glosses over the hotly-disputed fact issues regarding the government's charges against Skilling. And even in affirming Skilling's conviction, parts of the decision provide hope to Skilling that his monstrously unjust 24 year sentence will be set aside completely or reduced even further.

Rather than parse the decision in a blog post, here is a copy of the decision in which I have used Adobe Acrobat to bookmark the sections of the decision, as well as highlight and annotate comments on my initial reading of the decision.

First and foremost, the decision muddles the adjudication of Skilling's argument that his conviction was tainted by the government's legally invalid "honest services" theory.

If you've been following the Enron-related criminal cases from the first one (Arthur Andersen), you know the drill -- in an effort to facilitate prosecutions, the Enron Task Force developed a fallacious theory of criminal liability out of the honest services wire fraud statute that is normally used in corporate crime cases involving bribes or kickbacks. In short, the government's new theory attempted to stick a square peg in a round hole.

As a result, none of the Enron-related prosecutions proceeded smoothly. The government would normally bludgeon former Enron executives into plea deals, have them testify about "secret side deals" that changed the nature of an otherwise valid business transaction and then accuse defendants such as Skilling of breaching their fiduciary duty to the company and committing the crime of honest services wire fraud by allowing the transactions to be accounted for pursuant to the terms of written agreements rather than the "secret side deal." The fact that all of the written agreements contained provisions that rendered any such oral agreements void has been regularly ignored by the government and most courts throughout the entire Enron ordeal.

After the Enron Task Force used this theory of honest services wire fraud to convict Skilling, the Fifth Circuit struck down the theory in the Nigerian Barge case by concluding that it does not apply where employees "breached a fiduciary duty in pursuit of what they understood to be a corporate goal."  Accordingly, the Skilling team based a major part of his appeal on the Fifth Circuit's decision in the Nigerian Barge case.

Without expressly saying so, the Fifth Circuit in Skilling creates a "policymaker exception" to the rule that a breach of fiduciary duty that is aligned with corporate interests cannot be an honest services wire fraud. The Court reasons that, since Skilling was the person who authorized the fraudulent means to achieve the corporate goal, he could be held criminally liable under the honest services wire fraud statute even if his employees could not (pp. 21-23).

Not particularly persuasive reasoning, but there you go.

Some other observations:

At several points in the prosecutorial misconduct section, the Court invites Skilling to file a motion for a new trial with Judge Lake, particularly in regard to the Fastow interview notes that the prosecution failed to turn over to Judge Lake during the trial. The Court specifically finds that "the omission of this statement [that Fastow did not think he discussed Global Galactic with Skilling] from the [FBI Form] 302's is troubling."

The Court clearly is not impressed by the objectivity of the Houston Chronicle, citing the newspaper's highly inflammatory coverage of Skilling's case in finding presumed community prejudice against Skilling. Of course, the Chronicle's most vitriolic critic of Skilling doesn't even notice (see also here and here) the Court's criticism.

On one hand, the Fifth Circuit finds that Judge Lake committed error by failing to presume jury prejudice for purposes of Skilling's change of venue and jury prejudice argument. Then, on the other, the Court rules that Skilling waived his jury prejudice argument on appeal by failing to register objections for cause on 11 of the 12 jurors.

The Court concludes that Judge Lake's "exemplary voir dire" helped the government fulfill its burden of establishing that an impartial jury had been impaneled despite the presumed prejudice against Skilling. I have my doubts.

The Court chides Judge Lake for his remarks during a pre-trial hearing that there was a "reasonable likelihood" that the witnesses did not cooperate with Skilling because the witnesses were guilty of related crimes and wished to assert their Fifth Amendment privilege to avoid incriminating themselves. However, the Court concludes that Judge Lake's improper remarks were harmless error.

The Fifth Circuit lets former Enron Task Force Andrew Weissmann off the hook with regard to Skilling's allegation of witness intimidation, but notes that "Weissmann would have done well to have brought the issue [of alleged conflict of interest] to the court's attention instead of emailing [former Enron executive Ken] Rice's lawyer."

The opinion starts out by observing that "[A]n initial investigation uncovered an elaborate conspiracy to deceive investors about eh state of Enron's fiscal health." The Court does not identify who conducted this "initial investigation" or who the participants were in the "elaborate conspiracy." Not particularly convincing.

Although the Fifth Circuit opinion provides Skilling with some running room to continue challenging his conviction and sentence, it is foreboding to the dozens of business executives who are currently subjects of various pending grand juries investigating the meltdown on Wall Street. Given the paper-thin nature of the government's allegations of criminal conduct against Skilling and the substantial evidence of prosecutorial misconduct, the Fifth Circuit's decision sweeping most of that under the rug is a strong indicator that obtaining convictions in future prosecutions of business executives will be akin to shooting fish in a barrel.

Posted by Tom at 12:01 AM | Comments (1) |

December 24, 2008

Playing fair

So, now Alaska Senator Ted Stevens is finding out that some federal prosecutors do not play fair (H/T Doug Berman). Of course, we've known that for quite some time down here in Houston.

Oh well, at least the mainstream media has strong incentives to expose such abuses in the case of a major political figure.

But do the same media incentives exist in the prosecution of a wealthy and unpopular businessperson?

What if the reporter most responsible for such a prosecution is, might we say, not particularly motivated to expose prosecutorial abuses? Or what if the reporter for the nation's most prominent business newspaper is so conflicted that he ignores the abuses even when they are playing out in front of him?

And the foregoing doesn't even consider what we should think when one of those reporters in another case actively attempts to help investors score on their positions at the expense of a company and its chief executives.

It's hard enough to maintain innocence against the overwhelming resources of the federal government when the prosecution plays fair. It's next to impossible to do so when it doesn't. What chance is there if the people responsible for exposing prosecutorial abuse have incentives that override that responsibility?

Ask Jeff Skilling.

Posted by Tom at 12:01 AM | Comments (0) |

December 18, 2008

Making sense of Madoff

Loren Steffy, the Houston Chronicle's business columnist, has been having a hard time lately.

You will recall that Steffy was one of the leaders of the mainstream media lynch mob that embraced the myth of the Greed Narrative in calling for harsh criminal prosecutions of former Enron executives, particularly the late Ken Lay and Jeff Skilling.

However, now that pretty much the same thing that happened to Enron has happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses during the current financial crisis, Steffy has had difficulty making sense of it all. We can't just throw all of those executives in prison, can we?

Now to make things even more confusing for Steffy, Bernard Madoff's alleged Ponzi scheme has unraveled. Steffy's column from yesterday bemoans that Madoff, as with Enron, was at least in large part the result of lax regulation:

And so the era of lax regulation that began with Enron ends with the Madoff madness looming as a monument to the SEC’s ineptitude. Already under fire for smelling the flowers while Bear Stearns — to cite one example — charged toward collapse, the SEC’s days may be numbered. Treasury Secretary Henry Paulson introduced a sweeping reform plan earlier this year that would relieve it of much of its oversight role.

But wait a minute. The SEC had been continually warned about Madoff's company (see Henry Markopolos' 2005 notice to the SEC here). Moreover, the "lax regulation" that Steffy complains about came at a time of unparalleled growth in the SEC during the supposedly pro-business Bush Administration:

Since 2000 and especially after the fall of Enron, the SEC's annual budget has ballooned to more than $900 million from $377 million.  .  .  . Its full-time examination and enforcement staff has increased by more than a third, or nearly 500 people. The percentage of full-time staff devoted to enforcement -- 33.5% -- appears to be a modern record, and it is certainly the SEC's highest tooth-to-tail ratio since the 1980s. The press corps and Congress both were making stars of enforcers like Eliot Spitzer, so the SEC's watchdogs had every incentive to ferret out fraud.

Yet, the regulators couldn't put the pieces of the puzzle together (even Spitzer's family was a victim of Madoff!). So, Steffy's solution is the SEC "needs to be put out to pasture." In other words, rearrange the deck chairs on the Titanic.

Look, as J. Robert Brown and Larry Ribstein point out, there are understandable systemic reasons why Madoff was able to slip through the regulatory cracks for decades. Most of those flaws are not going to be fixed by simply creating a Super-SEC. Indeed, the suggestion that such regulatory remedies are the best protection against the next Madoff (and, rest assured, there will be many) actually is counter-productive to understanding the truly best protection from such schemes.

The primary justification for this regulatory retrofitting is the plight of the innocent investors (and it sure is an interesting bunch) who lost millions when Madoff's company went bust. Although nothing is wrong with compassion for folks who lose money in an investment fraud, it's important to remember that those investors who lost their nest egg in the Madoff implosion were imprudent in their investment strategy. They should have diversified their Madoff holdings or done some real due diligence into his operation if they were going to bet the farm on it. Even though every one of Madoff investors carry insurance on their homes and cars, one can only speculate why they didn't attempt to understand the risk of their investment in Madoff's company better than most did. Most likely, many of the investors simply did not care to truly understand how Madoff claimed to create wealth for them in the first place. Chidem Kurdas' speaks to this dynamic in his timely study on the demise of the Manhattan Capital hedge fund:

As the failure of the hedge-fund firm Manhattan Capital demonstrates, both government regulators and market players can make mistakes resulting from cognitive biases. Responding to such mistakes by strengthening government watchdogs, although often recommended, reduces both the watchdogs’ and the public’s incentive to learn, thereby creating a vicious spiral of regulation, regulatory failure, and even more regulation.

Thus, as Larry Ribstein has been advocating for years, no amount of increased regulation is likely ever to do a better job than the market in mitigating fraud loss. It's easy to throw Madoff in prison for the rest of his life, simply attribute the investment loss to him and pledge to do a better job of policing the crooks next time. It's a lot harder to understand how Madoff's investors could have hedged their risk of Madoff's fraud. As this WSJ editorial concludes, "expecting the SEC to prevent a determined and crafty con man from separating investors from their money is no more sensible than putting your life savings with a Bernard Madoff."

Posted by Tom at 12:01 AM | Comments (2) |

December 17, 2008

A tuna wins a small lottery prize

As a result of the Buffet Rule, the federal government decided to land a bunch of tuna rather than the barracuda in regard to an AIG-General Re finite risk insurance transaction that was not clearly illegal, much less criminal.

Subsequently, after convicting the business executives (sort of like shooting tuna in a barrel these days), the federal prosecutors proposed that the tuna get effective life sentences. For what?

Thankfully, a federal judge in Connecticut showed unusual restraint on Tuesday in rejecting the government's brutal behavior. He handed the first of the tuna to face sentencing a two-year prison term.

Meanwhile, former Enron executive Jeff Skilling continues serving an effective life prison sentence in Colorado pending his appeal after being convicted (although not fairly) for pretty much the same thing as the tuna above.

So, during a financial downturn when we need to be promoting our best and brightest to be engaging in the business risks that generate jobs and wealth, our federal government continues promoting its corporate criminal lottery.

Why would the best and brightest risk that?  Do any investors really feel safer now that Skilling is off the streets? And does anyone really think that keeping Skilling locked up for most of the rest of his life will deter the next Bernie Madoff?

A truly civil and wise society would find a better way.

Posted by Tom at 12:01 AM | Comments (0) |

December 5, 2008

But what about that case in which the threat worked?

This Wall Street Journal editorial from earlier in the week rightly notes that the "Department of Justice finally got something right" by electing not to appeal the Second Circuit's decision earlier this year upholding U.S. District Judge Lewis Kaplan's dismissal of tax fraud indictments against 13 former KPMG partners.

In the KPMG case, the DOJ made KPMG an offer that it couldn't refuse -- either ignore the firm's long-standing policy of paying the criminal defense costs of its indicted partners or be prosecuted out-of-business ala Arthur Andersen.

Judge Kaplan concluded that dismissal of the indictments was the only reasonable remedy in the face of the DOJ's deck stacking. I'm happy for the former KPMG partners, who at least get their lives back (but probably not their careers) from the threat of long imprisonment.

But what about Jamie Olis?

Unlike the KPMG case, the DOJ actually got away with undermining Olis' criminal defense by threatening Dynegy with indictment unless it quit paying Olis' criminal defense costs. Dynegy cratered to the DOJ's threat and a cash-strapped Olis was unable to mount an effective defense at his trial. The result was a conviction and a barbaric 24 year sentence, later reduced to a merely unconscionable six year term.

Olis is currently scheduled to be released from prison in mid-2009. This man and his family have already been tortured for over five years in one of the most egregious examples of prosecutorial abuse and excess of the misguided post-Enron governmental crusade to punish businesspeople.

Isn't it about time that the DOJ finally got something right in the sad case of Jamie Olis?

Posted by Tom at 12:01 AM | Comments (0) |

November 25, 2008

He should know

You just never know what those former Enron Task Force prosecutors are going to say.

Last week, one of them was incongruously advocating limitation of corporate criminal liability.

This week, David Westheimer points out that former Task Force prosecutor John Hueston is opining that the Securities and Exchange Commission's insider trading case against Mark Cuban is so weak that it should not be pursued.

A weak case that shouldn't be pursued?

Hueston sure ought to know.

Posted by Tom at 12:01 AM | Comments (0) |

November 22, 2008

Do as I say, not as I do

Andrew Weissmann is a rather odd advocate (see here and here) for limiting corporate criminal liability, don't you think?

Let's take a look back on Weissmann's business prosecution scorecard. A unanimous U.S. Supreme Court overturned Weissmann's dubious prosecution of Arthur Andersen, which was the final blow in putting that hallowed institution of American accounting out of business.

And the Fifth Circuit has largely eviscerated the notorious Nigerian Barge prosecution in which Merrill Lynch served up four executives to Weissmann to avoid an indictment of the firm.

But now, in United States v. Ionia Management, S.A., Weissmann is attempting to persuade the Second Circuit Court of Appeals to limit prosecutors from doing precisely what he did to Arthur Andersen and Merrill Lynch

In view of all this, I wonder whether any of the Second Circuit judges thought to ask Weissmann why he used his stint as a prosecutor to cause tens of thousands of job losses and enormous wealth destruction?

Or why Weissmann used criminal prosecutions to cause destruction of numerous good business careers of Arthur Andersen partners and Merrill Lynch executives where the only thing that they did wrong was to do business with what became a social pariah, Enron.

Had Weissmann been asked such questions, would he have attempted to defend his conduct at the expense of his current clients?

If so, that would not have been a winning appellate argument.

Posted by Tom at 12:01 AM | Comments (1) |

November 14, 2008

Ghosts of Enron

Ken Lay was prosecuted to death for promoting Enron even though he had a reasonable basis for believing that what he was saying about his company was true.

Fast forward a couple of years. Yesterday,  the W$J reported (NYTimes here) that General Motors may not be able to avoid bankruptcy because of political problems involved in obtaining a bailout loan package from the federal government. GM is "rapidly burning through cash reserves as car sales plummet and their access to credit tightens. GM has warned it may run out of money within months without outside help."

From what I can tell, no one is calling for the scalp of GM CEO Rick Wagoner because of confident public statements that he made just a few months ago about his company.

So, the corporate crime lottery continues. A truly civilized society would find a better way.

Posted by Tom at 12:01 AM | Comments (0) |

November 7, 2008

The NatWest Three are finally going home

The NatWest Three -- the three U.K. bankers who were dragged through the Enron mud for the past five years -- are finally going home after serving about six months of their sentences in U.S. prisons.

After a hearing in New York yesterday, the three men have completed the prolonged transfer process from the U.S. prison system to the U.K. system. Accordingly, they will fly to England next week to serve the remainder of their three-year sentences there. Hopefully, they will be paroled in short order under the U.K.'s more humane sentencing laws pertaining to white-collar crimes.

Although the treatment of these men by U.S. criminal justice authorities has been mostly scandalous, the mainstream media continues to misrepresent their story (see this earlier example). More recently, see this London Telegraph article that gets just about everything wrong about the case and the plea bargain that the three men struck.

Read this if you want to know what really happened with regard to the NatWest Three. It's a nuanced and far more interesting story than the mainstream media's morality play.

Posted by Tom at 12:01 AM | Comments (0) |

October 31, 2008

The Prince of Regulation

Get a load of the letter that New York Attorney General Andrew Cuomo, the new Prince of Regulation, sent to about ten Wall Street firms the other day:

We believe that the Board of Directors is most appropriately positioned to respond to our requests as the firm's top management likely has a significant interest in the size of the bonus pools. In this new era of corporate responsibility we are entering, boards of directors must step up to the plate and prevent wasteful expenditures of corporate funds on outsized executive bonuses and other unjustified compensation.

As my Office has told AIG, now that the American taxpayer has provided substantial funds to your firm, the preservation of those funds is a vital obligation of your company. Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them.

Accordingly, we also ask that the Board inform us of the policies, procedures, and protections the Board has instituted that will ensure Board review of all such company expenditures going forward. Please provide this Office with an accounting of the actions the Board plans to take that will protect taxpayer funds.

So, Cuomo charts the same political course as Eliot Spitzer before him and Rudy Giuliani before Spitzer. Embrace the Greed Narrative and then sit back and let the mainstream media do the rest. Before you know it, even both major presidential candidates tout the myth that business failure is always about dastardly villains and innocent victims.

My question for Cuomo and his mainstream media minions is quite simple: What is the likely quality of the management and board members who are willing to stick around and put up with Cuomo's grandstanding?

My bet is that you won't see many Hank Greenbergs.

Meanwhile, those less-than-stellar management teams all have tickets to feed at the Fed's money trough.

Ah, the webs we weave.

Posted by Tom at 12:01 AM | Comments (0) |

October 15, 2008

Hedging the Enron trial penalty

On the heels of this news, and given the mainstream media's ubiquitous characterization of Enron as the harbinger of the current Wall Street financial crisis, it's really not surprising that former Enron Broadband co-CEO Joe Hirko opted to cop a plea on Tuesday rather than face a draining re-trial of the notorious Enron Broadband case. A copy of the plea deal is here.

Although Hirko and his co-defendants overcame enormous odds to win acquittals and a hung jury in the initial Broadband trial, Hirko and his family have already endured over five years of uncertainty as the Damoclean Sword of a relentless federal prosecution hung over their heads. Inasmuch as Hirko could have easily been looking at a decade behind bars if he were to be convicted in the re-trial, a probable sentence of 12-16 months in a plea deal is a reasonable hedge of what has become the draconian trial penalty for business executives.

Posted by Tom at 12:01 AM | Comments (2) |

October 14, 2008

Refracting Enron myopia

One of the more entertaining aspects of the current Wall Street financial crisis has been reading how some of the business columnists have been interpreting it.

Take, for example, Houston Chronicle business columnist, Loren Steffy. You may remember him from his acerbic coverage of the trial of former Enron executives, Jeff Skilling and the late Ken Lay, or his perpetuation of the Enron Myth regardless of the circumstances.

Dismissing me as an Enron apologist, Steffy regularly disputed my long-held theory that the run-on-the-bank that felled Enron could well happen to any trust-based business.

Apparently confused by the fact that what happened to Enron has now happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses impacted by the current credit crunch, Steffy reaches for insight from one of the fellows who set the stage for this mess:

Investigators are poring over the failed firms, looking for signs that executives misled shareholders. Some evidence may be found, but Sam Buell, the former prosecutor who led the effort to indict Enron's Jeff Skilling, doesn't think we'll see widespread prosecutions.

"It's not a conspiracy if everybody's in on it," said Buell, who's now a law professor at Washington University in St. Louis. "In order to have a fraud conspiracy, you've got to have some effort by one group to deceive another group."

In this case, individual investors may not have understood what Wall Street bankers were doing with complex debt securities, but those charged with safeguarding the marketplace were certainly aware.

Regulators knew and approved. So did credit rating agencies. And auditors, both internal and external. With a mouse click, investors could find public documents that described the debt instruments with hundreds of pages of detail. [.   .   .]

"If everybody's in a bubble mentality, if they're betting the price of real estate will keep going up, disclosure doesn't address the problem of what happens when all those assumptions turn out to be wrong," Buell said. "Everybody knows what they're doing. They're just making bad decisions."

Yes, you read that correctly. Buell implies that Skilling was guilty of criminal conspiracy because not "everybody" was "in on it" at the time Enron was making its supposedly opaque disclosures. However, since "everybody's in on it" now, Buell doesn't think there will be widespread prosecutions because "[i]t's not a conspiracy if everybody's in on it."

With such reasoning, is there any doubt now why this outfit generated this record?

For the record, I actually hope Buell is right this time that few businesspeople are prosecuted for misjudging business risk. But for a more rational explanation of how financial regulation fits into the current crisis, check out these Larry Ribstein posts here, here and here and this masterful one by Arnold Kling.

Posted by Tom at 12:01 AM | Comments (1) |

October 11, 2008

230 years?

So, the Justice Department is seeking a sentence of 230 years for former General Re senior counsel Robert Graham, a 60-year old man who has never been involved in any wrongdoing in his life.

Mercifully, the pre-sentencing report recommends a sentence of "only" 12-17 years.

Graham was convicted earlier this year of securities fraud in connection with his involvement in a finite risk transaction between General Re and AIG that was one of the transactions that led to the downfall of former AIG CEO, Hank Greenberg (prior posts here).

Ironically, AIG is now fighting for its life -- even after receiving loans from the Fed in amounts approaching $150 billion -- as a result of thousands of transaction decisions that were far more questionable than the one Graham made.

230 years. For involvement in a transaction that was not even clearly improper, much less criminal in nature.

230 years. As a result of a prosecution that required application of the Buffett rule.

230 years. What does that portend for the AIG executives who engaged in this bit of bad judgment? Or those who were involved in this? Did they commit a crime because they breached an obligation to throw in the towel?

This is our government doing such things, folks. It is a reflection of us. And that reflection is not particularly attractive these days.

Posted by Tom at 12:01 AM | Comments (1) |

September 16, 2008

That other hurricane

So, while the Houston area was enduring a hurricane, the financial markets were enduring one, too.

As with Enron and Bear Stearns, the demise of Lehman Brothers reinforces the inherently fragile nature of a trust-based business (related posts here). 

Larry Ribstein has been insightfully pointing out for years that more regulation of those businesses will not prevent the next meltdown, just as the more stringent regulations added after Enron's collapse did not prevent Bear Stearns or Lehman Brothers from failing. More responsive forms of business ownership certainly are a hedge to the inherent risk of investment in a trust-based business. Better investor understanding of the wisdom of hedging that risk would help, too.

But as Warren Meyer eloquently wonders, what must Jeff Skilling be thinking about all this? Is Skilling's inhumane sentence -- as well as the barbaric handling of the criminal case against him and other Enron executives -- the sacrifice that American society needs to quench its blood thirst to do the same to the leaders of trust-based businesses that suffer the same fate as Enron? I hope not, but  .   .   .

The truth is that Enron -- as with Bear and Lehman Brothers -- was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation that got caught in a liquidity crunch when the markets became spooked by revelations about Andrew Fastow embezzling millions in the volatile months after September 11, 2001.

Fastow's embezzlement is a crime, but Enron's demise is not, nor should it be. Beyond the shattered lives and families, the real tragedy here is that an angry  mob convicted Skilling, trumping the rule of law and the dispassionate administration of justice along the way. None of us would be able to survive "in the winds that blow" from the exercise of the government's overwhelming prosecutorial power in response to the demands of the mob.

I continue to hope that Skilling's unjust conviction and sentence are reversed on appeal. Not only for his benefit, but for ours.

Posted by Tom at 12:01 AM | Comments (2) |

August 26, 2008

Glass houses

Dan Slater of the Wall Street Journal's Law Blog notes the Kremlin's recent refusal to grant parole to former OAO Yukos CEO Michael Khodorkovsky, who is serving an eight-year prison sentence in Siberia for tax evasion and fraud.

Khodorkovsky's conviction and prison sentence are widely viewed within the U.S. as evidence that the Russian business and judicial systems remain largely corrupt and not conducive to honest commercial investment.

Maybe so, but what does the same reasoning conclude about a system that produces barbaric injustices such as this, this, this and this, to name just a recent few?

People who live in glass houses .  .  .

Posted by Tom at 12:01 AM | Comments (0) |

August 9, 2008

Criminal justice?

The always-insightful Larry Ribstein points out that Jamie Olis would have been better off providing material support for Osama Bin Laden than working on the beneficial structured finance transaction that ultimately led to his criminal conviction.

The sad case of Jamie Olis remains one of the most egregious abuses of the government's prosecutorial power during the post-Enron criminalization of business. The relative lack of outrage over it reflects poorly on all freedom-loving Americans.

Posted by Tom at 12:01 AM | Comments (0) |

August 6, 2008

Cutting the Pai

Former Enron executive Lou Pai's recent settlement with the Securities and Exchange Commission confirmed that the Greed Narrative is still embraced by much of mainstream American society. Take, for example, Charles Kuffner's reaction:

Reading this story reminds me why I was bothered less than folks like Tom were about the criminal cases that were brought against the likes of Ken Lay, Jeff Skilling, and so on. Pai was (eventually) punished through the civil process, but the punishment he received doesn't come close to balancing the scales, in my view. He's still a millionaire many times over - assuming he hasn't blown it all, of course - while so many other people, employees and shareholders, got wiped out. I think the only way the civil justice system could really make these guys pay for their wrongdoings is if it left them in the same shape as the people who were affected by their actions - namely, in a situation where they'd have to work for the rest of their lives because they no longer had any accumulated wealth. Here's a bit I wrote from my review of "The Smartest Guys In The Room":

There's a really poignant scene in which Portland General Electric lineman Al Kaseweter matter-of-factly states that he sold his entire retirement portfolio, which was worth $348,000 at its peak, for $1200.

PGE had been bought by Enron before the crash; like most Enron employees were encouraged to do, Kaseweter put the bulk of his retirement funds into Enron stock. Put Lou Pai in Al Kaseweter's shoes, and I'd agree that justice had been served. Same with Skilling and the rest of that crowd. But that's not how it works, so despite the problems associated with the Enron prosecutions, I think they were necessary.

Stated simply, Charles' view is that "Pai got rich at Enron and a bunch of people lost money when Enron went down in flames, so he must have done something criminal and must be punished." Chron business reporter Loren Steffy, who really ought to know better, spews a similar view.

Frankly, given the societal bias against nearly everything related to Enron, such reactions are not particularly surprising. But it remains disappointing -- and, frankly, a reflection of our human instinct to demonize those in regard to whom we feel morally superior -- that reasonably intelligent people dismiss as a virtual white-collar criminal a man of considerable talent without even passing mention of what he supposedly did wrong.

In reality, Pai was a former SEC economist who became one of the commodities traders who helped Jeff Skilling transform Enron into a multi-billion dollar corporation with earnings that rose from a couple of hundred million dollars in 1990 to $1.6 billion in 1998, over half of which was generated by Enron's trading division. By 2000, Enron's revenue had risen to $100 billion and, on in late August of that year, Enron’s stock price peaked at $90 per share.

As virtually every mainstream media article about Pai's settlement reported, Pai had a legendary fondness for strippers and was a frequent patron of Houston's famous topless club near the Galleria, Rick's Cabaret. Pai met a woman at Rick's with whom he had a long affair, leading Pai and his wife to divorce in 2000 (Pai eventually married his mistress). Pai sold a large amount of his Enron stock in 2000 to fund the divorce settlement, so although he was a wealthy man before selling the stock, Pai was a wealthy and liquid man after doing so.

But the SEC charges against Pai did not involve any of that. Rather, the SEC alleged that between May 18, 2001 and June 7, 2001, Pai sold 338,897 shares of Enron stock and exercised stock options that resulted in the sale of 572,818 shares. According to the SEC, before making those sales, Pai -- who previously headed an Enron division called Enron Energy Services ("EES") -- learned from the successor EES management team that it had identified substantial contract-related losses in the division. The SEC theorized that, had Enron reported EES's contract-related losses in its retail energy services segment, that segment would have shown a quarterly loss of at least $60 million rather than the profit of $40 million that Enron reported in its Form 10-Q for the first quarter of 2001. By selling in May and June, the SEC alleged that Pai avoided the substantial losses that he would have suffered had he still been holding the stock when Enron's stock price collapsed in late 2001.

However, the SEC's allegations against Pai were anything but a slam dunk. Mirroring the SEC's theory of the case against Pai, the Enron Task Force attempted in the Lay-Skilling trial to prove that Enron and Skilling had lied about EES’s growth while simultaneously hiding mounting EES losses. Relying on the testimony of plea-bargainers David Delainey and Timothy Belden, the Task Force asserted that EES first moved an allegedly non-collectible account receivable to Enron's profitable Wholesale division in the fourth quarter of 2000 and then transferred the entire EES risk management book to Wholesale in the first quarter of 2001 ("the resegmentation"). According to the Task Force's theory against Skilling and the SEC's theory against Pai, these events occurred solely to make EES look more profitable than it really was.

Unfortunately for the Task Force and the SEC, that's not what the testimony reflected during the Lay-Skilling trial. The various witnesses expressed differing opinions as to the purpose for the moves with regard to EES, but not one of them stated that anyone had told them that the reason for the moves was to bolster EES’ profitability. Likewise, not one of the witnesses attributed knowledge of that alleged motive to Pai (or Skilling, for that matter). With respect to the transfer of the fourth-quarter 2000 receivable, Enron auditor Arthur Andersen had analyzed the transfer and approved the accounting treatment. Indeed, Skilling defense witness Diann Huddleson testified that Enron management believed it could collect on the questionable receivable and ultimately did collect most of it.

As for the resegmentation, Skilling testified that moving the EES risk book to Wholesale made sense from a business standpoint, and former Wholesale division executive Rogers Herndon confirmed Skilling's version by testifying that the Wholesale unit improved the efficiency and value of that risk book. Even Delainey, the Task Force's main witness on this issue, conceded that he ultimately recommended to Skilling that the risk book be moved. Indeed, the only independent accounting expert who testified during the Lay-Skilling trial -- Walter Rush -- testified that the transfer of the risk book complied with applicable accounting rules.

Thus, the SEC's civil case against Pai was similar to what we've seen in most of the criminal cases against former Enron executives -- long on bombast, short on substance.

But the promoters of the Greed Narrative protest, what about the innocent victims who lost their nest eggs as a result of Enron's collapse?

Well, one of the main reasons that those victims' nest eggs ever had value in the first place was because Pai helped Skilling transform Enron into the world's leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers. Although there is nothing wrong with feeling compassion for folks who lose money on an investment, rarely is it mentioned in the Greed Narrative with regard to Enron that many of those "victims" who lost their nest eggs were imprudent in their investment strategy. They should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron's stock price while being protected by a floor in that share price if it fell below a certain value. Such is the risk of investing in the trust-based business model. 

Thus, while virtually all of those Enron "victims" hedged the risk of their investment in their homes by purchasing homeowner's insurance, few of them hedged the risk of their investment in Enron stock. More than likely, most of them simply did not understand how Enron's risk management services created their nest egg in the first place. Thus, when those nest eggs evaporated during the bank run on Enron, they didn't even try to understand what had occurred. They simply embraced the easy-to-understand Greed Narrative.

Sadly, apart from the its egregious human toll and the serious abuse of state power that its promoters ignore, the Greed Narrative's devastating impact is that it obscures the true nature of investment risk and fuels the myth that investment loss results primarily from someone else's misconduct. As Larry Ribstein has been asking for years, do we really want to be sending a message to investors that risk is bad when it often leads to valuable innovation and wealth creation? For example, self-settled derivative prepay transactions are not particularly intuitive (no product actually changes hands) and are not well-understood outside the trading business. Nevertheless, such transactions provide the valuable benefit of hedging risk for companies, who pass along that benefit to consumers in the form of lower prices for their products and services.

Do we really want to allow prosecutors and regulators to paint such beneficial transactions as frauds and then manipulate the public's ignorance to demonize innovative risk-takers who were attempting to create wealth? How does throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison do anything to educate investors about the true nature of risk and the importance of diversification and hedging?

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (1) |

July 18, 2008

The Usual Suspects

Given the recent turmoil in the financial markets, it's a bit hard to keep up with the morality plays and the villains.

After the Enronesque fall of Bear Stearns, the villains of the moment were the two Bear Stearns executives who were indicted for not throwing in the towel timely.

Then, over the past several weeks, speculators who facilitate markets to hedge energy costs became targets of the demagogues.

And now this week, with the demise of Fannie Mae and Freddie Mac, SEC Chairman Christopher Cox issued an emergency order attempting to curtail naked short-sellers of the stock of the embattled government sponsored entities and also the stocks of Lehman Brothers, Goldman Sachs, Merrill Lynch and Morgan Stanley.

What on earth is Christopher Cox, a supposedly sophisticated securities lawyer, doing issuing orders that hinder the efficient functioning of markets?

Folks, the problem is not that stock prices of the GSE's and the investment banks are low because some nasty market manipulators have been targeting them. Larry Summers has a much more rational explanation for the GSE's demise. Instead of rethinking those misguided policies that led to the bubble in the GSE's stock price, Cox is engaging in a classic case of shooting the messenger by attempting to limit a price-setting mechanism for shares of stock.

Short selling -- the act of betting against a stock by borrowing it, selling it and then purchasing the stock later at a lower price to repay the loan -- plays an important role in well-functioning markets. If short selling is repressed, then optimists will dominate in the marketplace, which generally results in stocks becoming overpriced. Stated simply, persecuting the short-sellers contributes to stock bubbles. Larry Ribstein summed up the absurdity of the Cox's action well:

“[I]n our wacky world of regulation, as we step up liability to get out the truth about securities, we stomp down an important mechanism for getting the truth out about securities.”

And in addressing the above question about Cox, Craig Pirrong had an interesting 1993 encounter with the SEC chaiman regarding short-selling (and with Hillary and Bill Clinton, too, but that's a sideshow) that prompts him to make the following observation about Cox:

Given my 1993 experience with Chris Cox, I have my suspicions that the new short selling restrictions aren’t based on any empirical evidence or deep economic reasoning -– instead they are a reflection of Cox’s anti-shorting prejudices (and the prejudices of like-minded folks at the SEC) -– prejudices that he displayed in 1993.

When are we going to learn that knee-jerk regulatory responses such as Cox's latest often do more economic harm than good, not the least of which is the perpetuation of myths that distract investors from prudent risk allocation?

Update: Chron business columnist Loren Steffy agrees with me. And Don Boudreaux today identifies the underlying human dynamic behind such witch hunts:

We humans have a long and embarrassing history of blaming devils for distressing aspects of reality that we don't understand.   Droughts, floods, plagues, and erupting volcanoes have all been ascribed to the machinations of unseen super-powerful entities – as ill-defined as they are ill-intentioned – who manipulate a reality to which they are immune but to which we mortals must inevitably bend.

Today's witch hunt for speculators who allegedly are driving oil prices to heights unconnected with the realities of supply and demand is just the latest entry in this pageant of ignorance.

This post from two years ago addressed the same dynamic in connection with the death of Ken Lay. And Arnold Kling chimes in with an absolutely spot-on analysis about the folly of attempting to limit the pricing mechanism of markets:

In the mortgage market, people saw risk-takers outperforming prudent lenders. So they took more risks. There is no simple fix for that. For the foreseeable future, we can count on investors sticking to prudence when it comes to mortgage lending. We don't need any regulations to close that barn door.

But somewhere, some time, in some other market, there will be another outbreak of excessive risk-taking. You can't make the system idiot-proof. They'll just build a better idiot.

Update II: The SEC is already retrenching from its "emergency" order (W$J article here).

Posted by Tom at 12:01 AM | Comments (0) |

July 14, 2008

Be careful, Mr. Wagoner

General Motors CEO Rick Wagoner made some interesting public comments this past week in Dallas regarding the besieged automaker's bankruptcy prospects:

"Under any scenario we can imagine, our financial position, or cash position, will remain robust through the rest of this year," Mr. Wagoner said Thursday while in Dallas to speak to a business organization. He said the company has plenty of options to shore up its finances beyond 2008, although he declined to outline them.

The comments failed to boost investor sentiment as GM shares fell 6.2% to $9.69 in 4 p.m. New York Stock Exchange composite trading Thursday. The stock has been trading at its lowest levels in more than 50 years as concerns mount about the company's financial position amid a steep decline in U.S. sales.

GM and other U.S. auto makers are reeling as the slow U.S. economy depresses sales and as high gasoline prices push many would-be buyers to small, more-fuel-efficient vehicles and away from the higher-margin SUVs and trucks. Through June, for instance, GM's U.S. sales slipped 16%, more than offsetting strength in overseas markets.

GM has about $24 billion in cash but is burning an estimated $3 billion a quarter, prompting talk that it will need a significant cash influx to get to 2010.

"We have no thought of [bankruptcy] whatsoever," Mr. Wagoner said in response to an audience question during the Dallas event.

Now, I am not involved with GM, but I have been involved over the past 30 years in my share of big company reorganizations. Contrary to Wagoner's statements, GM has almost certainly "thought" of bankruptcy and GM management probably continues to examine whether a reorganization under chapter 11 of the Bankruptcy Code makes sense for the company, which it just might. Frankly, not to examine such alternatives would be egregious mismanagement. Any seasoned investor knows this and the market is clearly pricing that risk by lowering the company's stock price.

So, despite all that, if GM ends up in bankruptcy, is Wagoner at risk of being indicted for misleading investors regarding the company's ongoing bankruptcy analysis? Stated another way, will Wagoner be indicted for breaching the obligation to throw in the towel?

Posted by Tom at 12:01 AM | Comments (0) |

July 11, 2008

An Enron "hero" is looking for work?

This JoAnn Greco/Portfolio.com article bemoans that "famed Enron whistleblower" Sherron Watkins is having a hard time finding a job. Those dastardly employers just don't trust honest employees such as Watkins, now do they?

On the other hand, perhaps the reason that Watkins can't find a job is that prospective employers do more research than Ms. Greco bothered to do for her article and discover that Watkins wasn't really a whistleblower even though she disingenuously presented herself to Congress, the mainstream media and the public as one.

Posted by Tom at 12:01 AM | Comments (1) |

July 8, 2008

The latest Enron book

Harvard Business School issued this press release and interview yesterday of Malcolm S. Salter, the Harvard professor who has written the latest book -- Innovation Corrupted: The Origins and Legacy of Enron's Collapse (Harvard University Press) -- in what seems to be a continuing stream on the demise of Enron. From the looks of it, Professor Salter has figured out that the recent collapse of Bear Stearns is a good hook for his book:

Q: Can an Enron-type calamity happen again? Why or why not?

A: Perverse incentives are legion throughout our system today. For example, perverse incentives for both mortgage brokers and investment bankers helped create the subprime crisis that we are now living through. Many boards are also still struggling to improve their oversight. Preventing future Enron-type disasters will require the kind of attention to board oversight, financial incentives, and ethical discipline that I address in Innovation Corrupted.

You don't say?

Interestingly, Professor Salter notes that Enron's collapse was triggered by its third-quarter 2001 charge against earnings and equity write-down, which were relatively small in comparison to the losses, charges and write-downs that Wall Street firms have endured over the past year during the sub-prime meltdown:

In the third week of October 2001, Arthur Andersen, Enron's highly compromised outside auditor, "discovered" several large accounting irregularities related to the off-balance-sheet partnerships. This forced Lay—who returned as CEO after Skilling resigned that August—to announce a $544 million charge against earnings, and a $1.2 billion write-down in shareholders' equity, largely related to the impending closure of Enron's Raptor partnerships. Within weeks, Enron collapsed into bankruptcy as its trading partners quickly lost faith—proving, once again, that even a hint of negligence or misconduct can be devastating to a company.

Ah, yes. That pesky trust-based business model.

Posted by Tom at 12:01 AM | Comments (0) |

July 4, 2008

Nice job, but what about that other case?

This Wall Street Journal editorial pats itself on the back justifiably for swimming against the mainstream media tide in opposing from the outset former New York Attorney General Eliot's Spitzer's popular but dubious litigation and propaganda campaign against former New York Stock Exchange chief executive officer, Richard Grasso. The Spitzer-inspired case against Grasso fell apart earlier this week under the weight of multiple negative appellate decisions.

The Journal deserves much credit for standing up to Spitzer's bullying tactics when few others in the mainstream media were willing to do so. But what does the Journal say about turning a relative blind eye toward this even worse prosecutorial abuse?

Posted by Tom at 12:01 AM | Comments (0) |

June 20, 2008

The obligation to throw in the towel

So, the shoe finally dropped on the two Bear Stearns executives who managed the two Bear hedge funds that imploded in mid-2007. A copy of the indictment is here.

As I read the indictment, the government is contending that Messrs. Cioffi and Tannin were required to disclose to investors immediately in February and March, 2007 that the two of them feared that the two funds might be "toast" even as Cioffi and other Bear executives were fighting market pessimism toward the funds and urging investors to maintain trust in their ultimate financial merit. So, with their careers riding on whether the funds would survive, Cioffi and Tannin were supposed to throw in the towel and light a match to the funds by disclosing to the market their concerns about the heightened risk of a meltdown.

Stated simply, according to the Feds, about the time you think your trust-based business might be toast, it's already too late. Inasmuch as you are required to disclose to the markets that you think the business might be toast, that disclosure will understandably prompt the market to lose trust in your business, which means that your company is kaput. So, the smart thing to do is never to voice (and sure as heck don't write any emails!) your concern to anyone regarding the downside risk of your business. That lack of communication might dampen internal company analysis regarding risk of loss, but what the hell -- at least you won't get indicted for misleading investors when your company fails.

Just another chapter in the twisted policy implications that result from regulating business through criminalizing businesspeople's risk-taking. Larry Ribstein has typically insightful observations along the same lines, while Bess Levin muses over the Feds' suggestion that investors didn't know exactly what they were buying when investing in Bear's funds.

Posted by Tom at 12:01 AM | Comments (16) |

June 17, 2008

Criminalizing Failure

As Larry Ribstein reports, the Enron prosecutorial veterans are already picking up the usual suspects in regard to the Bear Stearns meltdown.

Meanwhile, John Carney wonders whether any investors really feel safer as a result of these criminal probes?

And although Bear struck out, do we really want to deter potentially beneficial risk-taking by criminalizing it when it fails?

Finally, wouldn't it make more sense to allocate the resources spent on criminalizing such risk-taking toward educating investors in trust-based businesses on how to hedge their risk of loss?

Posted by Tom at 12:01 AM | Comments (0) |

June 16, 2008

Bill King's story

As Republican presidential nominee John McCain is doing his best to stoke public prejudice against job-creators and wealth builders, longtime Houston lawyer and businessman Bill King is promoting his new book, Saving Face (Somerset 2008), which is King's personal history of the savings & loan crisis of the late 1980's and early 1990's. Ironically, McCain knows quite a bit about the back story to King's book. McCain was one of the Keating Five, the Congressional supporters of former Lincoln Savings & Loan chairman and CEO Charles Keating, who was convicted of various corporate fraud crimes and served four years in prison as a result of highly-stoked but substantively-thin prosecutions that were ultimately overturned on appeal. Keating eventually pled guilty to a single count of bankruptcy fraud to limit further prison time and insulate a family member from prosecution. For a thorough review of the mendacity of the Keating prosecutions, pick up a copy of Dan Fischel's book, Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution (HarperCollins 1995).

King's story is the Houston version of Keating's and a precursor of the prosecutorial abuse that the post-Enron criminal prosecutions in Houston generated a decade later. Not only does King do an excellent job of explaining the financial, economic, regulatory and political underpinnings of the S&L crisis, he explores how the government wielded its prosecutorial power indiscriminately to serve up scapegoats to a salivating mainstream media and an ill-informed public. King is thinking about running for Houston mayor in 2009 and, based on the depth and perspective that he exhibits in Saving Face, King would probably be a fine mayor. The following is King's overview of Saving Face, which I recommend highly:

These days I find myself cringing when I hear media accounts that fraudulent and greedy mortgage brokers are responsible for all of the woes of the current housing bubble and the sub-prime defaults. I do so because the recriminations are an all too familiar echo of an earlier debacle. One to which I had a ring-side seat.

Many of you who have known me for some years know that shortly after law school I made the somewhat less-than-fortuitous career decision of joining a law firm that specialized in representing savings and loans. At the time it did not seem like a bad decision. The Houston real estate market was enjoying an unprecedented boom and the savings and loan industry had just been deregulated. Investors were clamoring to get into the business.

Within a few years of joining the law firm, I began investing in savings and loans and related businesses. By 1986, notwithstanding that I had started with barely two nickels to rub together after working my way through law school, I had built a small, but respectable, business empire consisting of savings and loan holdings, title companies, and real estate investments. However, within a couple of years, everything I had built evaporated into thin air.

The Houston market collapsed when the price of oil fell from over $34 per barrel in 1984 to $9 the next year. It did not recover to above $20 until 2002. Manufacturing jobs in the region fell by nearly 50% and for the first time in history Texans' personal income declined.

Bankruptcies in Houston tripled between 1983 and 1987. All but one of Texas' major banking holding companies failed. Harris County's population actually declined from 1985 to 1989. It was the first and only time in Houston's history that it has lost population. If you did not live through these times, the magnitude of melt down is hard to imagine.

It is certainly difficult to lose everything that you have worked for, but the environment that existed in the late 1980s and early 1990s had an even more ominous aspect. As the public became increasingly aware that the savings and loan crisis was going to take a major taxpayer bailout, there were ever more strident cries to hold someone responsible.

The complexity of confluence of interest rates, regulatory policy, oil prices, the Tax Reform Act of 1986, and the collapse of large portions of the real estate market that actually explained the collapse was too great to be reduced to sound bites. Politicians and bureaucrats began pointing the finger at those in the industry, and soon, the "S&L crook" was born. And there were enough egregious cases for the politicians and bureaucrats to hold up as "proof" of their argument that the "S&L crooks" caused the crisis.

The proposition that fraud and insider abuse had sunk the savings and loan industry was eventually discredited. In 1993, a National Commission concluded that fraud had caused less than 15% of the total problem. But in the heat of the moment, there was little interest in cool, scholarly reflection on the problems of the industry.

As the 1980s came to a close I watched as many friends, associates and former clients in the S&L industry were swept up in a maelstrom of civil and criminal litigation. Naively, it never occurred to me that I might be caught up in such a dispute as well. But I was.

Eventually, I prevailed in my battle with the regulators, but as you might imagine, it was an experience that left an indelible mark and from which it took me many years to recover. For some time I have been jotting down notes for a book about these experiences. For a couple of reasons, I recently decided to finalize such a book.

First, as many of you know, I am considering a candidacy for mayor of Houston in 2009. We all know too well that "negative campaigning" has become the standard today. Certainly going bankrupt in the savings and loan business will provide potential opponents ready ammunition. So first and foremost, I want to put the issue squarely on the table. If I decide to become a candidate, there will undoubtedly be some voters who will be troubled by these experiences. Some will believe difficult times such as the ones I went through are a crucible that better prepares a person for leadership. Most, I expect, will simply want to be advised of the facts so that they can be weighed with other issues bearing on their decision.

But beyond the potential political implications, the troubling similarities between what I saw in the S&L collapse of the 1980s and the sub-prime crisis playing out before us now demands some consideration. It is a well worn adage, but nonetheless true, that if we do not learn from our history, we are doomed to repeat our mistakes. Perhaps relating what I saw during the saving and loan industry collapse will provide some perspective on the current financial crises.

So for these reasons I have written Saving Face: An Alternative and Personal Account of the Savings and Loan Debacle. I have attempted in the book to tell the story of what I experienced during these times, but at the same time, to place my experiences in a larger, national context. I believe my story has some relevance to anyone experiencing trying times generally, and certainly to those in the Houston real estate industry, many of whom lived through these times as I did.

Posted by Tom at 12:01 AM | Comments (0) |

June 15, 2008

The Refco Question

Ellen Podgor has the sentencing memos in regard to former Refco CEO Phil Bennett's plea deal. They are interesting reading, but what they do not answer is the most intriguing question that remains unanswered from the entire Refco affair:

Why did Bennett risk taking Refco public in the first place?

Posted by Tom at 12:01 AM | Comments (1) |

June 12, 2008

An odd spokesman for limiting corporate criminal liability

The always-alert Ellen Podgor notes that former Enron Task Force chief Andrew Weissmann (see also here and here) recently wrote an amicus brief on behalf of various business and defense-oriented organizations in the United States v. Ionia Management, S.A. case currently pending at the Second Circuit. In the brief, Weissmann advocates that the appellate court "adopt a standard for vicarious corporate criminal liability" . . . that limits "the application of respondeat superior."

As you may recall, Weissmann promoted precisely the opposite standard while engineering the destruction of enormous wealth and tens of thousands of jobs in prosecuting Arthur Andersen out of business.

It's better late than never that Weissmann apparently now understands the error of his prior ways. I wonder whether he will admit that to the Second Circuit panel?

Posted by Tom at 12:01 AM | Comments (1) |

June 3, 2008

So, what's the difference?

 Mel Weiss was sentenced to 2.5 years in prison yesterday for making undisclosed payments to class representatives in class action lawsuits that his firm handled. As noted here about a year ago, Weiss didn't have much of a choice given the trial penalty that he was facing.

Meanwhile, in return for being the key witness against former Enron CEO Jeff Skilling, Enron Task Force prosecutors "paid" Andy Fastow with a lighter prison sentence than the one the prosecutors disclosed to the jury and the judge during Skilling's trial. Those same prosecutors also withheld from Skilling's defense team exculpatory statements about Skilling that Fastow made before he elected to accept the prosecutors "payment" of a lighter sentence and testify against him. The lead prosecutors involved in arranging Fastow's testimony have gone on to presumably lucrative careers in private practice. Skilling is serving an effective life prison sentence.

As Larry Ribstein has long contended, paying kickbacks should not be condoned. However, the hyprocrisy reflected by the above-described state of affairs is not going to be solved by demonizing Mel Weiss.

Posted by Tom at 12:01 AM | Comments (0) |

May 30, 2008

The Bear Stearns lesson

Yesterday brought the final installment of Kate Kelly's extraordinary three-part W$J series on the fall of Bear Stearns (Kelly also contributed to today's story on Bear's final shareholders meeting). My goodness, was Kelly a fly on the wall over at Bear's office during all of this? Dear John Thain has an interesting critical analysis of the series here, here and here, while Larry Ribstein and John Carney point out that Kelly apparently fell for what has become known as "the loophole legend" in regard to JP Morgan's buyout of Bear.

Although all the articles in the series are fun reading, Kelly's most insightful observation comes from the second installment:

It was the beginning of a frantic 72 hours that would bring the Wall Street firm to its knees and threaten the stability of the global financial system.  .  .  . The brokerage's sudden fall was a stark reminder of the fragility and ferocity of a financial system built to a remarkable degree on trust. Billions of dollars in securities are traded each day with nothing more than an implicit agreement that trading partners will pay up when asked. When investors became concerned that Bear Stearns wouldn't be able to settle its trades with clients, that confidence evaporated in a flash. Trading partners, eager to avoid losses, began to disappear almost as quickly. That further fueled rumors of trouble. Some partners, spotting a chance to profit, made bets against Bear Stearns, helping accelerate its demise.  .  .  .

Even after the Bear Stearns lesson, our understanding of the pesky trust-based business model is still not what it should be. Improving the investing public's understanding of how best to hedge the risk of investing in trust-based businesses is a far more productive response to Bear Stearns-type business failures than this. 

Posted by Tom at 12:01 AM | Comments (0) |

May 29, 2008

The instinct against the money-makers

I swear, you can't make this stuff up.

As Larry Ribstein cogently explains, Southwest Airlines has taken advantage of futures markets over the past several years to hedge its fuel costs (previous posts on Southwest's hedging program are here). That hedging program has been one of the major factors in allowing Southwest to remain one of the only profitable U.S. airlines. Along the same lines, Bloomberg's Matthew Lynn explains how such markets provide an essential function in re-directing resources in the overall economy.

Meanwhile, Congress is trying to hamstring the very markets (see also here) that provided Southwest and many other businesses with the platform on which they hedged fuel-cost and other business risk. The wealth and lower prices generated from those hedges is not inconsequential.

Finally, the Justice Department continues its advocacy of an effective life sentence for one of the men primarily responsible for developing the robust markets that facilitate Southwest and others' wealth creation for shareholders and lower costs for customers.

And these folks in Congress and the Justice Department are supposed to be representing our interests?

Posted by Tom at 12:01 AM | Comments (0) |

May 19, 2008

The cost of Spitzerism

On Friday, February 11, 2005, shares of American International Group closed at $73.12 per share.

Last Friday, after Eliot Spitzer and the meltdown in the subprime mortgage markets, AIG's shares closed at $39.34 per share.

James Freeman of the Wall $treet Journal, one of the only mainstream media outlets to expose Spitzer's extortion of AIG for what it truly was, reports here on the massive reduction of wealth to which Spitzer's unbridled regulation of AIG contributed greatly. Larry Ribstein, who was one of the first bloggers to shed light on this injustice, surveys the economic carnage here.

My question: Where is the rest of the mainstream media in reporting on this enormous destruction of wealth to AIG shareholders?

Posted by Tom at 5:04 PM | Comments (1) |

May 17, 2008

Look at what Mary Flood has been reading

Chronicle legal reporter Mary Flood covered many of the Enron-related criminal trials, so it was only natural for her to pick up a copy of former Enron Task Force prosecutor, law professor and current Oregon attorney general candidate John Kroger's new book, which includes several chapters on his work in several Enron-related criminal cases.

You may remember Kroger. He is the fellow who tried early on to broker his experience on the Task Force to make a name for himself in academic circles. He was involved in preparing some of the worst carnage that the Task Force generated -- the Arthur Andersen debacle, the Enron Broadband disaster, and the Nigerian Barge abomination.

Ms. Flood reports on her blog that the Enron-related chapters of Kroger's book are downright bizarre:

[Kroger's book] is a self-congratulatory look at Kroger's years as a federal prosecutor. The four somewhat conflicted chapters on Enron talk alternately about his prowess, his lack of knowledge, how careful prosecutors were, how ruthless prosecutors were, how terrific his case against the Enron broadband executives was and how it hasn't been successful in court. [.  .  .]

What may be most surprising about the book is Kroger's admission of a lack of knowledge about how to go about these cases, an admission that the DOJ was out for quick scalps, and an admission that they threatened many witnesses. These are especially odd to see in print given that one of the allegations the defense made was prosecutorial misconduct in this case -- too much threatening and coercing of witnesses. One witness in the 2005 case even testified a member of the task force tried coerce him out of testifying for the defense.

Kroger frequently brags about his own prowess as an interrogator and lawyer, even guessing the broadband cases might be over now if he'd tried them. And he casts doubt on just about everyone else in the process.

Despite talking about the pressure the task force was under to get scalps and how aggressive they were, he creates a hypothetical conversation to illustrate how a defense attorney might try to trick a witness into saying no crimes were committed.

Amid the sometimes stunning hubris seems to be much angst about the decision of others to charge Lea Fastow in order to get to her husband and thus get to Jeff Skilling and Ken Lay.

He questions his colleagues, not just over the Lea Fastow charging decision (even including a mean-spirited comment a fellow prosecutor made about the Fastow children possibly winding up in foster care) but in general saying, in his career as a prosecutor he learned:

". . . that even well-intentioned prosecutors can present false testimony at trial, that a just process and a just result cannot always be obtained at the same time, that informants are both necessary and deceitful, that a certain small percentage of agents are corrupt, that our law enforcement policies often encourage crime rather than prevent it, and that successful interrogation requires the ethically questionable manipulation of other human beings.''

Just another chapter in the increasingly dubious legacy of the Enron Task Force.

Posted by Tom at 12:01 AM | Comments (1) |

May 6, 2008

The subprime mortgage criminal lottery

Well, well, well. Look who is resurfacing in connection with the creation of the Justice Department's latest criminal Task Force to investigate whether crimes were committed when the subprime-mortgage market collapsed (just what we need -- another corporate crime lottery):

Federal prosecutors are stepping up their scrutiny of players in the subprime-mortgage crisis, with a focus on Wall Street firms and mortgage lenders.

Prosecutors in the Eastern District of New York in Brooklyn have formed a task force of federal, state and local agencies that will involve as many as 15 law-enforcement agents and investigators.

The U.S. attorney for the office, Benton J. Campbell, who supervises about 150 prosecutors, said the group will look into potential crimes ranging from mortgage fraud by brokers to securities fraud, insider trading and accounting fraud.

You may remember Campbell. He was the lead prosecutor on the Enron-related criminal trial known in these parts as the first Enron Broadband trial, which ended in an embarrassing loss for Enron Task Force after the prosecution was caught threatening defense witnesses (see also here) and propounding false testimony from one of its key witnesses during the trial. Sort of what you would expect from a trial in which the Task Force advocated an unwarranted expansion of a criminal law intended to punish kickbacks and bribes against business executives who did no such thing.

Interestingly, in the Wall Street investigation, Campbell thinks there actually may be a non-criminal explanation about the meltdown in the sub-prime market:

Mr. Campbell said the "jury is still out" on just how much criminal activity the office might find, particularly on Wall Street, which saw a sudden decline in the value of securities backed by pools of mortgages last year. "There are market forces in play in that area, and that doesn't necessarily mean there is fraud," said Mr. Campbell, 41 years old.

H'mm. How many damaged lives and careers would have been salvaged had Campbell and his fellow Enron Task Force prosecutors been so open-minded?

Posted by Tom at 12:01 AM | Comments (1) |

April 27, 2008

Thoughts for a Sunday

The NY Times' Adam Liptak has penned a couple of interesting articles recently (here and here) on a frequent topic of this blog (here, here, here, here, here, here, here, here, here, and here) -- the troubling incarceration rate in the United States.

With only 5% of the world's population, the U.S. now houses almost a quarter (2.3 million!) of the world's prisoners. One in 100 adults in the U.S. is now behind bars and 751 people are in U.S. prisons or jails for every 100,000 in population. The only other major industrialized nation that even comes close to that rate of incarceration is Russia with 627 prisoners for every 100,000 people. England’s rate is 151, Germany’s is 88 and Japan’s is 63. Attempting to keep all of this in perspective, Pepperdine University's James Q. Wilson provides this recent op-ed that puts the U.S. incarceration rate in a more favorable light with regard to reducing serious crime.

Among other things, these incarceration numbers certainly makes one wonder why on earth we are sending folks like Jeff Skilling, the NatWest Three, the Merrill Four and Jamie Olis to prison?

Meanwhile, in this five-part LA Times debate, Reason's Jacob Sullum takes on the Heritage Foundation’s Charles Stimson over one of the main reasons for the high U.S. incarceration rate -- drug prohibition. At least in this first installment, Sullum makes a much more compelling case than Stimson. And Peter Gordon has this sage observation about the genesis of drug prohibition.

Posted by Tom at 12:01 AM | Comments (1) |

April 21, 2008

Remember Refco?

Amidst the current turmoil in the financial markets, the recent conviction on criminal fraud charges of a former Refco Inc executive barely registered on the radar screen. The details from the meltdowns from years past are just old news now.

However, the criminal conviction and plea deals arising from the Refco affair still leave a troubling question unanswered -- why did Refco's owners take it public in the first place?

Posted by Tom at 12:01 AM | Comments (0) |

March 24, 2008

The Enron Task Force laid bare

In this previous post on former Enron CEO Jeff Skilling's Supplemental Brief regarding prosecutorial misconduct in connection with covering up exculpatory evidence contained former Enron CFO Andrew Fastow's interview notes, I noted that the Skilling brief would likely have a ripple effect on the re-trial of three former Merrill Lynch executives in connection with the Enron-related criminal case known as the Nigerian Barge case.

Well, based on this extraordinary motion filed on behalf of former Merrill executive James Brown, that ripple effect has turned into a tsunami of evidence that includes, but is not limited to, the Fastow interview notes. I have bookmarked the sections of the above-linked motion in Adobe Acrobat to facilitate ease of review.

As with the Lay-Skilling case, the Nigerian Barge case has long represented much of what is wrong with the Department of Justice's regulation of business-through-criminalization approach in the post-Enron era. After prosecuting Arthur Andersen out of business in the intensely anti-business, post-Enron climate, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which it did with Mr. Brown, Daniel Bayly, Robert Furst and William Fuhs.

Through a deferred prosecution agreement with Merrill, the Task Force then proceeded to hamstring the defendants' defense by limiting access to other Merrill Lynch executives involved in the barge transaction. Moreover, the Task Force intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the defense. After bludgeoning a couple of plea deals from former key witnesses Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the defendants, which was good enough to obtain convictions in the hyper-anti-Enron climate of Houston in 2004.

Of course, most of the convictions were vacated on appeal (and in Fuhs' case, reversed and rendered), but not before each of the former Merrill defendants and their families had incurred the incalculable human cost of these misguided prosecutions. Now, Brown's motion provides a specific and detailed case that the Enron Task Force engaged in not only a wide-ranging cover-up of evidence that was exculpatory to the Merrill defendants, but also offered testimony at trial that the Task Force lawyers knew was contradicted by evidence and testimony that they had in their possession.

The lives and careers that have been damaged in the Nigerian Barge case are the inevitable carnage that results from giving incentivized prosecutors the overwhelming power of government to paint transactions as frauds and manipulate ignorance about them as a means to regulate merely questionable business transactions. A truly civil society would find a better way.

Update: As usual, Ellen Podgor asks the key question -- why are the Fastow notes so late in coming?

Update 2: The Chronicle's Kristen Hays has an article on the Brown motion here.

Posted by Tom at 1:16 PM | Comments (3) |

March 18, 2008

The Economist gets it

Following on recent posts here and here, The Economist produces the best mainstream media article that I've seen to date placing the prosecutorial misconduct of the Enron Task Force toward former Enron executives Jeff Skilling and Ken Lay in the context of the most recent demise of a trust-based business, Bear Stearns:

For many people, the mere fact of Enron’s collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between his conviction and sentencing, presided over a fraudulent house of cards. Yet Mr Skilling has always argued that Enron’s collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run. Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy.

Yet recent events in the financial markets add some weight to Mr Skilling’s story—though nobody is (yet) alleging the sort of fraudulent behaviour on Wall Street that apparently took place at Enron. The hastily arranged purchase of Bear Stearns by JP Morgan Chase is the result of exactly such a bank run on the bank, as Bear’s counterparties lost faith in it. This has seen the destruction of most of its roughly $20-billion market capitalisation since January 2007. By comparison, $65 billion was wiped out at Enron, and $190 billion at Citigroup since May 2007, as the credit crunch turned into a crisis in capitalism.

The Economist article goes on to compare the similarity of certain of Ken Lay's public comments regarding Enron's liquidity in the turbulent post 9/11 markets (for which he was eventually prosecuted) with those of Bear Stearns and Lehman Brothers executives during the current turmoil in the financial markets. As this post from almost two years ago notes, the source of the information upon which Lay based his positive statements is the same fellow (former Enron CFO Andrew Fastow) whose exculpatory statements regarding Skilling and Lay the Enron Task Force improperly withheld in connection with their criminal trial. And the revelations of this latest round of prosecutorial misconduct with regard to Fastow comes on top of the Task Force's blatant misrepresentation (see also here) of Fastow's plea deal to the Lay-Skilling jury during the trial.

As usual, Larry Ribstein places all of this in context:

I'm constructing a "narrative" for the prosecutorial misconduct case: Prosecutors desperate for a conviction, their careers turning on the outcome, have a key witness, Andy Fastow. The problem is, the guy has, in [Enron Task Force prosecutor John] Hueston's words, a "heartstopping history of self-dealing." Obviously the government couldn't afford any additional shadow on Fastow's credibility. Yet in the government interviews it seems his story got more negative on the defendants over time. Could be a big problem for Fastow on the witness stand, as the defense sought on cross to show he was changing his story to suit his jailers. Could the prosecutors afford to give these notes to the defense? Why not just turn over a summary?  By the time the truth came out (if it ever did) they could do a dance about how the differences were inconsequential.

The government is saying the differences are inconsequential. So why, then, didn't they produce the notes as repeatedly requested, rather than summarizing them?  I think those prosecutors have some explaining to do.

Update: Warren Meyer also notes the similarities between Bear Stearns' demise and that of Enron.

Posted by Tom at 6:55 PM | Comments (4) |

March 17, 2008

The Nacchio debacle

I'm shocked, absolutely shocked, that a former Enron Task Force member would have ever been involved in improperly suppressing exculpatory testimony at trial that would ultimately lead to the Tenth Circuit's reversal of the conviction of former Qwest CEO, Joseph Nacchio.

Larry Ribstein and Ellen Podgor break down and comment on the Tenth Circuit decision. As an aside, the expert witness who was improperly excluded in the Nacchio trial -- Daniel Fischel -- was the author of the book that exposed the true nature of, and motive behind, Rudolph Giuliani's prosecution of Michael Milken.

Posted by Tom at 9:21 PM | Comments (1) |

March 16, 2008

That pesky trust-based business model

Over the weekend, we learned that the Fed had bailed out New York-based investment bank Bear Stearns during this unsettled time in the financial markets.

Almost seven years ago, a much larger company that shared many characteristics with Bear Stearns -- Houston-based Enron -- did not even generate serious consideration for a Fed bailout before it went under in the turbulent post-9/11 financial markets.

In between those two events, one of the world's wealthiest insurers and another company that is similar in many respects to Bear Stearns and Enron --  American Insurance Group -- barely escaped a similar fate by cutting a deal with the now-disgraced former Governor and Attorney General of New York to cut loose the executive primarily responsible for creating AIG's vast wealth.

The fact of the matter is that Enron was -- and Bear Stearns and AIG are -- trust-based businesses that fundamentally depend on the trust of the markets to sustain their value. Once that trust is lost, such companies lose value quickly and dramatically (a case in point -- JP Morgan Chase's proposed $236 million purchase price for Bear Stearns comes just hours after Bear's market cap was $3.5 billion this past Friday and $20 billion as of January, 2007). Although unfortunate for the owners of such companies, such a dramatic loss of wealth does not necessarily mean that any criminal conduct caused or was even involved in the loss. Rather, such loss is simply one of the risks of investing in a company based on a trust-based business model. The sooner we all recognize and understand this risk -- and avoid the mainstream media's promotion of myths about them -- the quicker we can put a stop to injustices such as this while advancing the discussion of how best to hedge the risk of such potential losses.

Posted by Tom at 6:52 PM | Comments (7) |

March 14, 2008

The stench of prosecutorial abuse

The stench of prosecutorial abuse has long hung over the Enron-related criminal cases. But the extent of that abuse became crystal clear this afternoon when the Fifth Circuit Court of Appeals granted former Enron CEO Jeff Skilling's motion to unseal his supplemental brief relating to the government's interview notes of former Enron CFO and chief Skilling accuser, Andrew Fastow. I bookmarked the supplemental brief in Adobe Acrobat to facilitate ease of review.

The brief reveals suppression of exculpatory evidence by the Enron Task Force on a massive scale. The entire brief is devastating to the Task Force's prosecution of Skilling and the late Enron chairman, Ken Lay. But if you do not have time to read the entire brief, read the excellent 11-page introduction, which includes the following passage:

The raw notes are shocking. The 420 pages of contemporaneous notes, which we have spent the last many weeks comparing to the thousands of pages of trial record and the Task Force’s pretrial disclosures, confirm our worst fears. On the most crucial issues in Skilling’s case—especially where it was only Fastow’s word against Skilling’s—the Task Force suppressed vital exculpatory evidence from its “composite” FBI Form 302s for Fastow and all other disclosures given to Skilling. The Task Force then proceeded to present critical testimony and argument at trial it knew was contradicted by the evidence withheld from Skilling.

Much of the suppressed evidence directly relates to—and refutes—the Task Force’s pivotal contention that Skilling orally agreed to “secret side deals” to manipulate Enron’s financial statements. This “side deal” theory underlies every count of conviction against Skilling. By depriving Skilling of key exculpatory evidence that Fastow conveyed in his interviews, the Task Force was able to skew the proof and convince the jury to accept Fastow’s word over Skilling’s. As the Task Force later told Fastow’s sentencing judge and recounted in a law review article, Fastow’s testimony and credibility were the cornerstones to convicting Skilling.  .   .  . Enron Task Force Prosecutor John C. Hueston, Behind the Scenes of the Enron Trial: Creating the Decisive Moments (“Hueston”), 44 AM. CRIM. L. REV. 197, 197-99 (2007). The substantial evidence the Task Force kept from Skilling all shares one chatacteristic—it was harmful to the Task Force’s case against Skilling.  .    .    .

The implications of this brief reach far beyond the Skilling appeal. For example, the already-reeling re-prosecution of the three former Merrill Lynch bankers in the Enron-related Nigerian Barge case would appear to be over -- the Enron Task Force in the first trial of that case not only withheld exculpatory evidence, but put on incriminating testimony from former Enron treasurer and Fastow confidant Ben Glisan that directly contradicted the exculpatory evidence that Fastow provided to Task Force prosecutors during his interviews. Other Enron-related criminal cases -- as well as plea bargains -- could well be affected.

I've often noted on this blog that fair-minded people can disagree over whether the government's prosecutorial power is an appropriate tool to regulate business. However, my fervent hope is that even those who favor using the state's awesome power to criminalize merely questionable business transactions will be appalled by what the prosecution did in the criminal case against Skilling and Lay, as well as the other Enron-related criminal cases. In truth, none of us would be able to survive, as Thomas More reminds us, "in the winds that blow" from the unjust exercise of the government's overwhelming prosecutorial power. I continue to hope that Jeff Skilling's unjust conviction and sentence are reversed on appeal, not only for his and his family's benefit, but also for ours.

Update: The Chronicle's Kristen Hays, who is the only mainstream media reporter who I know of following this story, has an article on the Skilling brief here (the Chronicle story links to the copy of the Skilling supplemental brief that I bookmarked in Adobe Acrobat to facilitate ease of review; the Skilling supplemental brief on file with the Fifth Circuit is not bookmarked).

Probably in response to an off-the-record response from the DOJ, Hays writes that the Skilling supplemental brief contends that "some of [Fastow's] initial statements to authorities were not as damning as those in his testimony." That's a stark understatement of what the Skilling supplemental brief describes.

The initial Fastow statements set out in the Skillling brief were not only not as damning as Fastow's trial testimony, they were irreconcilable with that trial testimony and described completely legal activity, even by Fastow.  Consequently, had the Enron Task Force not been able to to pry Fastow off his original story, the core of the Task Force's case against Skilling and Lay would have have contradicted by Fastow, who was Skilling's main accuser at trial. And the fact that the DOJ did not disclose to the Skilling defense team how Fastow's incriminating testimony evolved over time from his exculpatory initial statements while Fastow and the Task Force were negotiating a dubious plea deal is beyond reprehensible. What is the DOJ going to say now, that they didn't disclose the exculpatory earlier statements to Skilling's defense team because Fastow was protecting Skilling in these initial meetings? Yeah, right.

Update 2: The blogosphere is picking up the story quickly, as Larry Ribstein, Ellen Podgor (see also here) and Warren Meyer have already commented. Curious, isn't it, that the mainstream media is lagging well behind. Could it be that the story simply does not comport with the media's pre-conceived notions of the Enron saga?

Update 3: The WSJ's John Emshwiller, who covered the Lay-Skilling trial for the WSJ despite legitimate questions about his objectivity, reports on the latest developments here.

Update 4: John Hueston, the former Enron Task Force prosecutor who is quite proud of his work in nailing Skilling and Lay on an admittedly weak case (see here, here, here and here), is mentioned often in the Skilling supplemental brief because of the law review article he authored that is cited in the passage above. Hueston's law firm bio used to link to a copy of the article, but the firm took the link down some time ago. However, Cara Ellison, who has followed the Enron-related criminal cases closely, provides this handy link to Hueston's article.

Update 5: A bookmarked copy of the DOJ's reply to the Skilling Supplemental Brief can be downloaded here. The DOJ argues essentially that, put in what the DOJ considers to be the proper context, each portion of the Fastow interview notes on which Skilling relies to establish Brady violations contains information that Skilling already had prior to trial or is evidence that would have had "minimal" value in impeaching Fastow. Frankly, the DOJ's analysis stands Brady on its head. The essence of Brady is that the prosecution does not retain the power to make such determinations regarding exculpatory evidence unilaterally -- that information is a part of the mix that the jury and the Court sort out in determining facts and in applying the law. If what the Enron Task Force withheld here is truly harmless error, then the DOJ's need of 70+ pages to explain why that is the case belies that contention. Ellen Podgor passes along similar thoughts regarding the DOJ's brief here.

Posted by Tom at 6:47 PM | Comments (5) |

March 11, 2008

The Spitzer Lesson

The mainstream media and the blogosphere have been buzzing over the past 24 hours regarding the fall from grace of New York's governor and former Lord of Regulation, Eliot Spitzer. As noted in this previous post, there is an under-appreciated human element in such dubious criminal problems as Spitzer fell into. So, I have a great deal of compassion for the members of Spitzer's family, although Spitzer's many victims would certainly attest that he showed none for them. Larry Ribstein has related and typically insightful thoughts regarding why the revelers in Spitzer's fate should be concerned about the way in which he was brought down.

But I hope that the most important lesson that Spitzer's political career teaches us is not lost amidst the glare of a tawdry sex scandal. As with Rudy Giuliani before him, Spitzer rose to political power through the misuse of the state's overwhelming prosecutorial power to regulate business interests. In so doing, Spitzer manipulated an all-too-accommodating mainstream media, which never misses an opportunity to take down an easy target such as a wealthy businessperson. Spitzer is now learning that the same media dynamic applies to powerful politicians, as well.

However, as noted earlier here, where was the mainstream media's scrutiny when Spitzer was destroying wealth, jobs and careers while threatening to go Arthur Andersen on American Insurance Group and other companies? Where was the healthy skepticism of the unrestrained use of the state's prosecutorial power to regulate business where business had no available regulatory procedure with which to contest Spitzer's actions? As Dealbreaker's John Carney noted at the time of that earlier post:

Why didn’t [the mainstream media covering Spitzer's investigation of Grasso] reveal the slimy tactics of the Spitzer squad? We suspect part of the problem was the fear of being “cut off” of access. Reporters compete for scoops, and often those scoops depend on sources who will leak information to them. In the NYSE case, reporters assigned to the story were largely at the mercy of the investigators, who could cut-off uncooperative reporters, leaving them without copy to bring to their editors while their competitors filed stories with the newest dirt. They probably felt—not unrealistically—that their very jobs were on the line.

This reveals an unfortunate state of affairs. Playing bugle boy while government officials call the tunes from behind a veil of anonymity is not investigative journalism—it’s hardly journalism at all. It’s closer to propaganda. It would have been far better had the journalists turned their backs on the Spitzer squad, or even revealed these tactics to the public. Sure they may have lost some “good” stories but they could have painted a truer picture of what was going on. But that’s probably too much to hope for.

And, as noted here, the same prosecution manipulation of the mainstream media contributed to the utter lack of balance in the media's reporting on the Enron criminal prosecutions.

Alas, change does not come easily to the mainstream media. Late last week, this post reported on developments that could well expose an egregious abuse of prosecutorial power in connection with the prosecution for former Enron CEO, Jeff Skilling. Why has no mainstream media outlet intervened in that case and demanded that the information about potentially serious governmental misconduct be made public?

The Spitzer lesson is not easily embraced.

Update: Following on the theme of this post, the W$J's Kimberly Strassel reviews the mainstream media's complicity in portraying Spitzer as something that he is not, and Charlie Gasporino -- who wrote the book about Spitzer that foreshadowed these issues -- comments along the same lines here.

Posted by Tom at 7:20 AM | Comments (2) |

March 7, 2008

What's going on in the Skilling appeal?

First, thank you to all of the many readers who have communicated their concerns and prayers for the family crisis that is precluding me from daily blogging for now. Your kind thoughts and words are comforting and much appreciated.

But now for a quick blog post. While working this week, I was checking the docket of an appeal in which I am involved at the Fifth Circuit Court of Appeals. While there, I ambled over to the docket of the appeal of former Enron CEO Jeff Skilling just to see if there was anything interesting happening. Check out the following recent entries:

3/4/08 Motion filed by Appellant Jeffrey K Skilling to file
       supplemental briefs. [5976818-1]  Supplemental brief
       included? (Y/N): Y, to unseal A's suppl. brief brief
       [5976818-2]    Date of COS: 3/3/08  Sufficient [Y/N]: Y
       [06-20885] (jmw)
 
 3/5/08 Motion filed by Appellant Jeffrey K Skilling [5976825-1] to
        place supplemental brief under seal.    Date of COS: 3/4/08
        Sufficient [Y/N]: Y [06-20885] (jmw)
 
 3/5/08 Response/opposition filed by Appellee USA to motion to file
        supplemental briefs [5976818-1] by Appellant Jeffrey K
        Skilling. Reply to Resp/Opp due on 3/14/08.   Date of COS:
        3/4/08  Sufficient [Y/N]: y [5976831-1] [06-20885] (jmw)
 
 3/7/08 Reply filed by Appellant Jeffrey K Skilling to
        response/opposition [5976831-1], motion to file
        supplemental briefs [5976818-1] Reply to Resp/Opp due ddl
        satisfied., motion to unseal brief [5976818-2]  Sufficient
        [Y/N]: Y [5978302-1] [06-20885] (jmw)

Translated, the foregoing means that Skilling's appellate team filed a motion on Tuesday requesting that the Fifth Circuit grant permission to the parties to file supplemental briefs and, because of confidentiality concerns, requested that the supplemental brief be filed under seal (in other words, not for public consumption). The government must have been expecting the Skilling motion because they filed a response in opposition to it the following day (Wednesday). Not to be outdone in terms of alacrity, the Skilling team filed their response today to the government's opposition and, for good measure, requested that the Fifth Circuit unseal the Skilling supplemental brief and make if available for public review.

Anyone want to bet that these developments might have something to do with this (see also earlier posts here and here)?

Looks to me like a good opportunity for a mainstream media outlet to intervene and demand that the Fifth Circuit order the supplemental briefs be made available for public review, don't you think?

Posted by Tom at 4:47 PM | Comments (2) |

February 20, 2008

Maintaining Enron myths

Ever wonder how the mainstream media maintains Enron-related myths?

In reporting on the sentencing hearing later this week in the Enron-related case of the three former UK bankers dubbed "the NatWest Three" (prior posts here), the Chronicle's Kristen Hays observes the following:

In their plea deals, the trio admitted they committed wire fraud in a scheme with Fastow and his top lieutenant, Michael Kopper, to cheat their former London employer, Greenwich NatWest. The bank, which is now part of the Royal Bank of Scotland, had a stake in a Fastow-created partnership and the three men advised their employer to sell that interest for $1 million when they knew its value had grown.

Fastow arranged for Enron to pay more than $19 million for Greenwich NatWest's stake and divided most of the cash among himself, Kopper, the British bankers and others.

Actually, as noted in this earlier analysis of the NatWest Three plea deal, the following is what the former bankers actually pled to:

So, after years of litigation, the NatWest Three pled guilty to a single count of wire fraud. The basis of the guilty plea is that the three bankers failed to disclose to NatWest the [$250,000] option that they had taken from Fastow to purchase a portion of NatWest's interest in Swap Sub at the time that NatWest sold that interest to Southampton [for $1 million]. Importantly, the basis of the plea deal is not that the NatWest Three knew and didn't tell NatWest that the value of the bank's Swap Sub interest was going to skyrocket soon after Southampton bought it as a result of Fastow completing the unwind transaction with Enron.

Read about the real NatWest Three deal.

Posted by Tom at 12:12 AM | Comments (6) |

February 16, 2008

A lingering question about Refco

So, Refco's former CEO and chairman Phillip Bennett pled guilty late Friday in a Manhattan federal court to fraud and other charges stemming from the 2005 collapse of the company (previous posts here). Peter Henning analyzes the plea here.

Bennett's guilty plea appears to have been prompted by the plea deal last December of Santo C. Maggio, Refco's former executive vice president, who was expected to testify against Bennett and the other Refco-related criminal defendants, former Refco executives Robert C. Trosten and Tone N. Grant, and former Mayer Brown partner and primary Refco outside counsel, Joseph P. Collins. Trosten and Grant's case is scheduled to go to trial in March.

Although not entirely unexpected, Bennett's guilty plea nevertheless leaves hanging the most intriguing question about the entire Refco affair:

Why on earth did Bennett ever take Refco public?

Let's recall the story. Refco -- a well-known Wall Street commodities and futures trading broker -- filed a chapter 11 case in mid-October 2005 a week after the company announced that a $430 million debt owed to the company by a firm controlled by Bennett had been concealed and then repaid by Bennett. Refco's board placed Bennett on indefinite leave and he was arrested on federal securities fraud charges shortly thereafter.

The indictment against Bennett alleged that Refco suffered hundreds of millions of dollars in bad debts in the late 1990's as a result of customer trading losses. The customers were unable to make good on the losses, so Refco was left on the hook because it had extended credit to the customers. Rather than making Refco's financial condition look less healthy by writing off the losses, Bennett allegedly had the losses assumed by a company that he owned and controlled -- Refco Group Holdings, Inc. ("RGHI") -- and then hid that fact from auditors and investors on multiple occasions by arranging the following series of transactions.

First, a Refco subsidiary -- Refco Capital Markets, Ltd. -- would make a short term loan (usually, about a two week term) in various amounts ranging from $325 million to $720 million to a third party, Liberty Corner Capital Strategies.

Liberty Corner would simultaneously make a short term loan to Mr. Bennett's company (RGHI) in the same amount and with the same maturity of its borrowing from Refco Capital (but at a slightly higher interest rate), and Refco the parent would guarantee RGHI's payment of the loan to Liberty Corner.

RGHI would then use the loan proceeds from Liberty Corner to pay Refco the amount of its related party indebtedness at the time shortly before the end of an upcoming Refco reporting period. Inasmuch as the debt was paid prior to the end of the reporting period, Refco's auditors did not report the amount of RGHI's previous indebtedness to Refco as related party indebtedness.

Finally, upon maturity of the two short term loans (which was timed to occur after the end of Refco's reporting period), the loans were "unwound" (apparently without telling Refco's auditors) so that RGHI was put back in the position of owing the same amount of related party indebtedness to Refco that it owed before it borrowed the money from Liberty Corner.

This arrangement apparently continued each quarter even after Thomas H. Lee Partners paid $500 million for a 38% stake in Refco in 2004 and even while the company was preparing its IPO, which took place in August, 2005. Less than two months after going public, the above-described scheme was exposed publicly, Refco proceeded to plunge into bankruptcy and Thomas H. Lee Partners' investment in the company went up in flames.

But why did Bennett take the considerable risk of having the scheme exposed under the microscope of taking Refco public and operating it as a public company? Had the fraud been discovered while Refco was a private company, matters probably would have turned out much differently for both Refco and Bennett. Bennett almost certainly would have been forced to resign, but the company would have been under no obligation to disclose the resignation publicly and, if it was disclosed at all, probably would have been described in the euphemistic manner of �pursuing other opportunities.�

Similarly, as a private company, Refco would have had no legal obligation to advise the market on why Bennett resigned and the financial press probably would not have connected it to fraud at Refco absent a leak from inside the company. Inasmuch as most folks would have never heard of Refco, Bennett's resignation would not have been particularly newsworthy outside of Wall Street. Indeed, unless Refco alerted the authorities about the fraud -- which it probably would not have done out of fear of triggering an Enronesque experience -- Bennett would not have been arrested.

Meanwhile, Refco's new management and board would have probably arranged an adjustment of the purchase price on the large investment that Thomas H. Lee Partners made in Refco in order to avoid a civil lawsuit that would have publicly disclosed the fraud. Perhaps the Refco board and management would have instituted some internal controls to lessen the risk of such a fraud occurring in the future. But most importantly, Refco probably would not have collapsed.

Now, compare what happened after Refco went public. The scheme was discovered almost immediately by the company's auditors, Refco's board was obligated to report what it concluded immediately to both the market and criminal authorities, Refco proceeded to go through an Enronesque experience and filed bankruptcy, Bennett was indicted, and Thomas H. Lee Partners lost over $300 million on its Refco investment. Meanwhile, Refco's creditors and investors are seeking hundreds of millions dollars in damages from Refco�s board, Refco's auditors (Grant Thornton) and the underwriters of the Refco IPO.

Did Bennett take Refco public simply because he was greedy, wanted to cash out on the IPO, and thought he could continue to cover-up the fraud? Maybe, but it doesn't seem likely. Did he lose control after taking in the Thomas H. Lee Partners investment and developments just overwhelmed him? Perhaps, but I'm still scratching my head on this one. Something doesn't add up. I am definitely staying tuned.

Posted by Tom at 12:00 AM | Comments (1) |

February 14, 2008

The DOJ loses another Enron criminal case

As expected, the Fifth Circuit denied the government's appeal yesterday of U.S. District Judge Vanessa Gilmore's decision to vacate the final count of the government's odious five count conviction against former Enron Broadband CFO Kevin Howard. The Fifth Circuit's decision affirmed Judge Gilmore's decision to vacate the only remaining count of Howard's conviction on which the prosecution had not already tossed in the towel. Ellen Podgor provides her usual excellent analysis of the decision.

With the Fifth Circuit's decision, the stage is now set for the Department of Justice's decision as to whether to try Howard for the third time on the same charges. One would hope that prosecutors would leave well enough alone, but don't count on it. This is an Enron-related prosecution, after all.

Meanwhile, far from Houston in Hartford, the DOJ continues to assert essentially the same case against three former General Reinsurance executives and an AIG executive that has been thrown out against Howard and also the four former Merrill Lynch executives in the equally reprehensible Nigerian Barge case (see also here and here). The defendants represented their company in the negotiation of a legitimate business transaction that was evidenced by a written agreement that provides that all agreements or representations between the parties that are not contained in the written agreement are void and unenforceable. But that's not what really happened, says the prosecution. The defendants entered into "secret side deals" that changed the risk allocation of the written agreement and eviscerated the company's accounting treatment of the transaction. Pay a couple of witnesses to testify against the defendants by cutting favorable plea deals with them and "presto" -- we've got a criminal case against some wealthy executives. Shattered lives, families and careers be damned.

This process is not one that a truly civil society would embrace.

Posted by Tom at 12:10 AM | Comments (0) |

February 13, 2008

Criminalizing Capitalism

If I didn't know better, I'd say that Nicole Gelinas has been reading (H/T Professor Bainbridge) my blog over the past several years:

[I]n the end, Sarbanes-Oxley has just made it easier for ambitious government attorneys to criminalize bad business judgment and complex accounting in hindsight. Further, in their focus on strengthening legal enforcement, the feds have passed up opportunities to create commonsense protections for investors. Worse still, the government has instilled investors with false confidence by implying that they can rely on prosecutors, not prudence, to protect their market holdings. Now the housing and mortgage meltdown�which could hurt the economy far more than Enron did�is reminding investors that no law or regulation can protect them from economic disruption. [. . .]

As the economy heads into a possible downturn, calls will grow for someone to pay for the pain of another burst bubble�and for yet more onerous rules, regulations, and prosecutions of businesses to prevent future crises. But no government mandate or punishment, however harsh, will stop companies and markets from being imperfect collections of fallible human beings. At the end of a decade of financial surprises, that may be the most enduring lesson of all.

As I noted here almost three years ago and have reiterated many times, the truth about Enron is that no massive conspiracy existed, that Jeff Skilling and Ken Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming commodities trading operation. Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst the perilous post-tech bubble, post-9/11 market conditions. Thus, when the markets were spooked by revelations of the embezzlement of several millions by Enron's CFO and his relative few minions, the company failed.

However, Gelinas is spot on in observing that Enron's failure was not a market failure. That Jeff Skilling failed to predict that Enron would fail is not a crime. Unlike his main accusers Andy Fastow and Ben Glisan, Skilling didn't embezzle a dime from Enron. Did he tirelessly advocate on behalf of this innovative company? Sure, but since when is it a crime for a CEO to be optimistic -- even overly-optimistic -- about his company?

The primary justification for the absurdly-long sentence handed to Skilling is the plight of the innocent employees and investors who lost their nest eggs when Enron went bankrupt. But the main reason that those nest eggs ever had value in the first place was because Skilling had transformed Enron into the world's leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers.

Although nothing is wrong with compassion for folks who lose money on an investment, rarely is it mentioned in the Enron morality play that many of those investors who lost their nest egg when Enron failed were imprudent in their investment strategy. They should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron's stock price while being protected by a floor in that share price if things did not go as planned. Even though virtually all of those innocent Enron investors carry insurance on their homes and cars, one can only speculate why they didn't attempt to hedge the risk of their investment in Enron stock. Most likely, many of the investors simply did not understand how Enron's risk management services created their wealth in the first place.

Beyond the shattered lives, families and careers, the real tragedy of the post-Enron demonization of business is that it has distracted us from examining the tougher issues of what really causes the demise of a company such as Enron and understanding how such a company can be structured to survive in even the worst market conditions. It's easy to throw a good and decent man such as Jeff Skilling in prison for most of the rest of his life, throw away the keys and simply attribute Enron's failure to him. It's a lot harder to try and understand what really happened.

Posted by Tom at 12:10 AM | Comments (3) |

February 12, 2008

Lerach's sentence

Former plaintiff's class action securities lawyer Bill Lerach was sentenced yesterday to two years in prison, fined $250,000 and ordered to complete 1,000 hours of community service (Peter Lattman's W$J interview of Lerach is here and more W$J coverage of blawgosphere reaction is here). Lerach pled guilty last September to a felony count of conspiring to obstruct justice and to submit false testimony in federal judicial proceedings after being investigated by the Department of Justice for the better part of a decade.

My posts from over the years on Lerach and the investigation into his practice are here, and my latest posts summarizing my views on his plea deal are here and here. Along similar lines to the thoughts expressed in this post from yesterday, Larry Ribstein cautions those who take satisfaction in watching Lerach's fall from the pinnacle of the plaintiff's class action securities bar:

What many call their �greed� is what moves the market�s invisible hand and what has . . . generated so much public good for our financial markets. Both financial innovations and legal innovations may be taken too far, but this doesn�t negate their positive aspects and the need to encourage them.

That�s not an excuse for wrongdoing. If laws have been broken the violators should be sent away. But we should be aware that the excesses of prosecutors can cause at least as much, and possibly more, harm than the excesses of financial speculators.

Posted by Tom at 12:10 AM | Comments (0) |

Guilty verdict in the latest natural gas trader case

We in Houston have become so jaded by dubious prosecutions of businesspeople that the guilty verdict in the latest natural gas trader case passed almost unnoticed late last week. The Department of Justice's press release on the verdict is here, and the article of Tom Fowler -- the Chron reporter who has done a good job of following these the trader cases -- is here. My previous posts on the natural gas trader cases are here.

What is particularly troubling about the result in this particular case is that three relatively young men (the oldest of the three defendants is 48) with families and (at least up to this trial) excellent careers are now facing effective life prison sentences for essentially lying to a magazine. The prosecution's alleged that the three traders provided false information to natural gas industry publications such as the Inside FERC Gas Market Report, which uses data from traders to calculate the index price of natural gas. Inasmuch as movement in index prices can theoretically affect the level of profits that traders can generate, the government's theory was that the defendants provided false information so that they and their employer -- El Paso Natural Gas Co. -- could reap higher profits.

However, it remains unclear whether the magazines actually used the false information that the defendants provided to them or that the false trades actually affected the markets at all. No problem for the prosecution, though. The government contended that the market effect of providing the false information was irrelevant and that it only needed to prove that false information was reported to the magazines in order to make a case against the defendants.

So, key point to all of you businesspeople out there -- don't ever provide any false information to a publication. It really doesn't make any difference whether the false information affects your business. The transmittal of false info is the crime.

I wonder if that applies to movie stars and tabloids, too? ;^)

As Fowler reports in his article, this was the second trial in what has been a five-year investigation of natural gas trading practices by Houston-based federal prosecutors and the Commodity Futures Trading Commission. A dozen Houston-area traders have been criminally charged in the trader cases and half of those have plea guilty. Two others -- former Dynegy trader Michelle Valencia and former El Paso trader Greg Singleton -- were convicted on several wire fraud counts but were acquitted on false reporting charges in 2006. They are still awaiting sentencing.

Posted by Tom at 12:00 AM | Comments (0) |

February 11, 2008

The winds of prosecutorial power

When the Department of Justice decided to prosecute Arthur Andersen out of business despite a manifestly weak case, that confirmed that the creation of enormous wealth for thousands of employees and an impeccable reputation built over decades of fine work provide no insulation these days from the excesses of an rapacious prosecutor's judgment.

Then, the DOJ decided to misapply a criminal law to prosecute several former executives of the social pariah Enron, which a vacuous mainstream media applauded without nary a mention of the dreadful implications that such a misuse of the state's overwhelming prosecutorial power portends.

Given this backdrop, it was not particularly surprising that the government threatened to put large employers out of business unless they served up a few employees for the government to prosecute. Or that the government turned its prosecutorial power on the business news media as well as almost everything else. In the meantime, some of the leading purveyors of this prosecutorial campaign of abuse were being rewarded for their actions and competing for the highest offices in the land.

But now the government is turning its prosecutorial power toward pillars of the legal profession, first with regard to a Mayer Brown partner who performed work for Refco and more recently with regard to Ben Kuehne, who has long been one of the most-admired lawyers in the Miami legal community. Ellen Podgor analyzes the implications of the Kuehne indictment and Ashby Jones adds more context here.

So, after much of the legal profession has stood by for years while prosecutors trampled the rule of law in criminalizing unpopular business executives, where does the profession now "hide [with] the laws all being flat?." Will the profession be able to stand upright in the winds of prosecutorial abuse that are blowing now? Stay tuned.

Posted by Tom at 12:10 AM | Comments (0) |

February 8, 2008

Another Enron Task Force alum rings the bell

Fresh off his victory in the Joseph Nacchio trial, former Enron Task Force prosecutor Cliff Stricklin is the latest former Enron Task Force prosecutor to land a cush job at a big firm. Sean Berkowitz and Andrew Weissmann, among other Task Force prosecutors, cashed in earlier.

The puff piece announcing Stricklin's new job left out a few details of his work with the Enron Task Force. Stricklin was one of the lead prosecutors during the first Enron Broadband trial in which the Task Force was caught eliciting false testimony from one of the Task Force's main witnesses (Ken Rice) and threatening two defense-friendly witnesses, Beth Stier and Lawrence Ciscon. During the trial, U.S. District Judge Vanessa Gilmore angrily cut off Stricklin from further cross-examination of one of the defendants and rebuked him in open court when Stricklin violated one of the Judge's limine orders.

That trial -- which appeared to be a tap-in for the Task Force at the outset -- ended in a crushing defeat for the Task Force. Stricklin parleyed his work in the Broadband case into a role on the prosecution team in the Lay-Skilling trial, where he proceeded to give a lesson in what not to ask on re-direct. That performance led to his appointment as the lead prosecutor in the Naccio case.

So, as Jeff Skilling fights for freedom from what amounts to a barbaric life sentence and many other lives have been shattered by the work of the Enron Task Force, the folks who cut corners to achieve those results are doing quite well, thank you. Given the dismal track record and the dubious tactics of the Enron Task Force, it makes one wonder just what these big law firms would have offered up to former Task Force members if they had done a really good job?

Posted by Tom at 12:10 AM | Comments (0) |

February 5, 2008

The human cost of questionable prosecutions

One of the more discouraging aspects of the societal tide of resentment and scapegoating that has permeated the Enron related criminal prosecutions has been the utter lack of perspective or compassion regarding the horrendous human cost of those prosecutions.

We already know the horrendous financial cost (see also here) of those prosecutions. However, the the starkest example of the human cost is what happened to the family of the death of Ken Lay, who endured the decline of a loving father and grandfather as he defended himself against questionable charges that in a less-heated environment would likely never have been pursued. Almost equally barbaric is the unsupportable 24-year prison sentence assessed to former Enron CEO Jeff Skilling, whose children are threatened with the loss of their father for most of the rest of his life.

The Enron-related criminal prosecutions have thrown numerous other families into turmoil, such as those of the four former Merrill Lynch executives (see also here) who were unjustly jailed for a year in the Nigerian Barge case. Dozens more have lived their lives in fear over the past several years as Enron Task Force prosecutors routinely threatened prosecutions against most anyone who could provide exculpatory testimony for a defendant looking down the Task Force's gun barrel.

But the enormous human toll of these prosecutions was reinforced by this London TimesOnline article, which reports on the heartbreaking child custody case involving the daughter of Gary Mulgrew, one of the former UK bankers known as the NatWest Three who recently entered into a plea bargain of dubious charges against them. Turns out that Mulgrew -- while forced to live in the US away from his family for most of the past two years -- has had to endure the emotional trauma of having his six-year-old daughter taken by his estranged ex-wife to live in Tunisia with the ex-wife's new boyfriend, "Abdul." Based on the difficulty of attempting to enforce Western legal obligations in an Islamic legal system, Mulgrew and his family must be going through a living hell in trying to rescue his daughter from a repressive Islamic culture.

To my knowledge, none of this human drama has been mentioned in the US mainstream media, which has moved on from Enron in its inexhaustible search for the next scapegoats. Wasn't the damage to families and careers that the government and the mainstream media left in the wake of the Enron-related prosecutions enough to satiate our resentment?

Sadly, I don't think so.

Posted by Tom at 12:15 AM | Comments (2) |

January 28, 2008

The power of myths

A common topic on this blog has been the power of anti-business myths within American society. Take Enron, for example. We all know how the myth played out. Enron, which was one of the largest publicly-owned companies in the U.S., was really just an elaborate financial house of cards that a massive conspiracy hid from innocent and unsuspecting investors and employees. The Enron Myth is so widely accepted that otherwise intelligent people reject any notion of ambiguity or fair-minded analysis in addressing facts and issues that call the morality play into question. The primary dynamics by which the myth is perpetuated are scapegoating and resentment, which are common themes of almost every mainstream media report on Enron.

The mainstream media -- always quick to embrace a simple morality play with innocent victims and dastardly villains -- was not about to complicate the story by pointing out that the investors in Enron could have hedged their risk of loss by buying insurance quite similar to that which Enron developed in creating their wealth in the first place. Instead of attempting to examine and tell the nuanced story about what really happened at Enron, much of the mainstream media simply became a part of the mob that ultimately contributed to death of Ken Lay and hailed the barbaric 24 year sentence of Jeff Skilling. Ambitious prosecutors, given wide latitude to obtain convictions of key Enron executives regardless of the evidence, gladly took advantage of the firestorm of anti-Enron public opinion to lead the mob.

Consequently, as Wall Street continues to endure massive equity write-downs that dwarf the $1.1 billion non-recurring charge against earnings that triggered Enron's demise after the 3rd quarter of 2001, I was somewhat surprised to read this common sense analysis from NY Times columnist, David Brooks:

There is roughly a 100 percent chance that we�re going to spend much of this year talking about the subprime mortgage crisis, the financial markets and the worsening economy. The only question is which narrative is going to prevail, the Greed Narrative or the Ecology Narrative.

The Greed Narrative goes something like this: The financial markets are dominated by absurdly overpaid zillionaires. They invent complex financial instruments, like globally securitized subprime mortgages that few really understand. They dump these things onto the unsuspecting, sending destabilizing waves of money sloshing around the globe. Economies melt down. Regular people lose jobs and savings. Meanwhile, the financial insiders still get their obscene bonuses, rain or shine.

The morality of the Greed Narrative is straightforward. A small number of predators destabilize the economy and reap big bonuses. The financial system is fundamentally broken. Government should step in and control the malefactors of great wealth.

The Ecology Narrative is different. It starts with the premise that investors and borrowers cooperate and compete in a complex ecosystem. Everyone seeks wealth while minimizing risk. As Jim Manzi, a software entrepreneur who specializes in applied artificial intelligence, has noted, the chief tension in this ecosystem is between innovation and uncertainty. We could live in a safer world, but we�d have to forswear creativity. [. . .]

The Ecology Narrative is not morally satisfying. I wouldn�t bet on its popularity as a backlash against Wall Street and finance sweeps across a recession-haunted country. But the Ecology Narrative has one thing going for it. It happens to be true.

Along those same lines, this Landon Thomas/NY times story reports on how two Wall Street executives who were intimately involved in $34 billion in write-downs remain reasonably hot properties on the Wall Street employment market. The Greed Narrative apparently hasn't caught up with those two yet, either.

But not so fast. This NY Times article reports that New York attorney general Andrew Cuomo, who replaced Eliot Spitzer as the Lord of Regulation, is currently putting the squeeze on a company that analyzed the quality of home loans for investment banks to provide evidence to prosecutors that the banks had detailed information that they did not reveal to investors about subprime mortgage risk. So, maybe that Greed Narrative still has legs after all.

But for the final word, don't miss this Larry Ribstein post in which he exposes NY Times columnist Gretchen Morgenson's stubborn adherence to the Greed Narrative even when it is clear from the subject of the story (in this case, the troubles of retailer Sears) that the narrative doesn't fit. In short, Morgenson is not one to allow the facts to get in the way of spinning a Greed Narrative morality play.

Posted by Tom at 12:10 AM | Comments (0) |

January 25, 2008

The Fastow notes

The big Enron-related news this week was the U.S. Supreme Court's refusal to hear the appeal of the Fifth Circuit's decision to dismiss securities fraud claims against several of Enron's banks (Ted Frank explains the decision). In light of the Supreme Court's recent Stoneridge decision, the denial of the Enron-related appeal was not surprising, although I agree with Larry Ribstein that the Supreme Court should have been clearer in defining the rule against holding third parties liable for another company's alleged securities fraud. Oh well.

Meanwhile, continuing to fly under the mainstream media's radar screen is the growing scandal relating to the Department of Justice's failure to turnover potentially exculpatory evidence to the defense teams in two major Enron-related criminal prosecutions (see previous posts here and here). The DOJ has a long legacy of misconduct in the Enron-related criminal cases that is mirrored by the mainstream media's myopia in ignoring it (see here, here, here and here).

This motion filed recently in the Enron-related Nigerian Barge criminal case describes the DOJ's non-disclosure of hundreds of pages of notes of FBI and DOJ interviews of Andrew Fastow, the former Enron CFO who was a key prosecution witness in the Lay-Skilling trial and a key figure in the Nigerian Barge trial.

Enron Task Force prosecutors withheld the notes of the Fastow interviews from the defense teams prior to the trials in the Lay-Skilling and Nigerian Barge cases. If the Fastow notes turn out to reflect that prosecutors withheld exculpatory evidence or induced Fastow to change his story over time, then that would be strong grounds for reversal of Skilling's conviction and dismissal of the remaining charges against the Merrill Lynch bankers in the Nigerian Barge case. The recent motion underscores the impact of the DOJ's non-disclosure of the Fastow notes in both trials:

The circumstances surrounding the debriefing of Andrew Fastow by the FBI are extraordinary and suspicious. Normally, when the FBI interviews a witness, it creates a 302 contemporaneously with each interview. Here, the government held scores of interviews with Mr. Fastow over 18 months, yet compiled only one composite 302�after apparently destroying any individual 302s or prior drafts of the composite 302 that were created. This does not comport with FBI policy and is highly unusual. . . . Skilling�s Opposition [to the United States� Motion for Reconsideration by a Three-Judge Panel of Order Requiring it to Produce FBI Raw Notes] sheds light on this troubling and highly unusual practice:

One of Skilling�s claims on appeal is that the government impermissibly thwarted his ability to cross-examine Fastow. It did so by violating FBI policy and Brady, Giglio, and their progeny, inter alia, in (1) failing to prepare an FBI form 302 memoranda for each interview it conducted with Fastow; (b) scripting a 200-plus page �composite� Form 302 that masked inconsistencies, contradictions, and the evolution of Fastow�s story; (c) destroying all drafts of the composite 302s; and (d) refusing to provide Skilling with copies of the underlying raw notes from its more than 1,000 hours of interviews with Fastow.

Moreover, defense counsel in Barge I were never informed by the government that the FBI, contrary to its customary policy, had prepared only one composite 302, rather than a separate 302 for each Fastow interview. This troubling practice of compiling a single 302 to encompass thousands of hours of interviews with Fastow has effectively denied the defendants the benefit of gauging the evolution of Fastow�s story over time, and the shaping by the government of his story. It is not surprising that given these unusual circumstances, and the critical nature of Fastow�s involvement in Enron prosecutions, the Fifth Circuit took the unusual step of ordering the release of the Binders even before final briefing or oral argument in the Skilling appeal.

The motion goes on to describe the DOJ's continued resistance to turning over the Fastow notes, even in the face of the Fifth Circuit order to do so in the Skilling appeal and the DOJ's agreement to do so in open court in the Nigerian Barge case.

So, why is the mainstream media ignoring this scandal? Enron fatigue? Or does it not fit neatly into the media and prosecution-fueled myth that Enron was merely a financial house of cards that its managers knew would ultimately fail? Truth and justice doesn't depend on adherence with such a myth, now does it?

Posted by Tom at 12:10 AM | Comments (5) |

January 14, 2008

The rotting Enron criminal prosecutions

You won't read about it much in the mainstream media, but the Enron-related criminal prosecutions increasingly smell like a rotting carcass.

After Jeff Skilling was lynched by an angry mob, most of the mainstream business media moved on to other stories, such as various Wall Street firms taking write downs that are far in excess of the $1.1 billion in non-recurring 3rd quarter 2001 charges that began the media-fueled run on Enron that ended with the firm in bankruptcy and many of its executives in the cross-hairs of federal prosecutors. Contrary to public perception, this earlier post chronicled how the Enron Task Force's actual effort in proving Enron-related crimes was nowhere near as effective as its public relations campaign in demonizing the defendants in the Enron-related criminal cases.

To her credit, the Chronicle's Kristen Hays remains one of the few mainstream media reporters who is following up on the Enron-related prosecutions. In this recent article, Hayes reports on the oral argument at the Fifth Circuit Court of Appeals of the Department of Justice's attempt to salvage at least a smidgen of the dubious conviction that the Task Force obtained in 2006 against former Enron Broadband executive Kevin Howard. U.S. District Judge Vanessa Gilmore threw out the conviction based largely on the Fifth Circuit's prior decision in the Nigerian Barge case (see also here).

During oral argument on its appeal, the DOJ's "best" argument before the Fifth Circuit panel was that the prosecution should not have given Judge Gilmore a flawed jury instruction linking the one count that it contends should survive with the four counts that the DOJ concedes should be tossed out. As Hayes reports, "A skeptical [Fifth Circuit Judge Patrick E.] Higginbotham noted that the prosecution supported the instruction and nearly two years later on appeal is saying it shouldn't have been given."

As they say in appellate circles, that's not a good signal from the bench for the DOJ.

If the Fifth Circuit does as expected and denies the DOJ's appeal, then the DOJ will confront whether to try Howard for a third time on Enron-related charges. And given the DOJ's track record, I wouldn't put it past them.

Meanwhile, in a development that I didn't see picked up by any of the mainstream media, U.S. District Judge Ewing Werlein effectively put off the trial of former Merrill Lynch bankers Daniel Bayly and Robert Furst for a year or so by granting Bayly and Furst an interlocutory appeal of a part of his recent decision denying their motion to dismiss the DOJ's ongoing attempt to re-try them in the Nigerian Barge case. Judge Werlein's decision to grant the interlocutory appeal puts that re-trial off for the better part of a year, at least.

Finally, as this recent post noted, Skilling's defense team and the defense teams for the former Merrill bankers are currently sifting through the notes of FBI and Task Force interviews with former Enron CFO Andrew Fastow, who was a key witness in the Skilling trial and a key player in the Nigerian Barge trial. Inasmuch as Task Force attorneys withheld information from those interviews from both defense teams prior to the trials in both cases, if the notes of the Fastow interviews reflect that prosecutors withheld exculpatory evidence or induced Fastow to change his story over time, then that would be strong grounds for reversal of Skilling's conviction and dismissal of the remaining charges against the Merrill bankers. Stay tuned.

Quite a record of that Enron Task Force, eh?

Update: Larry Ribstein points out that these should have never been criminal cases in the first place.

Posted by Tom at 12:10 AM | Comments (2) |

January 3, 2008

Landing the tuna rather than the barracuda

As noted here last month, Berkshire Hathaway chairman and mainstream media folk hero Warren Buffett is a key player and, as these NY Times and W$J articles report, perhaps even a key witness in the upcoming criminal trial of a former AIG executive and four former executives of Berkshire's General Reinsurance Corp, including former General Re CEO, Ronald E. Ferguson.

Although Buffett knew about the finite risk transactions that are at the heart of the prosecution, he is exempt from prosecution under the Buffett Rule. Previous posts on this case are here, here, here, here and here.

What's particularly interesting about all this is that the prosecution is attempting to prevent the defense from even mentioning Buffett, whose knowledge of the transactions (and the government's election not even to include Buffett as an unindicted co-conspirator, much less a defendant) is at least some evidence of the defendants' lack of criminal intent (Warren Buffett would not engage in any criminal conduct, now would he?). The prosecution is contending that any evidence relating to Buffett's knowledge of the transactions is hearsay and, thus, inadmissible. But until the testimony regarding Buffett's knowledge is propounded in court, who knows whether it is hearsay?

Of course, the prosecution is not shy about using hearsay testimony when it comes from someone who is not an avuncular media darling such as Buffett. The prosecution has fingered former AIG chairman Maurice "Hank" Greenberg as an unindicted co-conspirator in the trial, which -- based on previous experience -- means that the prosecution will use testimony about Greenberg's statements that would otherwise be hearsay.

As usual, Larry Ribstein sums up the vagaries of the government's policy of selectively criminalizing merely questionable business transactions:

One might think that the government would have been trying to ensnare Buffett, who would be a high-profile trophy. The problem is that trying a cultural icon like Buffett would raise public doubt about the legitimacy of the government's corporate crime enterprise. So Buffett gets the benefit of a version of the Apple rule -- . . . the Buffett rule. In this case, unlike Enron, it's better for the government to land the tuna than the barracuda.

According to the WSJ, the prosecution is arguing that "[t]he defendants want to deflect the issue of their involvement, knowledge and the intent relating to ... the fraudulent transaction at the heart of this case by creating a trial-within-a-trial about Warren Buffett." Deflect? Yes, I guess, for the government, a defendant's insistence on defending himself is a pesky nuisance.

The bottom line is that issues of defendants' guilt, including critical evidence of whether they knew they were engaging in wrongdoing, may not be available because, ultimately, the government decides who testifies by deciding whom to prosecute. All part of the costs of the extensive criminalization of accounting and other conduct of corporate agents.

Posted by Tom at 12:10 AM | Comments (0) |

December 24, 2007

Behind the scenes in the Skilling appeal and the Nigerian Barge case

I normally throttle down blogging during the holiday season to just one post a day, but I wanted to pass along something that you don't see every day in connection with former Enron CEO Jeff Skilling's appeal of his convictions and in the Nigerian Barge case involving the re-trial of three former Merrill Lynch bankers.

As this CNBC news release reports, the Fifth Circuit last week ordered -- over the Department of Justice's strenuous opposition -- that the DOJ prosecutors must deliver to Skilling's defense team the FBI's notes of their interviews with former Enron CFO, Andrew Fastow. Then, this past Friday, U.S. District Judge Ewing Werlein cited the Fifth Circuit's order in Skilling's case in granting the Merrill bankers' motion in the Nigerian Barge case requiring the DOJ to turnover the same notes of the Fastow interviews to the bankers' defense teams.

The DOJ's refusal to provide the criminal defense teams the notes of the Fastow interviews has long been a point of contention in several Enron-related criminal cases. The defense teams suspect that the notes will show that Fastow changed his story during his extensive interviews with FBI agents. Prosecutors in the Skilling and Nigerian Barge cases have have previously refused to turnover the notes to defense attorneys and provided only a prosecution-prepared "summary" of Fastow's statements to FBI agents.

Fastow was a key witness against Skilling and was a central figure in the first Nigerian Barge trial. Thus, if the notes of the Fastow interviews reflect that prosecutors withheld exculpatory evidence or induced Fastow to change his story over time, then that would be strong grounds for reversal of Skillings' conviction and dismissal of the remaining charges against the Merrill bankers.

By the way, the re-trial of Merrill bankers Dan Bayly and Robert Furst in the Nigerian Barge case is currently scheduled for January 28th, although the docket reflects a number of dispositive motions that must be ruled on before the case can proceed to trial. The re-trial against the third Merrill banker -- James Brown -- has been severed for a separate trial, which has not yet been scheduled.

Finally, Skilling's appellate team filed his reply brief this past Friday, although my sense is that the document that was filed will likely not be the final version. As with Skilling's first brief, the Skilling team has requested that the Fifth Circuit waive its page limitations for reply briefs. Consequently, once the Fifth Circuit rules on that request, the Skilling team will probably then file the final version of the reply brief, which will include tables of contents and authorities that the current version lacks. I am looking forward to reading the brief over the holidays and will pass along my thoughts after I have done so. In the meantime, both Ellen Podgor and Doug Berman have already posted their typically insightful thoughts on the brief.

Posted by Tom at 12:15 AM | Comments (0) |

December 20, 2007

Criminalizing the legal advisors

Regular readers of this blog know that the federal government's criminalization of business since Enron has been steadily encroaching on professionals who provide advice to business interests. First, it was Arthur Andersen, then the Merrill Lynch bankers in the Nigerian Barge case, and then KPMG.

Now, Nathan Koppel of the WSJ Law Blog reports that the Department of Justice has thrown down the criminal gauntlet on legal advisors by indicting former Refco, Inc outside counsel, Joseph P. Collins, the former head of Mayer, Brown & Platt's derivatives section. A copy of the indictment is here and my previous posts on the Refco case are here.

The indictment crosses the Rubicon in terms of the govenment's willingness to prosecute an outside lawyer for merely advising a client in regard to structuring transactions that are not intrinsically illegal, but it nevertheless raises more questions than it answers. As is typical of most business prosecutions over the past several years that criminalize questionable business judgment rather than clear white collar criminal acts such as embezzlement, the indictment of Collins is a jumble of conclusory allegations of fraud without any specific allegations of Collins' fraudulent conduct.

Although inartfully drafted, the government's indictment essentially alleges that Collins assisted former Refco CEO and controlling shareholder Phillip Bennett in using Refco's credit to reduce indebtedness to Refco of an affiliate controlled by Bennett. That's not a crime, but the government alleges that Collins committed a crime by aiding Bennett in misleading Refco auditors and investors in not telling them about the use of Refco's credit to reduce the affiliate's debt to Refco. In addition, the government alleges that Collins aided Bennett in covering up from investors the dilution of Bennett's ownership interest in Refco to BAWAG, which is characterized as "a longtime Refco customer." Again, the government hinges its criminal case against Collins on the alleged non-disclosure of that dilution.

What's curious about all of this is that numerous lawyers, accountants and investment bankers scrutinized and presumably profited from Refco over the past several years in connection with various investments in the firm, including its well-publicized public offering that valued the company at $4 billion five months before it disintegrated into a bankruptcy case. Not only did none of these professionals uncover the alleged fraud, but none of them other than Collins has been targeted as a criminal. Moreover, as this earlier post asks, if Bennett and Collins were orchestrating a massive fraud at Refco, then why on earth did they take it public where discovery of the fraud would likely lead to far more draconian consequences than if Refco had remained private?

Oh well, I suppose that question will be sorted out eventually. An ominous sign for both Bennett and Collins is that former Refco Capital Markets vice-president, Santo C. Maggio, pled guilty yesterday in New York to two counts of securities fraud, one count of conspiracy and one count of wire fraud under a cooperation agreement with prosecutors. In the meantime, it looks as if Collins and Bennett are not in lockstep with regard to defending their criminal cases. The initial public comments of Collins' attorney suggest that Collins will assert that he had been duped by Refco's fraud. Although that position can't be pleasing to the Bennett defense, it is certainly understandable from Collins and Mayer Brown's standpoint. It appears that Mayer Brown is underwriting Collins' defense and probably will continue to do so as long as Collins is taking the position that any failure of his legal counsel was the result of being duped or, at worst, negligence.

Maintaining that position would appear to be extremely important to Mayer Brown, which has had been having its own business problems over the past year or so (see here, here and here). If a jury finds that Collins was engaged in criminal fraud with regard to Refco, then such a finding would likely constitute grounds for any insurer or reinsurer of Mayer Brown to deny coverage for damage claims arising from Refco-related civil litigation against the firm, as well as any legal fees generated in the defense of such litigation. In that turns out to be the case, Mayer Brown's resulting business problems may make the ones that the firm has been dealing with over the past year look like a piece of cake in comparison.

As always, Larry Ribstein and Peter Henning have insightful thoughts on various implications of the Collins indictment.

Posted by Tom at 12:10 AM | Comments (0) |

What is Reyes being sentenced for again?

Following on this post from last week that pointed out the illusory nature of the financial damages attributed to former Brocade CEO Greg Reyes' backdating of stock options, the W$J's Holman Jenkins -- who has been the most lucid mainstream media voice condemning the witch hunt mentality that permeated the criminal prosecutions involving backdated stock options -- pens this column on the Reyes sentencing, in which he concludes:

Punishment should fit the crime; dozens of executives have lost jobs over backdating; a few have been asked to disgorge money and sign regulatory settlements that don't require acknowledgment of wrongdoing. Even the trial lawyers have been unable to make a meal out of this scandal, thanks to an absence of demonstrable shareholder harm.

The great flaw in the Reyes prosecution, which was the first of its kind, was the prosecution's attempt to fulfill the media image of backdating, rather than focusing on the venial offense it was. The government has suggested Mr. Reyes should face 10-20 years. Judge Charles Breyer, in a recommendation recently unsealed, proposed 15-21 months. Some law bloggers think it not impossible Mr. Reyes will receive a suspended sentence.

Let's hope so. Because unless we plan to send Steve Jobs and a hundred other executives to jail for backdating, it would be grossly disproportionate to inflict jail on Mr. Reyes.

Read the entire column. By the way, the Reyes sentencing has been postponed indefinitely.

Posted by Tom at 12:00 AM | Comments (0) |

December 11, 2007

Conrad Black faces the trial penalty

Former Hollinger International chairman and CEO Conrad Black (previous posts here) was sentenced on Monday to six and a half years in prison as a result of his conviction on three counts of mail fraud and one count of obstruction of justice stemming from Black and his associates' taking of $2.9 million in non-compete compensation from the sale of Hollinger assets that the prosecution contended should have gone to Hollinger. Lord Black was ordered to report to prison on March 3rd.

Given the severity of the trial penalty (see also here) in criminal cases against wealthy businesspeople these days, Black's sentence could have turned out much worse under the circumstances (sentencing expert Doug Berman had set the over/under on Black's sentence at 8 years). Let's face it -- the American criminal justice system is stacked against defendants such as Lord Black, Jeff Skilling, Jamie Olis or any number of other recently-convicted businesspersons who elect to protest their innocence at trial. The now common practice of the prosecution loading indictments with multiple charges for the same acts (and the judiciary's reluctance to dismiss duplicative charges) virtually ensures that juries will throw a bone to the government and convict on at least some of the counts (Lord Black was acquitted on 9 of the 13 counts against him).

Meanwhile, it's interesting to note the impact that all of this has had on Hollinger. The stock of Sun-Times Media -- which is all of what is left of Hollinger -- is down to about $1 a share, which is a quarter of the share price when the Black trial began and a fraction of its value during the time that Black ran the company. Black himself expressed "deep regret" during the sentencing hearing for the $1.2 billion in shareholder value that has been lost during the tenure of the company management team that succeeded Black's team.

In a very real sense, the government destroyed Hollinger in order to make a statement in destroying Conrad Black. Sound familiar?

Posted by Tom at 12:10 AM | Comments (0) |

December 10, 2007

Backdating options -- the scandal within a non-scandal

As noted earlier here, the mainstream media-driven scandal over the fairly common practice of backdating stock options has been more about demonizing the unlucky businesspeople who engaged in the practice more than anything else. Inasmuch as there is nothing inherently illegal or damaging financially to granting backdated stock options, the real issue has always really been whether the company granting the backdated options disclosed them properly.

Unfortunately, the proper perspective toward that non-disclosure issue has been overwhelmed amidst the demonization of the backdating practice by mainstream media and avaricious prosecutors, many of whom did not bother to learn about how backdating options can be a legitimate tool to provide incentive to key employees. To this day, even many businesspeople and professionals who I talk with don't understand backdated options. One can only imagine the level of confusion among the vast majority of American citizens who probably equate a backdated option with a backdated check.

The sad part about all this is that backdated stock options are really quite straightforward. Traditionally, management has provided key employees "at-the-money" options -- that is, the option to buy stock at the price at which the shares are trading on the day the option is granted. Thus, if the share price goes up, then the key employee makes money. On the other hand, if the share price goes down, then the key employee makes nothing on the options.

But "at-the-money" options aren't the only type of options. There can be "out-of-the-money" options or "in-the-money" options, and each type of option serves to provide a different type of incentive for key employees. If a key employee is granted out-of-the-money options, then a small increase in the share price won't allow the employee to make any money on their options. Rather, it's going to take a large increase in the share price for the employee to make money on the options. However, that large increase in share price can be very profitable for the employee -- a grant of $100,000 in out-of-the-money options is much more valuable if there is a substantial increase in share price than a grant of $100,000 in at-the-money options would be under the same circumstance.

On the other hand, consider "in-the-money" options. These options continue to have value to the key employee even if the share price decreases slightly (because they are still "in-the-money"). But if the share price goes to hell in a handbasket, the options lose their value completely.

So, the different types of options provide management with flexibility in tailoring differing incentives depending on the circumstances that a company faces. A key employee with out-of-the-money options has incentive to take big risks because the only way that those options will become valuable is if the share price rises dramatically. On the other hand, a key employee with in-the-money options has little incentive to take big risks; rather, he wants to prevent the share price from falling because that's the only way the options can lose their value.

Backdated options are simply a form of in-the-money option. Inasmuch as in-the-money options are a legitimate way to incentivize key employees, what's the big deal about backdated options?

Well, there are different tax implications to these types of stock option grants, but whether there is any clear tax benefit from backdating options is far from clear. Heck, how many executives who were involved in backdating options based their decision on the tax implications of the grants? Probably not many. For years, accounting firms advised companies that, so long as the options were issued with formulaic pricing, then backdating the options was not a problem from a tax standpoint. Thus, for example, where companies granted options priced �at the lowest trade date in the month granted,� accountants would routinely advise the companies that these were at-the-money options that need not be expensed.

Moreover, just because backdated options are in-the-money options doesn't mean that the company or its shareholders are losing money. Options are not a zero-sum game where someone wins and someone loses. If management decides to sell the company's stock for $50 when the market price is $100, then that does not mean that the company is losing money. So long as the shareholders know about management's option program and that the company is going to be required at some point to sell a certain number of shares at $50, the shareholders aren't losing money, either. The efficient market will price the dilution into the share price. This point was reinforced late last week when U.S. District Judge Charles R. Breyer of San Francisco concluded in the sentencing phase of the backdating criminal case against former Brocade CEO Gregory Reyes that the government had failed to "quantify any amount of loss that can be attributed to Reyes� conduct" (see related Roger Parloff post; Peter Henning also comments on the ruling here).

Which brings us around to the disclosure issue. Some of these backdated options were either not disclosed at all or were disclosed with a public statement such as "no gain to the options is possible without stock price appreciation, which will benefit all shareholders." As can be seen from the above analysis, such a disclosure is wrong or at least misleading.

So, the question is what should be done about such a bad disclosure? Professor Ribstein took the lead early on in the blawgosphere by noting that criminalizing such conduct was akin to using a sledgehammer where surgical precision is needed. In this recent post examining the deal in which former UnitedHealth Group executive William McGuire agreed to return $620 million in compensation to settle backdating claims, Professor Ribstein contrasts McGuire's deal with what happened to Brocade's former human resources director Stephanie Jensen, who was found guilty of two criminal counts relating to backdating options even though she did not personally benefit from them. "In one [case,] the chief executive and main beneficiary likely will walk away with hundreds of millions of dollars," notes Professor Ribstein. "In the other, an underling who didn't profit from the offenses likely will go to jail."

And the foregoing disparity doesn't even address the Apple Rule as it relates to backdating stock options.

The reality is that criminalizing the practice of backdating stock options was a bad idea from the beginning, the equivalent of mob violence against unpopular businesspeople. The result is more of what Professor Ribstein has coined the "corporate crime lottery" where the winners pay a fine or fade the heat entirely while the losers go to jail. Professor Ribstein concludes his recent post in with the following observation:

[The McGuire and Jenson] cases are only the most recent examples of the lottery in action. Not much is gained from criminalizing this conduct over the many remedies, including the corporation's own right of recovery, available for any wrongs that occurred (mostly inadequate disclosure). But much is lost from the odor of injustice that wafts over these disparate results.

And as Peter Henning reports, that odor of injustice may include the prosecution's use of false testimony to convict Reyes.

Posted by Tom at 12:00 AM | Comments (0) |

December 6, 2007

A forerunner of business ethics?

Mary Flood notes that former Enron Task Force director Andrew Weissmann has been named in this Ethisphere article as one of the "100 Most Influential People in Business Ethics."

They are kidding, right?. If it's acceptable to promote business ethics through abuse of prosecutorial power, then Weissmann is your guy.

Posted by Tom at 12:10 AM | Comments (3) |

The latest natural gas trader case

This Tom Fowler/Chronicle article (also see later report here) reports on the beginning of the latest in the series of criminal trials nicknamed "the trader cases" among the Houston defense bar involving Houston-based natural gas traders who allegedly manipulated natural gas trading indexes that are used to value billions of dollars in gas contracts and derivatives. The defendants are former El Paso Corp traders Jim Brooks, Wesley Walton and James Pat Phillips, who face 49 charges of conspiracy, false reporting and wire fraud. The trial of this particular trader case looks as if it will last about two months.

Posted by Tom at 12:00 AM | Comments (0) |

December 5, 2007

Will the Oracle of Omaha serve up the sacrifical lambs?

So, Warren Buffett finally gets to experience the price of ratting out his business associates (background here, here, here and here).

As noted in the foregoing posts, I seriously doubt that the transactions involved in this prosecution are the product of any criminal conduct. However, does anyone really believe that Buffett did not fully understand the nature, scope and purpose of these transactions? Ah, the benefits of being the mainstream media's folk hero of business.

Posted by Tom at 12:10 AM | Comments (0) |

December 4, 2007

Did the DOJ hide the ball in the Olis case?

This earlier post reported on how the full story about the Department of Justice's sordid prosecution of former Dynegy executive Jamie Olis is finally starting to come out in connection with a civil trial earlier this year by Olis' former attorney and Olis' recent motion to set aside his conviction.

Now, Ellen Podgor reports that Olis' new legal team has filed a motion that Olis be released from prison on bond pending the outcome of the motion to set aside his conviction, and the basis of the motion is that the DOJ failed to turnover to the Olis defense in violation of its obligation under U.S. v. Brady evidence regarding the DOJ's frequent communications with Dynegy's employees and attorneys during the prosecution of Olis. As Professor Podgor asks:

"What was the collective knowledge of the government here, and was the discovery properly provided to [Olis'] defense counsel prior to trial?"

This is getting very interesting.

Posted by Tom at 12:10 AM | Comments (0) |

November 30, 2007

The real NatWest Three deal

I gave up hope long ago that the mainstream media would ever provide particularly accurate reports regarding the Enron-related criminal prosecutions. However, the mainstream media news reports on the plea bargain hearing earlier this week in the Enron-related NatWest Three case (see NY Times, WSJ, Chronicle) are particularly devoid of any meaningful perspective of what really happened in the case (a copy of one of the plea agreements, which is the same as the other two, is here). The real story of the plea bargain can easily be distilled from the pleadings that are on file in the case. It's a substantially more nuanced story than what you are hearing from the mainstream media.

The prosecution in the NatWest Three case alleged that the three bankers defrauded NatWest, their former employer, by conspiring with former Enron CFO Andrew Fastow and his sidekick, Michael Kopper, to underpay NatWest for its interest in an entity named Swap Sub, which was an affiliate of one of Enron's special purpose entities (LJM1) that Fastow and Kopper ran.

Swap Sub was involved in one of LJM1's primary transactions, which was to hedge Enron's valuable but highly volatile interest in a technology company called Rhythms NetConnections, Inc ("Rhythms"). The NatWest Three were responsible for overseeing the banking relationship between Enron and NatWest, including NatWest's interest in Swap Sub. Another investor in Swap Sub was Credit Suisse First Boston ("CSFB"), which owned the same percentage interest in Swap Sub as NatWest.

In early 2000, Fastow and Kopper offered to buy NatWest's interest in Swap Sub for $1 million. NatWest evaluated its interest in Swap Sub in response to the offer and concluded that its interest was worth zero. At the time, NatWest was in the process of being taken over by Royal Bank of Scotland and, thus, was amenable to disposing of the Swap Sub interest. So, NatWest agreed to accept Fastow's $1 million offer, Fastow and Kopper created an entity called Southampton specifically to buy NatWest's interest in Swap Sub, and the deal closed on March 17, 2000.

After NatWest had agreed to accept Fastow's offer to buy the bank's Swap Sub interest, Fastow offered to sell a portion of that interest to the three bankers personally for $250,000 upon Southampton's completion of the purchase of the interest from NatWest. The NatWest Three still worked for NatWest at the time of Fastow's offer, but they were all contemplating leaving the bank because of the impending takeover by the Royal Bank of Scotland. Inasmuch as acceptance of Fastow's offer while they were still working for NatWest might run afoul of the bank's conflict of interest rules, the NatWest Three took an option to acquire the Swap Sub interest rather than buy it outright.

Subsequently, one of the bankers (David Bermingham) resigned from NatWest, exercised the option in late April, 2000 and paid Southampton $250,000 for the interest. At the time that Southampton bought NatWest's interest in Swap Sub, the NatWest Three did not disclose to NatWest that they had bought the option to acquire a portion of that interest through Southampton. That non-disclosure ultimately became an important fact in the plea bargain of the NatWest Three.

Shortly after Fastow offered to buy NatWest's interest in Swap Sub for $1 million, Fastow and Kopper -- unbeknownst to NatWest or the NatWest Three -- offered CSFB $10 million for its interest in Swap Sub. CSFB, like Natwest, also evaluated its interest in Swap Sub at the time of the offer and concluded -- as did NatWest -- that the interest had zero value.

Inasmuch as Fastow and Kopper didn't have $10 million to buy CSFB's Swap Sub interest, they reached an agreement with Enron on March 22, 2000 to unwind the Enron-LJM1 hedge transaction on the Rhythms stock, the result of which was that Enron would buy a large chunk of Enron stock from Swap Sub for $30 million. Inasmuch as the unwind transaction would not close until the end of April, Fastow borrowed $10 million from Enron on March 22nd to pay CSFB for its Swap Sub interest. Neither NatWest nor the NatWest Three knew anything about these developments.

Subsequently, in late April, 2000, Fastow arranged with former Enron chief accountant Richard Causey to close the unwind transaction between LJM1 and Enron on the Rhythms stock. The transaction has since been subject of a substantial amount of scrutiny in the various investigations and litigation relating to Enron and it appears reasonably probable that Enron should not have paid a dime (much less $30 million) to LJM1 for agreeing to unwind the hedge. The best explanation that I have heard is that Fastow and Kopper pulled a fast one on Causey, who received nothing from the unwind transaction.

After receiving the $30 million in connection with the unwind transaction, Fastow used $10 million to repay the loan from Enron that he had used to pay CSFB for its interest in Swap Sub and paid the NatWest Three $7.3 million for their interest in Swap Sub. Fastow spread the balance of the money around to some of his underlings, including Enron treasurer Ben Glisan, who received about $1 million. Glisan's failure to disclose his receipt of that $1 million eventually led to his termination in early November, 2001 as Enron's treasurer. It also formed the basis of the criminal case against him.

Interestingly, the first time that the NatWest Three had any indication that the $7.3 million that they had received for their interest in Swap Sub may have resulted from a Fastow fraud on Enron was when they heard that Glisan had been fired in early November, 2001 over his failure to disclose his receipt of $1 million from Southampton. As a result, the NatWest Three immediately and voluntarily reported everything to the UK Financial Services Authority (the UK equivalent of the Securities and Exchange Commission) -- their involvement in the sale of NatWest's interest in Swap Sub to Southampton, their purchase of the option from Fastow to acquire a portion of that Swap Sub interest, their non-disclosure to NatWest of the option at the time, their exercise of the option and purchase of the Swap Sub interest from Southampton, and their eventual receipt of $7.3 million for that interest.

The UK authorities passed along that information to the SEC and, the next thing you know, the NatWest Three had become the subjects of a criminal complaint filed on June 27, 2002 in Houston (that really encourages voluntary disclosure of information, now doesn't it?). No US investigator ever contacted the NatWest Three to get their side of the story before filing the criminal complaint against them. UK criminal authorities never pursued any charges against the them.

The Enron Task Force originally alleged that the NatWest Three knew at the time they took the option to acquire a portion of NatWest's interest in the Swap Sub that Fastow and Kopper were going to unwind the hedge on the Rhythms stock. Thus, the Task Force asserted that the NatWest Three knew that the unwind transaction would make NatWest's interest in Swap Sub worth far more than either the zero value that NatWest placed on it at the time or the $1 million that Southampton eventually paid NatWest for it. In that connection, the Task Force contended that the $10 million that Fastow arranged to pay CSFB for its interest in Swap Sub and the $7.3 million that the NatWest Three eventually received for their interest in Swap Sub was conclusive proof that the bankers had defrauded NatWest of the true value of its interest in Swap Sub.

Alas, the government's theory of the case appears largely to have fallen apart over the past year and a half. NatWest and CSFB's zero valuations of their respective interests in Swap Sub at the time Fastow offered to buy them proved to be valid and accurate. Given those valuations, the $250,000 that the NatWest Three agreed to pay at the same time to buy a portion of NatWest's Swap Sub interest was clearly a speculative bet that placed the three bankers at considerable risk of loss of their entire investment.

Similarly, it also turns out that Fastow had a good reason to pay CSFB more for its interest in Sub Swab (i.e., $10 million rather than the $1 million paid to NatWest). At the time, CSFB was providing a myriad of other financial services on Enron-related deals for Fastow. Thus, buying the Swap Sub interest for $10 million was a convenient vehicle for Fastow to curry favor with CSFB. It did not mean that CSFB's Swap Sub interest was worth anything close to $10 million.

Finally, considerable evidence emerged during the case that confirmed that the NatWest Three knew nothing about Fastow and Kopper's plan to unwind the Rhythms hedge with Enron when they bought a portion of NatWest's former interest in Swap Sub. Importantly, that lack of knowledge is consistent with the story that the NatWest Three told to UK Financial Services Authority in November, 2001 immediately after learning of Fastow's possible fraud on Enron as a result of Glisan's resignation.

So, after years of litigation, the NatWest Three pled guilty to a single count of wire fraud. The basis of the guilty plea is that the three bankers failed to disclose to NatWest the option that they had taken from Fastow to purchase a portion of NatWest's interest in Swap Sub at the time that NatWest sold that interest to Southampton. Importantly, the basis of the plea deal is not that the NatWest Three knew and didn't tell NatWest that the value of the bank's Swap Sub interest was going to skyrocket soon after Southampton bought it as a result of Fastow completing the unwind transaction with Enron.

Subject to court approval, the plea bargain provides that the defendants will serve 37 months in prison, that they will pay restitution of $7.3 million to the Royal Bank of Scotland (NatWest's successor) and that the prosecution will support the defendants' request that they be allowed to serve their prison sentence in the UK. Under UK rules pertaining to prison sentences of white collar criminals, it is expected that the three former bankers would be released from their UK prisons after serving approximately half of their sentence.

As noted earlier here and as the Financial Times' Martin Wolf observes here, this plea deal appears to be the product of the draconian trial penalty that the three bankers faced if they availed themselves of their right to a trial and lost. Under those circumstances, the defendants were facing possible sentences of 35 years each, although the sentences would likely have been considerably less than that. Nevertheless, the sentences after a trial probably would have been greater than 37 months and, had the NatWest Three defended themselves at trial and lost, the prosecution almost certainly would never have agreed to support a request to serve their prison sentences in the UK.

Thus, on one hand, the defendants could risk a trial in a virulent anti-Enron environment (see also here) that could result in a long prison sentence that would have to be served in the US prison system thousands of miles away from their families. Or, on the other hand, they could enter into a plea deal that gives them the hope of being able to serve a considerable amount of a definite sentence in the UK prison system near their families.

Given those choices, my sense is that the NatWest Three's choice was a rational and reasonable decision. It's simply not a choice that they should have been forced to make.

Posted by Tom at 11:00 AM | Comments (5) |

November 28, 2007

Hedging the trial penalty

Although some have questioned his business ethics, no one has ever questioned that legendary Houston oilman Oscar Wyatt is good at hedging risk. After Wyatt was sentenced yesterday to a year in prison as a result of his plea deal (previous posts here), my sense is that Wyatt hedged the trial penalty risk (i.e., a life sentence) in an reasonably effective manner.

Meanwhile, in another plea deal, a tenured economics professor at the University of Pennsylvania faces a likely prison sentence of 4 � to seven years for bludgeoning his wife to death. The professor says he "just lost it." What must Jamie Olis think about that as he finishes serving what will almost certainly be a longer sentence than the professor will serve?

And what about Chalana McFarland, a first-time offender who was sentenced to 30 years in prison in connection with a mortgage fraud scheme. Ellen Podgor is following that case Or former Enron executive Jeff Skilling, who continues to serve a 24-year sentence for simply availing himself of a forum in which to defend himself against charges that are far more nebulous than murder or mortgage fraud?

Finally, tomorrow afternoon in Houston federal court, the NatWest Three, three former bankers from the U.K. who have been forced to live in Houston apart from their families in the U.K. for the past year and a half, will likely enter into a plea deal in order to hedge the considerable risk of a lengthy prison sentence if they were to defend themselves in a U.S. court from Enron-related charges that U.K. authorities concluded were too weak to merit a prosecution there (see previous posts here and here).

Is the draconian trial penalty in the American criminal justice system really generating the type of results that a truly civil society wants?

Update: The real NatWest Three deal.

Posted by Tom at 12:07 AM | Comments (0) |

November 11, 2007

Why didn't the mainstream media expose Spitzer's abuses?

Regular readers of this blog know that former New York attorney general and current NY governor Eliot Spitzer's abuses of power have been a frequent topic for a long time, particularly Spitzer's dubious prosecution of former New York Stock Exchange chairman, Richard Grasso.

Well, as the years pass from Spitzer's odious term as AG, additional information is beginning to filter out that indicates that Spitzer's abuses of power were every bit as bad as suspected. Dealbreaker's John Carney has posts here and here reviewing Charles Gasparino's new book, King of the Club: Richard Grasso and the Survival of the New York Stock Exchange (Collins 2007) in which Carney summarizes Garparino's research on Spitzer's dubious tactics in investigating Grasso. Suffice it to say that Spitzer's tactics would have qualified him for a key position in any of the secret police units of the former Eastern European totalitarian regimes.

In Carney's latter post, he makes an excellent point about the mainstream media's myopia regarding Spitzer's abuses of power, which were regularly noted in the blogosphere, but rarely mentioned in the mainstream media outside of the Wall Street Journal. Carney observes:

Why didn�t [the mainstream media covering Spitzer's investigation of Grasso] reveal the slimy tactics of the Spitzer squad? We suspect part of the problem was the fear of being �cut off� of access. Reporters compete for scoops, and often those scoops depend on sources who will leak information to them. In the NYSE case, reporters assigned to the story were largely at the mercy of the investigators, who could cut-off uncooperative reporters, leaving them without copy to bring to their editors while their competitors filed stories with the newest dirt. They probably felt�not unrealistically�that their very jobs were on the line.

This reveals an unfortunate state of affairs. Playing bugle boy while government officials call the tunes from behind a veil of anonymity is not investigative journalism�it�s hardly journalism at all. It�s closer to propaganda. It would have been far better had the journalists turned their backs on the Spitzer squad, or even revealed these tactics to the public. Sure they may have lost some �good� stories but they could have painted a truer picture of what was going on. But that�s probably too much to hope for.

Exactly.

Posted by Tom at 12:00 AM | Comments (0) |

October 26, 2007

Free the Koz

Dan Ackman provides this cogent WSJ ($) op-ed that calls for the reversal of the convictions of former Tyco International executives Dennis Kozlowski and Mark Swartz:

Kozlowski wasn't convicted for overspending, nor for defrauding investors -- the most common charges leveled against corrupt CEOs. He was convicted instead of grand larceny, that is, of stealing his bonuses, which were certainly oversized. But even if you believe the worst about Kozlowski and his co-defendant former Tyco CFO Mark Swartz, they were paid according to a contract, and that is not stealing. [. . .]

. . . There is no question that Kozlowski was paid according to the incentive compensation plans that were duly approved by the Tyco board in 1994 and again in 1997. The plans rewarded the CEO and CFO with bonuses based on improvements in company earnings, cash flow and earnings per share. Excessive? That's an understatement. But though the record-keeping was careless, nothing was secret: The contract and the payments were all on the books.

In short, Kozlowski and Swartz were convicted of being greedy, which, the last time I looked, is still not a crime. As Larry Ribstein notes:

Kozlowski and Swartz are headed to Riker�s Island, where they�ll mingle with people who did stuff that seems more obviously bad. And they may get 30-year sentences. I wonder what they would have gotten for a first offense selling heroin to schoolkids. . .

[T]he shareholder suits are still pending. These suits aren�t ideal (lots of money to lawyers) but they can sweep in all the people involved, including the directors who approved the wrongful payments. Unless, of course, the shareholders contracted to indemnify them against liability, in which case we�re back to wondering whether this is wrong.

What was done to Kozlowski and Swartz is quite similar to the equally vacuous prosecution of Conrad Black. But this was even worse.

Posted by Tom at 12:05 AM | Comments (0) |

October 16, 2007

The faux Enron whistleblowers

First, it was Sherron Watkins portraying herself for profit on the rubber-chicken circuit as a whistleblower of wrongdoing at Enron when, in fact, she was no such thing.

Now, this USA Today article raises substantial questions regarding the credibility and veracity of self-proclaimed Enron whistleblower and "corporate integrity" author Lynn Brewer:

Within the world of business ethics, Brewer is considered a star. She is a founding member of the Open Compliance and Ethics Group. She delivered the keynote address at a Sarbanes-Oxley conference hosted by the New York Stock Exchange in 2003 (there are video clips of it on her website, www.lynnbrewer.info). She has spoken in Great Britain, India, Venezuela, Italy, Canada, Malaysia and New Zealand, and given keynote addresses at dozens of other gatherings in the USA. She's also a regular speaker at universities, where she lectures students on the importance of ethics in business.

Brewer has even co-authored an article in Business Strategy Review with noted management guru Oren Harari showing how the leadership skills of Colin Powell could have been applied at Enron.

But to those who worked with her at Enron, when she was known as EddieLynn Morgan (she changed her name after getting married in 2000), her transformation from back-office researcher to international corporate governance heroine is astonishing.

"I don't think people will even believe this," says Ceci Twachtman, a former colleague, speaking of Brewer's transformation. "It reminds me of that movie with Leo DiCaprio with Pan Am," she adds, referring to Catch Me If You Can, a story about a high school dropout who passes himself off as an airline pilot.

"EddieLynn is a good nurse who is trying to claim she was a brain surgeon," says Tony Mends, a former vice president at Enron who was her boss for much of her tenure at the company. [. . .]

When it comes to giving specifics about her whistle-blowing, Brewer contradicts herself. In her book, subtitled A Whistleblower's Story, she recounts her failed efforts to alert her immediate superiors to questionable actions. She also says that just before she left the company in November 2000, she called the employee-assistance help line to complain about criminal activity at Enron. She says she was rebuffed there, but instead of taking her complaints to the chief compliance officer at Enron, or regulators at the Securities and Exchange Commission or the Justice Department, she accepted a severance package and left.

In her speeches, Brewer dons a different mantle, presenting herself as one of the collaborators in fraudulent activity at Enron and asking her audience for forgiveness.

Read the entire article. I swear, you can't make this stuff up.

Posted by Tom at 12:00 AM | Comments (1) |

October 9, 2007

Jamie Olis seeks another chance

A little over a month after I started this blog back in early 2004, former Dynegy executive Jamie Olis was sentenced to over 24 years in prison for allegedly cooking Dynegy's books. That shocking sentence aroused my interest in the Olis case, so I have followed Olis' ordeal closely for going on four years. The tremors from the Olis sentence have been enormous, not the least of which was its impact on various defendants who entered into plea bargains in the Enron-related criminal cases rather than risk a similar quasi-life sentence.

Despite my interest in the Olis case, I have been somewhat frustrated over the years by the lack of available public information regarding the evidence of Olis' alleged criminal acts. Olis had already been convicted before I even found out about his case, so I didn't follow his trial and don't know much about what was presented during it. However, I do know that the structured finance transaction that was the basis of the charges against Olis -- nicknamed "Project Alpha" -- was not a particularly unusual transaction for a large company such as Dynegy at the time. I also knew that the transaction had been approved by dozens of accountants and lawyers both inside and outside of Dynegy.

From my experience in defending several former Enron executives, I also knew that government prosecutors neither understood nor cared much to understand the complex structured finance transactions in which companies such as Enron and Dynegy commonly engaged. Rather, prosecutors knew that obtaining a conviction against business executives in the aftermath of Enron was like shooting fish in a barrel, so it became common for them to criminalize legitimate business transactions (for example, see here, here and here) where it was far from clear that anything was wrong with the transaction in the first place. To the extent such transactions should have been subject to litigation at all, they should have been subject solely to civil litigation where the liability for the alleged wrongdoing could be allocated fairly among the dozens of individuals or companies commonly involved in approving such transactions.

So it was with great interest that I read this memorandum in support of a motion to set aside Olis' conviction that a new group of lawyers (including, interestingly, Houston plaintiffs' lawyer, John O'Quinn) representing Olis filed late last week with U.S. District Judge Sim Lake (Chronicle business columnis Loren Steffy published the memorandum in a blog post over the weekend and Chronicle legal columnist Mary Flood followed up with a Monday blog post here).

The memorandum is the first document that has been filed in the Olis case that lucidly explains how -- as I've long suspected -- it was far from clear that there was anything wrong with Project Alpha and even farther from clear that Olis had anything to do with any alleged criminal conduct. Knowing this, the prosecution veered away from its original charges against Olis and ultimately prosecuted him at trial over a "hide the real deal" theory that was entirely different from the one contained in the Olis indictment. As it turns out, Olis didn't really hide anything and there is substantial evidence to support his disclosures. However, the Olis' defense at trial was limited when Dynegy quit funding it as a result of the government's threat "to go Arthur Andersen" on the company. Thus, Olis' defense counsel was overwhelmed and did not find the exculpatory evidence, which the Olis team did not discover until Olis' lawyer sued Dynegy and recovered a substantial money judgment for failing to fulfill its obligation to fund the Olis criminal defense. The ordeal that Olis and his family have suffered over the past four years is the result of this travesty.

Credit Steffy for getting it right in his blog post calling for Olis' release from prison (related column here). However, Steffy's call for justice in the Olis case is ironic in that he bears a substantial portion of the responsibility for flaming the poisonous anti-business climate in Houston that led to brutal injustices such as the Olis case in the first place. Let's remember that the next time someone starts inciting an angry mob.

Posted by Tom at 12:10 AM | Comments (0) |

September 19, 2007

The Lerach deal

Former class action securities plaintiffs' lawyer William Lerach finally cut a non-cooperation plea deal (Nathan Koppel's WSJ Law Blog post is here) to resolve the longstanding criminal investigation into alleged undisclosed payments that Lerach and his firm made to class representatives and co-counsel in cases that they handled.

In certain defense and business circles, there is a fair amount of schadenfreude over Lerach's demise -- he had no reservation about alleging criminal conduct against business executives, such as he did when he claimed that Enron was shredding documents during the early stages of that company's bankruptcy case (that claim turned out to be wrong).

However, before we get too sanguine about Lerach's plea deal, let's not forget the circumstances under which it has been obtained. The 61-year old Lerach was facing a horrifying trial penalty if he chose to fight the charges, and he almost certainly will lose his law license as a result of pleading guilty to a felony. And as Larry Ribstein has repeatedly pointed out, it doesn't say much for our criminal justice system that the government is paying witnesses to testify against Lerach for the crime of paying his class representative clients. As Larry points out in his most recent post on the matter, the non-cooperation nature of the plea deal does not necessarily mean that the government isn't providing Lerach some form of hidden incentive for his plea.

Update: Ted Frank argues that Lerach's plea deal is, all things considered, not so bad for him, after all. On the other hand, Peter Henning is not so sure.

Posted by Tom at 12:10 AM | Comments (1) |

September 10, 2007

The Skilling Appeal Brief

As Ashby Jones and Peter Henning noted on Friday, lawyers for Jeff Skilling filed his appellant's brief this past Friday along with a motion requesting that the Fifth Circuit Court of Appeals waive length-of-brief rules under the special circumstances of Skilling's appeal. Inasmuch as the brief is a 240-page tome, my sense is that it will probably be modified slightly to include tables of contents and authorities when the final version is filed after the Fifth Circuit rules on the the length-of-brief motion (Update: I've since updated the link above to include the final version filed with the Fifth Circuit).

I read the entire brief while watching football over the weekend and it is brilliant. The brief is extremely well-written and organized, and eschews much of the technical legal jargon that often makes appellate briefs a chore to read. It would be extremely difficult to read this brief objectively and come to the conclusion that Jeff Skilling has not been the victim of a gross miscarriage of justice (see earlier posts on that subject here, here and here).

The first statement of the brief -- the usually mundane statement advising the appellate court whether the appellant believes that oral argument would be helpful to the court -- Skilling's appellate team crafted the best such statement that I've ever read:

Defendant-appellant Jeffrey Skilling requests oral argument. This case is perhaps the most prominent and publicized white-collar case ever prosecuted. But with certainty, it is the most misunderstood case, enveloped from the outset by perceptions and myths that bear little resemblance to the actual facts. Almost everyone believes, for instance, that Skilling was indicted, tried, and convicted for causing the 2001 bankruptcy of Enron Corporation and its devastating effects on thousands of Enron employees and shareholders. As the government itself conceded, however, the case against Skilling had nothing to do with Enron�s collapse.

Profound, inherent weaknesses in the government�s case�not just gaps in its evidentiary proof, but doubts about its basic theories of criminality�motivated the government to resort to novel and incorrect legal theories, demand truncated and unfair trial procedures, and use coercive and abusive tactics. Skilling submits that oral argument is essential to assist the Court�s understanding of the remarkable record in this case, including the multiplicity of substantial legal and procedural errors that have put Skilling in prison for 24 years not only for crimes that he did not commit, but for acts of business judgment that are not crimes at all.

Following that statement is an 11-page introduction, which -- if you don't have time to read the entire brief -- is an excellent overview of the arguments presented. My favorite parts of the brief are as follows:

The Statement of the Case (pp. 15-59). This is a marvelously clear description of Enron's business and the superficiality of the evidence that the Enron Task Force presented at trial against Skilling. In discussing Enron with hundreds of folks over the past several years, I understand how few people really understood that Enron was an innovative and successful business before its demise. Fewer still understood the shallowness of the Task Force's case against Skilling. This section of the brief takes on those widely-held misconceptions and dispenses with them cogently.

The Change of Venue Section (pp. 122-175). Given the venomous environment in Houston regarding all things related to Enron, U.S. District Judge Sim Lake's refusal to grant Skilling's motion to change the venue of the trial has always struck me as odd. Skilling's brief provides truly shocking information (heretofore not public) about the enormous bias against Skilling expressed in the answers to the juror questionairres of the jurors who ended up on Skilling's jury! Also provided in this section is heretofore non-public information on Judge Lake's questionable refusal to grant Skilling's proposed multiple strikes for cause on a large number of the jurors who who had expressed clear bias against Skilling and Lay. As the brief notes, if there was ever a trial that called for a change of venue, Lay-Skilling was the one.

The Prosecutorial Misconduct Section (pp. 175-206). The subject of this section has been a common topic on this blog, but this section provides additional unknown evidence of the Task Force's abusive tactics in prosecuting Skilling and other Enron executives. Moreover, the brief sums up brilliantly the prejudicial impact of the Task Force's threats against witnesses who would have provided exculpatory testimony for Skilling (all record citations contained in the brief are excluded here):

At trial, the severe imbalance in witness access was obvious. The Task Force�s case consisted mostly of cooperators from Enron�s senior management�people who worked with Skilling at Enron and who were his friends, including some of his closest friends. With plea or non-prosecution agreements with the Task Force, these witnesses were under the Task Force�s complete domination and control. They were obligated to testify, contractually bound to admit guilt and support the allegations against Skilling, and their ultimate fate rested in the �sole and exclusive discretion� of the Task Force. None of them would meet with Skilling or his counsel. At least two (Rice and Belden)�and probably all of them�were clearly ordered not to.

In contrast, most of Skilling�s key defense witnesses never took the stand. Specifically, Skilling sought to call David Duncan of Arthur Andersen and seven Enron executives: Greg Whalley, Rick Buy, Lou Pai, Jeff McMahon, Georgeanne Hodges, Janet Dietrich, and Joe Hirko. Each possessed critical exculpatory evidence, and would have directly refuted testimony given by Task Force cooperators. Yet all eight invoked the Fifth Amendment, fearing Task Force reprisals. Hoping to overcome this, Skilling asked the Task Force to immunize them, as it did for Ben Glisan (its own witness). The Task Force declined, thereby ensuring that vital exculpatory testimony never saw the light of day.

Without these (and many other) key witnesses, the defendants were forced to rely primarily on their own testimony. Roughly two-thirds of the defense case consisted of Skilling and Lay�s testimony; the remainder was a patchwork of character witnesses, experts, and others�anyone courageous enough to testify. Most could offer relatively narrow testimony on limited issues. Besides Skilling and Lay, only two senior executives testified for the defense, and neither was deeply involved in many transactions at issue.

Compounding the prejudice, the Task Force argued in closing that Skilling�s defense was not credible because it did not square with the testimony of many witnesses. By intimidating witnesses into silence and then refusing to immunize them�knowing they would give testimony favorable to the defense�it was the Task Force that prevented witnesses from corroborating Skilling. U.S. v. Golding, 168 F.3d 700, 702-05 (4th Cir. 1999) (�The government did not stop with the threat. Instead, the prosecutor further abused her power by using the very situation she had created against the defendant in closing argument.�). Skilling, meanwhile, could not explain to the jury why his best witnesses were missing, because the district court explicitly prohibited him from introducing any evidence of the Task Force�s threats and other misconduct.

The prejudice was irreparable. It obstructed Skilling�s preparations before trial, distorted the presentation of evidence at trial, and affected the outcome. Gregory, 369 F.2d at 188-89 (�A criminal trial � is a quest for truth. That quest will more often be successful if both sides have an equal opportunity to interview the persons who have the information from which the truth may be determined.�).

As if on cue, even before the ink on the Skilling brief was dry, some of the more vitriolic members of the mob that lynched Skilling were already dismissing it without so much as a smidgen of analysis. But my bet is that a fair review of this brief will leave most readers shocked over the weakness of the case against Skilling and the government's ruthless tactics in pursuing a conviction despite that weakness.

The popular myth of the mob is that Enron was a house of cards that was propped up by a conspiracy of greedy executives who told lies to trusting but unknowing investors. The truth is that Enron was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation that got caught in a liquidity crunch. That liquidity crisis occurred when the credit and equity markets became spooked by a variety of factors in late October, 2001, including revelations about Fastow's embezzlement of millions and the volatility in markets after the September 11, 2001 attacks on New York and Washington, D.C.

As I've noted many times over the years, Fastow's embezzlement from Enron is a crime, but Enron's unfortunate demise is not, nor should it be. Beyond the shattered lives and families, the real tragedy here is that an angry mob convicted Jeff Skilling, trampling the rule of law and the administration of justice along the way. In truth, none of us would be able to survive, as Thomas More reminds us, "in the winds that blow" from the exercise of the government's overwhelming prosecutorial power in response to the demands of the mob. I continue to hope that Jeff Skilling's unjust conviction and sentence are reversed on appeal. Not only for his and his family's benefit, but also for ours.

Posted by Tom at 12:15 AM | Comments (4) |

September 6, 2007

Loren Steffy's Enron myopia

Houston Chronicle business columnist Loren Steffy is a particularly vitriolic critic of former Enron executives Jeff Skilling and the late Ken Lay. Steffy convinced himself early on that Skilling and Lay had lied to investors about Enron, so he made a good part of his living for the past several years appealing to resentment and scapegoating rather than fair-minded analysis in covering Enron's demise.

Even the fact that the criminal cases against both Skilling (see also here) and Lay turned out to be rather weak made no difference to Steffy. He rarely, if ever, gave Skilling or Lay any credit for the enormous wealth that was created from their legacy of beneficial risk-taking. Stoking anger toward wealthy business executives is much easier than nuanced analysis of often complex markets and business transactions. Probably sells more newspapers, too.

So, against that backdrop, imagine my surprise when I came across this recent Steffy column in which he defends embattled securities fraud plaintiff's lawyer, Bill Lerach. As regular readers of this blog know, Lerach is in the cross-hairs of a federal criminal indictment for lying to federal judges and his firm's class clients about payments that his firm allegedly made to class representatives in certain of the cases that Lerach's firm and former firm (Milberg Weiss) handled. Despite these allegations, Steffy sees the good in Lerach's work:

Lerach and his lawyers have held countless executives accountable over the years. They've recovered billions for fraud victims, both individuals and, more recently, pension funds and institutions.

All of this, of course, has made Lerach wealthy, which fuels the criticism against him. [. . .]

Past mistakes may have caught up with him, and if they have, he must pay the price.

But for . . . thousands of other shareholders, those mistakes may tarnish Lerach's reputation, but his legacy remains unblemished.

As noted several times over the past year (most recently here), I also have doubts about the anticipated criminal case against Lerach, although not for the same reasons as Steffy. My radar system for abuse of prosecutorial power is always activated whenever the government's case is based on witnesses whose testimony has been bought and paid for.

But here's what gets me. Steffy balances Lerach's alleged lying to judges and his investor class-clients against the economic benefit of the recoveries his firm made on behalf of those investor-clients (many of those recoveries actually reduced the value of the companies that Lerach's clients owned, but that's another issue). However, Steffy excoriates Skilling and Lay for their alleged lying to investors despite the fact that the two former Enron executives created enormous wealth that dwarfs any economic benefit that Lerach's firm ever generated.

Thus, to Steffy, Lerach is Robin Hood who deserves some slack, while Skilling and Lay are greedy shysters who got what was coming to them. But in reality, what happened to Skilling, Lay and Lerach is far more complicated than that. Too bad that Steffy prefers his simple morality plays to analytical clarity that might actually lead his readers to understand that encouraging the type of risk-taking that Lay and Skilling promoted at Enron facilitates productive markets, employment growth and wealth creation.

Posted by Tom at 12:10 AM | Comments (2) |

September 2, 2007

A continuing abuse of power

Economist James Buchanan won a Nobel Prize for his work on applying economics to explain how incentives impact the behavior of government officials. In short, Buchanan concluded that government officials are people who behave in the same selfish manner as most folks. For example, when dealing with the government's awesome prosecutorial power, prosecutors often could care less about discretion and justice. Rather, they often use that power to advance their personal interests, to extort tribute from the private sector, to blackmail politicians into increasing prosecutorial resources and privileges, and to manipulate the media in their favor.

The foregoing seems to be an apt explanation of what continues to go on in the Enron-relates debacle known as the Nigerian Barge case:

A federal prosecutor wants a former Merrill Lynch & Co. executive to serve the entire prison term imposed for five Enron-related crimes even though three of those convictions were overturned by an appeals panel last year.

But lawyers for James Brown say the prosecutor is pushing to incarcerate their client for the remainder of his three-year, 10-month term because he has refused to plead guilty to another felony and possibly testify against two co-defendants.

Read about the entire tawdry affair. Brown's perjury and obstruction of justice convictions were upheld in this Fifth Circuit decision that reversed the convictions against him and his co-defendants on the other three charges. However, Judge Harold DeMoss' dissent lucidly explains just how flimsy the convictions on the perjury and obstruction charges are:

[The majority decision relies on] two types of evidence [to support the convictions of Brown on the perjury and obstruction charges]: (1) business negotiations preceding a deal ultimately reduced to a written agreement and (2) an after-the-fact oversimplification and shorthand description of the barge partnership investment by Merrill employees during the discussion and evaluation of a subsequent and entirely unrelated deal. Neither of these types of evidence should be used to support an inference of the falsity of Brown�s testimony.

After what the prosecution has put Brown and his Merrill Lynch co-defendants through, the prosecution's continued pursuit of this case borders on the barbaric. Here's hoping that Judge Ewing Werlein rejects the prosecution's continued pursuit of this Enron-related witch hunt in the same manner as he rejected the prosecution's original over-the-top sentencing recommendations. Perhaps a few decision of that nature would induce some adult supervision to return to the Department of Justice.

Posted by Tom at 8:50 PM | Comments (0) |

August 21, 2007

Judge Hughes finalizes his Hyde Act ruling

These earlier posts reported on U.S. District Judge Lynn Hughes' decision to sanction the Department of Justice under the Hyde Act for its sloppy indictment and handling of a criminal fraud prosecution of Oklahoma lawyer John Claro. The always alert Ellen Podgor passes along that Judge Hughes has issued his formal ruling on the Hyde Act sanctions, in which he observes:

The United States Attorney indicted an Oklahoma businessman in conscious indifference to the legal and factual basis of the charges that they brought against him. The fifty-four-count indictment was a jumble of claims and stray facts � a garbled press release about working men who cannot get insurance. The court dismissed all counts of the indictment. The businessman seeks defense costs. He will be repaid because the prosecution was not substantially justified. [. . .]

Criminal prosecution casts a shadow on defendants that can linger even after an acquittal. The discretion the government has to prosecute those it thinks guilty of crimes must be grounded in a sound facts and articulated law. The Hyde Amendment was passed to give some recompense to those prosecuted without this most basic discretionary safeguard from prosecutorial oppression. The case against [this individual] lacked even a semblance of responsible work by the government. His attorneys had to work with a jumbled array of facts and theories, a mountain of documentary evidence, and unresponsive government lawyers.

Sort of makes you wonder what Judge Hughes would have done with a number of the Enron-related prosecutions, doesn't it? Here's a hint.

Posted by Tom at 12:05 AM | Comments (0) |

August 7, 2007

The DOJ's bumbling Enron Broadband case

As noted here and here, the Enron Broadband trials were not the Enron Task Force's finest hour. Now that the Task Force has been disbanded, Justice Department attorneys are left to pick up the pieces of the Task Force's shattered cases and, as the Chronicle's Kristen Hays reports from the Fifth Circuit, it's not an easy task.

Sort of what you would expect from cases in which the government asserted an unwarranted expansion of a criminal law intended to punish kickbacks and bribes against businessmen who did no such thing. Criminal convictions based primarily on juror resentment of wealthy businessmen tend not to hold up well under the bright light of appellate scrutiny.

Posted by Tom at 12:15 AM | Comments (1) |

July 27, 2007

Steyn on the Conrad Black trial

Mark Steyn continues his excellent analysis of the criminal case against Conrad Black (prior posts here) with this lengthy piece on the trial, in which he agrees with me regarding the defense team's decision not to have Lord Black testify:

When Black declined to testify in his own defence, the result was that he was defined only by the glimpses of him permitted by the government: he was the guy who, in Alana's phrase, got the money, and sent boorish emails, and installed heated towel rails in his Park Avenue apartment. Had he been put on the stand, he would certainly have been tripped up by government lawyers in some areas, but he would have opened up others that allowed the jury to see Conrad Black as a man in full, warts and all, rather than only the warts, the unsightly carbuncles of non-compete fees and company-jet perks and a security video of a British peer taking boxes down the back stairs of a Toronto office building.

Steyn also has some choice words for the Black defense team, which he viewed as largely dysfunctional. Reading Steyn's piece along with this lengthy Adrian and Olga Stein essay (pdf) on the background of the case against Lord Black leaves one with a depressing image of how the U.S. criminal justice system is being manipulated to regulate the unpopular businessperson of the moment.

Posted by Tom at 12:20 AM | Comments (0) |

July 25, 2007

A bully exposed

As noted in this post from a couple of weeks ago, more than a few folks are not losing any sleep over the fact that former crusading state attorney general and current New York Governor Eliot Spitzer is having trouble getting along with with his new playmates in Albany.

But now things are getting even more interesting. According to a report issued yesterday by Andrew Cuomo, Spitzer's successor as New York AG (and perhaps as governor sooner than we thought), Spitzer's aides used the state police to gather information about whether Spitzer�s chief political rival, Joseph Bruno, improperly used state-owned aircraft for political purposes. To make matters worse, when the improper use of state police was revealed, Spitzer�s communications director, Darren Dopp, concocted a false story as to why the aides sought the information. Although the Cuomo report concluded that the aides� conduct was �not unlawful,� Spitzer suspended Dopp and conceded at a press conference that his administration had �grossly mishandled� the situation. And all this occurred despite the fact that Cuomo's report was not thoroughly prepared.

Spitzer has a lot of experience in the area of "grossly mishandling" situations. OpinionJounal notes the same thing.

The irony of Spitzer's plight has generated quite a few entertaining blog post titles around the blogosphere, the best of which are Ellen Podgor's (she of "Busted for Yoga" fame) "Spitzer Spitzered" and Nathan Koppel's "Spitzer Schadenfreude." Seems as if Spitzer is redefining the bully pulpit.

Posted by Tom at 12:11 AM | Comments (1) |

"Pulling a Mackey"

Overstock.com's CEO Patrick Byrne is already a controversial character in business circles over his dubious demonization of shorting (earlier posts here and here) and his rather bizarre handling of Wall Street conference calls. But as this Gary Weiss post explains, Bryne has now outdone himself -- he's "pulled a Mackey."

Posted by Tom at 12:00 AM | Comments (0) |

July 24, 2007

Steyn on reforming the criminal justice system

Canadian Mark Steyn's experience in blogging the Conrad Black trial gives him an interesting perspective in proposing several common sense reforms for the federal criminal justice system, most of which have been addressed in this blog over the years:

1) An end to the near universal reliance on plea bargains, a feature unknown to most other countries in the Common Law tradition. [. . .]

2) An end to the reliance on technical charges such as "mail fraud" and "wire fraud", whereby you're convicted not for the crime itself but for sending a letter or authorizing a bank transfer in the course of said crime. [. . .]

3) An end to the process advantages American prosecutors have accumulated over the years - such as the ability to seize a defendant's funds and assets and deprive him of the means to hire good lawyers and rebut the charges. Or to take another example: Unlike the Crown in Commonwealth countries, in closing arguments to the jury the US government gets to go first and - after a response from the defence - last. This is an offence against the presumptions of English law: The prosecutor makes his accusation, the accused answers them. Every civilized legal system allows the defendant the last word.

4) An end to countless counts. In this case, Conrad Black was charged originally with 14 crimes. That tends, through sheer weight of numbers, to favour a conviction on some counts and acquittal on others as being a kind of "moderate" "considered" "judicious" "compromise" that reasonable persons can all agree on. [. . .]

5) An end to statute creep. One of the ugliest features of American justice is the way that laws designed to address very particular situations are allowed to metastasize and be applied to anything a prosecutor fancies. The RICO statute was supposed to be for mobsters and racketeers. Conrad Black is not a racketeer but he was nevertheless charged with racketeering. [. . .]

6) An end to de facto double jeopardy. Conrad Black is likely to wind up back in court to go through all the stuff he's been acquitted of one mo' time, this time in a Securities and Exchange Commission case. That would be a civil case, not a criminal one, and the US Attorney insists that the SEC is an entirely separate body. Oh, come on. The US Attorney and the SEC are both agencies of the US Government. They work in synchronicity. It's not the same as Nicole Brown's family suing OJ after the state's murder case flopped. In this instance, two arms of the same organization are bringing separate cases on exactly the same matters. That's double jeopardy - or, in fact, given the zealousness of the SEC, triple and quadruple jeopardy.

Steyn expands on these points, so read the entire post. And here is another proposed reform that should be added to the list.

Posted by Tom at 12:25 AM | Comments (1) |

July 20, 2007

A Wells Notice bouquet?

When the Securities and Exchange Commission sends you a Wells Notice, that's not usually considered a positive development. It means that the SEC Enforcement staff has decided that sufficient evidence and cause exists to file an enforcement lawsuit, usually seeking civil penalties, disgorgement of proceeds from stock sales and almost always bans from serving as an officer or director of a public company.

Under SEC guidelines, a target of a Wells Notice may respond directly to the SEC Commissioners by submitting what is know as a "Wells Submission," but doing so is a dicey proposition. The Commissioners almost always defer to the Enforcement Division's recommendation on whether to pursue an enforcement action, so filing a Wells Submission is essentially providing the Enforcement Division an outline of the target's defense. Moreover, a Wells Submission is neither privileged nor confidential, so anything in the submission can be used against the target in further proceedings with the SEC or in related civil or criminal proceedings.

Thus, with that backdrop, get a load of the way in which Interpublic Group describes the receipt of a Wells Notice in a recent press release, as this footnoted.org post reports:

[J]udging by the press release that Interpublic Group (IPG) put out this morning, you�d think that getting a Wells notice from the SEC was something to celebrate. Indeed, the idea that responding is not voluntary is missing from the release. Instead, Interpublic describes it as an "invite" and calls it as another step in the settlement process.

The spin doesn�t end there. The release goes on to quote Chairman and CEO Michael Roth, who notes that "Given our understanding of new procedures at the SEC, this development is not unanticipated and we believe that it moves us a step closer to resolution in this matter."

Heck, based on this logic, an indictment related to the company's activities would be cause for a big party.

Posted by Tom at 12:02 AM | Comments (0) |

July 19, 2007

Talk about a misleading P.R. campaign

Get a load of this press release (hat tip Ellen Podgor) from the Department of Justice heralding the five year anniversary of the DOJ's Corporate Fraud Task Force. Here is the press release's description of the Task Force's accomplishments in connection with its investigation into the demise of Enron:

Criminal charges were brought against 36 defendants, including 27 former Enron Corporation executives. Eighteen of those charged pleaded guilty or were found guilty after trial, including Enron�s former chief executive officer, who was sentenced to 292 months in prison. The guilty verdicts against the former chairman/CEO in two cases were dismissed by abatement following his death. The Task Force seized over $100 million in ill-gotten gains and the Department of Justice worked jointly with the Securities and Exchange Commission to obtain orders directing the recovery of more than $450 million for the victims of the Enron frauds.

What parallel universe are these people living in? Here is the harsh reality of the Task Force's legacy in regard to the Enron criminal cases:

The Enron Task Force procured a deeply flawed conviction that put the nail in the coffin of one of the oldest and most respected U.S. accounting firms, costing tens of thousands of jobs in communities and wealth loss to individuals throughout the nation. Later, the head of the Task Force expressed an appallingly arrogant "end justifies the means" regarding the wrongful prosecution of Andersen and other Enron-related cases;

Then, the Task Force ruthlessly ruined the careers of four respected former Merrill Lynch executives and sent them to prison for a year before the Fifth Circuit overturned that atrocity. That prosecution included a disingenuous market loss argument in connection with the sentencings of the four executives, an argument that contradicted the Justice Department's position at the time in a case involving the same issue that was pending before the U.S. Supreme Court.

After two trials, the Task Force finally obtained a conviction against former Enron Broadband executive Kevin Howard, only to have that conviction tossed out (the Task Force is appealing that decision). After the latter trial, the Task Force characterized as "harmless error" strong evidence of misconduct during jury deliberations.

For the past two years, Task Force lawyers have been attempting to patch something together to make a case against Howard's former co-defendants in the Enron Broadband case that the Task Force has already lost once. In connection with the first Enron Broadband trial, the Task Force's threatened two defense witnesses (here and here) in an attempt to induce them not to testify, elicited false testimony from former Enron executive Ken Rice, the Task Force's key witness in that trial, and a Task Force prosecutor violated the judge's instruction during trial not to question witnesses on certain subjects.

The Fifth Circuit -- even before the appeal briefs have been filed -- has opined that "serious frailties" exist in the conviction of former Enron CEO Jeff Skilling (see also here), and the stress associated with mounting a defense to the Task Force's questionable case against former Enron chairman Ken Lay almost certainly contributed to his death.

Serious questions remain as the validity of the Task Force's controversial prosecution of the NatWest Three (see also here), an ordeal that is now entering its fifth year for those defendants.

The Task Force obtained a highly dubious indictment against former Enron mid-level executive Christopher Calger (the prosecutor handling the plea bargain hearing could not even articulate Calger's crime to the judge who took the plea), and Calger's later renunciation of the plea deal exposed several dirty secrets of the Task Force, particularly the bludgeoning of former Enron executives into plea bargains.

The Task Force engaged in a highly prejudicial and inflammatory public relations campaign demonizing anyone and anything having to do with Enron.

The Task Force engaged in a dubious tactic of fingering potential defense witnesses as either unindicted co-conspirators or targets of the Enron criminal investigation to deter those witnesses from testifying for defendants in the Enron criminal trials. Strong evidence exists that the Task Force threatened witnesses with indictment (see also here and here) if they testified for the defense in the Lay-Skilling trial.

The Task Force's tactics have had a negative impact on such fundamental rights as the attorney-client privilege, the presumption of innocence and the right to a fair trial, not to speak of the negative effect on creation of wealth and jobs.

Meanwhile, as noted earlier here and here, many of the Task Force lawyers who contributed to making this mess have moved on to lucrative careers outside of government.

In light of the foregoing, rather than extolling the Corporate Fraud Task Force's accomplishments, wouldn't it be a more productive exercise to examine the cost of the Task Force and its actions relative to the value of its benefits?

Posted by Tom at 12:20 AM | Comments (1) |

Dissecting the expanding realm of white collar prosecutions

Over at Point of Law.com, Moin Yahya, Assistant Professor of Law Faculty of Law at the University of Alberta, is dissecting the prosecution against Conrad Black (earlier posts here) in a series of posts, the first two of which are here and here. Unless you are in favor of the expansion of federal criminal power, his findings are troubling. Take, for example, the obstruction of justice charge against Lord Black:

One of the charges that the prosecution added against Black was obstruction of justice. This charge was added at the last minute and was not in the initial indictment. The charge related to the fact that Black removed boxes of documents from the offices of Hollinger Inc. (which was the parent company of Hollinger International the American company based in Chicago). The order not to remove the boxes had been issued by a Canadian judge in Toronto. (As an aside, wouldn�t a simple contempt of court charge have sufficed?)

What jurisdiction did the United States have over Black for an event that took place on foreign soil? Putting aside the question of whether the prosecution already had these documents, so it is not clear that his removal obstructed any investigation; the more important and troubling aspect of this case is the creeping federalization of American law not just inside the United States but abroad. [. . .]

But now, will Congress seek to regulate the conduct of Americans and American corporations all over the world? . . . [A]s we have seen before, the courts cannot seem to find that magic bright line to constrain Congress . . . Today Congress regulates sex tourism, truly a noble cause, but tomorrow what else will it decide on. Will it outlaw dog-fighting in foreign lands? Will Congress criminalize paying workers in developing countries less than the minimum wage in the United States? Will Congress criminalize not following the mandates of Sarbanes-Oxley even if the American company is only listed on a foreign exchange? What then will be the result? The answer depends on your view of whether federalism is good or bad. If the growth of Congressional power concerns you, then these latest cases should cause you more concern; if not, then not.

Update: Professor Yahya's third segment is here.

By the way, it sounds as if Houston business executive and philanthropist Dan Duncan is getting a dose of what Professor Yahya is talking about:

A 2002 big game hunting trip in Siberia could bring big trouble for Houston billionaire Dan Duncan.

The 74-year-old founder of pipeline giant Enterprise Products Partners may face criminal charges following his appearance Wednesday before a grand jury in Houston, where he answered questions about the trip he and other hunters took with Russian guides.

During the trip, Duncan shot and killed a moose and a sheep while riding in a helicopter, a practice Duncan said he did not know was illegal in Russia. Neither animal was considered endangered, he said.

Russian officials were aware of the hunting expedition � Duncan's attorney Rusty Hardin said the guide on the trip is now a top official with the Russian Federation's hunting licensing agency � but there were no complaints or charges filed in that country.

Hardin said prosecutors from Washington, D.C., may use the Lacey Act, a 107-year-old law designed to prevent the interstate and international trafficking of rare plants and animals, to bring felony criminal charges against Duncan. If found guilty he could face jail time, Hardin said.

"What the hell is the U.S. interest in bringing felony charges here for hunting on Russian soil, where not one single person has complained?" Hardin said Wednesday. "Is this really the best use of our prosecutorial resources?"

Read the entire article.

Posted by Tom at 12:05 AM | Comments (0) |

July 17, 2007

Judge Kaplan hammers the DOJ in the KPMG case

As widely anticipated, U.S. District Judge Lewis Kaplan dismissed all charges today against 13 former KPMG partners in the KPMG tax shelter case because of the prosecution's interference with the defendants' Constitutional rights under the Fifth and Sixth Amendments. A copy of the decision is here (pdf), Peter Lattman provides this handy timeline of the case, while Ellen Podgor and Larry Ribstein and Kevin Lacroix provide their usual lucid commentary on Judge Kaplan's decision.