It looks to me as if this case should be going back to the District Court for re-trial on all charges. Skilling and the government have agreed to an expedited briefing schedule on the issues and Skilling has requested that the Fifth Circuit review the matter on an expedited basis. Thus, look for a decision sometime next month.

Jeff Skilling Opening Merits Brief on Remand

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

July 27, 2010

Ungagged.net: The Other Side of the Enron Story

A common topic on this blog has been the power of anti-business myths within American society.

Take Enron, for example. The anti-business myth contended that that Enron ? at one time 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 the 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.

As noted originally here and in many subsequent posts over the years, it is far more likely that the truth about Enron is that no massive conspiracy existed, that Skilling and 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 market conditions when the markets were spooked by revelations of the embezzlement of millions of dollars by Enron CFO Andy Fastow and a relative few of his minions.

The carnage of the Enron Myth is now piled high -- the destruction of Arthur Andersen, the death of Lay, the outrageous prosecutorial misconduct involved in the case against Lay and Skilling, the senseless prosecution and imprisonment of the four Merrill Lynch executives in the Nigerian Barge case, Richard Causey, Chris Calger, Kevin Howard, Joe Hirko and the other Enron Broadband defendants -- the list goes on and on.

In the wake of such destruction of careers and lives, the public is even less willing to confront the vacuity of the myth and the destructive dynamics by which it is perpetrated. indeed, even though 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 over the past two years, much of the public and the mainstream media still cling to the Enron Myth.

Attempting to challenge this enduring myth is a wonderful new resource -- Ungagged.net: The Other Side of the Enron Story.

Created, funded and filmed by Beth Stier -- who was the subject of prosecutorial misconduct as a non-party witness in the trial of the Enron Broadband case -- Ungagged.net is a "webumentary." That is, a website comprised of short modules of documentary-style content, organized into two main categories: "What It Was Like to Be on The Other Side of the Enron Story," and "Behind the Scenes of The Other Side of the Enron Story."

Ungagged.net currently features over a dozen relatives of defendants, attorneys, former Enron executives and employees telling their stories about what they experienced personally in dealing with the overwhelming governmental power and societal forces at work in the Enron saga. Moreover, six experts in economics, political science, finance, UK law and civil liberties -- including Clear Thinkers favorites William Anderson and Harvey Silverglate -- provide their views on the ominous implications that the government's handling of the Enron case have on us all.

Ms. Stier continues to add new information to the site, the latest of which are dozens of snippets from fascinating interviews of David Bermingham and Gary Mulgrew, two of the NatWest Three bankers from England who were caught up in an international firestorm in connection with the Enron Task Force's effort to turn Fastow and his right-hand man, Michael Kopper, into witnesses for the Task Force against Skilling and Lay. This series of interview modules paints an absolutely fascinating tale of three regular fellows from the U.K. having their lives, families and careers turned utterly upside down by governmental forces that viewed them as mere pawns in a much larger game.

Apart from the its egregious human toll and the serious abuse of state power that its promoters ignore, the Enron Myth?s devastating impact is that it obscures the true nature of investment risk and fuels the notion 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 are 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?

Ungagged.net is currently a voice in the wilderness advocating against such governmental overreach. Here?s hoping that voice grows louder as those of us who are concerned by the pernicious growth of abusive governmental power listen to the stories and observations contained in this valuable resource.

The trailer for the webumentary is below.

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

July 23, 2010

Cassano wins the lottery

Larry Ribstein notes that AIG scapegoat Joseph Cassano appears to have won in his turn enduring the criminalization-of-business lottery.

Meanwhile, Conrad Black was released from prison this week pending a re-trial of the charges against him, but he is ruined financially by his turn at the lottery.

And Jeff Skilling remains in prison and James Brown awaits another trial in his seven-year ordeal.

So, does the decision not to prosecute Cassano indicate a government move away from the lottery policy of regulating business?

I’ll believe it when I see it.

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

July 7, 2010

At least tell him that he is a sacrificial lamb

Regular readers of this blog are familiar with the technique that federal prosecutors used in the post-Enron era to score easy convictions against businesspeople.

Threaten to go Arthur Andersen on a company, offer to let the company off the hook under a deferred prosecution agreement in return for offering up an executive or two as sacrificial lambs to be prosecuted, and then bludgeon the individual’s career, life and family into bits under the sledgehammer of the DOJ’s prosecutorial power.

Jamie Olis was arguably the first of those sacrificial lambs, and there were plenty in connection with the Enron-related prosecutions. Heck, the DOJ is even getting ready to tee up a re-trial of one such case this September.

But check out this example of DOJ brazenness that Ellen Podgor passes along. The DOJ enters into a deferred prosecution agreement with American Express and, as a part of the deal, has AE enter into a side-letter agreement that, absent the DOJ’s prior consent, prohibited AE executive Sergio Masvidal from obtaining employment with an AE unit or any company that bought the AE unit.

Given the DOJ’s heavy-handed approach in such matters, that part of the deferred prosecution agreement is not all that unusual. But one aspect of this particular deal was.

The DOJ didn’t bother to disclose the side-letter to either Masvidal or the District Court that approved the deferred prosecution agreement.

Masvidal eventually found out about it when he was denied employment by the company that bought the AE unit. So, he sued the DOJ, which eventually led to the DOJ’s issuance of the letter below, which admits that the DOJ did not disclose the side-letter to the District Court on purpose and that the DOJ’s investigation “did not reveal any evidence that Mr. Masvidal had committed any criminal offenses or violated any banking regulations.”

Now, do you still have any doubts that the same bunch was capable of this and this?

Posted by Tom at 12:00 AM | Comments (3) |

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) |

March 2, 2010

Jeff Skilling Day at SCOTUS

Got to love the response of Sri Srinivasan -- who handled yesterday's oral argument for Jeff Skilling in his appeal to the U.S. Supreme Court -- to the government's contention that a five-hour voir dire of the jury was sufficient in Skilling's trial to rebut the presumption of community prejudice against Skilling.

According to Lyle Denniston, whose account of the argument is the most comprehensive that I've seen, Srinivasan pointed out that the far less complicated criminal trial of Martha Stewart involved six days of juror selection in a case where there was no evidence of "deep-seated passion and prejudice" among jurors.

As Denniston notes, the SCOTUS Justices are usually hard to read during oral argument and the Skilling argument was no different. As Jeffrey Toobin notes in his recent book on the Supreme Court, Supreme Court decisions are often more the product of coalition-building between the Justices than the legal theories.

From reading Denniston's account and from talking with a couple of friends who attended the argument, I'm guessing that the Justices have already decided either to invalidate or dramatically limit the honest-services wire fraud statute (18 U.S.C. 1346), and that much or all of Skilling's conviction will be overturned on that basis. If I'm right on that, then the Justices are now only deciding whether to knock out Skilling's conviction entirely on the District Court's refusal to change venue from Houston or to conduct a thorough voir dire of jurors and leave the honest services issues for the other two pending cases involving the same issue.

But ignored among all the media reports on the Skilling SCOTUS argument is that the Skilling case is far from over even if SCOTUS were to uphold Skilling's conviction. Put on hold pending the outcome of the SCOTUS appeal is the Fifth Circuit's order to U.S. District Judge Sim Lake to re-sentence Skilling because of errors in the calculation of the length of the sentence.

But even more importantly, the Skilling team is awaiting the outcome of the Supreme Court appeal before filing what will certainly be a scalding motion for new trial in the District Court based on pervasive prosecutorial misconduct involved in the Enron Task Force's prosecution of Skilling.

And that could well be more revealing than any Supreme Court argument.

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

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) |

February 17, 2010

Greece and the Enron narrative

The New York Times’ Floyd Norris is still having a hard time giving up the tired and largely debunked Enron narrative.

This time, Norris applies the Enron narrative to Greece, which supposedly hid its true financial condition from honest investors through engaging in complex derivative transactions with the ever-present and greedy investment bankers.

There is only big problem with Norris’ morality tale. It’s not true.

As University of Houston finance professor Craig Pirrong points out in this blog post that runs rings around Norris and the Times’ dubious analysis, what Greece was doing in using swaps engineered by the investment banks to finance its way into the European Monetary Union has been well known since the early part of this decade. Thus, as Professor Pirrong points out, “nobody  .   .   . has any more reason to be shocked about these transactions than Captain Reynaud had to be shocked about gambling going on at Rick’s.”

That includes Floyd Norris and the New York Times.

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

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 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 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 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 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) |

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 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 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 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 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 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) |

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) |

January 21, 2009

Skilling fires back

As noted earlier here, the Fifth Circuit Court of Appeals panel decision in former Enron CEO Jeff Skilling's appeal of his criminal conviction was unusual in several respects.

For example, even though the three-judge panel reversed Skilling's sentence and remanded that part of the case to the U.S. District Judge Sim Lake for re-sentencing, the part of the panel's decision affirming the conviction was oddly superficial in a number of key respects.

In particular, the panel's decision failed to reconcile its reasoning in upholding Skilling's conviction for honest services wire-fraud under 18 U.S.C. § 1346 with the Fifth Circuit's earlier decisions on the same issue in the Nigerian Barge and Kevin Howard cases.

Similarly, despite finding that Judge Lake had improperly failed to grant Skilling a presumption of community prejudice for purposes of establishing the correct venue and in selecting jurors, the panel turned around and affirmed the conviction anyway by reasoning that Skilling had waived his juror argument by failing to object to the seated jurors (except one) and by finding that Judge Lake had overcome the presumption of prejudice against Skilling by conducting an "exemplary" voir dire.

Now it's time for Skilling's team to fire back at the Fifth Circuit panel's decision.

Yesterday, Skilling's lawyers zeroed in on the unusual aspects of the panel's decision by filing this Petition for Panel Rehearing and this Petition for Rehearing En Banc in front of the entire Fifth Circuit Court of Appeals (Kristen Hays' Chronicle article is here). As with the panel's earlier decision, the copies of Skillings' petitions provided in this post are bookmarked, key arguments are highlighted, and a few of my comments are included.

The Petition for Rehearing En Banc is the meatier of the two pleadings in analyzing the alleged defects in the panel's decision.

First, Skilling hammers the panel's creation of a "following orders" exception to rationalize affirming Skilling's conviction on the honest services wire-fraud charge even though that decision is inconsistent with the Fifth Circuit's previous decisions in the Nigerian Barge and Kevin Howard cases and other appellate decisions on the same issue. In short, Skilling argues that the only discernable “rule” that can be gleaned from the Fifth Circuit's conflicting decisions on the issue is that an employee cannot be convicted for honest services wire fraud if the conduct charged was in furtherance of the corporate interest (Nigerian Barge decision) unless the employee is a senior executive (Skilling decision) except in certain unspecified circumstances (Howard decision).

Skilling rightly asks: How could "any employee .  .  . know under existing circuit precedent what conduct will subject him to prosecution for honest-services fraud?"

Heck, maybe we all ought to be signing up for this.

Moreover, Skilling argues that the panel simply misread the trial record in finding that Skilling had "failed to challenge for cause all but one of the jurors." The panel used that key finding to conclude that Skilling had "waived most of his argument" regarding improper venue and juror bias.

This is important because of the panel's finding that the District Court committed error in failing to find presumed community prejudice against Skilling. In effect, the panel’s waiver analysis relieved the Enron Task Force of its burden to show that each juror was impartial. Instead, the panel required Skilling to show that each juror was biased, which confuses an actual prejudice case (in which Skilling would bear the burden of proving bias) with a presumed prejudice case, where the prosecution is required to fulfill the tough burden of proving that each juror is impartial.

Inasmuch as Skilling's appellate petitions specify in the trial record where he challenged the entire jury and objected specifically to at least seven seated jurors, Skilling's request for rehearing on this ground appears to be solid. Frankly, if it is not clear error for the District Court to have denied Skilling's motion to change the venue of his trial because of the unprecedented community bias against him, then there is simply no longer a legal basis to change the venue of a trial on that basis within the Fifth Circuit.

Finally, Skilling argues that the panel was wrong to affirm the District Court’s (i) jury charge on the definition of “materiality” for purposes of securities fraud, and (ii) its refusal to dismiss “puffing” statements that are normally dismissed as immaterial in civil securities fraud cases.

It is well-settled in securities law generally that reasonable investors rely on facts in assessing the value of a company's stock and not mere expressions of optimism from company spokespeople. Consequently, Skilling argues that the panel was wrong to affirm the District Court's decision that Skilling's misstatements had to be submitted to the jury even though they were indistinguishable from misstatements that the Fifth Circuit has routinely ruled could not sustain a securities fraud claim. In fact, Skilling relies on a Fifth Circuit decision in a recent Enron-related civil case as support for his argument.

So, where does all this leave Skilling?

Well, on one hand, it's never easy winning a case on appeal in the best of circumstances, and it's hard to imagine a worse political climate than the present one for a formerly wealthy businessman to be pursuing sympathy from an appellate court in regard to the way in which he was prosecuted for alleged business crimes.

On the other hand, the prosecution of Skilling stinks to high-Heaven. Moreover, there are a number of Fifth Circuit judges with first-rate business law experience who could very well be uncomfortable with the way in which the Department of Justice is attempting to convict businesspeople such as Skilling by placing the square peg of the honest services wire-fraud charge in the round hole of a non-kickback, non-bribery business crime case.

My bet is that Skilling has a better than normal chance of the full Fifth Circuit taking a good, hard look at his appeal. Stay tuned.

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 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) |

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 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) |

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) |

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 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 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) |

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 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 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) |

April 1, 2008

The Wall Street Journal's Enron embarrassment

In anticipation of the oral argument on Wednesday in New Orleans on former Enron CEO Jeff Skilling's appeal of his criminal conviction, don't miss this Larry Ribstein post on Wall Street Journal Enron reporter John Emshwiller's tardy realization that Skilling may just have legitimate grounds for reversal of his conviction and that the Enron Task Force's record is not what its sycophants crack it up to be. This comes from Emshwiller after his newspaper last year characterized the Enron Task Force as having "a good record overall."

I can't improve upon Professor Ribstein's post regarding the irony of the nation's leading business newspaper just now realizing that the corporate criminal case of the decade was badly mishandled. However, even before the Lay-Skilling trial, it was clear that the WSJ's coverage of Enron was open to serious questions (see also here). That the newspaper continues to soft pedal coverage of wide-ranging evidence of serious prosecutorial misconduct in the Enron-related criminal cases reflects a troubling blind spot. Even in the current article, Emshwiller is less than forthright in assessing what is truly going on in the Skilling appeal regarding the Fastow interview notes:

Normally, defense attorneys aren't allowed to see the raw notes of Federal Bureau of Investigation interviews with government witnesses. But Mr. Skilling's defense team, led by Daniel Petrocelli, sought them anyway, and the Fifth Circuit agreed to order the federal government to turn over the notes.

Emshwiller fails to explain that the Fifth Circuit granted the Skilling team's motion to obtain the raw notes because the Enron Task Force took the highly unusual step of providing the Lay-Skilling defense team a "composite summary" of the Form 302 ("302s") interview reports that federal agents prepared in connection with their interviews of former Enron CFO and chief Skilling accuser, Andrew Fastow. Those composites claimed that the Fastow interviews provided no exculpatory information for the Lay-Skilling defense, even though Fastow's later testimony at trial indicated all sorts of inconsistencies.

In point of fact, the process of taking all the Fastow interview notes or draft 302s and creating a composite is offensive in that it allowed the prosecution to mask inconsistencies and changing stories that Fastow told investigators as he negotiated a better plea deal from the prosecutors over time. Likewise, the Task Force's apparent destruction of all drafts of the individual 302s of the Fastow interviews in connection with preparing the final composite is equally troubling. Traditionally, federal agents maintain their rough notes and destroy draft 302s. However, in regard to the Fastow interviews, what turned out to be the draft 302s were probably not "drafts" in the traditional sense. They were probably finished 302s that were deemed “drafts” when the Task Force prosecutors decided to prepare their highly unusual composite summary of the 302s.

Meanwhile, while manipulating Fastow's story, Task Force prosecutors were also preventing other exculpatory evidence from being introduced at trial on behalf of Skilling and Lay by taking the unprecedented step of fingering over 100 unindicted co-conspirators in the Lay-Skilling case (see also here) and implicitly threatening those co-conspirators with indictment if they testified on behalf of Skilling and Lay at trial. 

None of the foregoing is explained in Emshwiller's article. Regardless of what happens in the Skilling appeal, the WSJ has some deep soul-searching to do regarding its coverage of the aftermath of Enron's demise. Engaging in media myths and morality plays regarding business interests is bad enough. Ignoring the abuse of the government's overwhelming prosecutorial power to levy a life sentence on an executive who created enormous wealth elevates poor judgment in business reporting to a much more troubling level. 

Update: Larry Ribstein comments further here, while Ellen Podgor has a pre-appellete argument post for the Skilling appeal here. The Chronicle's Kristen Hays, who has done the best job in the mainstream media of covering the latest developments in the Skilling appeal, previews the oral argument here.

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

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 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 12, 2008

More rumblings in the Skilling appeal

This post from last week noted some interesting docket entries in former Enron CEO Jeff Skilling's Fifth Circuit appeal of his conviction on criminal charges in connection with the demise of Enron.

Now, it looks as if the mainstream media is picking up on the issue. The Houston Chronicle's Kristen Hays, who is one of the only mainstream media reporters continuing to follow-up on the Enron-related criminal cases, reports here on a couple of the pleadings referenced in the docket entries from last week that apparently were not placed under seal when filed. Although a copy of the pleadings that Hays was able to review are not included in the article, it appears clear that the government is scrambling in an attempt to contain public disclosure of exculpatory evidence that is contained in the interview notes of former Enron CFO and chief Skilling accuser, Andrew Fastow:

[Skilling attorney Daniel] Petrocelli and his team have since examined the notes. They want to file an additional brief arguing that the notes contain much information that is favorable to Skilling, and prosecutors and Lake wrongly denied him access to the notes before the trial.

He said the notes reveal evidence that is "a sledgehammer that destroys Fastow's testimony" against Skilling, "infecting virtually every facet" of the government's case.

Petrocelli also asked the 5th Circuit to accept his new brief as a public document, which he said quotes liberally from the Fastow notes.

The controversy regarding what Fastow told prosecutors and FBI agents who were investigating Enron became a big issue in the Lay-Skilling prosecution when the prosecution took the unusual step of providing the Lay-Skilling defense team a "composite summary" of the Form 302 ("302's") interview reports that federal agents prepared in connection with their interviews of Fastow. Those composites claimed that the Fastow interviews provided no exculpatory information for the Lay-Skilling defense, even though Fastow's later testimony at trial indicated all sorts of inconsistencies.

However, I have spoken with several former federal prosecutors about this issue and all believe that the government has a big problem in the Skilling case on the way in which the information from the Fastow interviews was provided to the Lay-Skilling defense team. None of these former prosecutors ever prepared a composite 302 in one of their cases or ever used such a composite in one of their cases. The process of taking all the Fastow interview notes or draft 302's and creating a composite is offensive in that it allowed the prosecution to mask inconsistencies and changing stories that Fastow told investigators as he negotiated a better plea deal from the prosecutors.

Similarly, the Enron Task Force's apparent destruction of all drafts of the individual 302s of the Fastow interviews in connection with preparing the final composite is equally troubling. Traditionally, federal agents maintain their rough notes and destroy draft 302s. However, in regard to the Fastow interviews, my sense is that the draft 302s were not drafts in the traditional sense. They were probably finished 302's that were deemed “drafts” when the Enron Task Force decided to prepare a composite summary of the 302's.

I will try and obtain copies of the pleadings referenced in Hays' article and add them later to this post. Stay tuned.

Update: A copy of the respective prosecution and Skilling pleadings that are the basis of the Hays/Chronicle story are here and here.

Update2: Larry Ribstein comments on the implications that criminalizing the actions of Skilling and Lay has on their prosecutors in light of their actions.

Posted by Tom at 7:55 AM | Comments (4) |

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) |

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) |

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) |

October 4, 2007

The NACDL's amicus brief in the Skilling appeal

The National Association of Criminal Defense Lawyers has requested permission from the Fifth Circuit Court of Appeals to be allowed to file a friend of the court brief (you can download a copy here) in the appeal of former Enron executive Jeff Skilling.

The NACDL brief is excellent and focuses on the controversial decision of U.S. District Judge Sim Lake to grant the Enron Task Force's request for a "deliberate ignorance" jury instruction against Skilling. Judge Lake's allowed that instruction despite the fact that the prosecution didn't allege that Skilling was deliberately ignorant of anything until just before the end of the evidentiary phase of the trial. Moreover, Skilling defended the case on the basis that he was a highly-involved executive of a company where there was no evidence of widespread criminal wrongdoing. Skilling never claimed that he even attempted to turn a blind eye toward alleged wrongdoing.

The NACDL's brief comes out of the box smoking:

This case highlights a recurring problem in federal criminal cases: the indiscriminate use of the deliberate ignorance instruction. As we describe below, the deliberate ignorance doctrine has grave flaws that raise serious constitutional concerns. Left uncorrected, these defects will undermine the mens rea requirements that distinguish criminal and civil liability and perpetuate the status of deliberate ignorance as the new "darling" ofthe prosecutor's nursery.

To mitigate the constitutional concerns with the deliberate ignorance instruction, the Court should restrict the instruction to narrow, clearly defined circumstances consistent with its purposes--circumstances that plainly do not exist here. At the first opportunity to consider the instruction en banc, the Court should eliminate it entirely, leaving to Congress the decision whether, and in what circumstances, deliberate ignorance is sufficiently culpable to warrant criminal sanction.

The NACDL notes that the indiscriminate use of the instruction is particularly troubling in corporate fraud cases, where jurors are already predisposed to believe that the defendant has done something wrong:

That danger is particularly great in the context of a fraud charged against an executive of a large corporation. Potential jurors, like the public generally, may hold the view that such executives should be aware of fraud in the organizations they lead, even if they are not. In such cases, therefore, the deliberate ignorance instruction may encourage jurors to indulge their own notions of culpability, in disregard of statutes and instructions requiring that the defendant act "knowingly." The post-verdict remarks of the jurors in this case suggest that some of them may have blurred the critical line between knowledge and intent on one hand and recklessness or negligence on the other. . . . The deliberate ignorance instruction may well have encouraged that conflation of knowledge with less culpable mental states.

In the context of alleged corporate fraud, the deliberate ignorance instruction also raises the specter of the improper imposition of criminal liability based on the civil doctrine of respondeat superior. Jurors may well view the deliberate ignorance instruction as an appropriate imposition of supervisory responsibility (moral or otherwise), particularly when, as here, they may view the consequences of the alleged fraud to the corporation and its investors as severe and irremediable. [. . .]

If the Court affirms Skilling's conviction on this record, district courts and prosecutors will rightly view the ruling as the final abandonment of any limit on the use of the deliberate ignorance instruction. Deliberate ignorance will have become the default basis for "knowledge" in corporate criminal prosecutions. In our view, this is the wrong message for the Court to send, at a time when the deliberate ignorance doctrine faces withering criticism and is ripe for reconsideration. The Court should find that the evidence did not warrant a deliberate ignorance instruction, reject any contention that the error was harmless beyond a reasonable doubt,8 and--in accordance with Ojebode and cases from other Circuits--reverse Skilling's conviction.

And for good measure, the NACDL brief concludes by taking dead aim at Judge Lake's equally questionable decisions not to transfer venue of the trial and the way in which he empaneled the jury:

In such extraordinary cases, the district court must take strong measures to guarantee the defendant's Fifth and Sixth Amendment right to a fair and impartial jury. Here, as in the Oklahoma City case, the Constitution required the district court to transfer venue and then conduct a rigorous voir dire of prospective jurors from the new venue. Given the sheer loathing for Skilling and Lay that the collapse of Enron engendered in Houston, only with both of those protections--change of venue and thorough voir dire--could there be any confidence that the defendants would receive the trial to which the Constitution entitled them.

Remarkably, the district court provided neither protection. Faced with overwhelming evidence that Houston was suffused with hostility toward the defendants, the court cursorily rejected Skilling's motions to transfer venue. The court then declared that voir dire would last no more than a day. It insisted on conducting voir dire itself, with only the most perfunctory follow-up questioning by counsel. It ignored unmistakable indications of bias in the potential jurors' questionnaires. It persistently asked leading questions of potential jurors-questions designed to mask, rather than expose, bias. Even when grounds to strike potential jurors for cause became apparent, the court often denied them. . . . And the court granted Skilling and Lay a meager two additional peremptory challenges (for a total of twelve combined challenges), and then denied repeated requests for additional peremptories as jury selection unfolded. [record citations deleted].

The district court's conduct of jury selection--from the denial of the motions to transfer venue without a hearing to the stunningly brief and superficial voir dire to the rulings on challenges for cause to the denial of additional peremptory challenges--represents a shocking triumph of efficiency over fairness. Under these circumstances, the court's decisions should not be viewed in isolation and examined ruling-by-ruling under the deferential abuse of discretion standard. Such an atomized analysis would ignore the crushing unfairness of the court's overall approach. Instead, this Court should review the record independently to determine whether the jury selection process violated Skilling's fundamental right to a fair trial. See, e.g., United States v. Williams, 523 F.2d 1203,1208-09 (5th Cir. 1975) (constitutional claim of community prejudice requires independent review).

Such an independent review mandates reversal of Skilling's conviction. If the bedrock constitutional right to "indifferent" jurors means anything, it means that Skilling should not have been tried in Houston before jurors selected in less than a day with only cursory examination, a number of whom had unequivocally expressed harshly negative opinions of the defendants on their questionnaires.

Based on the quality of the NACDL brief and the Skilling Appellant's brief, the Department of Justice has its hands full in preparing its appellee's brief, which is currently scheduled to be filed with the Fifth Circuit around sometime around mid-November.

Posted by Tom at 12:10 AM | Comments (2) |

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) |

April 23, 2007

The Glisan Interview

Tongues were wagging all over Houston this weekend as a result of Wall Street Journal reporter John Emshwiller's exclusive interview ($) with former Enron treasurer and Andy Fastow confidant, Ben Glisan (excerpts of the interview are here). The theme of the interview is that Glisan initially deluded himself into thinking that he hadn't done anything wrong while at Enron, but that he discovered his true self during his 4+ year prison term and came to terms with his criminality. Emshwiller -- whose coverage of the Enron case has been subject to serious issues before -- laps up the morality play. Next thing you know, Glisan will be joining Sherron Watkins as a speaker on the "corporate governance reform" rubber chicken circuit.

However, as with almost everything pertaining to Enron, the true story about Glisan is more nuanced than meets the eye. Glisan was a golden boy at Enron, a rising star in the management circles who Fastow plucked as his hand-picked replacement after running off Enron treasurer Jeff McMahon in early 2000. Contrary to the unsupported statements contained in the interview with Emshwiller, there are real questions as to whether Glisan did much of anything wrong in his duties as Enron's treasurer. But he did use bad judgment in getting drawn into one of Fastow's partnership deals in which he made a quick $1 million in mid-2001 on a nominal investment, although even then it remains unclear as to whether Glisan actually knew that he was engaged in any criminal wrongdoing in taking that return on his investment. Nonetheless, later in 2001, a month or so before Enron filed its chapter 11 case, Glisan was ultimately canned as Enron's treasurer because of his failure to disclose that investment in connection Enron's failed merger negotiations with Dynegy, and so he quickly came under the scrutiny of federal investigators who were suspicious about Glisan's $1 million prize.

For over a year and a half after being fired by Enron, Glisan continued to maintain to investigators that he had not engaged in any criminal conduct while at Enron. But soon after being indicted in 2003, Glisan -- who had not made big money at Enron and was not financially capable of mounting a formidable defense to the criminal charges -- copped his deal with the Enron Task Force and began serving his prison sentence.

The rest of the story is not particularly surprising. Glisan was treated roughly during his early days in prison and he quickly began negotiating with the Task Force prosecutors for better accomodations in return for testimony in other Enron-related criminal cases. He ended up being one of the key witnesses in the Nigerian Barge trial, even though he was not directly involved in the transaction. Most of his testimony in that trial was hearsay of alleged statements made by other "co-conspirators" that was admitted as evidence under an exception to the hearsay rule that would have otherwise excluded such testimony. That testimony helped lead to the improper convictions of four former Merrill Lynch executives that were later overturned on appeal (see also here).

Glisan then parleyed his Nigerian Barge work into a transfer to a better prison, where he offered his testimony (which is reviewed here and here) against former Enron executives Jeff Skilling and Ken Lay in return for liberal furloughs from prison to Houston, where he lived at home while working with prosecutors. Although the Lay-Skilling jurors viewed him as an effective prosecution witness, there remain substantial questions whether Glisan was truthful during much of his testimony.

So, what to make of all this? Simple morality plays are easier to write and understand, and certainly easier (and legally safer) to spin on the rubber chicken circuit. The truth in such matters is often far less certain and more difficult to understand, but it's far more likely to prevent the injustices that have been heaped upon the four former Merrill Lynch executives, Jeff Skilling, Ken Lay, Kevin Howard and Chris Calger, just to name a few. As Ellen Podgor comments:

Although not the focus of [the Glisan interview], it is interesting to note that the risk and cost of trial weigh heavily in the decision to plea. Glisan, like Martha Stewart realized the value of "getting it over with," and "moving on." But is that the way the justice system is supposed to work?

Posted by Tom at 4:30 AM | Comments (0) |

April 17, 2007

"Somebody was guilty because they were guilty"

Mary Flood, the Houston Chronicle's lead reporter on the criminal trial of former Enron executives Jeff Skilling and Ken Lay, reports that some of the former Lay-Skilling jurors are now hitting the rubber-chicken circuit:

Deliberating the fate of Jeff Skilling and Ken Lay last year was "horribly confusing" and very intense, juror Jill Ford told a group of appellate lawyers at a dinner Thursday night.

Ford, juror Dana Fernandez and alternate jurors Gary Creakbaum, Amanda Perry and Kristine Statham answered after-dinner questions from the inquisitive lawyers at the Four Seasons Hotel. U.S. District Judge Sim Lake, who oversaw the trial, was also in attendance.

Some of the juror observations that Flood reports are quite telling. One of the jurors confirmed that the real presumption in the case was not that of innocence and that Skilling and Lay never really had a chance:

Ford, who was 24 when the jury deliberated last May, said she learned that Diet Coke could keep her awake in the morning and that she took things very seriously. "I felt it was important that somebody was guilty because they were guilty . . . not because we needed somebody to blame," she said.

Flood goes on to report that the jurors thought that former Enron treasurer Ben Glisan (here, here and here) and former investor relations chief Mark Koenig (here and here) were the most damaging witnesses to Skilling and Lay, and that none of them believed Skilling or Lay's testimony, although they all agreed that both of the former executives had to testify under the circumstances. Given the 25 year sentence that Skilling received, one shudders to think what basis the jury would have given Judge Sim Lake to sentence him had he not testified.

Of course, in a trial of such complexity, Skilling's testimony regarding his underdisclosed investment in his former girlfriend's fledgling company named Photofete was a key issue for at least two jurors. And apparently no one cared to ask the jurors what they thought about the fact that the Enron Task Force prevented them from hearing from dozens of witnesses who would have provided exculpatory testimony for Skilling and Lay.

This post outlines the case and evidence that was presented at trial against Skilling, and this one does the same for the case against Lay. But it all still boiled down to Photofete. So it goes in the wacky world of regulating business through the blunt object of the criminal justice system.

Posted by Tom at 4:30 AM | Comments (4) |

March 7, 2007

The politics of destruction

In this International Herald Tribune article, Michael Oxley -- the "Oxley" of the Sarbanes-Oxley corporate governance statute -- confirms the vacuous nature of the politicians who passed that destructive law and encouraged the destruction of Arthur Andersen and various Enron executives:

Presiding over a recent dinner in Paris for more than 200 accountants, Oxley -- the former Republican congressman from Ohio and co-author of the Sarbanes-Oxley corporate governance law -- was asked during the question period whether he realized he had helped create one of the most crushing financial burdens ever imposed on business.

Was Oxley aware, his questioners asked, that the law that he and Senator Paul Sarbanes, a Maryland Democrat, rushed onto the books five years ago after the collapse of Enron and WorldCom had contributed to a sharp decline in listings on U.S. stock exchanges? And, knowing what he knows now about the cost and effects of the law, would Oxley -- who retired in January after 25 years in Congress -- have done it any differently?

"Absolutely," Oxley answered. "Frankly, I would have written it differently, and he would have written it differently," he added, referring to Sarbanes. "But it was not normal times." [. . .]

"Everybody felt like Rome was burning," Oxley, 62, recalled during an interview after the dinner in Paris. "People felt like they were getting cheated. It was unlike anything I had ever seen in Congress in 25 years in terms of the heat from the body politic. And all the members were feeling it."

Until that moment, a bill to tighten corporate controls had been languishing in the Congress for years, held back by lobbying by big business. But suddenly, the impetus was there, and the firestorm led Oxley, then head of the House committee that oversees America's financial services industry, to quickly push forward a solution based on that measure to calm the hysteria of voters.[ . . .]

in the summer of 2002, with pressure also mounting from the administration of President George W. Bush, there was no question that the bill needed to be pushed through, however imperfect.

"The president called Paul and I down to the White House almost immediately after the Senate passed its bill, 97 to 0" on July 15, Oxley recalled.

"I remember it was in the Cabinet Room and you could see the pressure he was under because the Democrats were pressing his relationship with 'Kenny boy'" -- a reference to Kenneth Lay, the chief executive of Enron, who had sought help from the administration to avoid a bankruptcy filing in the weeks before the giant energy trading company collapsed.

"The president basically said, 'Get this wrapped up,'" Oxley said. The House and Senate quickly agreed on a new draft, and Bush signed the bill into law on July 30. [. . .]

A month later, Arthur Andersen, the accounting firm that had been convicted of obstructing the government's investigation into the collapse of Enron, declared bankruptcy after 89 years in business, crushed by Enron-related liabilities.

The Andersen prosecution was "a White House decision," Oxley said. "They had to really look tough and so they decided at the highest levels they were just going to give the death penalty to Arthur Andersen."

"I think at the end of the day virtually anyone would agree it was a terrible decision, because you eliminated a major accounting firm," he added, "and you just sent a chill through the accounting industry."

Read the entire article. Yet another example of the legislative overreaction to a perceived problem being far worse than the problem itself.

Posted by Tom at 4:50 AM | Comments (1) |

February 16, 2007

DOJ throws in the towel on appealing the Fifth Circuit's Nigerian Barge decision

The Chronicle's Kristen Hays reports on the news that was bubbling through the Houston legal community on Thursday afternoon -- the Department of Justice has decided not to mount an appeal to the U.S. Supreme Court of the Fifth Circuit Court of Appeals' decision vacating the convictions (see also here) of the four Merrill Lynch executives in the travesty known as the Nigerian Barge case.

Although expected, the DOJ's decision in the Nigerian Barge case reverberates through several other pending Enron-related cases. The DOJ can retry three of the four former Merrill Lynch executives, but that would be petty by even the DOJ's standards given the eviscerated nature of the original charges and the fact that each of the defendants has already spent a year of their lives in prison based on a prosecution that was based more on resentment than on true criminal conduct. The Fifth Circuit's now final decision in the barge case casts doubt (see also here) on a substantial number of the charges upon which former Enron CEO Jeff Skilling was convicted, and dispositively blows away over 80% of the case against former Enron Broadband executive Kevin Howard. In addition, the re-trials of Howard's former co-defendants from the disaster that was the first Enron Broadband case are now in various states of disarray, as is the pressured plea deal of former mid-level Enron executive, Chris Calger. And don't forget the mess that is the DOJ's case against the NatWest Three (see also here).

And this is the product of what the Wall Street Journal called "a good record overall?"

Look, this mess is what happens when government is allowed to bastardize charges (in this case, the honest services charge that is supposed to pertain to bribery or kickback cases) against merely questionable business transactions 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 those winds turned toward them?

Posted by Tom at 4:54 AM | Comments (1) |

January 19, 2007

The price of favorable testimony

In response to my recent lengthy posts (here and here) on the injustice of the conviction and brutal sentencing of former Enron executive Jeff Skilling, many folks who have not followed the Enron criminal cases closely have observed to me that they did not realize that the Enron Task Force relied almost entirely on testimony from cooperating witnesses who had copped pleas with the Task Force in convicting Skilling. That approach, coupled with the Task Force's equally dubious tactic of freezing exculpatory testimony for Skilling and the late Ken Lay out of the trial (see here, here and here), raises serious appellate issues regarding the legitimacy of the entire prosecution against Skilling and Lay.

Interestingly, the same dynamic is at play in the current prosecution of the Milberg Weiss law firm (see prior posts here). Larry Ribstein has been at the forefront of pointing out the injustice of the prosecutorial tactic of "paying" witnesses and proposing a framework for addressing it. Recently, Professor Ribstein posted the paper that he and Bruce Kobayashi are developing on this issue, The Hypocrisy of the Milberg Indictment: The Need for a Coherent Framework on Paying for Cooperation in Litigation, which includes in its abstract a wonderfully cogent sentence regarding the essence of the problem:

[T]he . . .important hypocrisy is that Milberg's prosecutors are essentially paying the same witness . . . that Milberg is being prosecuted for paying.

Posted by Tom at 5:43 AM | Comments (0) |

January 10, 2007

Reacting to Gladwell's Enron article

It's been a week now since Malcolm Gladwell's New Yorker article on the injustice of the case against Jeff Skilling. One of the more revealing reactions to the article resulted from a question that Gladwell posed in this blog post relating to his article:

Can anyone explain—in plain language—what it is Jeff Skilling and Co. did wrong? . . . The question is strictly a legal one: according to the way the accounting rules were written at the time, what specific transgressions were Skilling guilty of that merited twenty-four years in prison?

Peter Lattman forwarded Gladwell's question to former Enron Task Force prosecutor John Hueston, who is now in private practice. You may recall Hueston from the Lay-Skilling trial -- he was the prosecutor who conducted a largely disingenuous cross-examination of the late Ken Lay (see also here) and then bragged after the trial to the New York Times that he and the other Task Force prosecutors had brilliantly convicted Lay even though the case against him was weak (he is proud of that "accomplishment"?).

At any rate, Hueston's response to Lattman's request largely avoids addressing Gladwell's straightforward question, preferring instead to speak in the platitudes that have become all too familiar to anyone who attempts to have an objective discussion of anything having to do with Enron. However, toward the end of his email to Lattman, Hueston makes three conclusory statements that are at least somewhat responsive to Gladwell's question:

Skilling was found guilty because he was caught flat-footed in lies about the performance of highly-touted business units such as Enron Broadband Services, telling employees the sour truth about the dismal state of the EBS business and then reversing course in a public call with analysts just eight days later.

Skilling didn’t suspect earnings manipulation, he condoned and promoted it with CFO Fastow and CAO Causey, who kept a tally sheet that included accounting side deals that unequivocally violated accounting rules.

Likewise, Ken Lay repeatedly and falsely misrepresented the performance of Enron’s business units, told employees and others to ignore the Wall Street Journal exposes and reports from short sellers, and lulled them with reports of his purchases of Enron stock as he quietly dumped $70 million of his Enron holdings.

Taking Hueston's point about EBS first, and as noted in this earlier comprehensive post on the Enron Task Force's case against Skilling, the Task Force attempted to prove that Enron lied about the health of EBS exclusively through the testimony of four cooperating witnesses who had copped pleas with the Task Force to hedge the risk of long prison sentences -- former Broadband executives Ken Rice and Kevin Hannon, and former Enron investor relations executives Mark Koenig and Paula Rieker. Of course, Hueston doesn't mention that fact, nor the fact that the Task Force effectively prevented (see also here) witnesses with exculpatory testimony for Skilling from testifying during the trial and disputing the cooperating witnesses' allegations.

Moreover, the documentary evidence regarding EBS introduced during the trial actually supported Skilling's defense. Documents showed that EBS experienced substantial growth during 2000 in volumes traded and number of counterparties, and that Enron repeatedly had disclosed sales of fiber through monetizations as part of EBS’s business. Even more importantly, far from being the vehicle for fraud that Hueston suggests, Enron's broadband unit was attempting to develop and deliver the video-on-demand service that is now a popular and profitable product of cable television and Apple's iPod. These systems are a creative accomodation to copyrighted music and video programming under which enormous wealth is generated for artists and shareholders. As Skilling passionately testified during his trial:

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.

Frankly, given the current value of video-on-demand technology, Skilling's valuation of Enron's Broadband business -- had the company been able to capitalize on its investment -- was probably low. Yes, Enron ended up being ahead of the market in regard to this investment. But what public policy does it serve to have the likes of Hueston use government power to prosecute businesspeople who take the risks necessary to facilitate the development of this type of valuable asset?

Moving on to Hueston's other allegation against Skilling, the evidence that Skilling engaged in earnings manipulation is so sketchy (see more extensive discussion in the earlier comprehensive post) that Hueston resorts to attempting to tie Skilling to the alleged Global Galactic agreement between Fastow and Causey. Revealingly, only the non-believable Fastow testified during the trial that Skilling knew about Global Galactic. Moreover, even after Causey copped a courthouse steps plea deal to hedge the risk of the effective life sentence that Skilling received, the Task Force chose not to call Causey as a witness. More than likely, the reason that the Task Force did not call Causey is that Causey wouldn't have corroborated Fastow at all, which raises a quite reasonable question -- why did the Task Force prosecutors use Fastow's testimony to convict Skilling when they knew that there was reasonable doubt about Fastow's veracity? Indeed, what does Hueston have to say about the Task Force's duplicity with regard to Fastow's testimony during the Lay-Skilling trial? And again, what does Hueston have to say about the numerous witnesses who the Task Force effectively prevented from testifying who would have provided exculpatory testimony for Skilling and refuted Fastow's testimony?

Finally, as to Hueston's allegations regarding the late Mr. Lay, one can only ponder what he is remembering? Lay was charged with wrongdoing for only about a two-month period following his return to Enron's CEO position after Skilling resigned unexpectedly in mid-August, 2001. Had Lay not made that ill-fated return at the behest of the Enron board, he presumably would not have been charged at all. Moreover, as noted here and here, Hueston spent most of his time cross-examining Lay during the trial about his lavish lifestyle and his line of credit arrangement with Enron, neither of which represented the core basis of any of the criminal charges against Lay.

In fact, the entire line of credit issue reflects how the Task Force elevated form over substance in the Lay-Skilling prosecution. Lay traditionally took a substantial part of his compensation from Enron in stock, which was a good thing for both the company and him. As an accommodation to Lay, Enron’s board approved a line of credit -- eventually reaching $7.5 million -- that allowed Lay to monetize the stock efficiently by borrowing on the line and then repaying it with his Enron stock. Each year, Lay and Enron complied with the requirement under SEC rules to disclose Lay’s use of stock to pay the credit line.

That arrangement probably wouldn’t have made any difference except that Lay made what turned out to be a bad decision in regard to his personal financial affairs well before the time that the Task Force contended he was involved in wrongdoing at Enron. Because his at-one-time $300 million-plus net worth was almost entirely invested in Enron stock, Lay and his financial advisers decided that he should diversify his portfolio. However, Lay continued to believe that Enron stock was the best value in his portfolio. So, rather than selling the stock and using the proceeds to buy other securities, Lay borrowed $100 million from third party financial institutions, pledged his Enron stock as collateral and began buying other assets with the loan proceeds. Accordingly, Lay was actually exhibiting an optimism and confidence in the underlying value of Enron, a fact that the Hueston blithely ignores in alleging that Lay knew that Enron was a sinking ship.

The steady decline in Enron stock price during 2001 undermined the value of the Enron stock collateral for the $100 million in personal loans that he had used to diversify his portfolio. Thus, as the collateral value fell and margin calls resulted, Lay used the most efficient facility at his disposal to repay about $70 million of debt in 2001 — i.e., the proceeds from draws on his company line of credit, which he repaid with his Enron stock.

During his cross-examination of Lay, Hueston hammered Lay relentlessly over the fact that Lay did not disclose to Enron employees in late October, 2001 that he was using Enron stock to repay the line of credit, on one hand, while advising the employees at the same time that he was purchasing Enron stock and that the stock remained a good value, on the other. However, Hueston is simply wrong in his contention that Lay was dumping Enron stock at a time when he was advising employees and the market that it was a good value. In September 2001, Lay accepted $10 million in cash and another $10 million in Enron stock in return for agreeing to step back into the CEO role after Skilling resigned, and Lay used the $10 million in cash to repay a portion of his margin loans. In so doing, Lay effectively bought $10 million in Enron stock, meaning that Lay acquired over $20 million in Enron stock roughly a month before he made the statements to Enron employees of which Hueston complains. Consequently, even though Lay was also paying his line of credit with Enron stock at the same time, his acquisition of another $20 million in Enron stock is consistent with the optimistic view about Enron that Lay was communicating to employees and the public. In his quest to demonize Lay, Hueston simply ignores that fact.

So at the end of the day, Hueston falls squarely into what Gladwell calls the Higgs Boson syndrome with regard to answering Gladwell's question. Hueston is gung ho for nailing Skilling and Lay, but he just can't plainly explain their guilt without leaving out important parts of the story. Of course, it is far easier to conclude that someone is guilty of a crime if you start from the presumption that they are guilty of the crime.

In reality, Hueston's view simply plays to the real presumption in the case against Skilling and Lay -- that Skilling and Lay were rich, Enron went bust, and investors had big losses, so Skilling and Lay must be guilty of something. Although they made some bad business judgments (as well as some very good ones, too), Skilling and Lay are not the villians that Hueston and many in the mainstream media portray them to be. Skilling and Lay may not have been saints, but it should give us all pause that the government's overwhelming prosecutorial power has been manipulated to hand them effective life sentences for, at worst, denying that their business dream had ended.

Posted by Tom at 8:32 PM | Comments (3) |

January 2, 2007

Malcolm Gladwell on Enron

Malcolm Gladwell, he of Tipping Point fame, has authored this must-read New Yorker article on the demise of Enron. Although Gladwell gets a couple of things wrong, his article provides a refreshingly candid and objective view of what happened to Enron and highlights several aspects of the company's demise that makes criminalization of the affair so troubling. Reading Gladwell's account along side this earlier post on the case against Jeff Skilling, is there really any meaningful doubt that an enormous injustice has occurred in regard to the conviction and sentencing of Skilling to 24 years in prison?

By the way, these observations are quite interesting regarding a lecture that Gladwell recently gave in Dallas.

Posted by Tom at 12:07 PM | Comments (3) |

December 12, 2006

The mob must wait awhile longer

As noted here last week, an angry mob lynched Jeff Skilling.

On Monday evening, the Fifth Circuit Court of Appeals postponed the final stage of the lynching while it considers his motion to remain free pending disposition of Skilling's appeal of the lynching.

Meanwhile, media members of the mob were already checking out the gallows when the Fifth Circuit issued its order postponing Skilling's report date. What a way to make a living.

By the way, the Chronicle article on the Fifth Circuit's postponement of Skilling's report date quotes as one of its legal "experts" the local lawyer who went on national television immediately after Ken Lay's death and suggested that Lay had killed himself so that his conviction could be voided.

I guess it's hard to find objective experts among members of a mob.

Update: Skilling's reprieve was short-lived as the Fifth Circuit issued this order earlier this evening lifting the postponement of the deadline to report. Although certainly disappointing for Skilling, the order's language indicates that the panel that considered Skilling's motion is clearly troubled by what occurred in Skilling's trial and signals that the panel believes that Skilling has a reasonable chance of success on at least a substantial portion of his appeal.

Posted by Tom at 4:16 AM | Comments (1) |

December 8, 2006

The injustice of the Jeff Skilling case

In a few days, unless the Fifth Circuit grants his motion to remain free on bond pending appeal of his conviction, Jeff Skilling will report to prison to begin serving a 24-year prison sentence. The image of Skilling entering that Minnesota prison will be a powerful reminder of the utter failure of the American criminal justice system in the case against him and others caught up in the Enron maelstrom.

Given the societal bias against Skilling and nearly everything else related to Enron, it's not all that surprising how little most people know about the case against Skilling. "Wasn't he prosecuted for Enron's fraudulent accounting?" I am often asked. Well no, he was not. The government dropped those charges.

"Well then," they ask. "Wasn't he prosecuted for causing Enron to go bankrupt?" Again, no, I reply patiently, Enron Task Force prosecutors repeatedly declared throughout Skilling's case that they were not prosecuting him because Enron failed. Of course, those same prosecutors quickly dispensed with that myth during Skilling's sentencing hearing when they blamed him for Enron's failure so that they could heap a huge prison sentence on him. But that's another issue.

"But wait," they invariably say. "Didn't they go after him because of those shady partnerships that he did with that guy Fastow?" No, I point out, the prosecutors didn't even attempt to prove that any of those special purpose entities ('SPE's) were illegal.

"Well, shoot" most folks finally throw up their arms in exasperation. "He's rich and a bunch of people lost money when Enron went down the tubes. He must have done something criminal."

I have had literally hundreds of conversations similar to the foregoing. The ugly reality is the same one that we didn't want to confront when Ken Lay died and one that we resist confronting now -- Jeff Skilling was lynched by an angry mob.

The primary justification that the mob gives for the absurdly-long sentence for Skilling almost always 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 there is nothing wrong with having 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 melted down 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. Probably, most of them simply did not understand how Enron's risk management services created their wealth in the first place. Thus, when that wealth evaporated during Enron's meltdown, they didn't even try to understand what had occurred. They simply joined the unruly mob calling for Skilling's scalp.

The mainstream media -- always quick to embrace a simple morality play with innocent victims and dastardly villians, regardless of its validity -- was not about to complicate the story by pointing out that the investors could have hedged their risk of loss by buying insurance quite similar to that which Skilling developed in creating their wealth in the first place. Thus, instead of attempting to tell the entire story, much of the mainstream media simply became a part of the mob. 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 to Skilling and others.

Although the Enron Task Force has succeeded in securing some convictions for the anti-Enron mob, the mob's work has not withstood scrutiny on appeal. After the mob had caused enormous wealth destruction and job loss by indicting and convicting Arthur Andersen, the Supreme Court unanimously reversed the conviction, concluding that the Task Force had obtained an improper mens rea instruction that allowed the jury to convict the firm for merely negligent or innocent conduct. Then, in the Nigerian Barge case (see also here), the Fifth Circuit reversed the Merrill Lynch defendants' convictions (but only after each of them had been forced to endure a year in prison) because the Task Force had pressed for an improper "honest services" theory of liability that stretched the wire fraud statute beyond any reasonable interpretation. Finally, after the spurious conviction of former Enron Broadband Services executive Kevin Howard, the Task Force recently conceded that the Fifth Circuit's decision in the Nigerian Barge appeal requires that all but one of the counts of conviction be vacated.

In fact, you won't read about it much in the mainstream media, but Skilling's appeal presents the same issues as Andersen and the Nigerian Barge case. As in Andersen, the Task Force in Skilling's case successfully argued at trial for an improper mens rea instruction on "deliberate ignorance" that invited the jury to convict Skilling based on a civil, "should have known" standard of liability. Similarly, the Task Force rested its core conspiracy count and the ensuing substantive charges against Skilling on the same "honest services" theory of criminal liability that the Fifth Circuit rejected in the Nigerian Barge case,

So, just what was it again that Skilling did that could possibly justify a 24-year prison sentence for a man who was not even accused of stealing a dime from his company? As our criminal justice system places this man in a prison cell for perhaps the rest of his life, take a few minutes to review the following summary analysis of what Skilling was accused of doing and the evidence that was presented at trial relating to those charges. It's a foreboding tale for those who understand the fragile nature of justice and the rule of law in even a civil society.

In February 2004, after three years highly-publicized investigation, the Enron Task Force filed a sweeping 35-count indictment against Skilling, alleging conspiracy to commit securities fraud, securities fraud, wire fraud, making false statements to Enron's external auditors, and 10 counts of insider trading. The same indictment contained 11 counts against former Enron chairman and CEO Ken Lay and another 34 counts against former Enron chief accounting officer Richard Causey. Just days before the trial was scheduled to commence, Causey pled guilty to one count of securities fraud in exchange for a maximum seven-year sentence with the possibility of less time should he cooperate with the Task Force (he was eventually sentenced to a 5.5 year prison term).

At the outset, it should be noted that it is impossible to determine what specific fraudulent conduct the jury concluded that Skilling committed because the jury returned only a general verdict (Skilling's lawyers requested that a special verdict to the jury, but U.S. District Judge Sim Lake denied that request). As noted above, Skilling was not charged with causing Enron's bankruptcy and, unlike Enron's chief financial officer, Andrew Fastow, Skilling was not charged with self-dealing, stealing or other acts by which he directly profited from the company. Indeed, Fastow later conceded during his testimony that he had successfully concealed his fraud from Skilling and others at the company.

At trial, the Task Force's case against Skilling was based almost entirely on the testimony of cooperating witnesses, all of whom agreed to testify in exchange for leniency and favorable sentencing recommendations from the Task Force. Dozens of other witnesses who would have provided exculpatory testimony for Skilling were "iced" by the Task Force from testifying out of fear that they would be indicted if they did so. The Task Force's case relied on virtually no documentary proof -- in fact, there were no documents or other pieces of tangible evidence directly implicating Skilling in any crime.

Skilling's defense was simple and straightforward. He essentially contended the following:

Enron was a sound company that was enduring the transient post-bubble pressures that many public companies were facing during much of 2001;

There was no wide-ranging conspiracy to cook Enron's books or lie about the company;

The challenged statements made to the public were true and that the challenged financial transactions were proper; and

Most of the cooperating witnesses pled guilty because of fear and pressure, not because they had committed crimes.

The theory of Skilling's defense is particularly important because it did not rely on an "I didn't know" or "ostrich" defense. Nevertheless, the Task Force convinced the Judge Lake to give the jury a "deliberate ignorance" jury instruction and other instructions permitting the jury to convict Skilling for depriving Enron of his "honest services." As is now clear Fifth Circuit law, such a theory of liability applies only where the defendant looted from the company or engaged in self-dealing. Those faulty jury instructions are now at the core of Skilling's appeal of his conviction.

Despite the myriad of claims that the Task Force initially asserted in its indictment against the Skilling, the Task Force's case against Skilling at trial ultimately boiled down to only seven discrete areas:

1. Use of SPEs/LJM Partnership to misrepresent Enron's financial condition;

2. Use of Enron Wholesale reserve accounts to misrepresent Enron's financial condition;

3. Misrepresentation of Enron Energy Services' financial condition;

4. Misrepresentation of Enron Broadband Services financial condition;

5. Misrepresentation of Enron's third quarter 2001 earnings;

6. Involvement in filing false SEC Annual and Quarterly Reports; and

7. Skilling's September 17, 2001 Enron stock sale.

The following is a summary of the evidence on each of the foregoing areas:

Use of SPEs/LJM Partnership. As with the Nigerian Barge case and the Kevin Howard case, the Task Force argued at trial that Enron's off-balance sheet accounting treatment for several transactions entered into with the LJM Partnership -- one of Fastow's infamous SPE's -- was rendered fraudulent by virtue of "secret side deals" between Skilling and Fastow. To prove the side deals, the government relied on the testimony of Fastow, former Enron treasurer Ben Glisan, and a former junior Enron finance division executive, Christopher Loehr.

With the exception of Fastow, no witness directly implicated Skilling in the alleged oral side deals. Loehr never mentioned Skilling in his direct testimony, stating only that he had heard from Fastow about an understanding with Enron. Glisan testified that he had no knowledge of Skilling giving an oral guarantee or verbal assurance on any deal. Indeed, with respect to the Nigerian Barge transaction, Glisan testified that he heard that an "oral assurance" came from Causey, not Skilling. Likewise, Glisan's notes indicated no improper dealings involving Skilling. The Task Force elected not to call Causey as a witness. Even Fastow conceded that Skilling never used the word "guarantee" in their conversations and that Skilling's alleged "bear hug" in regard to the Cuiaba transaction was not legally enforceable. The Task Force produced no documents, emails, memos, or notes that corroborated Fastow's testimony regarding the alleged side deals.

Skilling denied having made any oral side agreements or secret guarantees, or being aware of anyone else at Enron making them. He explained that Enron's internal and external accountants and lawyers reviewed each of the transactions and signed off on the accounting treatment. Moreover, although accountants such as Glisan and former Arthur Andersen partner Tom Bauer testified that an oral guarantee would invalidate Enron's accounting of the LJM transactions, the Task Force did not ask either one whether the words that Fastow alleged Skilling said to him -- "you won't get hurt; you won't lose any money" -- constituted such a guarantee or would invalidate the accounting treatment.

Wholesale Reserve Accounts. The Task Force attempted to prove that Enron improperly manipulated its earnings by adjusting reserve accounts in the company's Wholesale business unit. Former Enron accountant Wesley Colwell and former Enron Wholesale executive David Delainey testified that they personally used reserve accounts to meet quarterly estimates, and Andersen accountant Bauer opined that such use of reserves violated accounting rules.

However, the Task Force introduced no evidence that Mr. Skilling authorized, directed or even knew about any improper use of reserves. Colwell's interactions were solely with Causey. Colwell testified that Causey had told him that Skilling would "like an additional two pennies of earnings" in the second quarter of 2000 and later, in the fourth quarter of 2000, that Mr. Skilling would like to "land the quarter" on a specific number. But the Task Force introduced no direct evidence that Skilling's alleged statements -- or even the statements of Causey, for that matter -- directed or even suggested to Colwell that he should improperly use reserves to meet earnings or revenue targets.

As with his testimony regarding the SPE's, Skilling testified that Enron's experts on establishing reserves advised him that the reserve amounts were appropriate. Accounting expert Walter Rush, who appeared as an defense expert (the Task Force did not call an independent expert on this issue), testified about the accounting rules applicable to reserve accounts and concluded that the reserve amounts for both second and fourth quarters of 2000 were proper and lawful. Likewise, Andersen accountant Bauer confirmed that Arthur Andersen had independently reviewed the reserve amounts each quarter and determined them to be the appropriate number. Finally, the evidence at trial reflected that the second quarter reserve ended up being almost precisely equal to the value of the contingency for which it was originally established, and that the fourth quarter volatility reserve tracked almost exactly the volatility in the marketplace.

Enron Energy Services. The Task Force attempted to prove that Enron and Skilling lied about EES's growth while simultaneously hiding mounting EES debts. Relying on the testimony of Delainey, Timothy Belden, and Wanda Curry, the Task Force asserted that EES first moved an uncollectable receivable to the 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 issue"). According to the Task Force's theory, these events occurred solely to make EES look more profitable than it really was.

The various witnesses expressed different opinions as to the reasons for the moves with regard to EES, but not one of them stated that someone had told them that the reason for the moves was to bolster EES's profitability. Likewise, not one of the witnesses attributed knowledge of that alleged motive to Skilling. With respect to the transfer of the fourth quarter 2000 receivable, the Task Force did not dispute that Arthur Andersen had analyzed the transfer and approved the accounting treatment. Defense witness Diann Huddleson testified that Enron management believed it could collect on the receivable and ultimately did collect the majority of the outstanding amount.

As for the resegmentation issue, Skilling testified that moving the risk book 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 government's primary witness on this issue, conceded that he ultimately recommended to Skilling that the risk book be moved and accounting expert Rush testified that the transfer complied with applicable accounting rules.

Enron Broadband Services. The government attempted to prove that Enron lied about the health of EBS through the testimony of former Broadband executives Ken Rice and Kevin Hannon, and former Enron investor relations executives Mark Koenig and Paula Rieker. They testified that the floundering unit had no customer base and propped up its revenue numbers through the sale of dark fiber, investment returns, and monetizations, all of which constituted non-core activities. They also testified that Skilling told analysts that EBS was a strong division with sustainable high earnings power when, at the same time, the unit was starting to lay off employees.

The Skilling defense refuted all of that testimony. Documentary evidence showed that EBS experienced substantial growth during 2000 in volumes traded and number of counterparties, and that Enron repeatedly had disclosed sales of fiber through monetizations as part of EBS's business. As to the allegations regarding layoffs, both government and defense witnesses refuted the Task Force's allegations. Marla Barnard, former head of human resources for EBS, testified that she developed the redeployment plan and it was a bona fide redeployment. Task Force witness Hannon also confirmed that the EBS employee reassignments were the result of a redeployment, not a layoff.

Third Quarter 2001. Skilling announced his resignation to Enron's Board early in the third quarter of 2001 and resigned on August 14, 2001. As a result, he could not have participated in the alleged third quarter frauds and misrepresentations. Nevertheless, the Task Force attempted to connect him to information discussed during an August 13, 2001 joint meeting of the Board, which the Task Force claimed should have been disclosed to the public.

Rieker, Koenig, Glisan, and Fastow testified about two parts of that meeting. The first was a liquidity presentation that previewed a series of events that could result in a bankruptcy of Enron and also showed that Enron had recorded several assets at a combined $5 billion dollars above their present value. The second was a discussion about several challenges facing the company, including EES and EBS income issues, Wholesale trading and the Raptor transactions, all of which had increased the company's financial risks.

Skilling explained in his testimony that there was nothing fraudulent or even particularlry unusual about the liquidity presentation. It had been prepared at his direction by the company's Risk Assessment and Control Department as part of established procedures to manage Enron's risks. The presentation analyzed several extreme risk scenarios, including nuclear disaster, credit downgrade, recession and hurricane. Notably, the presentation concluded that, even under these highly unlikely worst-case scenarios, Enron would be able to survive.

Similarly, Skilling refuted the allegation that Enron's asset portfolio was inflated. The asset valuation question had been referred to the accountants, who opined that an impairment was not necessary. In addition, documentary evidence indicated that the valuation was preliminary in nature and based on dated models. The lower estimate of value that Skilling provided was his best estimate as to what Enron could generate for the assets in a "fire sale" given unfavorable foreign currency markets. Finally, with respect to the business challenges that Enron faced, these were all issues that management and the board knew needed special attention, but they were not particularly unusual for a company of the size and complexity of Enron and did not present revenue concerns. On the contrary, the Skilling defense presented evidence that corroborated Skilling's view that Enron was in great shape when he resigned.

SEC Annual and Quarterly Reports. The Task Force argued that Skilling, along with Causey, was responsible for the preparation, drafting, and accuracy of Enron's financial statements. In the Task Force's view, any proven misrepresentation not disclosed in the financial statements was unlawful. Although Skilling was responsible for the accuracy of those statements, he did not prepare or draft them. Rather, he reviewed them at the very end of a lengthy preparation and review process, which involved scores of business unit personnel, accountants, and lawyers. Defense witness and former Enron general counsel Jim Derrick testified about this process and stated that Skilling had never once overruled a recommendation concerning preparation of Enron's financial statements. Derrick's testimony was uncontroverted at trial.

September 17, 2001 Sale of Stock. Skilling was acquitted on all counts of insider trading except for his sale of 500,000 shares of Enron stock for approximately $31 dollars per share on September 17, 2001. The Task Force contended that Skilling knew about the alleged criminal conspiracy at Enron and chose to unload his stock before the fraud was disclosed. The Task Force further alleged that Skilling met with Lay and others at Enron after his resignation, and intimated that Skilling must have known about the Sherron Watkins memo and related investigation. That allegation was unsubstantiated by any testimony or evidence during the trial.

The actual evidence at trial showed that Mr. Skilling's historical trading patterns were inconsistent with a scheme to pump and dump Enron stock. From January 1999 until he left Enron in August 2001, Skilling increased his stock holdings by 255%. Moreover, as Skilling explained, and contemporaneous tape recordings and the testimony of witness Glenn Ray corroborated, he received no inside information after his departure from Enron, did not trade on any inside information and did not have a plan to sell his Enron stock prior to September 11.

Shortly after resigning, Skilling shorted the stock of one of Enron's competitors, AES Corp. As a result, Skilling was considering selling shares of Enron on September 6, 2001 to create what is known as a bull hedge to spread risk throughout his portfolio. However, Skilling's broker advised him that he could not execute the sale at that time because he had not yet received a letter from Enron confirming Skilling's resignation. After additional discussion with the broker, Skilling elected not to sell any Enron shares at that time. After September 11, Mr. Skilling (along with most investors) became concerned about the effect that the event would have on the market and sold a large portion of his Enron shares on the day the markets reopened. By then, Skilling and his broker had been advised by Enron general counsel Derrick and SEC lawyer Rex Rogers that he was free to sell Enron stock.

After Enron melted down, the SEC, toward the end of a lengthy examination of Skilling, asked him why he sold the 500,000 shares of Enron stock on September 17, 2001. Skilling replied that he feared the market reaction to the tragic events of September 11. The SEC then asked if there was any other reason why he sold the stock, and Skilling replied, "[t]here was no other reason other than September 11th that I sold the stock." The SEC followed up, asking if Skilling had a plan to sell his Enron stock before September 11, and he replied "no."

At trial, the Task Force argued that Skilling's tape-recorded conversation with his broker on September 6 proves that he lied to the SEC and that his trial testimony that he had forgotten about the September 6 call was not credible. However, Skilling's September 6 broker call was hardly a part of any plan to liquidate his Enron position -- he was simply exploring whether to sell some stock as a part of a bull hedge. When he discovered that he could not do so at that time, he moved on to other matters with the broker and soon thereafter terminated the call. Inasmuch as Skilling sold 2.5 more shares of Enron stock on September 17 than he was contemplating selling on September 6, it is certainly reasonable that Skilling could have simply forgotten about his September 6 conversation with the broker, particularly given that he was asked about it during the SEC examination at the end of a long day.

So, there you have it. Is that a record that even comes close to being enough to throw a talented and tortured man behind bars for most of the rest of his life? Not in a truly civil society. 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 when the markets became spooked by revelations about Fastow embezzling millions in the volatile months after September 11, 2001.

Fastow's embezzlement 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 the angry anti-Enron mob convicted Jeff Skilling, trumping the rule of law and the dispassionate administration of justice along the way. The truth is that 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. Here's hoping that Skilling's unjust conviction and sentence are reversed on appeal. Not only for his benefit, but for ours.

Posted by Tom at 4:49 AM | Comments (12) |

November 14, 2006

Another dirty secret of the Enron Task Force

Former Enron chief accountant Richard Causey will be sentenced tomorrow by U.S. District Judge Sim Lake, and Causey's sentencing hearing highlights another of the Enron Task Force's dirty secrets that the mainstream media has largely ignored in favor of demonizing former Enron executives.

When Causey entered into his plea deal on the eve of the Lay-Skilling trial (see also here), most folks figured that the Task Force would use him as a key witness against his former co-defendant Skilling. The Task Force needed Causey to corroborate former Enron CFO Andrew Fastow's testimony regarding the Global Galactic agreement, the alleged secret handwritten agreement between Fastow and Causey under which Causey supposedly provided Enron's assurance -- allegedly with Skilling's blessing -- that Fastow's various special purpose entities would receive a guaranteed rate of return for investing in Enron assets. Inasmuch as those SPE transactions removed a substantial amount of debt and underperforming assets from Enron's balance sheet, a key contention in the Task Force's charges against Skilling and Lay was that Global Galactic proved that Enron's SPE transactions were shams that helped Skilling and Lay illegally disguise the company's deteriorating financial condition. So, Global Galactic was a pretty important element in the Task Force's case against Skilling and Lay.

During his Lay-Skilling testimony, Fastow sang like a canary about the Global Galactic agreement, although the existence of the agreement became more suspect the more Fastow talked about it. Meanwhile, the Task Force never called Causey to testify during the Lay-Skilling trial, probably because Causey would not corroborate Fastow's testimony regarding Global Galactic. And that's not the only dirty secret of the Task Force (see here and here), nor the only lie that Fastow told during his testimony.

Thus, Fastow -- who stole millions and then lied to help convict Skilling and Lay -- is doing a six-year sentence and will be out in about five. On the other hand, Causey -- who didn't steal a dime and refused to corroborate Fastow's lies -- will probably serve more time in prison than Fastow.

Is this how we want to go about learning the truth about what really happened at Enron? Ellen Podgor has more here.

Update: Judge Lake sentenced Causey to five and a half years in prison.

Posted by Tom at 4:55 AM | Comments (2) |

November 3, 2006

Berkowitz cashes in

So, as Peter Lattman reports, most recent Enron Task Force director Sean Berkowitz is the latest in a long line of former Task Force prosecutors who parleyed prosecuting unpopular Enron executives into a more lucrative career than government work. Berkowitz led the team that obtained convictions against Jeff Skilling and Ken Lay, but his main attribute as the Task Force director is that he was not as bad as his predecessor, Andrew Weissmann, who was primarily responsible for the economic and human carnage of putting Arthur Andersen out of business and of sending four Merrill Lynch executives to prison for over a year before their utterly unjust convictions were vacated and, in one case, reversed.

However, one interesting item about Berkowitz arose shortly after the Lay-Skilling trial when the New York Magazine reported that Berkowitz was having a whirlwind romance with Bethany McLean, the co-author of the original Enron expose', Smartest Guys in the Room. Inasmuch as McLean had covered the trial for Fortune magazine, both Berkowitz and McLean were careful to state publicly that they didn't start dating until after the conclusion of the trial. However, several reporters who covered the trial confided to me after the romance became public that they had suspected something was up between the two during the trial because of how chummy they had become.

All of which reminded me of something that occurred at an early stage of the Lay-Skilling trial. Taking a page from this earlier post that criticized the Wall Street Journal's coverage of the trial, lead Skilling lawyer Daniel Petrocelli sent a letter to the Fortune editor pointing out the rather clear conflict of interest that McLean and her Smartest Guys co-author, Peter Elkind, had in covering a trial in which they had a vested interest in the outcome. As this Talk News Biz post relates (the entire letter, published by Fortune on March 2, is here, but you have to scroll down), Petrocelli noted as follows:

“It is ironic that so much of Elkind and McLean’s criticism of Enron has been based on their claimed outrage about a confict of interest at Enron. These two have an obvious financial interest in having the trial — or at least the public’s perception of the trial — turn out consistent with the one-sided and ultimately cartoonish depiction of Enron and my client in their book and in the so-called documentary to which they have lent their names and other support.”

To which the Fortune Editor -- presumably not yet aware of the budding Berkowitz-McLean relationship -- replied self-righteously as follows:

“Peter Elkind and Bethany McLean are journalists of the highest reputation, as well known for their integrity as they are for their knowledge of Enron. While they have certainly chronicled the failings of the company and its management, they have neither a rooting interest nor a financial interest in the outcome of the trial.”

Yeah, right.

Posted by Tom at 4:40 AM | Comments (2) |

October 25, 2006

The media's mistreatment of Jeff Skilling

As noted here, here, here and several other times on this blog over the past couple of years, the mainstream media's coverage of the Enron-related criminal trials has been spotty at best, shameful at its worst, particularly as it embraced and perpetrated the Enron Myth in reporting on the trial and sentencing of Jeff Skilling. Thus, this Ayn Rand Institute press release of yesterday caught my attention:

The Media's Mistreatment of Jeff Skilling

Irvine, CA--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 misportrayal 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 mainstream media's slanted coverage of Enron in general and Skilling in particular is a subject that is ripe for examination. We have not heard the last of this issue.

Posted by Tom at 4:31 AM | Comments (3) |

October 24, 2006

What Skilling was really sentenced for

Former Enron CEO Jeff Skilling was sentenced on Monday to spend most of the rest of his life in prison for causing Enron's bankruptcy and resulting loss to investors. However, Skilling was neither prosecuted nor convicted for that crime.

Skilling began working at Enron in 1990 as the sole employee and head of a wholesale division, was made president and chief operating officer of Enron in 1997, and was eventually elevated to CEO in February 2001. During his tenure, Enron grew into an international, multi-billion dollar corporation with earnings that rose from a couple of hundred million dollars in 1990 to $1.6 billion in 1998, of which his trading division produced over half. By 2000, Enron's revenue had risen to $100 billion and, as of August 23, 2000, Enron’s stock price peaked at $90 per share. Skilling resigned about a year later, by which point the stock had declined 51% in a troubled post-bubble market for energy and broadband companies. From January 1999 until he resigned in August 2001, Skilling increased his stock holdings in Enron by over 250%

After listening to Enron’s October 23, 2001 conference call with market analysts, Skilling called Enron chairman Ken Lay and asked to return to the company. On the heels of revelations about former CFO Andy Fastow's embezzlement of millions from the company, Enron was caught in the beginning stages of losing the trust of the marketplace, and Skilling believed that his return would send a strong signal to the market of his confidence in the strength of the company. The company declined Skilling's offer, at which time Skilling attempted to arrange a liquidity infusion -- including most of his net worth -- to stem the company's death spiral. The efforts failed and Enron filed a chapter 11 case on December 2, 2001.

So, if Skilling wasn't convicted of causing Enron's failure, then what is it that he is being thrown in jail for until he is in his mid-to-late 70's? For allegedly lying about Enron's financial condition (and one throw-in count of insider trading). But even though Skilling's alleged lies may have changed the identity of the investors who ended up holding the bag when Enron failed (a group that included himself, by the way), they did not cause Enron's failure. And it goes without saying that Skilling was given no credit whatsoever during his sentencing for contributing to the creation of enormous wealth for investors in many valuable markets.

So, make no mistake about it -- Jeff Skilling was not sentenced yesterday in regard to the crime for which he was prosecuted and convicted. Rather, he was sentenced for causing Enron's failure. There is a big difference between those two crimes, and a quasi-life sentence for Skilling fails to distinguish between them.

Posted by Tom at 4:18 AM | Comments (3) |

October 22, 2006

The Skilling sentencing hearing

Former Enron CEO Jeff Skilling's sentencing hearing is Monday afternoon, so it's a good time to provide some links that will provide a basis for an objective evaluation of Skilling's case as a counterbalance to what the mainstream media typically serves up.

By now, we all know the myth -- Enron was merely an elaborate financial house of cards that a massive conspiracy led by the greedy and lying Skilling and the late Enron chairman Ken Lay hid from innocent and unsuspecting investors and employees. The Enron Myth is so thoroughly 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 Skilling and Enron.

The power of the Enron Myth and the real presumption in the criminal case against Skilling are such that an objective jury probably could not have been found in Houston and the jurors who did serve dispensed with critical thinking skills when confronted with the biggest business conspiracy even alleged in the history of federal prosecutions. Given the power of the Enron Myth, the jurors were content with a prosecution that cast Skilling as a liar about Photofete and his one sale of Enron stock after he left the company, and ignored the paucity of evidence of any massive conspiracy or even the true reasons why Enron collapsed. That same view has been readily embraced by a wide-range of societal forces, such as publicity-seeking politicians who don't allow facts to get in the way of demonizing unpopular entreprenuers for political gain, government prosecutors who improperly expand the reach of criminal laws to further their careers, supposedly "objective" journalists who work literally hand-in-hand with the Enron Task Force or who simply perpetuate the myth in spite of the facts, competing businesspeople and lawyers seeking to profit from Enron's demise, and a general public that finds it easy to resent wealthy businesspeople, particularly after the bursting of a stock market bubble. The myth is so pervasive and accepted -- why bother with the truth?

The carnage of the Enron Myth is now piled high -- the destruction of Arthur Andersen, the death of Ken Lay, the outrageous prosecution and imprisonment of the four Merrill Lynch executives in the Nigerian Barge case, Richard Causey, Kevin Howard, Christopher Calger, the NatWest Three -- the list goes on and on. In the wake of such destruction of careers and lives, the public is even less willing to confront the vacuity of the myth and the destructive dynamics by which it is perpetrated. In fact, any challenge to the myth is now commonly met with derision and appeals to even more resentment over the Enron failure.

As noted originally here and in many subsequent blog posts, it is far more likely that the truth about Enron is that no massive conspiracy existed, that Skilling and 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 market conditions when the markets were spooked by revelations of the embezzlement of millions of dollars by the company's CFO and his relative few minions.

That Jeff Skilling did not predict that Enron would fail under those conditions does not make him a criminal. Unlike his main accusers Andy 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 post-bubble market conditions during 2001? Sure, 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 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 throw away the keys, but examining objectively what really occurred at Enron is far more likely to result in real justice.

Here are some links to prepare you for the Skilling sentencing hearing:

Peter Henning analyzes the Skilling sentencing issues here, while Doug Berman provides a handy archive on Enron-related sentencing issues;

The trial penalty issue in the Skilling sentencing is explained here and in this Ellen Podgor post (also here), while this post previews the Skilling appeal issues;

Larry Ribstein places the Skilling sentencing in the perspective of the government's purchase of testimony with pleas and questions the legitimacy of this policy;

Skilling's fascinating testimony during his trial is summarized here and here, and this post analyzes the immediate aftermath of the jury verdict against him; and

Finally, Skilling's legacy of beneficial risk-taking, an interesting letter to Judge Lake, and what might have been had Ken Lay made a different decision in 1997.

Posted by Tom at 4:05 AM | Comments (0) |

October 17, 2006

Judge Lake dismisses the indictment against Ken Lay

US District Judge Sim Lake has overruled the Enron Task Force's dubious opposition and dismissed the indictment against the late Enron chairman, Kenneth Lay. Judge Lake's memorandum opinion is here, and his conclusion pretty well says it all:

Since the Fifth Circuit Court of Appeals has adopted the abatement rule, and since . . . the United States . . . has raised any legal basis for denying the rule’s application in this case, the court concludes that Lay’s conviction must be vacated and that this action against him must be dismissed. Accordingly, the Motion of the Estate of Kenneth L. Lay to Vacate His Conviction and Dismiss the Indictment (Docket Entry No. 1082) is GRANTED, . . . The indictment against Kenneth L. Lay is DISMISSED.

As noted earlier here, here and here, I don't believe Ken Lay was guilty of anything other than making some bad business decisions (among many good ones, too). Dismissing the charges against his legacy is not only the right thing to do legally, but also morally.

Posted by Tom at 3:07 PM | Comments (0) |

October 14, 2006

The trial penalty issue in the Skilling case

One of the many troubling aspects of the Enron Task Force's prosecution of former Enron CEO Jeff Skilling is the "trial penalty" that Skilling faces in connection with his sentencing (which is next Monday, October 23rd) -- that is, the additional time that Skililng faces in prison because he chose to assert his Constitutional right to defend himself against the government's charges in comparison to similarly-situated defendants, such as former Enron CFO Andrew Fastow (six years) -- who copped a plea under a cooperation agreement with the Task Force -- or former Enron chief accountant Richard Causey (no more than seven years), whose deal with the Task Force does not include an obligation to cooperate in other cases.

Exhibiting the same professional integrity that Joseph Grundfest recently displayed in the sad case of Jamie Olis, University of Illinois law professor and criminal law expert Margareth Etienne has filed this amicus curie brief in connection with the October 23rd Skilling sentencing hearing. Professor Etienne bears down on the key issue (citations are omitted):

[A] plea discount must be differentiated from a trial penalty. A plea discount--or a limited reduction such as acceptance of responsibility that takes into account factors such as a guilty plea--have been deemed constitutional; but a trial penalty--a punishment for exercising Fifth and Sixth Amendment rights--would clearly be unconstitutional insofar as it would violate the "unconstitutional conditions" doctrine. The "unconstitutional conditions" doctrine simply states that the imposition of a penalty for exercising a constitutional right creates an unconstitutional condition. Imposing a sentence on Mr. Skilling that is several times that of the sentences faced by his co-defendants--when the only material distinction between their cases appears to be Mr. Skilling's decision to go to trial--strongly suggests that Mr. Skilling is being penalized for exercising his constitutional rights. This is particularly true in a determinate sentencing (or guideline) regime where the potential benefits bestowed on co-defendants for acceptance of responsibility (and cooperation with the government, when applicable) are easily quantifiable.

Accordingly, the question for sentencing courts is whether there is a point at which a permissible plea discount becomes an impermissible and unconstitutional trial penalty. At the very least, when the disparity in sentences between similarly situated defendants can no longer be attributed to easing the government's burden by entering a resource-saving guilty plea, such a disparity risks being an unconstitutional trial penalty. Such an unjustified disparity, when it violates norms of fundamental fairness and proportionality, may also rise to the level of a Fifth and Fourteenth Amendment violation.

Not only is the trial penalty a horrifying injustice for individuals such as Skilling, it is also a substantial factor in the great waste of the government's dubious regulation of business-through-criminalization policy.

Posted by Tom at 7:49 AM | Comments (2) |

October 13, 2006

What happened behind closed doors in regard to the Fastow sentence?

As noted earlier here, the six-year prison sentence handed down earlier last month to former Enron CFO Andrew Fastow was surprising on several levels, not the least of which was that the Enron Task Force elicited extensive testimony from Fastow during the Lay-Skilling trial that his minimum sentence would be ten years. The purpose of that testimony was to make Fastow appear to be more credible to the Lay-Skilling jury -- he was going to do at least ten years, so he supposedly didn't have any incentive to lie in order to reduce his sentence.

Thus, it was somewhat surprising that, in the run-up to the Fastow sentencing hearing, Fastow's attorneys requested a sentence of less than ten years and there was nary a peep from the Task Force objecting to the request. Then, at the sentencing hearing, the Task Force prosecutors at least tacitly supported the less-than-ten-year sentence by not objecting to Fastow counsel's requests for leniency to U.S. District Judge Ken Hoyt and even extolling Fastow's "cooperation" with the Task Force in regard to the Lay-Skilling trial. Indeed, one of the most surprising aspects of the Fastow sentencing hearing is that neither the Task Force prosecutors nor Fastow attorneys disclosed to Judge Hoyt during the sentencing hearing about Fastow's contrary testimony during the Lay-Skilling trial.

Or did they? According to this Tom Fowler/Houston Chronicle article, Task Force prosecutors and Fastow's attorneys met with Judge Hoyt in chambers during a transcribed meeting the afternoon before Fastow's sentencing. The transcript of that meeting has not been made public and none of the participants is talking about what was discussed. The Chronicle has filed a motion to unseal the transcript (download a copy here) and neither Fastow nor the Task Force is really opposing the Chronicle's motion (Fastow has requested that matters regarding his personal medical condition be redacted from the transcript).

But what is really odd about all this is that Fowler reports that the Task Force, in a recent filing that is not yet publicly available, states that it wants to review the transcript of the closed-door meeting because "[t]he government is currently assessing whether to file a notice of appeal of the sentence imposed on Mr. Fastow, and it cannot make that determination without a copy of the transcript of the pre-sentencing hearing."

Note to Task Force -- it's hard to appeal rulings successfully when you do not object to the ruling in the first place.

Posted by Tom at 4:21 AM | Comments (0) |

October 12, 2006

Previewing the Skilling appeal

Former Enron CEO Jeff Skilling filed a motion for bail pending appeal earlier in the week (download a copy here; Carrie Johnson's WaPo article on the motion is here) and, in so doing, previews the major issues that he will emphasize in his upcoming appeal of his conviction on conspiracy, securities fraud and insider trading charges: the "deliberate ignorance" jury instruction; the Task Force's application of the "deprivation of honest services" theory upon which most of the conviction is based; failure to transfer the venue of the trial and related jury bias issues; and the Task Force's prosecutorial misconduct, particularly in effectively precluding witnesses with exculpatory testimony for Skilling from testifying during the trial by threatening those witnesses with prosecution if they were to do so. The motion is compelling, and its introduction sums up Skilling's position well:

Jeff Skilling should remain on bail pending appeal. He presents no flight risk, nor is he a threat to society; his appeal is not being pursued to delay; and his appeal will raise substantial issues of law that, if resolved in his favor, will likely result in the reversal of his convictions. See 18 U.S.C. § 3143(b) (elements defendant must establish to obtain bail pending appeal); United States v. Clark, 917 F.2d 177, 179 (5th Cir. 1990) (same). Only the last of these elements should be in dispute, and Skilling satisfies them. His appeal challenges all the counts of conviction and presents enough of a “close,” or “substantial,” question to warrant bail pending its resolution. United States v. Valera-Elizondo, 761 F.2d 1020, 1024 (5th Cir. 1985).

One of the strongest arguments Skilling will have on appeal is that a “deliberate ignorance” instruction should not have been given in this case. Whether to give such an instruction always presents a “close question.” United States v. Tunick, No. S3 98 CR 1238 (SAS), 2001 U.S. Dist Lexis 2911, at *8 n.5 (S.D.N.Y. Mar. 22, 2001). The question was especially close here for at least four reasons:

• Such instructions are disfavored, see United States v. Ojebode, 957 F.2d 1218, 1229 (5th Cir. 1992);

• Skilling never asserted an “ostrich” defense, a usual prerequisite to issuing the instruction, see United States v. Lara-Velasquez, 919 F.2d 946, 951 (5th Cir. 1990);

• Skilling never purposefully blinded himself to any allegedly criminal facts, another prerequisite, see United States v. Posada-Rios, 158 F.3d 832, 875 (5th Cir. 1998); and,

• Finally, the Task Force all but conceded that the instruction should apply only to Lay, yet the Court refused to give an instruction informing the jury that the deliberate ignorance theory could apply only to one, and not to both, defendants, cf. 2001 Fifth Circuit Criminal Jury Instruction 1.37 (approving such clarification; citing United States v. Reissig, 186 F.3d 617 (5th Cir. 1999)).

Courts in three recent, white-collar cases (one involving WorldCom CEO Bernie Ebbers) released defendants pending appeal based solely on a disputed deliberate ignorance instruction. See United States v. Kaplan, No. 02 CR. 883 (DAB), 2005 WL 3148060, at *1-2 (S.D.N.Y. Nov. 22, 2005); United States v. Ebbers, No. S4 02 Cr. 1144 (BSJ) (S.D.N.Y. Sept. 7, 2005) (attached as Ex. 1); Tunick, 2001 U.S. Dist Lexis 2911, at *8-10. In granting bail pending appeal, these courts did not endorse defendants’ arguments and, in fact, the court in Ebbers stated its strong disagreement with Ebbers’ claim that it had erred. See Ebbers, No. S4 02 Cr. 1144 (BSJ) at 4. Importantly, however, these courts recognized that “bail pending appeal is not conditioned on the [District] Court’s ‘finding that its own judgment is likely to be reversed on appeal.’” Id. As is the rule in the Fifth Circuit, for bail to be warranted, the appeal must only present a “substantial question” that likely impacts all the counts of conviction. Id.; see also United States v. Valera-Elizondo, 761 F.2d 1020, 1022 (5th Cir. 1985).

As in Ebbers, Kaplan, and Tunick, this Court need only look at this one appellate issue— deliberate ignorance—to find a substantial question exists and to grant Skilling’s motion. This instruction applied to all the counts, it was argued by the Task Force in closing, and if it were improperly given, then reversal of all of Skilling’s counts of conviction is likely. Here, we submit, is where the Court’s inquiry on this bail motion may begin and end.

If the Court is not convinced that this one appellate argument warrants granting bail pending appeal, other “substantial questions” exist. For example:

• Jury bias impacted every count of the verdict. If the appellate courts apply the correct, current, more nuanced tests to measure prejudice, reversal is likely.

• Moreover, this case, like no other recent case of note, tests the boundaries of prosecutors’ discovery obligations and defense access to witnesses. The Task Force’s approach to discovery, witnesses access, and the trial should be grounds for reversal, if not outright dismissal, as recent developments, especially in the KPMG case, establish.

Separately, but especially together, these various appellate issues warrant granting Skilling bailvpending appeal. Again, we do not expect the Court to “certify” that Skilling’s convictionsvshould be reversed. United States v. Randell, 761 F.2d 122, 125 (2d Cir. 1985). That is not the standard. The Court need only find that the appeal is not taken for delay and the issues raised are substantial, and, if decided in Skilling’s favor, likely will result in a reversal. See id.

Skilling meets this test and exceeds it. Given its track record on appeal, the Task Force will be hard pressed to argue otherwise. Appellate courts have tested two sets of convictions the Task Force secured at trial. The Supreme Court unanimously reversed the first conviction in the Arthur Andersen case. It did so because the Task Force, as here, successfully argued for mens rea instructions that allowed the jury to convict the firm for conduct that arguably was innocent, or at worst negligent. See Arthur Andersen LLP v. United States, 544 U.S. 696, 704-06 (2005). Courts in the Fifth Circuit have made clear that an improperly given deliberate ignorance instruction poses this precise risk: “[T]he deliberate ignorance instruction poses the risk that a jury might convict the defendant on a lesser negligence standard—the defendant should have been aware of the illegal conduct.” Lara-Velasquez, 919 F.2d at 951 (italics added). This risk was realized in this case, and was only compounded by the Court’s refusals to (a) sever Skilling’s and Lay’s trials, and (b) give an instruction, to which the Task Force had agreed, that the deliberate ignorance theory may not apply to both defendants, but only one.

The Task Force’s second appellate reversal further compels the relief Skilling seeks. In United States v. Brown, 459 F.3d 509, 522-23, 524 (5th Cir. 2006) (en banc petition pending), the Fifth Circuit reversed each of defendants’ conspiracy convictions either for insufficient evidence or because the Task Force’s conspiracy charge was premised on an overly expansive and improper theory of “honest services” wire fraud. Over defendants’ objections, that same honest services theory of wire fraud conspiracy was charged and instructed in this case. The Task Force relied heavily on this improper theory in cross-examining Skilling and in its closing argument to the jury. In light of Brown, Skilling’s Count One conspiracy conviction cannot stand. In addition, because the conspiracy count was the foundation of the Task Force’s case, Brown will likely require the reversal of every count on which Skilling was convicted. For example, Pinkerton instructions were given on the securities fraud counts (Counts 2, 14, 16-20, and 22-26), tying the faulty conspiracy charge to these substantive offenses. Similarly, the Task Force said both before and during trial that the conspiracy was the inside information on which Skilling traded, thereby linking the erroneous Count One to the insider trading conviction in Count 51.

Given the presence of so many appellate issues, granting Skilling bail pending appeal is appropriate.

Posted by Tom at 5:00 AM | Comments (1) |

September 28, 2006

The surprising Fastow sentence

This Kristin Hays-Tom Fowler/Chronicle article picks up on an aspect of the six-year sentence assessed to former Enron CFO Andrew Fastow earlier this week that has largely been ignored in the media but noted earlier here -- the Enron Task Force eliciting testimony from Fastow during the Lay-Skilling trial that represented to the jury that Fastow was a more credible witness because he had agreed to a minimum ten-year prison sentence and, thus, had no incentive to lie. As we know now, Fastow had not really agreed to anything of the sort and, in fact, successfully petitioned U.S. District Judge Ken Hoyt for a lighter sentence. The article quotes several experts -- including former Enron Task Force director Andrew Weissmann -- who express surprise that the Task Force did not attempt to require Fastow to serve a minimum of ten years.

Although interesting, the article fails to address the most troubling aspect of the Fastow sentencing hearing -- that is, the apparent failure of any of the attorneys involved to inform Judge Hoyt about how the Lay-Skilling jury was misled by Fastow's testimony. When Judge Hoyt finds out about that he was not informed about that, my sense is that he is not going to be pleased.

The public reaction to the Fastow sentence has been fascinating and reflects the dubious nature of the Justice Department's regulation of business-through-criminalization policy. Viewed in a vacuum, the Fastow sentence is reasonably fair. Fastow effectively embezzled millions from Enron and ruined the careers of several other Enron executives who he induced to participate in the embezzlement. Six years is a harsh sentence, so Fastow is certainly not getting off lightly.

However, the Fastow sentence was not handed down in a vacuum. Not only did Fastow and the Task Force prosecutors mislead the jury in order to convict Lay and Skilling, they trampled justice by needlessly ruining the careers of the four Merrill Lynch executives in the Nigerian Barge case and they are currently doing the same thing to the three U.K. bankers in the NatWest Three case. There is simply no way to reconcile Fastow's sentence with the six-year sentence handed down to Jamie Olis -- who did not steal anything and refused to tell lies about others -- or the seven-year sentence of former Enron chief accountant Richard Causey, who also did not steal anything and who has not testified against anybody. The death of Ken Lay from defending himself against a weak and unjust case, as well as the effective life sentence likely faced by Jeff Skilling, further underscore the confusing message conveyed by the Fastow sentence.

As Larry Ribstein has repeatedly observed, criminal cases involving business executives have become a sort of lottery, incrementally undermining the principles of justice and respect for the rule of law upon which the success of American society is largely based. If we lose respect for those principles, then "do you really think you could stand upright in the winds [of abusive state power] that would blow then?

Posted by Tom at 4:30 AM | Comments (6) |

September 26, 2006

More on the Fastow sentence

It's a good thing that Andy Fastow's counsel did not mention Fastow's following testimony on March 8 in the Lay-Skilling trial during Fastow's sentencing hearing today in front of U.S. District Judge Kenneth Hoyt:

Q. Does the government decide your sentence?

A. My Judge decides the sentence.

Q. And who is your Judge?

A. Judge Hoyt.

Q. Is that right here in Houston, in this courthouse?

A. Yes.

Q. Do you recall the maximum sentence that you could be sentenced to for these crimes?

A. For the crimes I've pled guilty to?

Q. Yes.

A. Yes. Ten years.

Q. And was there a minimum sentence that you pleaded guilty to?

A. My plea agreement states that I agree to a sentence of 10 years. [. . .]

Q. And in agreeing -- in addition to agreeing to serving 10 years in prison, did you also have to forfeit moneys?

A. Yes.

The foregoing testimony was elicted on direct examination of Fastow by Enron Task Force prosecutor John Hueston for the purpose of representing to the Lay-Skilling jury that Fastow's testimony was credible because he had agreed to a floor of ten years of prison time. On March 8th, Skilling counsel Daniel Petrocelli followed up by asking Fastow during cross-examination about the sentence that he had agreed to under his plea deal:

Q. Okay. And you said you have to go to jail for 10 years; right?

A. Well, my sentence is for 10 years. I could potentially have time off for good behavior. [. . .]

23 Q. Okay. And the reason why you just answered my question in the way you did is because you want to communicate to the jury that Mr. Skilling is a criminal along with you, correct?

A. No, Mr. Petrocelli. I'm just trying to answer the questions honestly. My outcome is already determined.

Q. Well, not --

A. I'll be sentenced to ten years as far as I understand. It doesn't matter -- my sentence isn't affected by whether
Mr. Skilling is convicted or not.

Then, on re-direct examination by Hueston on March 13th, Fastow testified as follows:

Q. And as a result of your pledge to cooperate, did you agree to plead guilty to a 10-year minimum sentence of imprisonment?

A. A 10-year maximum imprisonment.

Q. And what is the minimum amount of time that that plea agreement calls for?

A. It calls for a 10-year sentence.

Q. So after January 14th, can your cooperation lower that 10 years?

A. My understanding is that I will be sentenced to 10 years. The Judge ultimately has a discretion; but in my plea agreement, I agreed to the 10-year sentence.

Later that same day, Hueston asked Fastow about the suggestion made during cross-examination that Fastow had forged the key Global Galactic agreement between Fastow and former Enron chief accountant, Richard Causey:

Q. And after all this time, you found and turned over the document to the FBI, you remembered, late May or June; is that right?

A. I believe that's correct, yes.

Q. And you turned it over because you were cooperating?

A. Yes, sir.

Q. And this is months after, six months after, you enter your plea of guilty; is that right?

A. Approximately, yes, sir.

Q. And can this document lower your sentence now, under your understanding?

A. My understanding is, no.

Q. And if, as the defense was suggesting, you were just falsely creating this document, wouldn't it have been better to do so before you entered a plea of guilty, when you were bargaining with the government?

A. Well, one could argue that. [. . .]

Q. Mr. Fastow, if as the defense suggests, you're on some sort of mission to say or do anything to convict Jeff Skilling, might you have been tempted to just add a couple more initials to that Global Galactic document?

A. Sir, I have no incentive to add any initials. My incentive is to be truthful. If I'm not truthful, I could go to prison for life. By making a document more compelling, I can't lower my sentence.

Q. By trying to do that, there's only one thing you're sentence would do; right?

A. I'm sorry?

Q. If you tried to alter a document or tell a lie, there's only one direction that sentence can go?

A. That's correct. That would be a lie. That means my sentence would go up, potentially, to a life sentence.

Want to make a bet that the Task Force prosecutors did not inform Judge Hoyt today during Fastow's sentencing hearing that Fastow and the Task Force had previously represented to the Lay-Skilling jury that Fastow's testimony was more credible because he had agreed to a minimum ten-year sentence?

Posted by Tom at 1:35 PM | Comments (0) |

Try to make sense of this

Let's see if I get this straight.

On one hand, Andrew Fastow -- who served up his wife as a sacrifical lamb for his embezzlement of millions from Enron that triggered one of the largest bankruptcy cases in U.S. history, who used the NatWest Three to hide his embezzlement of millions more and then turned on the U.K. bankers to save his skin, who very well may have forged Richard Causey's initials on the Global Galatic "agreement," whose bizarre testimony during the Lay-Skilling trial was largely discounted by jurors and who had a large hand in ruining the careers of four innocent Merrill Lynch executives in order to lessen his prison sentence -- is sentenced to six years in prison.

On the other hand, Jamie Olis -- who worked on a transaction to improve his company's earnings, did as he was told by his superiors, did not profit from the transaction, defended his company and himself against allegations of wrongdoing with regard to the transaction and did not trigger any type of insolvency case by his company -- is sentenced to six years in prison.

These results are not the product of a rational application of our criminal justice system. Ellen Podgor has additional thoughts, particularly how the Fastow sentence may bear on the anticipated life sentence that former Enron CEO Jeff Skilling faces.

Posted by Tom at 12:45 PM | Comments (4) |

An interesting letter to Judge Lake

The day before one of the relatively few real Enron criminals is scheduled to be sentenced, an interesting letter to U.S. District Judge Sim Lake became public in regard to the sentencing of former Enron CEO Jeff Skilling.

During and after the Lay-Skilling trial, Heartland Institute economists Paul Fisher and Jim Johnston authored several articles (previous posts here) that challenged the myth that Enron was merely a house of cards propped up through the fraud of its leaders (that myth has been a recurring theme on this blog, see here, here, here, here, here, and here, to cite just a few posts).

Now, in this letter to U.S. District Judge Sim Lake, Fisher and Johnston urge Judge Lake -- in connection with the sentencing of Skilling -- to take into consideration the huge beneficial impact that Enron had on various important markets. In so doing, Fisher and Johnston remind us once again of the vacuous nature of the real presumption in the Lay-Skilling trial -- that is, that Skilling and Lay were rich and Enron collapsed, so they must be guilty of something in connection with Enron's descent into bankruptcy:

From an economic perspective, the harm [that Skilling and Lay caused] is difficult to calculate. For sure, the collapse caused a huge notional loss to investors and employees in the form of pension and savings plans. However, Ken Lay and Jeff Skilling were not convicted of causing the collapse. They were convicted of lying about Enron's financial condition (and one count of insider trading [against Skilling]). If the misrepresentation of Enron's financial condition in 2001 as alleged in the indictment had not occurred, presumably the bad news would have been known earlier. That in turn would have caused the Enron share price to collapse sooner and even less time would have been available for investors and employees to liquidate their holdings.

The implication of this reality is that there was no additional harm done to the investors and employees from the alleged hiding of Enron's profits and losses. While it may have changed the identity of the losers it did not increase the totality of the losses.

On balance, the benefits created by Ken Lay and Jeffrey Skilling in building Enron seem to us to far outweigh any incremental harm done to investors from the alleged fraud. The economists we know who have carefully studied the risk management practices and techniques developed by Enron agree that they were beneficial and will continue to be so. Not giving this reasonable weight will send a potentially harmful message. That is not to excuse any fraud, but rather to recognize the context of the decision.

Meanwhile, this Carrie Johnson-Brooke Masters/WaPo article explores the dubious reasoning behind prison sentences for businesspersons convicted of fraud that are harsher than those handed down for first-degree murder or treason.

Posted by Tom at 4:16 AM | Comments (1) |

September 21, 2006

The Fastow sentencing memorandum

As Jamie Olis awaits his resentencing for working on a transaction for which he did not profit, Andrew Fastow's lawyers (one of whom is Olis' attorney -- small world, isn't it?) filed a sentencing memorandum earlier this week that claims that Fastow has "stepped up to take responsibility," has expressed "full remorse" for his role in Enron's demise and "is a changed man." WaPo's Carrie Johnson reports on the memorandum here and a copy of the Fastow sentencing memo can be downloaded here.

Before you become convinced that Fastow has turned his back on his evil ways and become a paragon of virtue, take a moment to review the following:

How Fastow served up his wife as a sacrifical lamb for his effective embezzlement of funds from Enron;

How Fastow used the NatWest Three to hide his embezzlement of funds from Enron and then turned on the bankers to save his skin;

How Fastow may have forged Richard Causey's initials on the Global Galatic "agreement";

Fastow's bizarre testimony in the Lay-Skilling trial; and

Fastow's involvement in ruining the careers of four innocent Merrill Lynch executives in order to lessen his prison sentence.

Changed man? Heck, it looks to me as if Fastow has manipulated the Enron Task Force in the same manner as he manipulated many of his colleagues at Enron.

Posted by Tom at 6:54 AM | Comments (3) |

Wasting talent

So, a tortured Jeff Skilling is back in the news as a result of being cited for public intoxication while visiting Dallas a week or so ago.

While many await with anxious anticipation the imposition of the harsh prison sentence that Skilling will almost certainly receive, I continue to think about the great waste that results from the government's criminalization policy toward risk-taking businesspersons and Skilling's legacy of beneficial risk-taking.

This is not the product of a rational criminal justice system.

Posted by Tom at 4:46 AM | Comments (1) |

September 7, 2006

Wanted: Adult supervision at the Enron Task Force

This one takes the cake.

After trampling justice and the rule of law for five years while damaging lives, families and careers of former Enron executives and a selected few who did nothing other than have the misfortune of engaging in transactions with Enron, the Enron Task Force outdid itself yesterday in responding to the Ken Lay Estate's motion to vacate the jury verdict against the late Mr. Lay. In its response, the Task Force requests U.S. District Judge Sim Lake to postpone ruling on the Lay Estate motion until the Task Force has had an opportunity to lobby Congress to change the law that mercifully provides for the dismissal of charges against individuals such as Lay who die during the criminal proceedings. The Chronicle's Tom Fowler reports on the Task Force pleading here, Chronicle business columnist Loren Steffy comments here and the NY Times' Alexei Barrionuevo reports here.

Given the Task Force's lengthy track record of exhibiting dubious judgment, its over-the-top response to the Lay Estate motion is really not surprising. However, it is a stark reminder that the use of the overwhelming power of government to criminalize business executives -- now even in death -- is seriously out of hand, as even some prominent former Justice Department officials are now acknowledging publicly. As Sir Thomas More reminds us, we better address the difficult task of curtailing use of that power, lest it be used on us.

Posted by Tom at 3:59 AM | Comments (3) |

September 3, 2006

They never really had a chance

As noted in this post at the conclusion of the Lay-Skilling trial, my sense is that the trial was over before it began because the jury -- particularly its leaders -- was predisposed to convict. According to this Brenda Sandburg/American Lawyer article, the jury consultants working the Lay-Skilling case thought the same thing. In fact, they gave little hope that any jury anywhere could be empaneled that would view the case without a strong predisposition to convict.

Remember that the next time you read and hear the prosecution in a criminal case undertaking a propaganda campaign to fan the flames of resentment and scapegoating in the jury pool. As Sir Thomas More reminds us, do any of us really think that we could "stand upright in the winds that would blow" if that power were applied to us?

Posted by Tom at 8:20 AM | Comments (2) |

September 2, 2006

Lay and Skilling's legacy of beneficial risk-taking

During the criminal trial of Ken Lay and Jeff Skilling, attorney Paul Fisher and economist Jim Johnston of the Heartland Institute authored this piece (see also here) regarding the unjust prosecution Lay and Skilling that echos a common theme of this blog (see here, here, here, here, here and here) regarding almost all of the Enron-related criminal prosecutions -- that the prosecutions were fundamentally weak criminal cases that were really a smokescreen to promote an underlying political agenda of regulating beneficial risk-taking that generates robust markets and creation of wealth and jobs.

Following up on their earlier piece, Fisher and Johnston have written this excellent article that speculates on what the business legacy of Lay and Skilling should be. In so doing, Fisher and Johnston note another common theme of this blog (most recently here) -- the intrinsic weakness of the convictions against the two executives:

We are left with two convictions that are devoid of any gain to the perpetrators and illogical to the extreme. The real culprit, in our opinion, is the political establishment in California, primarily Democrats, who were intent on punishing a friend of President George W. Bush and his father. While the California Democrats have escaped unscathed, except for ex-governor Davis, the energy trading system is impaired and corporate accounting is now in chaos. It remains to be seen if these institutions will recover any time soon.

However, even more importantly, Fisher and Johnston note the extraordinary wealth creation that resulted from Lay and Skilling's risk-taking at Enron, and lament how the understanding of the beneficial nature of that risk-taking is now largely lost amidst the media and government-hyped societal condemnation of Lay, Skilling and Enron:

At the end of the day, when the successes and mistakes are tallied for Ken Lay and Jeffrey Skilling, we predict the result on balance will be positive. Perhaps the biggest contribution was to provide risk management of natural gas prices for producers and industrial consumers. Enron operated the over-the-counter market for a year until the exchange-traded futures and options contracts were offered on the New York Mercantile Exchange in 1990. Those futures contracts are now among the most liquid in the world.

The electricity markets established for California are no longer traded. However, there is a market in the PJM (Pennsylvania, New Jersey, Maryland) region and an auction is to be established soon in Illinois. In the meantime, natural gas contracts serve as a hedging vehicle because gas is the fuel used at the margin to generate electricity.

Enron's failed broadband joint venture with Blockbuster was intended to bring video on demand. This now exists on cable and is similar to the iPod offered by Apple Computer. This latter system is a masterful accommodation to copyrighted music and video programming where artists are compensated.

Weather derivatives started by Enron and Koch Industries in 1996 for a swap in the following year have evolved into an exchange-traded contract offered by the Chicago Mercantile Exchange. Futures and options contracts based on temperatures in 18 U.S., nine European, and two Asia-Pacific cities are now traded in this market.

Finally, the establishment of a robust water market by Enron failed. However, much was learned from the effort and there is optimism about another try.

We fervently hope that Ken Lay and Jeffrey Skilling will be remembered for their extraordinary contributions, rather than their politically-inspired prosecution.

Amen. As noted in my posts on the Lay-Skilling trial and the Nigerian Barge case, the Enron Task Force turned the Enron-related criminal cases into morality plays that appealed to the dynamics of resentment and scapegoating in disingenously portraying legitimate and productive business transactions as complex frauds. The result has been a dangerous misuse of the government's overwhelming prosecutorial power to impose burdensome regulatory costs on valuable markets. In reality, a far more progressive government policy would be to encourage precisely the type of risk-taking that Lay and Skilling promoted at Enron to facilitate productive markets, employment growth and wealth creation.

Posted by Tom at 8:18 AM | Comments (0) |

August 7, 2006

Perpetuating the Enron Myth

As noted in this prior post on the death of former Enron chairman Ken Lay, the myth of Enron is now so fully embraced within American society that otherwise intelligent people reject any notion of ambiguity in addressing facts and issues that call the Enron morality play into question.

One of the poster boys for the myth of Enron is Chronicle business columnist Loren Steffy, who has made a good part of his living for the past several years appealing to resentment and scapegoating rather than fair-minded analysis in covering the aftermath of Enron's demise. Steffy's latest effort in that regard is this column on the Fifth Circuit's recent ruling eviscerating most of the Enron Task Force's dubious Nigerian Barge prosecution of four former Merrill Lynch executives. Steffy dismisses the ruling as "a quagmire" and "thick mumbo jumbo" that "only a lawyer could love," and suggests that none of the three judges on the Fifth Circuit panel who wrote the decision "completely agreed with each other." Compare Steffy's treatment of the case with this analysis from a year ago, which foreshadowed much of the Fifth Circuit's decision.

But the best indication that Steffy's appeal to resentment trumps sound analysis or good judgment is his statement that none of three Fifth Circuit judges involved in Fifth Circuit's decision "completely agreed with each other." That's simply false, as each of the Fifth Circuit judges agreed with each other that the conviction of Merrill Lynch executive William Fuhs should not only be vacated, but reversed and rendered (i.e., the case cannot be re-tried). In so doing, each of the judges agreed that the Enron Task Force had produced insufficient evidence during its case-in-chief against Fuhs for a jury to find him guilty beyond a reasonable doubt of any crime. The ruling is a strong rebuke of the Task Force's decision to prosecute Fuhs in the first place.

Inasmuch as that part of the Fifth Circuit's decision does not fit neatly into the myth of Enron, Steffy ignores it (after misrepresenting it). The human tragedy of a young man with a wife and two young children being unjustly imprisoned for almost a year and having his professional career shattered by a wrongful prosecution does not even register on Steffy's radar screen.

That it does not reflects the shallow nature of Steffy's analysis well. As Larry Ribstein has observed in his ongoing series of posts regarding the disingenuousness of NY Times business columnist Gretchen Morgenson:

The last thing the journalists want is the sort of analytical clarity that we need for useful public policymaking. Rather, they want to obfuscate differences to enlarge the apparent, though not actual, size of the story.

Posted by Tom at 5:30 AM | Comments (1) |

July 17, 2006

Can the NatWest Three receive a fair trial in Houston?

Barry Turner, lecturer in criminal law and criminal evidence at Leeds Law School, makes the following declaration in this Times Online blog post regarding the NatWest Three, who are presently awaiting a bond hearing in Houston in regard to the Enron-related criminal case against them:

"It is . . . absurd to suggest that the men will not get a fair trial in a country that uses exactly the same legal system as we do."

H'mm. Better check the facts, Mr. Turner. Kevin Howard and Ken Lay are stark reminders that the suggestion is not absurd at all.

By the way, a friend who is prominent in the media business was vacationing in England when Ken Lay died. He passes along the following observation regarding the British media coverage of Mr. Lay's death:

"The coverage [of Mr. Lay's death] on the domestic BBC service was interesting. Close to the top of the report, the journalist noted that Ken Lay continued to maintain that he had done nothing wrong. The report then went on to entertain the idea that this might actually be true.

The extensive coverage of the Natwest Three added to the sense that, in Britain at least, there is now as much questioning of the Department of Justice as there is of ex-Enron officers."

Posted by Tom at 5:08 AM | Comments (0) |

July 10, 2006

Crashing the Ken Lay funeral?

Overall, the Houston Chronicle's coverage of the Enron case has at least been exhaustive, if not particulalry balanced. But in the interests of exhaustive coverage, was it really necessary for the hometown newspaper to have society columnist Shelby Hodge attempt to crash the funeral of Ken Lay in Aspen on Sunday?

Posted by Tom at 8:20 AM | Comments (2) |

July 6, 2006

Ken Lay and the Enron Myth

Former Enron chairman and CEO Ken Lay died yesterday of a heart attack and, given the stress that Mr. Lay had endured over the past five years, such a fate is certainly not surprising. However, my sense is that the heart attack was merely the physical manifestation of what really killed this proud, talented and flawed man -- his inability to overcome the Enron Myth and the societal implications of it.

By now, we all know the myth -- Enron was merely an elaborate financial house of cards hidden from innocent and unsuspecting investors and employees by a deceitful management team led by the greedy and lying Mr. Lay. The Enron Myth is so thoroughly 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 exhibited everywhere:

The Houston Chronicle's business columnist ridiculing Mr. Lay and calling for his conviction on almost a daily basis throughout the trial;

The community outpouring of celebration over the guilty verdict against Mr. Lay and the self-righteous indignation over his continued claim that he committed no crimes;

A Houstonian interviewed on radio yesterday contending that she was unsatisfied because Mr. Lay's death had allowed him to escape appropriate punishment;

A prominent Houston-based blogger mocking Mr. Lay's death (here and here);

Without a smidgen of evidence, a Houston criminal defense attorney suggesting during an interview on MSNBC yesterday that Mr. Lay may have committed suicide to void his conviction.

These are but a few examples of the frequent eruptions from the cauldron of societal bitterness over Enron that are palpable reminders of the fragile nature of civil society. The Enron Myth conveniently serves to obscure that which most people do not want to confront. Loss, fear, and anger expose our essential human insecurity -- Christians sometimes refer to it as our "brokenness." The vulnerability that underlies such insecurity is scary to behold, so we use myths and the related dynamics of scapegoating and resentment to distract us.

Therefore, a wealthy and powerful businessman who is easy to resent becomes a handy scapegoat. We rationalize that he did bad things that we would never do if placed in the same position and thus, he is deserving of our punishment. That the scapegoat is portrayed as greedy and arrogant -- just as we are -- makes the lynch mob even more bloodthirsty as it attempts to purge collectively that which is too sordid for its members to face individually.

As noted in this prior post, even the Task Force prosecutors have admitted that the legal case against Lay was extraordinarily weak. But the power of the Enron Myth and the real presumption in the criminal case against Mr. Lay are such that even presumably fair-minded jurors dispense with critical thinking skills when confronted with supposedly the biggest business conspiracy in the history of federal prosecutions. Rather than seeking the truth regarding that alleged mass conspiracy, the jurors were content with a prosecution that cast Mr. Lay as a liar about Photofete and his company line of credit, and ignored the paucity of evidence of any alleged massive conspiracy or even the true reasons why Enron collapsed. The myth is so pervasive and accepted -- why bother with the truth?

The carnage of the Enron Myth and similar myths is now stacked high -- the destruction of Arthur Andersen, the vapid Enron-related Congressional hearings, the shallow Enron documentary, Martha Stewart, Jamie Olis, Daniel Bayly, William Fuhs, Frank Quattrone, Hank Greenberg, Mr. Lay -- the list goes on and on. In the wake of such destruction of wealth and lives, the public is even less willing to confront the vacuity of the myth and the destructive dynamics by which it is perpetrated. In fact, any challenge to the myth is now commonly met with derision and appeals to even more resentment over the Enron failure.

Such syndromes are not only an abuse of our justice system, but a serious affront to civil society. Ken Lay was no criminal. Did he fudge the truth? Maybe. But even if so, did his lies justify public humiliation, a physically-draining criminal trial, and a life prison sentence? Not in a truly civil society.

Ken Lay's death is a terrible tragedy for his family and friends, and my family's thoughts and prayers are with them. But the larger tragedy is that a myth has again played out as "justice" in our criminal justice system while distracting us from examining what really happened at Enron, understanding the benefits and risks of such a company, and educating ourselves on how to take advantage of such benefits while hedging those risks prudently.

Such a sober undertaking is not as easy as rationalizing a financial failure by calling a rich man a crook and reveling in his demise, but it's far more likely to result in a better -- and far more honest -- understanding of investment and markets, as well as ourselves.

Posted by Tom at 5:35 AM | Comments (8) |

July 5, 2006

The death of Ken Lay

Former Enron chairman and CEO Ken Lay died early this morning in Colorado, reportedly of a heart attack. He was 64 at the time of his death.

I have a day's worth of meetings that prevent me from collecting and conveying my thoughts immediately on Mr. Lay's death, but I wanted to pass along a couple of recent posts (here and here) about Mr. Lay and the weakness of the criminal case against him, one of which includes this excerpt about the man that Mr. Lay was:

Lay is clearly a proud man who desperately wants to tell his side of the story, and it is quite a story. Born and raised in a family with little money, Lay worked his way through college and graduate school, landed his first job with Houston-based Humble Oil (the predecessor to ExxonMobil), and then served his country admirably as a Naval officer and Deputy Undersecretary of Interior for Energy for six years during the Vietnam War. After his governmental service, Lay rose quickly through the executive ranks of a couple of gas pipeline companies before assuming the chairman and CEO position of the company that eventually became Enron in 1985. From that perch, Lay accumulated a personal net worth of about $350 million as of 2000 as he oversaw the growth of Enron into one of the largest publicly-owned companies in the U.S., and then saw that net worth evaporate over the past four-plus years since Enron's collapse into bankruptcy.

But as difficult as that fall must have been, Lay does not appear to be the type of man who is bothered all that much by the loss of wealth, and certainly not nearly as much as he is aggravated by the Task Force and media’s ravaging of his reputation over the past five years. According to media reports, Lay and [defense counsel Mac] Secrest struggled somewhat during the early stages of Lay’s direct examination, and my sense is that their struggles were attributable largely to Lay’s frustration with not being able to explain to the jurors directly — without the limiting framework of a trial — the utter contradiction between his life story and the nature of the criminal charges against him.

And, as usual, Larry Ribstein has these insightful observations on Mr. Lay's death and Peter Henning passes along an interesting implication of Mr. Lay's death on the criminal case against him.

Posted by Tom at 9:32 AM | Comments (0) |

July 1, 2006

The Lay-Skilling forfeiture motion

In the least surprising post-verdict motion to date, the Washington Post's Carrie Johnson reports that the Enron Task Force filed its forfeiture motion yesterday against former key Enron executives Ken Lay and Jeff Skilling. A bookmarked pdf copy of the motion can be downloaded here.

As expected, the Task Force requests that the remaining net worth of both Skilling and Lay be forfeited to the government to satisfy the Task Force's contention that the two should pony up about $183 million as the undeserved fruit of the securities fraud for which the two were convicted. In addition to the defendants, the Task Force's forfeiture request will probably generate opposition from various parties in the civil litigation still swirling around the Enron case, which parties are also seeking compensation from Lay and Skilling on various business and securities fraud claims. Finally, both Lay and Skilling owe substantial amounts to their respective defense teams, so the claims of those firms will also need to be sorted out in connection with the Task Force's forfeiture claim. Lay and Skilling have requested that U.S. District Judge Sim Lake schedule a bench trial regarding forfeiture issues sometime this fall, but it remains unclear at this time just how Judge Lake will handle the Task Force's forfeiture request.

Posted by Tom at 7:58 AM | Comments (0) |

June 27, 2006

Foreshadowing a key issue in the Lay-Skilling appeal

In a strong indication that he believes that the matter raises important appellate issues, U.S. District Judge Sim Lake issued this this 22-page opinion late last week in the criminal case of former key Enron executives Ken Lay and Jeff Skilling expanding on the reasons for his ruling during the trial (see here and here) denying Lay and Skilling's request that Judge Lake grant defense immunity to a half-dozen or so former Enron executives who Lay and Skilling believe would have provided exculpatory testimony for the defendants. Lay and Skilling contend that the Enron Task Force used the threat of indictment against those former executives and dozens of other former Enron executives to induce the witnesses to assert the Fifth Amendement against self-incrimination rather than provide exculpatory testimony for Lay and Skilling.

The Task Force's tactic of icing favorable witnesses for Lay and Skilling has been swirling around the case from the beginning. Lay and Skilling raised the issue prior to trial in regard to the Enron Task Force's alleged intimidation of witnesses (see here and here) and also on the key evidentiary issue in the trial (here and here). Then, Lay and Skilling raised the issue again during the trial as the defendants struggled to corroborate their testimony that key Task Force witnesses such as Ben Glisan and Andrew Fastow were lying when they testified that they had cautioned Lay and Skilling about Enron's shaky financial condition at various times when Lay and Skilling were making positive statements to the market regarding the company's finances.

In a key part of the ruling, Judge Lake explains his reasoning for denying Lay and Skilling's request for the Court to grant defense immunity to the proposed witnesses:

The testimony that defendants expect the proposed witnesses would provide may be relevant and exculpatory, but it falls far short of being essential exculpatory evidence for the simple reason that defendants do not — and cannot — argue that these are the only witnesses capable of providing exculpatory evidence on these issues. When defendants filed their motion to immunize the proposed witnesses both defendants had testified and their testimony contradicted the government’s evidence on these issues. At best, the anticipated testimony of [the witnesses] would be cumulative of the testimony of defendants and of other evidence presented by defendants. Accordingly, the court concludes that the defendants have failed to establish that the testimony that defendants seek to immunize would constitute essential exculpatory evidence.

This reasoning seems oddly superficial. Not only does it fail to address the fact that the Task Force's witness-icing strategy allowed the prosecution to use hearsay statements from alleged co-conspirators against the defendants, the reasoning ignores the important impact that corroborating testimony has in a criminal trial. Just as prosecution witnesses testifying under draconian plea deals have a powerful incentive to testify favorably for the prosecution, defendants asserting their innocence have a similar incentive to testify consistent with that position. Juries intuitively understand this dynamic, and thus often discount such testimony while placing more weight on the testimony of corroborating witnesses who are not subject to those pressures. That Judge Lake's opinion does not address that important impact of the Task Force's witness-icing strategy will almost certainly be a key point on the appeal of this issue.

By the way, the same prosecution witness-icing strategy that was used in Lay-Skilling case is already an issue in the the Nigerian Barge appeal and the Bernie Ebbers appeal. Inasmuch as a number of the convictions in the barge appeal already appear to be unraveling, the Fifth Circuit may even issue a ruling on the issue before the Lay-Skilling opinion arrives at the Fifth Circuit's doorstep.

Posted by Tom at 4:50 AM | Comments (2) |

June 17, 2006

Skilling talks

In his first meaningful public comment since being convicted on 19 criminal charges, former Enron CEO Jeff Skilling agreed to this Wall Street Journal ($)/John Emshwiller interview in which he concedes, among other things, that his decision to testify before the SEC in the aftermath of Enron's collapse into bankruptcy provided prosecutors with the information (particularly Photofete) that they were able to use to undermine his credibility with the jury during his trial.

Inasmuch as Skilling made his decision to testify in front of the SEC and Congress against the advice of his counsel, one of the many legal ramifications of Lay-Skilling trial is that any future corporate executive confronted with a criminal investigation into his company's business will almost certainly assert the Fifth Amendment privilege in connection with any investigation and decline to provide the executive's perspective about what happened at the company. Thus, the prosecution's use of Skilling's bad memory about Photofete and his attempted Sept. 6, 2001 Enron stock sale reinforced a perverse incentive for business executives -- if an executive declines to assist in determining what really caused the business failure of the executive's company, then the chance of the executive being successful in what Larry Ribstein calls the lottery of corporate criminal trials improves. Some public policy, eh?

Meanwhile, WaPo's Carrie Johnson reports on Skilling's attempt to use a portion of the $60 million or so that the prosecution has frozen in connection with the criminal charges against him to pay his defense firm. By my estimate, the Lay-Skilling defense teams have now incurred a total of over $100 million in defending the charges against the two former executives. In the great waste of criminalizing corporate agency costs, the price of asserting innocence continues to increase.

By the way, Skilling and Lay's sentencing hearing has been postponed for six weeks to October 23.

Posted by Tom at 4:20 AM | Comments (0) |

June 13, 2006

Rumblings from the jury room of the first Enron Broadband retrial

As noted in this earlier post, U.S. District Judge Vanessa Gilmore's decision to conduct the re-trial of former Enron Broadband executives Kevin Howard and Michael Krautz during the latter stages of the media-saturated Lay-Skilling trial was highly prejudicial to Howard and Krautz. As it turned out, the juries in both cases deliberated at the same time, and the Howard-Krautz jury was deliberating amidst the media firestorm on the Thursday before Memorial Day weekend when the Lay-Skilling verdict was announced. The following Tuesday, the Howard-Krautz jury returned a verdict convicting Howard and acquitting Krautz. Previous posts on this case are here, including this recent one on the closing arguments of the trial.

The dubious nature of the decision to conduct the Howard-Krautz trial during the Lay-Skilling trial is now becoming readily apparent. This John Roper-Purva Patel/Houston Chronicle article reports that Howard's defense team has filed a motion for a new trial that contains statements from two jurors and two alternate jurors in the Howard-Krautz trial alleging that the Howard-Krautz jury deliberations were seriously compromised and that certain jurors promoted a vindictive environment in the jury room "to fry" top Enron executives, including Howard. It does not appear that the Chronicle reporters had a copy of the motion when they prepared their article, so here is a download site for the motion and juror affidavits, which are bookmarked in Adobe Acrobat to facilitate ease of review. Among other things, the motion and affidavits confirm the following troubling allegations:

Jurors holding out for acquittal for Howard were threatened with physical harm from jurors pushing for conviction;

Contrary to Judge Gilmore's instructions, certain jurors regularly discussed the case between themselves during the trial and, after deliberations began, discussions among certain jurors took place outside the jury room;

One male juror asserted that he was an expert on Enron because he had read one of the books on the Enron scandal, and used information from the book in persuading jurors to convict Howard;

The jury in the Howard-Krautz trial deliberated in a room literally next door to the room used by the Lay-Skilling. When the Lay-Skilling jury agreed on a verdict, the loud applause and cheering from the Lay-Skilling jury room was readily apparent in the Howard-Krautz jury room; and

Without advising attorneys involved in the case, Judge Gilmore met with and answered questions from the jurors at least twice during deliberations, including immediately after the Lay-Skilling verdict was announced. According to the jurors quoted in Howard's motion, Judge Gilmore told the jurors after the Lay-Skilling verdict that they had to reach a unanmious verdict, leaving the holdout jurors with the impression that a hung jury was not an option. Moreover, one juror also advised the rest of the jurors that the hung jury in the previous Enron Broadband trial (a fact that was not brought up during the retrial) was a failure that would be emulated by jurors in the retrial if they also could not reach a verdict.

Although the allegations regarding Judge Gilmore's ex parte communications with the jury will likely put her on the defensive and prone to deny Howard's request for a new trial, the motion indicates that the Howard-Krautz trial probably should not have been conducted in Houston and, at very least, should never have been allowed to proceed during the Lay-Skilling trial. The Fifth Circuit -- which already has some issues with Judge Gilmore -- is likely to take Howard's appeal on these issues very seriously.

Posted by Tom at 4:33 AM | Comments (1) |

June 8, 2006

Fifth Circuit orders the release of Bayly and Furst in the Nigerian Barge case

As this earlier post anticipated, the Fifth Circuit Court of Appeals this morning ordered the release of former Merrill Lynch executives Daniel Bayly and Robert Furst pending disposition of the appeal of their controversial convictions in the Enron-related Nigerian Barge case. Another former Merrill executive convicted in the case -- William Fuhs -- was previously ordered released from prison by the Fifth Circuit on March 30. The fourth Merrill executive convicted in the barge case -- James Brown -- had his renewed motion for release pending appeal curiously denied summarily by the Fifth Circuit. Daniel Boyle, Enron's former vice president of global finance, was also convicted in the case and is serving a 46 month sentence, which he is not appealing. Former Enron in-house accountant, Sheila Kahanek, was the only defendant acquitted in the trial of the case.

As noted in these earlier posts, the plight of Bayly and Furst in the Nigerian Barge case is a prime example of the appalling cost of the government's criminalization of business in the post-Enron era (for a thorough discussion of that subject in the context of the barge case, begin here). In the Nigerian Barge case, the Enron Task Force took a relatively small transaction under which Merrill Lynch bought a stream of dividend payments from an Enron affiliate and criminalized it through a brazen web of distortion, suppression of key testimony, inadmissible hearsay, opposition to the defense's jury instruction on the key issue in the case and prosecutorial misconduct. The Task Force effectively prosecuted the Merrill Four for doing their jobs in connection with Enron's sale of an asset for which Enron may have improperly accounted, although even that issue was never proven at trial.

In reality, the Merrill Four were convicted for having the misfortune of being involved in a legitimate transaction with the social pariah Enron. Kudos to the Fifth Circuit for beginning to correct this monstrous wrong.

Bayly is represented on his appeal by a team of lawyers, including his lead trial counsel, Tom Hagemann and Marla Thompson Poirot of Gardere Wynne and Sewell in Houston, appellate specialists Lawrence S. Robbins, Gregory L. Poe and Alice W. Yao of Robbins, Russell, Englert, Orseck & Untereiner LLP in Washington, D.C., and Richard J. Schaeffer, Peter J. Venaglia, and Brian Rafferty of Dornbush Schaeffer Strongin & Weinstein, LLP in New York City. Furst is represented on appeal by John W. Nields, Jr. William L. Webber, Kyle S. Cohen and Sowmia Nair of Howrey, LLP's Washington, D.C. office.

Posted by Tom at 10:28 AM | Comments (0) |

June 5, 2006

The Ken Lay narratives

On several occasions while covering the Lay-Skilling trial, I noted that the Enron Task Force prosecutors were presenting a fundamentally weak case in an effective manner. Quite a few commenters both here and on other blogs took me to task for that view, some of whom suggested that my defense bias rendered me incapable of appreciating the true strength of the Task Force's case.

So, it was with a small dose of vindication on Sunday that I read Alexei Barrionuevo and Kurt Eichenwald's NY Times article on the story behind the Enron Task Force's preparation and prosecution of the case against former Enron chairman, Ken Lay. According to Barrionuevo and Eichenwald's piece, Enron Task Force prosecutors such as John Hueston agree with me -- their case against Lay was so weak they had serious doubts whether they could even make one.

Barrionuevo and Eichenwald's article provides an interesting peek into the lengths that federal prosecutors will go to make a case against a person who the prosecutors have already concluded is a crook. But leave it to Larry Ribstein in this post on the Barrionuevo/Eichenwald article to nail the serious implications of the Task Force's motives and actions toward Lay:

Many people no doubt will get a warm feeling from the job our government servants have done in finally nailing the evil Lay. But as I said at the beginning, there’s an alternative narrative. The prosecutors were out to get Lay, who had already been convicted by public opinion just for being associated so closely with Enron, which of course journalists, filmmakers and other shapers of public opinion had already elevated into the symbol of whatever it was that went pop at the end of the big boom.

The prosecutors and journalists had a willing audience. Stupid and greedy investors, convinced they knew more than the market did and that gravity was suspended just for them, abetted by credulous analysts who didn’t think they had to ask questions, now needed somebody other than themselves to blame. The prosecutors looked long and hard and finally found Ben Glisan, whom the jury was primed to believe despite his questionable provenance. There were other potential witnesses with other potential stories, but the government was willing neither to free them from the threat of indictment nor grant them immunity.

Read Professor Ribstein's entire post. As Barrionuevo and Eichenwald note in their article, the case against Lay boiled down to the testimony of Ben Glisan and Andy Fastow, both of whom testified that they were telling Lay as early as mid-August 2001 immediately after he replaced Skilling that Enron was in far worse financial shape than the company was letting on to investors. The Task Force prosecutors molded this testimony into the securities fraud charges against Lay, contending that he continued to urge employees and investors to buy Enron stock even though he supposedly knew better.

Of course, Lay testified that neither Glisan nor Fastow said anything of the kind to him; indeed, Lay contended that they were advising him of exactly the opposite -- that the company's liquidity was as strong as it ever had been -- and he had substantial documentary evidence to back up his version of the events, such as Glisan's October 8, 2001 presentation to the Enron board. However, the Task Force iced other Enron executives who would have provided exculpatory testimony for Lay, so Lay was forced to go it alone in defending himself against Glisan and Fastow's allegations.

Thus, the case against Lay came down to an old-fashioned swearing match -- Glisan and Fastow, on one hand, and Lay on the other. That's why such a large part of the Task Force's cross-examination of Lay (see also here) focused on such things as PhotoFete and Lay's clumsy but legal use of his line of credit with the company. With Glisan and Fastow's testimony in hand, the Task Force simply had to cast Lay as a liar to the jury and they would win the swearing match.

Interestingly, Eichenwald's seminal book on Enron -- Conspiracy of Fools (Broadway 2005) -- actually suggests that it is Glisan and Fastow who are lying. On pp. 540-541 of his book, Eichenwald relates an amusing story about Enron's chief operating officer, Greg Whalley, meeting with Fastow and Glisan around October 20, 2001 when it was becoming clear that the market was turning on Enron after a series of Wall Street Journal articles had exposed Fastow's shenanigans with certain special purpose entities.

Whalley called the meeting with the two financial officers so that they could apprise him of Enron's liquidity position in the face of the quickly-unfolding crisis. Fastow began the meeting by assuring Whalley that the company was in very good liquidity position because it had $3.8 billion in available lines of credit. But then, under questioning from Whalley, Fastow and Glisan conceded that the company actually had only $1.5 billion in available liquidity. As Eichenwald relates, the meeting ended rather abruptly:

What the hell? Whalley stood up, disbelief etched on his face.

"You guys are out of your minds!" he said, turning to head out. "I walked in with $3.8 billion in liquidity, and I'm leaving with $1.5 billion."

[Whalley] shook his head. "I don't want to ask you another question. I don't think we can afford it."

So, how likely is it that Glisan and Fastow were telling Lay that Enron was a house of cards as early as mid-August when they began a meeting with Enron's chief operating officer on October 20th by assuring him that the company's liquidity position was in good shape?

Posted by Tom at 5:21 AM | Comments (1) |

A Quick Enron Reality Check?

As expected, the Conglomerate Enron online symposium last week generated over 15 interesting posts, including ones by the reliably insightful Larry Ribstein (see also here), Ellen Podgor, Don Langevoort, Lisa Fairfax, and Thomas Joo.

However, one of the final posts in the symposium particularly caught my attention. Moderator Gordon Smith passed it along from John Kroger, who served on the Task Force for a year or so in 2002-03, during which time he helped prosecute Arthur Andersen out of business and prepare the odious prosecution that placed four former Merrill Lynch executives in prison for arranging to have Merrill buy an asset from Enron that Enron may have improperly accounted for, although even that has never been proven.

Following his service on the Task Force, Kroger took a job as a law professor in Portland, from where he proceeded to publish a law review article, Enron, Fraud and Securities Reform: An Enron Prosecutor's Perspective. Kroger's resume reflects no apparent background in either structured finance or the private finance business sector, but that doesn't stop him in the article from, among other things, characterizing Enron's structured finance transactions as wholesale frauds and proposing that such risk-taking should be criminalized. For a more balanced view from experts in the field of structured finance regarding the economic and financial benefits of such transactions and Enron's use of them, see Christopher Culp and William Niskanen's Corporate Aftershock: The Policy Lessons from Enron and Other Major Corporate Corporations and Culp's subsequent book, Risk Transfer: Derivatives in Theory and Practice.

With that backdrop, Kroger wrote the following post on the Conglomerate Enron symposium:

"Here's a Quick Reality Check"

I am shocked at how skeptical most of these blog entries are. Of course, as a former prosecutor in the case, I am certainly biased. That said, here's a quick reality check. In 2000, 96% of Enron's reported net income and 105% of its reported funds flow came from accounting manipulation schemes, the vast majority of which clearly violated GAAP. At the same time, Enron managed to keep some $25 billion in company debt off its financial statements, hidden from investors. Lay told his employees to keep buying more Enron stock while he was secretly selling his own. Both men made millions spinning the socks off investors for a company that was, in the end, revealed as an empty shell. The jury heard months of testimony and concluded, quite reasonably, that the defendants knew precisely what was going on. In the United States, we don't always treat poor criminals and rich criminals alike, but we should. When people commit fraud, they should go to prison.

Using Kroger's post as a template, my reply is as follows:

I am shocked at how many of the blog entries presume that Lay and Skilling were involved in a massive fraud at Enron. Of course, as a defense attorney in various Enron-related civil actions, I am certainly biased. That said, here's a quick reality check.

In 2000, rather than allowing shareholders to suffer loss of value during a difficult post-stock market bubble period, Enron supplemented its net income and reported funds flow through innovative structured finance transactions that effectively hedged the risk of loss in many of its assets for the benefit of investors. Moreover, when the Enron board induced Lay to return to the Enron CEO position after Skilling's resignation in August 2001, he put his money where his mouth was — he used the entire board-approved $20 million bonus to invest in more Enron stock. Indeed, Lay made that bold investment in Enron even though he had already lost an enormous amount of his personal net worth in the first seven months of 2001 due to the decline in Enron's stock price, losses that he willingly incurred because he insisted that his personal portfolio remain disproportionately invested in Enron stock.

The jury heard months of testimony from primarily cooperating prosecution witnesses who had a substantial incentive to lie by implicating Lay and Skilling in crimes. After the prosecution effectively prevented witnesses with exculpatory testimony for Lay and Skilling from testifying, the jury concluded, quite reasonably, that Lay and Skilling were rich and the company they led went bust, so they must be guilty of some crime. In the United States, we don't always treat poor criminals and rich criminals alike, but we should. When business executives are accused of fraud, they should get a fair trial before they are sent to prison for life.

Posted by Tom at 4:17 AM | Comments (0) |

June 1, 2006

The Conglomerate Enron Forum

On the heels of last week's jury verdict in the Enron Task Force's legacy case against former key Enron executives Ken Lay and Jeff Skilling, Gordon Smith, Christine Hurt and the rest of the blawgers over at the Conglomerate are hosting an online forum of legal scholars today and tomorrow to explore the issues relating to the use of criminal law as a corporate governance mechanism. In addition to Professors Smith and Hurt, Clear Thinkers favorites Larry Ribstein and Ellen Podgor are scheduled to participate, as well as University of Houston law professor and former law school dean, Nancy Rapoport.

Given the participants, this is likely to be a compelling discussion of the often troubling (and costly) implications of the government's increasingly-aggressive criminalization of corporate agency costs. Be sure to check it out.

Posted by Tom at 5:19 AM | Comments (4) |

May 30, 2006

Monday morning QB'ing the Lay defense

Yes, it's Tuesday, but the Monday morning quarterbacking on the failed defense of Ken Lay is in full swing.

Donald Watkins, an Alabama-based lawyer who headed up the defense team that handled the successful defense of former HealthSouth CEO, Richard Scrushy, says the following about the Lay defense:

In an interview following the Enron trial, Watkins called Lay's strategy wrong from the start because the former Enron CEO began his defense by hiring a team of big-name trial lawyers. What Lay needed first, Watkins says, was a strategist with a broader view of what was needed to keep such a high-profile defendant out of prison.

"Lawyers are technicians," Watkins says. "They're like painters, plumbers and sheet-rockers."

Frankly, although somewhat interesting, Watkins' views should be taken with a rather large grain of salt. First, Lay did not hire a "team of big-name trial lawyers." Mike Ramsey -- Lay's lead attorney -- has a good local reputation as a criminal defense attorney, but is hardly close to a "big-name" trial lawyer in Houston or anywhere else. No one else on the Lay team comes close to having that reputation, either.

Moreover, although similarities exist, all big business criminal cases have significant differences. HealthSouth did not experience anywhere near the societal and media demonization of Enron, which made Lay's public relations problem much more difficult than Scrushy's. Moreover, under the circumstances of Lay's case, Lay's defense had to be far different from Scrushy's, who relied on the "honest idiot" defense and did not testify during his trial. In contrast, the jurors to a person in the Lay trial stated post-trial that they expected Lay to respond to the testimony of prosecution witnesses against him, signaling that they would have crucified him if he had not testified. Thus, the fact that Lay was not particularly effective in defending himself while testifying does not mean that it was a mistake to put him on the stand.

In short, different circumstances call for different strategies. The fact that Watkins' strategy worked in the Scrushy case does not mean that the same strategy would have worked in the defense of Lay. However, his success in the Scrushy case does provide a nice perch from which to Monday morning quarterback.

Posted by Tom at 8:10 AM | Comments (2) |

Lessons from an Enron short

Jim Chanos is a well-known investor and investment advisor who specializes in shorting stocks -- one of his most famous shorting targets was Enron back in 2001.

Making money by selling stocks short is most often accomplished through the process of borrowing stock, selling it, and then covering the loan of the stock at maturity by purchasing the stock in the market later at a lower price. The process is often criticized by the short seller's target because it generates profits from misfortune (i.e., when the target company's stock price goes down) and is counter-intuitive to the usual way folks make money on investments -- that is, holding stocks long-term as they appreciate in value. Nevertheless, the practice provides a valuable market purpose in hedging risk and, thus, is a component of any well-structured securities market.

In this Wall Street Journal ($) op-ed, short-seller Chanos provides the following ten lessons (without Chanos' explanation for each rule that is provided in the article) on the Enron saga:

1. The Enron scandal shows a need for a standards-based accounting system, rather than a rules-based one.

2. Mark-to-Market accounting was not the problem at Enron, Mark-to-Model was.

3. Off-balance-sheet deals and entities are "off" the balance sheet for a reason.

4. Wall Street analysts don't "do" complex.

5. The rating agency system breaks down when most needed. Rely on it at your own peril.

6. Beware of, and question, unexpected executive resignations.

7. Whistleblowers aren't whistleblowers if they blow their whistles inside the company walls (note: Chanos is referring to this).

8. Special investigations by corporate boards are almost always a waste of time/money, and often prove highly misleading.

9. Character cannot be compartmentalized.

10: Friends do not let (possibly guilty) friends take the stand in criminal trials.

Read the entire op-ed. Probably because Chanos did not actually read Lay and Skilling's testimony about Enron's short sellers, his comments regarding the extent to which the Lay-Skilling defense strategy relied upon short sellers in explaining Enron's demise reflects the generally overblown nature of the media's reporting of that testimony. Nevertheless, Chano's rules are helpful reminders of the myth that underlies much of American securities regulation and prosecutions such as the one against Lay and Skilling. As noted several times previously on this blog, investing heavily in a company such as Enron without a corresponding hedge is akin to playing the slots in Las Vegas. You can win big, but you can also lose big. The difference is that we don't generally create morality plays to assuage folks who gamble away their money in Las Vegas, and we don't prosecute the casino owners, either.

Posted by Tom at 6:18 AM | Comments (2) |

What might have been

In a development that drips with irony on the heels of last week's jury verdict in the Lay-Skilling trial, Houston-based Kinder Morgan, Inc. announced that its management team -- led by Kinder Morgan CEO and former Enron chief operating officer, Richard D. Kinder -- is proposing to take the oil-and-gas pipeline powerhouse private in a $13.5 billion deal that would be the largest management-led, leveraged buyout in American business history.

Any further question that the public company model is looking less attractive to private ownership as a means to building owner wealth in the post-Enron era? Chalk up a good portion of that development as another cost (among the many others, as Larry Ribstein notes) of demonizing Lay and Skilling, as well as everything having to do with Enron. Remind me again -- the purported purpose of these prosecutions was to protect investors in public markets?

At any rate, Kinder and other KM executives are planning on contributing $2.8 billion of their existing shares to the newly private company, and private-equity investors Goldman Sachs Capital Partners, American International Group Inc. and the Carlyle Group would contribute another $4.5 billion. The new private company would take on a total of $14.5 billion in debt, which means that the transaction has a total value of around $22 billion. Kinder and other KM executives are offering $100 a share for the company, which is about an 18% premium on Friday's New York Stock Exchange closing price of $84.41. The 52-week high for KM shares is $103.75.

The irony of the deal is that KM is largely the result of a combination of Kinder's talent and Ken Lay's choice. Back in 1996, Lay and the Enron board were attempting to choose between Kinder and Jeff Skilling to replace Lay as chief executive in running Enron's day-to-day operations. Lay chose Skilling, so Kinder left and began KM with about $40 million in primarily pipeline assets that he bought from Enron as a part of his severance deal. Under Skilling, Enron embraced a business model based primarily on what became a huge trading operation, while Kinder built a formidable portfolio of stodgier, but increasingly valuable, oil and gas pipeline assets at KM.

KM has been fabulously successful. Since 1999, KM's share price has increased over 150% through an aggressive expansion of the company's business in both the U.S. and Canada and the company currently transports more than two million barrels of gasoline a day through 43,000 miles of pipelines, manages over 80 million tons of coal each year, owns huge terminals for distributing oil and gas and oil-sands assets in Alberta, Canada and stores about 75 million barrels of oil and chemicals. As a result, Kinder has become one of Houston's wealthiest business executives -- his 18% stake in KM is worth around $2.4 billion based on Friday's closing KM share price.

Thus, KM's success provides one of the most interesting "what if's" of the Enron saga. What if Lay and the Enron Board had chosen Kinder over Skilling and spun off Enron's trading operation to Skilling in a similar manner to the way in which Enron provided Kinder with the base assets he used in starting KM?

As this earlier post alluded, my sense is that Kinder would have steered Enron to success as a KM-type pipeline company, albeit probably not as successful as KM, which was never hindered by Enron's less-successful business ventures. Meanwhile, I believe Skilling would have enjoyed the same type of success in building a spin-off trading company that Kinder has enjoyed in building KM. Indeed, with the benefit of 20-20 hindsight, Skilling seems like the type of fellow who would have been much more fulfilled in building an Enron spin-off into a trading powerhouse than he was in dealing with many of Enron's far-flung business operations that he neither created nor thought were particularly important to Enron's success.

Amidst the current demonization of Lay and Skilling, most folks largely overlook the fact that Lay probably would not have been indicted at all if he had declined the Enron Board's request that he replace Skilling as Enron CEO when Skilling resigned unexpectedly in August, 2001. What is ignored even more is that the entire Enron saga would almost certainly not have occurred at all had Lay made the better choice ten years ago.

Posted by Tom at 4:26 AM | Comments (2) |

May 26, 2006

Lay-Skilling, Week Seventeen

Remember that point made in the previous week summaries about the predisposition of the leaders on the jury determining the outcome of the trial of the corporate criminal case of the decade?

Well, in a strong indication that this trial was already over after the jury was selected, the jury in the Lay-Skilling trial concluded its relatively short deliberation (less than five days) before the long holiday weekend and returned a verdict of guilty on most counts against the two key former Enron executives. The jury convicted former Enron chairman Ken Lay on all six conspiracy, wire fraud and securities fraud charges, and then U.S. District Judge Sim Lake piled on by finding Lay guilty of four more charges of bank fraud in connection with Lay's bench trial over his self-admitted violation of Regulation U in using bank lines of credit improperly in buying stock in publicly-owned companies. Former Enron CEO Jeff Skilling was convicted on 18 counts of conspiracy and securities fraud, but the jury convicted Skilling on only one of ten counts of insider trading, prompting Larry Ribstein to ask "does this mean that the jury thought he didn't know enough about what was happening to bar him from trading, but that he did know enough to go to jail for fraud?"

Ah, the vicissitudes of criminalizing corporate agency costs.

Most followers of the case agree that the jury's verdict is not particularly surprising. As noted here many times during the trial, the Enron Task Force prosecutors did an effective job of presenting a fundamentally weak case against Lay and Skilling, emphasizing time and time again the real presumption upon which the Task Force's entire legacy case was based -- that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something in connection with Enron's descent into bankruptcy. Despite the transparent nature of that presumption, the harsh reality of defending wealthy business executives is that most jurors are just ordinary folks with nominal experience in complex business matters who readily accept such a presumption. That presumption -- coupled with an overwhelming public bias, particularly in Houston, against anything having to do with Enron -- was in the end simply too much for Lay and Skilling to overcome.

Although I did not attend nearly as much of the trial as many other observors, I read the entire trial transcript, so I have a reasonably good understanding of the testimony and the evidence. It's always a hard call to say when a case as long and arduous as this one may have turned in favor of the prosecution, particularly given the probability that the leaders on the jury were predisposed in favor of the Task Force's case from the beginning. However, my sense is that the Lay-Skilling defense was in reasonably good shape after completion of the Task Force's case-in-chief -- there had been no defining moment during that presentation that would have appeared to compel the jury to convict. Even as late in the trial as completion of Skilling's testimony during presentation of the defense's case, no one incident had occurred that appeared to undermine either side's position in the trial.

However, if 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 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 I'm right on that speculation, then one of the most fascinating "wonder if's" of this trial is whether Skilling would have done better had Lay's motion for a separate trial early in the case been granted rather than denied?

More time for reflection is needed before the true impact of this trial on business interests can be properly assessed, but the initial signs are not good. Beyond the waste involved in such prosecutions, it's hard to fathom how any CEO of a publicly-owned corporation after Lay-Skilling could feel comfortable about doing anything more than making the most banal public statements about the CEO's company. Indeed, little incentive exists for a CEO to say anything publicly about the CEO's company at this point other than "everything you need to know is in our regulatory filings, so go read those." The Lay-Skilling saga will quite likely represent yet another disincentive for business executives running emerging businesses to tap public equity markets, while another quite probable effect is to reduce the supply of innovative business executives who will be willing to take on the increasingly risky CEO position in a publicly-owned company at all. Given that none of that is good for the health of public equity markets, those are decidedly incongruous results for a prosecution that was supposedly premised on protecting investors in those markets.

Even more troubling for business interests is the disingenuous nature of the Task Force's theory of the case against Lay and Skilling. The Task Force pitched the case to the jurors as one in which Lay and Skilling misled unsuspecting investors by touting Enron during a period in which it was a much more troubled than they were really letting on. As Jeff Matthews pointed out during the trial, since when did it become a crime in America for business executives to be overly optimistic about their company?

Any investor who did who did any meaningful investigation of Enron over the final half-decade of its existence easily discovered that the company was a relatively highly-leveraged but innovative business with a low credit rating that was experiencing explosive growth in its trading operation. As such, it was never anything more than a speculative play for investors and, as such, one that should have been hedged. Jim Johnston of the Heartland Institute noted the same thing recently in this post:

[Investors in Enron stock] should have hedged their risk exposure. If they did not, they were like motorists who have accidents while driving without automobile insurance. We generally do not feel sorry for those people. Moreover, not being hedged is an indicator that those folks did not understand Enron’s basic business model and therefore did not deserve the run up in Enron’s stock price in 2000 and 2001. They gambled. For a while they won, but eventually lost. This is hardly any different from going to Las Vegas. Except, the federal government is not being asked to prosecute the casinos for fraud.

Stephen Bainbridge noted a similar dynamic in his initial blog post on the verdict:

One of the curious things about this case is the documented evidence that "a number of people were contradicting Enron's own rosy view of itself long before the middle of 2001." At what point does a lie by top management cease to matter if the market doesn't believe it? Presumably the government convinced the jury that people believed the lies Skilling and Lay told, but did the market really do so?

In short, the Task Force presented the jury with the convenient Enron morality play that has become so engrained in the American psyche over the past five years rather than the more nuanced truth. The morality play is easier to tell and understand, but the truth is much more likely to result in justice.

As far as appeal points go, there are a couple of obvious grounds. The first is Judge Lake's denial of the Lay-Skilling defense team's repeated motions to change the venue of the trial from Houston. Although that issue will be determined on appeal under the formidable abuse-of-discretion standard, the Lay-Skilling team will still be able to mount compelling evidence of five years of relentlessly negative local media reporting on Enron, Lay and Skilling, as well as pre-trial polling showing a jury pool that was overwhelmingly predisposed to believe that Lay and Skilling must have done something wrong. Even during the trial, the Houston Chronicle -- which did a commendable job of blending traditional news reporting with blogs in providing a trendsetting framework for covering an important news event -- featured its lead business columnist on its online Enron news page, who regularly mocked Lay and Skilling in blog posts and columns. If there ever was a case that begged for a change of venue, then this was it.

But the second obvious appeal point is the most troubling aspect of the entire case -- the Task Force's unprecedented designation of over 100 former Enron executives as unindicted co-conspirators with Lay and Skilling. Never before has such a wide-ranging conspiracy been alleged in a federal prosecution, and the transparent Task Force motive for doing so became apparent as the prosecution essentially punted on presenting any meaningful case involving a conspiracy of those unindicted co-conspirators during the trial.

The massive unindicted co-conspirator designation was vitally important to the Task Force's prosecution for two reasons. First, as noted in this post early in the trial, the designation allowed the Task Force to introduce hearsay statements of those unindicted co-conspirators through the testimony of the Task Force's cooperating witnesses. The Task Force elicited such hearsay statements from its cooperating witnesses frequently during the trial.

But even more importantly, the designation of unindicted co-conspirators effectively precluded dozens of former Enron executives with exculpatory testimony for Lay and Skilling from disputing those hearsay statements or even testifying in the trial because of the threat that a waiver of the Fifth Amendment privilege against self-incrimination would likely lead to criminal charges against such a witness if he or she were to testify contrary to the Task Force's theory of the case. As noted in this earlier post, the Task Force has used that dubious tactic in each of its Enron-related prosecutions and -- as with the other cases -- the impact on the Lay-Skilling trial cannot be underestimated.

The Task Force presented the jury with testimony against Lay and Skilling from around 15 or so cooperating witnesses who were former Enron executives. Inasmuch as the Lay-Skilling defense was hamstrung from calling former Enron executives who would have provided exculpatory testimony for the defendants, the jury could have reasonably concluded that the testimony of the former Enron executives who were cooperating with the Task Force was credible because that testimony was not counterbalanced with exculpatory testimony from other Enron executives. For example, what would the impact have been on this jury if several former Enron executives had testified that key Task Force witness Ben Glisan had repeatedly lied during his testimony? At least one juror in post-trial comments noted that the jury relied heavily on Glisan's testimony against Lay and Skilling. Would that reliance have been as great had Glisan's testimony been challenged by not just the defendants, but numerous other -- and potentially more credible -- former Enron executives?

As noted in last week's weekly post, reasonable people can differ over the issue of whether criminalizing corporate agency costs is sound public policy. However, there is simply no serious question that the Task Force’s effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious affront to the principles of justice and the rule of law upon which our criminal justice system is based. As Sir Thomas More reminds us, "do you really think you could stand upright in the winds that would blow" if such a prosecution tactic were turned on you?

The parties and their attorneys in this titanic struggle now take a well-deserved breather for a couple of months until the sentencing hearing in early September, a week or so after Labor Day. Prosecutors Sean Berkowitz, Hueston and Kathy Ruemmler all performed effectively during the trial and carved a path for further success within either the Justice Department or a more lucrative job in private practice. On the defense side, lead Skilling attorney Daniel Petrocelli and his entire O'Melveny & Myers team were brilliant in defeat, and Lay attorney Mac Secrest did an admirable job under extremely adverse circumstances in picking up a substantial part of the Lay defense when Mike Ramsey was incapacitated by health problems during the trial. On the bench, Judge Lake was his usual steady presence in handling the unwieldly case and he now becomes the focal point as the case turns to its sentencing phase.

While operating under mandatory sentencing guidelines, Judge Lake was reportedly not pleased with what he considered to be his obligation to sentence former Dynegy mid-level executive Jamie Olis to a draconian 24-year prison sentence. Shortly thereafter, U.S. District Judge Ewing Werlein rejected Task Force calls for severe 15-year sentences against the four Merrill Lynch executives who were convicted in the currently unraveling Nigerian Barge case, and Judge Lake will almost certainly be confronted with Task Force requests for even longer sentences against the 64-year-old Lay and the 52-year-old Skilling. Nevertheless, the sentencing guidelines are no longer mandatory, so Judge Lake will have more flexibility in fashioning punishment for the two men than he previously believed that he had in the Olis case. In thinking about what Judge Lake ought to do in this case, I cannot improve on Larry Ribstein's observation in concluding his post on the Lay-Skilling verdict:

Many people think that there was so much loss associated Enron that the guys at the center of it must have been villains. But they weren't villains. The jury is saying they weren't even insider traders, as if that would have made a difference. They lost as much as anybody, and that's what drove them to lie, if they did lie. This doesn't make them saints, but it should make even the most hardcore antibusiness types queasy with the denouement of this tragedy. Locking these guys up for pretty much the rest of their adult lives for being unable to face the fact that their dream had ended is not the way a civilized society would deal with this case.

Speaking of that supposedly civilized society, amidst the media barrage over the Lay-Skilling verdict, two men and their families in a much different Enron-related case cling to the faint hope that the jury in that case can ignore the rabble and render a fair verdict. A faint hope indeed.

Posted by Tom at 4:00 AM | Comments (26) |

May 19, 2006

Lay-Skilling, Week Sixteen

Week Sixteen (prior week summaries here) of the corporate criminal case of the decade was closing argument week, and the lawyers used the full 12 hours over two and a half days that U.S. District Judge Sim Lake allocated for such argument. As with opening arguments, lawyers and the mainstream media tend to overestimate the importance of closing arguments, which really are more about reinforcing the views of jurors — particularly the leaders on the jury — rather than actually changing any juror’s opinion about the case. Having said that, even though cases are rarely won during closing argument, cases can be more easily lost during closing if an attorney gets careless. I wasn’t able to attend the Lay-Skilling closing arguments because of prior commitments, but my sense from reading the transcript is that none of the lawyers who participated in closing arguments came close to losing the case for their client.

Assistant U.S. Attorney Kathy Ruemmler handled the first part of the Enron Task Force’s closing, and — although competently presented — I found reading her argument to be quite tedious. Indeed, Ruemmler's delivery was so slow in the initial hour and a half of the presentation that Judge Lake suggested at the lunch break (outside the presence of the jury, of course) that she might want to pick up the pace a bit. Rather than focusing in on specific allegedly false statements or specific testimony of witnesses, Ruemmler relied more on generalities and provocative words — Lay and Skilling’s statements were “lies,” they were “arrogant,” their testimony was “ludicrous” or “patently absurd” or "outrageous" while favorable testimony of Task Force witnesses was “compelling.” Given that virtually every factual issue relating to the Task Force charges was hotly-contested during the trial, my sense in reading the transcript was that such outspoken declarations did not mesh particularly well with Ruemmler’s presentation of evidence relating to those contested issues.

A friend who attended Ruemmer’s closing noted that one spectator dozed off in the middle of her presentation and that several of the jurors appeared to be bored stiff. Probably sensing the chloroforming effect that she was having, Ruemmler after lunch tried to liven things up a bit by punctuating her remarks with hand claps, although one can only wonder whether that might have seem contrived in comparison to the rather bland presentation. The Financial Times had the best observation about the performance in commenting that “trial-weary jurors” would likely “enjoy a little variety” when Lay lawyer Mike Ramsey delivered his closing argument, noting that Ramsey “missed most of the trial while recovering from heart surgery. It is hard to say whether the jurors or Ramsey have had the more pleasant experience.”

Upon reflection, there may be a couple of valid reasons for Ruemmler’s curious approach. First, the Task Force may gauge that it’s far ahead with the jurors in what is a fundamentally weak case and thus, a rather bland closing argument reduces the risk of a mistake that could lose that perceived advantage. Moreover, Ruemmler was the Task Force prosecutor who gave the over-the-top closing argument in the odious 2004 trial of the Nigerian Barge case (which appears to be currently unraveling on appeal) and compounded that dubious performance by absurdly calling for the immediate imprisonment of Merrill Lynch executive Daniel Bayly during his subsequent sentencing hearing in which U.S. District Judge Ewing Werlein ignored the Task Force's proposed sentence. Inasmuch as certain inflammatory statements made by Ruemmler during closing argument have been raised by the four Merrill Lynch executives in the appeal of their convictions, Ruemmler may have chosen a more vanilla approach in Lay-Skilling to avoid a similar appellate attack.

Despite the restrained nature of the presentation, Ruemmler still hammered on two central themes that the Task Force has emphasized while presenting its case — (i) the real presumption in the case (“Enron went broke, Lay and Skilling made a lot of money in leading the company, and thus, they must be guilty of some crime”), and (ii) the testimony of the supposedly numerous number of former Enron executives who testified against Lay and Skilling as cooperating witnesses of the Task Force. As I've noted many times during this trial, that latter theme is particularly disingenuous given the Task Force’s icing of dozens of former Enron executives who would have provided exculpatory testimony for Lay and Skilling, including six such witnesses for whom the Task Force specifically declined the Lay-Skilling team’s request for immunity toward the end of the defense’s case.

Reasonable people can differ over whether criminalizing corporate agency costs is sound public policy, but there is no serious question that the Task Force’s effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious affront to the principles of justice and the rule of law upon which our criminal justice system is based. The Task Force prosecutors' repeated references during closing on the large number of Enron executives/cooperating Task Force witnesses who testified against Lay and Skilling — intimating “how could all these people be lying?” — only underscores the fact that this jury should not have been prevented from hearing from the many former Enron executives who would have provided exculpatory testimony for Lay and Skilling. The fact that this key issue in the trial has been largely ignored outside a few other blogs is a startling reflection of the fact that a mainstream media that has already convicted Lay and Skilling in the court of public opinion is not ready to confront the grave implications of such prosecutorial abuse, even when such abuse is now regularly emerging in other cases.

As expected, Daniel Petrocelli’s performance on behalf of Skilling was the most entertaining of the closing arguments. Indeed, Petrocelli performance in this trial — win or lose — has cemented his reputation as one of the best trial lawyers in the U.S., and his closing argument reflected that status. Juggling passion with keen insight and genuine self-deprecation, Petrocelli skillfully challenged the Task Force’s entire theory of the case while using the specific language from the Task Force’s indictment juxtaposed against specific excerpts of testimony from various Task Force and defense witnesses. The fact that the Task Force attempted to suppress use of the indictment during the trial (here and here) seemed to empower Petrocelli.

Particularly effective was Petrocelli’s dismemberment of the Task Force’s key conspiracy allegation, which the Task Force barely touched on during the trial:

Let me ask you a question, . . . Do you know when this conspiracy started? . . . You've heard the whole Government's case. They've given their closing argument. Do you know when [the conspiracy] started? Do you know what happened? What event started it? Was there a meeting? Was there some kind of conversation? Was -- what was there? When did it -- when did it happen? Where did it happen? Can you answer these questions?

By the way, if you hesitate -- if you hesitated, that's reasonable doubt. Right there. . . I can't answer these questions. I probably know this case better than anybody, I will immodestly say. Yes, some of my client's traits are rubbing off on me. I don't know when this conspiracy happened. I don't know who's in it. I don't know where it happened. I don't know how it happened. I can't tell you the foggiest thing about it. . . . How can that be? How can that be? How can we have gotten this far? How can we be closing the case and sending it to you and nobody knows where the conspiracy is?

Yet, that conspiracy allegation is the lynchpin upon which the Task Force used extensive hearsay testimony during the trial and kept out exculpatory testimony for Lay and Skilling. But for the Task Force designating those witnesses with exculpatory testimony as unindicted co-conspirators and prompting them to decline to testify on the basis of their Fifth Amendment privilege against self-incrimination, the testimony in this trial would have been dramatically different.

Petrocelli also hammered away at the presumption underlying the Task Force’s case:

Mistakes are not a crime. [Skilling] made a lot of mistakes. He said, "I should have sold those assets off in the international arena. I didn't do a good job. I miscalculated on broadband. I was a step behind. I should have better anticipated the collapse of the bandwidth market. I trusted Andy Fastow. If I knew now what I knew then, of course, there wouldn't be an LJM. I made mistakes."

Mistakes are not a crime. They may lead to liability in a civil case, which it felt like we've been in for three months; and God knows, he's been sued in 200 cases. If he made mistakes and it violates civil laws, then he'll have to deal with that; but this is a criminal case. Mistakes are not a crime.

Finally, Petrocelli explained why the credibility of the Task Force’s cooperating witnesses is suspect:

[Task Force prosecutors] talked about lies and choices. That's the theme of their case: lies and choices. Well, the Government, that applies to them, too. They had choices. . . If they really wanted to get the truth out of this case, they didn't have to use cooperators. That was their choice. If they wanted to use cooperators, they didn't have to make these deals with them. That was their choice. If they wanted to use cooperators, they didn't have to put off their sentencing. Not one of them has been sentenced. [. . .]

So Glisan doesn't make a deal at that time because he's not prepared to do everything they want him to do until he ended up in the hole in solitary confinement and then in hard prison with two convicts and a single toilet. And then that changed his mind. Then he got a chance to come out on furloughs, see his family, go to a camp. That's what happens to people. . . . it could happen to anybody, . . . It robs you of your free will. It's not right. [The prosecution] can do it. You don't have to accept it, though. You don't have to believe those witnesses. You can demand a higher quality of proof.

But as entertaining as Petrocelli’s closing was to read, the most surprising development of the closing arguments was the performance of the Lay defense team, which — along with Lay — has come under some heavy criticism in the media and the blogs during the trial. When I heard that Lay and his team had decided to have all four lawyers on the team do a part of the closing argument, I must admit that I first thought that such an unusual approach was a recipe for disaster.

However, I was wrong. Lay attorney Bruce Collins led off with a superb analysis of the charges against Lay, and again used the specific language in the Task Force’s indictment as a guide for the jury in comparing the actual charges against the testimony and the evidence. Collins is not blessed with Petrocelli’s panache (few are), but his closing was a clinically effective breakdown of the Task Force’s entire case against Lay. Mac Secrest — who performed admirably when forced at mid-trial to take on the lion share of the Lay defense when Ramsey was disabled by surgery — followed with an astute analysis of the Task Force’s cooperating witnesses, pointing out how their credibility is undermined by the very terms of their plea agreements and the substantial amount of time that the Task Force expended in rehearsing their testimony. Following Secrest, Chip Lewis’ gave his short, verbal assault on Task Force prosecutor John Hueston (“Don’t come to Houston, Texas and lie to us”), which seemed a bit over-the-top in reading it, but then the folksy Ramsey followed Lewis with a relatively short (12 minutes) and measured commentary on the nature of reasonable doubt and reminding the jurors that they, not the Task Force, are really who represent the United States in the courtroom.

Finally, Task Force director Sean Berkowitz finished the closing arguments on Wednesday morning with a fast-dash rehash of many of the same points that Ruemmler hit on Monday. Berkowitz's performance was workmanlike, but he has never seemed particularly enthralled with the Lay-Skilling indictment, which was prepared well before he joined the Task Force. During the trial, Berkowitz did not fare particularly well during the cross-examination of Skilling and seemed to struggle at times with some of the arcane business principles and practices that were involved in the case. Consequently, it’s really not surprising that he closed with the following analysis of what he thinks the case is about:

You [jurors] get the final word in this historic case. You get to decide whether [Lay and Skilling] told truths or whether they told lies. Black and white. I submit, ladies and gentlemen, that, when you consider all of the evidence, you will conclude beyond a reasonable doubt that these men lied. They withheld the truth. They put themselves in front of their investors. And I'm asking you to send them a message that it's not all right. You can't buy justice. You have to earn it.

Or were Lay and Skilling simply struggling on behalf of shareholders to put the best face possible on an innovative but admittedly highly-leveraged company with a booming and profitable trading operation that found itself in a fatal credit crunch when the commercial paper market dried up in response to public disclosure of Fastow’s financial shenanigans, the company’s relatively low credit rating, a falling stock price and the uncertainty of an anxious post-9/11 stock market?

Those two starkly different frameworks are essentially what the parties have presented to the jury during this trial. Which one the jurors choose to adopt will ultimately determine the outcome.

So, where does that leave us? The jury went home for the weekend after deliberating for a day and a half without any communication to Judge Lake. The betting markets continue to predict convictions of both men at around a 70% probability, although the bet on a Skilling conviction has not increased during the trial while the bet on a Lay conviction has risen markedly. The betting market is probably a reasonably good measure of the public’s attitude about the case after being deluged with mostly anti-Enron media reports for over five years now.

However, I continue to believe that that this jury’s verdict will depend largely on the leaders of the panel. If those leaders were predisposed to convict Lay and Skilling from the outset of the trial, nothing in this four month slog is likely to have changed their position. But if even one of those leaders is skeptical of the Task Force's methods or case, then the Task Force has not presented nearly a strong enough case to ensure convictions by any stretch of the imagination. If the leaders have doubts, then my sense is that a mix of acquittals and a hung jury on some counts — similar to what occurred in the first Enron Broadband trial — is a distinct possibility. The jury returns on Monday to deliberate and will do so through Thursday of each week until a verdict is reached. In the meantime, the Task Force and the Lay team began the trial yesterday of Lay on the charges relating to Reg U, which prompted Ramsey to comment awhile back "I thought Reg U was a tomato sauce." That case is being tried to Judge Lake without a jury and will likely conclude early next week. Judge Lake has already stated that he will not announce a verdict in that case until after the Lay-Skilling jury comes back with its verdict.

By the way, speaking of the Enron Broadband case, the first re-trial of that case is expected to go to the jury next week. Wouldn’t it be ironic if the jury in that trial decides the core issues relating to Enron’s Broadband unit differently from the way the Lay-Skilling jury decides those same issues? In the wacky world of criminalizing corporate agency costs, it could happen.

Posted by Tom at 4:00 AM | Comments (7) |

May 12, 2006

Lay-Skilling, Week Fifteen

Week 15 of the corporate criminal case of the decade (previous weeks summary posts here) was the relative calm before the final battle of closing arguments next week. Although there was a skirmish over the Ostrich jury instruction, the lull in the trial provides an opportunity to step back and survey the massive landscape of this important case and attempt to place what has occurred during the trial in a reasonable framework for evaluating closing arguments.

As noted previously, the Enron Task Force has done a much better job in this trial of presenting its case than in the trials of the three previous Task Force prosecutions, the Arthur Anderson case, the Nigerian Barge case and the Enron Broadband case. However, as was the case in all three previous trials, the Task Force has presented a fundamentally weak case against the defendants in this trial.

That the Task Force has made a weak case certainly does not mean that the prosecution cannot win it. Indeed, given the societal bias against anything related to Enron, the betting markets have lined up solidly in favor of conviction of both defendants. But that does not alter the fact that the Task Force’s case is tenuous, perhaps best reflected by the fact that the Task Force believed it necessary to protect its heavily-scripted case by taking the unprecedented step of effectively precluding dozens of former Enron executives with exculpatory testimony for Ken Lay and Jeff Skilling from testifying in the trial. If the Task Force were confident in the strength of its case, then why would it be necessary to prevent the jury from hearing such relevant testimony? In the event that Lay and/or Skilling is convicted, you can make a good bet by wagering that this Task Force tactic will be a front-and-center issue of any appeal.

Another reflection of the weakness of the Task Force’s case is the degree to which the Task Force’s theory of the case changed since the original indictment against Skilling and Lay over two years ago. In fact, as noted earlier here, the Task Force’s indictment ended up being such a mess that the prosecution attempted to prevent Lay and Skilling from using it in questioning certain witnesses during the trial because the prosecution conceded that it was too confusing. About the only thing that has been consistent about each transformation in the Task Force’s theory of the case is the unstated but nevertheless omnipresent presumption that underlies this entire prosecution — i.e., that Enron went bust and Lay and Skilling became rich while leading the company, so they must be guilty of some crime in connection with the company’s meltdown.

Initially, the prosecution alleged that Lay and Skilling presided over a house of cards at Enron that was hidden from the investing public by the fraudulent behavior of Enron management and its conspiring auditor, Arthur Andersen. Then, after a unanimous Supreme Court rebuked the Task Force for prosecuting Andersen out of business, the Task Force modified its original story to allege that Lay and Skilling had also fooled Andersen about Enron’s true nature. After the plea bargain of former Enron chief accountant and former Lay-Skilling defendant Richard Causey about a month before the trial, the Task Force's case evolved into a fairly standard “pump and dump” theory based on Lay and Skilling's alleged non-disclosure of material information.

As an aside, one of the many daunting messages that this prosecution is sending to the business community is that an executive of any publicly-owned corporation better disclose every bit of bad news about their company. Otherwise, that executive will risk prosecution -- under the sharp lens of hindsight bias -- for misleading the investing public about the true health of the company. If the Task Force's approach is successful against Lay and Skilling, then one has to wonder why any executive of a publicly-owned corporation would risk saying anything to analysts and the investing public other than "go read the financial statements in our regulatory filings. It's all there." In fact, in this insightful post, Jeff Matthews asks the salient question: Since when did corporate spin-doctoring in America become a crime?

Once the Task Force finally fixed on its theory of the case, the prosecution presented a case during the trial that largely relied on a complex jumble of innuendo and opinion from plea-bargained prosecution witnesses that requires the jury to connect the dots of many amorphous points in finding a crime. For example, the Task Force does not contend that either Lay or Skilling was involved in approving fraudulent accounting, but rather that mainly Skilling engineered a reorganization of a poorly-performing Enron business unit in a manner that hid losses of that unit underneath the blanket of high profits of Enron's trading unit. The Task Force theorizes that the hiding of these losses — along with over-reserving to hide excess profits of the trading unit — allowed Skilling and Lay to misrepresent Enron to the investing public as a stable logistics company rather than the more volatile trading company that prosecutors allege it had become. Stated simply, the Task Force contends that Enron was a successful but volatile trading company that was having severe financial problems in other parts of its business empire, and the greedy Skilling and Lay covered up the real condition of the company so that they could unload their Enron stock at higher prices than what they would have gotten had they disclosed the true financial condition of the company to the investing public.

However, the premise for the Task Force’s theory seems particularly flimsy. Did Lay and Skilling really orchestrate this alleged massive fraud simply because they are greedy men? During his testimony, Skilling did not come across as a greedy man at all. Similarly, even though the Task Force humiliated Lay during cross-examination regarding his legal use of a company line of credit and his family’s formerly lavish lifestyle, he did not appear to be a particularly greedy man, either. As Lay lawyer Mike Ramsey foreshadowed during opening argument:

"When you don't have a case, you talk about something else, and that's what [the prosecution is] doing when they are trying to make Ken Lay look greedy and when they start talking about him selling stock based on inside information."

Meanwhile, almost all of the incriminating testimony against Lay and Skilling came from former Enron executives who are cooperating with the Task Force, and there are considerable problems for the Task Force with regard to each one of those witnesses. For example, former Enron investor relations executives Mark Koenig and Paula Rieker claimed that they believed that Skilling and Lay misled the investment community in various ways, but they admitted that their knowledge of Enron’s finances was a mile wide and an inch deep, and that they didn't really know the mechanics of how Enron’s earnings estimates were finalized. On the other hand, former Enron Broadband executive Ken Rice asserted that Skilling misled the investment community on the prospects of Enron's broadband unit, but conceded on cross-examination that he also believed the unit had great long-term potential.

Similarly, the prosecution went for a cheap score (also here and here) with former Enron Broadband executive Kevin Hannon by eliciting from him that Skilling had supposedly admitted during a May 2001 meeting with a group of other Enron executives that "they're on to us" after a small analyst firm had produced a research note critical of some Enron transactions. However, when you think about it, Hannon's testimony really undermines the Task Force’s core case. The report that supposedly prompted Skilling's remark was based on negative information about Enron that the company had made available to the efficient securities market. The report was not a particularly novel analysis of Enron; it came a couple of months after Bethany McLean's much-ballyhooed Fortune article in early 2001 that suggested that Enron stock was overpriced. How does the Enron Task Force square publication of the report's negative evaluation based upon information that Enron disclosed to the efficient securities markets with its core allegation that Skilling withheld such information from the markets?

Another risk to the Task Force is how the jury assimilates the highly-publicized and sometimes bizarre testimony of former Enron CFO, Andy Fastow, and his former sidekick, Ben Glisan. Although Fastow implicated Skilling in "secret side deals" and undisclosed "bear hug" guaranties, Fastow is such a despicable character that it remains decidedly unclear whether the prosecution gained much of anything with the jury from his testimony. Moreover, the prosecution's emphasis with Fastow in regard to the Global Galactic memo creates a huge hole in its case given that the Task Force chose not to risk attempting to corroborate Fastow's testimony on that key issue with the testimony of former Enron chief accountant, Richard Causey.

Likewise, former treasurer Glisan — whose heavy-handed treatment by the Task Force had to have made an impression on the jury — contended that he had been advising Lay and others of Enron's dire financial condition since mid-August of 2001 immediately after Skilling's resignation. However, he had no meaningful documentary evidence to support his testimony on that issue. In contrast, Lay's attorneys on cross-examination introduced Glisan's own reports from September and October, 2001 detailing Enron's improving finances, which included one presentation dated October 8 in which Glisan informed Enron’s directors that the company was "on target" to meet its year-end liquidity goals, that it would hold onto its investment-grade credit rating and calling a lowered outlook the "most likely worst-rating outcome" from its third-quarter earnings report. Ten days later, Glisan transmitted an October 17 Deutsche Bank credit analysts' report to Mr. Lay and others that noted Enron's "liquidity remains solid."

Thus, the Task Force's case relies heavily on testimony from cooperating witnesses who initially lied to investigators — sometimes for years — until finally copping a plea in which they bargained for a reduced prison term and usually a substantial net worth in return for testifying against Lay and Skilling. Despite alleging now that Lay and Skilling were involved in lying about Enron to the investment community years ago, none of the Task Force witnesses produced any meaningful corroborating documentary evidence that they had any reservations at the time about the statements that Lay and Skilling were making. None of the witnesses testified that Lay or Skilling at the time ever admitted that they thought they were making misleading statements. None of the Task Force witnesses provided meaningful testimony in regard to the alleged huge conspiracy within Enron to cover up the alleged wrongdoing at the company. In short, the Task Force would have the Lay-Skilling jury believe that the biggest corporate conspiracy in American history was hidden from everyone except Lay, Skilling and these relative few Enron executives who have copped pleas, struck deals while in prison or entered into non-prosecution agreements. That's not a compelling case in my book.

Given that the Lay-Skilling defense took a considerably shorter amount of time to put on than the Task Force’s case, I’ve simply highlighted the following posts that summarize Skilling and Lay’s rebuttal to the Task Force’s charges:

The initial Lay-Skilling witnesses.

Jeff Skilling defends Enron and himself.

The misdirected cross-examination of Skilling.

Attempting to equate humiliation with guilt in regard to Ken Lay.

The real story about Ken Lay’s Enron line of credit.

What is particularly interesting to note while reading through these posts is how the focus of the Task Force’s case subtly shifted during presentation of the defense’s case. Rather than attempting to challenge Skilling and Lay on the core business fraud charges, the Task Force during the defense case emphasized marginal but easy-to-understand matters such as PhotoFete and Lay’s personal finances. By the time Lay’s testimony was completed, the Task Force prosecutors had asked Lay and Skilling several hundred questions over PhotoFete and Lay's handling of his personal finances while asking precisely zero questions on such issues as the alleged Global Galactic agreement and the alleged huge conspiracy at Enron. Yet another indictation that this is simply not a strong prosecution case.

While I’m at it, the following are a few more of the posts dealing with key issues or testimony that have arisen during the Lay-Skilling trial:

The great waste of criminalizing risk-taking.

While the price of asserting innocence is high, pleading guilty is lucrative.

The real presumption in the Lay-Skilling case.

The key evidentiary issue in the Lay-Skilling case

The Nigerian Barge case unravels for the Task Force during the Lay-Skilling trial as William Fuhs is released from prison.

Andy Fastow’s testimony, the increasingly bizarre case of Lea Fastow and the possible Fastow forgery of Causey’s signature on Global Galactic.

By the way, where is Waldo, er, . . I mean, Causey, anyway?

Ben Glisan’s sordid deal with the Task Force and his 30,000 foot flyover testimony.

The insufferable Sherron Watkins.

The Task Force prevents the jury from hearing the entire story of what happened at Enron.

So, on Monday, U.S. District Judge Sim Lake will read the 40 plus page charge to the jury and then Prosecutor Kathy Ruemmler will give 3-4 hours of closing argument for the Task Force. On Tuesday, Dan Petrocelli will give about 3½ hours of argument on behalf of Skilling and Mac Secrest and Mike Ramsey will provide about 2½ hours of argument on behalf of Lay. Task Force director Sean Berkowitz will close with a couple of hours on Wednesday morning and then Judge Lake will give the corporate criminal case of the decade to the jury.

My experience with closing arguments is that they are mostly about reinforcement of beliefs that have developed during the trial and rarely about persuading jurors about changing their position. Consequently, there is a good chance that the Lay-Skilling jurors have already made up their minds about the case and, given the enormous pre-trial publicity in this case, they may have done so even before the trial began.

If the jurors have already made their decision before the trial began, then that would not only be an injustice for the defendants, but also an unfortunate ending to this chapter of the Enron saga. Despite the fact that the Task Force has prevented many witnesses with exculpatory testimony from testifying on behalf of Lay and Skilling, much of what has been presented during the trial conflicts with the presumptions and biases of the numerous societal forces that adhere to the now familiar Enron morality play that rejects any notion of ambiguity or fair-minded analysis in determining the truth of what really happened at the company. Twelve citizens of Houston have an opportunity to evaluate the evidence presented during the Lay-Skilling trial objectively without the veneer of that Enron morality play.

For the sake of justice, the rule of law and our criminal justice system, here's hoping they do.

Posted by Tom at 5:00 AM | Comments (3) |

May 11, 2006

Overreacting a bit to the Ostrich instruction

Alexei Barrionuevo, who has done an excellent job covering the Lay-Skilling trial for the NY Times, weighs in today with this article reporting on U.S. District Judge Sim Lake's decision to include in the jury charge an instruction relating to the "conscious avoidance" or "deliberate ignorance" for both Skilling and Lay, which is a lower standard for finding the men guilty of conspiracy and fraud related to the company's collapse in December 2001. In short, such an instruction allows the jury to convict the defendants of crimes if it concludes that the former executives put their heads in the ground (thus, the instruction is nicknamed "the Ostrich instruction") to avoid finding out about criminal activity at the company.

The instruction is important from a legal standpoint, particularly given that the U.S. Supreme Court reversed the conviction of Arthur Andersen in an earlier Enron Task Force prosecution because of a faulty jury instruction. Inasmuch as neither Skilling nor Lay contended in their defense that they were detached from running Enron during the time in which the Task Force alleges that they committed crimes, and the Task Force has prosecuted the case as a fairly typical "pump and dump" case, there is a good argument that inclusion of the instruction in the charge is reversible error if either or both men are convicted. Barrionuevo quotes my old friend, Houston-based criminal defense lawyer, Joel Androphy:

"The government can't argue a theory, offer evidence on a theory and then do a 180 and argue for an instruction on an alternate theory. That's not permissible."

Although important from a legal issue standpoint, my sense is that the Ostrich instruction in this special case is probably not all that important from a practical standpoint. Because of the almost unprecedented negative media coverage relating to Lay, Skilling and Enron prior to this trial, the much more important issue is whether the jury was truly impartial at the outset of the case. If they were not, then Lay and Skilling's fate was sealed from the beginning and the Ostrich instruction is not going to affect the jury's decision in the slightest. On the other hand, if the jurors are truly impartial -- particularly the leaders on the jury who will guide the panel to a decision once deliberations begin -- then my sense is that the jurors are unlikely to rely on something as amorphous as the Ostrich instruction to convict these men in a case of this nature.

In short, if the jury is truly impartial -- the key issue in the trial -- then they are likely going to want more meat than merely Lay and Skilling "should have known" to send these men to the slammer for the rest of their lives.

Posted by Tom at 6:02 AM | Comments (4) |

May 10, 2006

Anything for a conviction

As noted here yesterday, the Enron Task Force refused Ken Lay and Jeff Skilling's request to have the prosecution recommend to U.S. District Judge Sim Lake that half-a-dozen former high-level Enron executives who have declined to testify during the trial on Fifth Amendment grounds be granted immunity from having their testimony used against them in a subsequent prosecution.

Those witnesses -- several of whom have been mentioned prominently in testimony during the trial -- would likely provide exculpatory testimony for Lay and Skilling if they were to testify. The Lay-Skilling defense team limited their immunity request to those six witnesses even though the Task Force fingered the unprecedented number of the Task Force identified over 100 former Enron executives as unindicted co-conspirators in the case for the transparent purpose of preventing the jury from hearing the full story of what happened at Enron.

Now, according to this Mary Flood/Houston Chronicle article, the Task Force is requesting that Judge Lake go even further and instruct the Lay-Skilling defense team not to inform the jury during closing arguments of the Task Force's decision not to allow the jury to hear all the witnesses with relevant testimony about the charges against Lay and Skilling. In short, the Task Force's position is "we don't want the jury to hear all the relevant evidence, but we also don't want the other side telling the jury that we don't want them to hear all the relevant evidence." In the meantime, you can bet that the Task Force will tell the jury during closing argument that the testimony of the dozen or so former Enron executives who testified against Lay and Skilling under plea deals with the Task Force is pervasive evidence of Lay and Skilling's guilt. A copy of the Task Force's motion is here.

The destroyed lives, careers and economic wealth that lies in the wake of the Task Force's previous Enron-related prosecutions is a foreboding legacy of this abominable Task Force tactic that ensures that juries will never hear exculpatory testimony for the defense. During those earlier trials -- the Arthur Anderson case, the Nigerian Barge case and the Enron Broadband case -- the Task Force identified dozens of former Enron executives as either targets of the Enron criminal investigation or unindicted co-conspirators of the defendants. As a result, the Task Force effectively prevented many witnesses with exculpatory testimony for the defendants in those cases from testifying because of the threat that the witnesses' waiver of their Fifth Amendment privilege would likely lead to criminal charges against them if they chose to testify contrary to the Task Force's position in those cases.

The huge impact of this Task Force tactic was brought into full focus during the first trial of the Enron Broadband case last year. That trial initially appeared to be a sure-thing for the prosecution, but the Task Force's case unraveled quickly as witnesses Lawrence Ciscon and Beth Stier both testified to a riveted jury about the Task Force's threats of prosecution against them if they provided exculpatory testimony on behalf of the former Enron executives on trial in that case. That trial ended in a disastrous mix of acquittals and jury deadlock on the Task Force's charges.

Arthur Andersen and the defendants in the Nigerian Barge trial were not so fortunate. In Andersen, the Task Force used the tactic in maliciously destroying a fine American company that had contributed to orderly commerce and the preservation of wealth in the U.S. for over eight decades. Likewise, in the Nigerian Barge case, dozens of witnesses from Enron and Merrill Lynch with exculpatory testimony for the defendants declined to testify because of the threat to Task Force retribution. The result was an an unspeakable injustice for the four Merrill Lynch executives convicted in that case.

Thus, our "Justice" Department is not really about "justice" at all. Rather than having a jury fairly evaluate all evidence relating to its charges against unpopular defendants or -- as Larry Ribstein points out today -- allowing defendants access to funds necessary to defend themselves effectively, our Justice Department is much more interested in indulging public bias against those defendants. Indeed, that bias is so pervasive with regard to the Lay-Skilling case that the Houston Chronicle runs vile columns and blog posts on almost a daily basis embracing the prosecution's calls for conviction of the defendants without so much as a mention -- much less meaningful analysis -- of the serious implications to justice and the rule of law arising from the government effectively preventing witnesses with exculpatory testimony for the defense from testifying in the case. Something is seriously wrong with the administration of justice in America when the judiciary and the media blithely accept the government preventing a jury from hearing favorable testimony for defendants who are facing the overwhelming governmental power to imprison them for most of the rest of their lives.

Posted by Tom at 4:45 AM | Comments (11) |

May 5, 2006

Lay-Skilling, Week Fourteen

Week 14 (previous week summaries here) of the corporate criminal case of the decade is in the books and the biggest news is that U.S. District Judge Sim Lake has issued an edict that he does not want the case to go beyond Week 16. So, it presently looks as if the Lay-Skilling defense will wrap up its case-in-chief next early next week, the Enron Task Force will present a short rebuttal case, and then the reading of the jury charge and the closing arguments will begin on Monday, May 15th with the jury to get the case on Wednesday, May 17th.

So, yes, it does appear that this long slog is really coming come to an end.

The first part of Week 14 was the last chapter of the Ken Lay phase of the trial, and the cross-examination of Lay this week was not much different from last week’s. Prosecutor John Hueston wasted little time addressing the actual business fraud charges against Lay, choosing again to spend far more time attempting to equate humiliation with guilt in hammering Lay over his personal financial affairs. Although not particularly persuasive substantively, Hueston's approach was at least consistent with the Task Force’s strategy of masking a fundamentally weak case through reliance on the real presumption that underlies the Task Force's theory of the case — i.e., that Enron went bust and Lay and Skilling are rich, so Lay and Skilling must be guilty of some crime.

No corporate criminal trial in recent memory (perhaps ever) has had the extensive media coverage of the Lay-Skilling trial. Multiple blogs and major newspapers cover the trial daily, and the coverage is generally helpful in attempting to keep up with what’s going on in the trial. However, just as the media coverage generally of Enron from the beginning has been overwhelmingly slanted against the company and its executives, the media coverage of the Lay-Skilling trial has not been particularly insightful in the depth of its analysis of the substance of the Task Force’s business fraud case against the two former executives. Interestingly, a good dose of the vacuity that passes for analysis of the Lay-Skilling trial comes from the media's various legal “experts,” some of whom have little or no experience in complex business cases and who appear to be competing with each other to have the most colorful comment of each day. One such expert even pulled out the Watergate card this week by comparing Lay to the late former president, Richard Nixon.

Really penetrating analysis, eh?

Meanwhile, the media reported breathlessly this week on Hueston’s questioning of Lay regarding his relatively lavish lifestyle and use of Enron stock to pay his company line of credit while attempting to reassure employees and the market that Enron was still a fundamentally strong company. During and after that testimony, the media covering the trial reached a virtually unanimous consensus that Lay and his defense team had performed poorly. However, none of the media reports or legal experts raised a key fact relating to the Task Force’s focus on Lay's personal finances — i.e., that the Task Force has not charged Lay with any crime relating to either his use of Enron stock to pay his company line of credit or his lavish lifestyle.

Sort of an important point, don’t you think?

In reality, the entire line of credit issue smacks of a red herring. Lay traditionally took a substantial part of his compensation from Enron in stock, which was a good thing for both the company and him. As an accommodation to Lay, Enron’s board approved a line of credit -- eventually reaching $7.5 million -- that allowed Lay to monetize the stock efficiently by borrowing on the line and then repaying it with his Enron stock. Each year, Lay and Enron complied with the requirement under S.E.C. rules and regulations to disclose Lay’s use of stock to pay the line.

That arrangement probably wouldn’t have made any difference in this trial except that Lay made what turned out to be a bad financial decision in regard to his personal financial affairs well before the time that the Task Force contends he was involved in wrongdoing at Enron. Because his $300 million-plus net worth was almost entirely invested in Enron stock, Lay and his financial advisers decided that he should diversify his portfolio. However, Lay continued to believe that Enron stock was the best value in his portfolio, so rather than selling the stock and using the proceeds to buy other securities, Lay borrowed $100 million from third party financial institutions, pledged his Enron stock as collateral and began buying other assets with the loan proceeds. In so doing, Lay was exhibiting an optimism and confidence in the underlying value of Enron, a fact that the Task Force conveniently ignores in blithely alleging that Lay knew that Enron was a sinking ship.

Unfortunately for Lay, the steady decline in Enron stock price during 2001 undermined the value of the Enron stock collateral for the $100 million in personal loans that he had used to diversify his portfolio. Thus, as the collateral value fell and margin calls resulted, Lay used the most efficient facility at his disposal to repay about $70 million of debt in 2001 — i.e., the proceeds from draws on his company line of credit, which he repaid with his Enron stock.

Despite the straightforward nature of the Lay’s line of credit arrangement, the Task Force spent more time on Lay's handling of it than any other subject during his cross-examination. Hueston hammered Lay relentlessly over the fact that Lay did not disclose to Enron employees in late October, 2001 that he was using Enron stock to repay the line of credit, on one hand, while advising the employees at the same time that he was purchasing Enron stock and that the stock remained a good value, on the other. Similarly, Hueston skewered Lay for his draw of a final $1 million on the line of credit roughly five days before Enron filed its bankruptcy case and Lay's application of those proceeds to pay the remaining balance on the mortgage on his multi-million dollar homestead at the tony Huntington condominiums near River Oaks. Although the Task Force has not charged Lay with any crime regarding his handling of the line of credit, Hueston repeatedly asserted that Lay's conduct in regard to it reflects that he is a hypocrite who lacks credibility on other issues.

Lay's eve-of-bankruptcy draw on the line of credit was clearly ill-advised, but the Task Force is simply wrong in its contention that Lay was largely dumping Enron stock at a time when he was advising employees and the market that it was a good value. For example, in September, 2001, Lay accepted $10 million in cash and another $10 million in Enron stock when he agreed to step back into the CEO role after Skilling resigned, and Lay used the $10 million in cash to repay a portion of his margin loans. In so doing, Lay effectively bought $10 million in Enron stock, meaning that Lay acquired over $20 million in Enron stock roughly a month before he made the statements to Enron employees of which the Task Force complains. Consequently, even though Lay was also paying his line of credit with Enron stock at the same time, his acquisition of another $20 million in Enron stock is consistent with the optimistic view about Enron that Lay was communicating to employees and the public. In its quest to demonize Lay, the Task Force simply ignores that salient fact.

In view of the Task Force’s emphasis on Lay's handling of his line of credit, I suspect that the prosecution may attempt to morph Lay’s non-disclosure regarding his use of Enron stock to pay the line of credit into an alleged basis for either a wire fraud or securities fraud charge against Lay. As noted above, there is nothing in the indictment about any of this being the basis of criminal charges against Lay, so it will be interesting to see how Judge Lake deals with that issue if the Task Force indeed seeks to make such a case to the jury. However, the underlying weakness of the Task Force’s business fraud case against Lay and Skilling is perhaps best reflected by comparing the number of questions that the Task Force prosecutors asked Lay and Skilling over such titillating issues as PhotoFete and Lay's handling of his personal finances (literally hundreds) versus the number of questions that the prosecution asked on such core business fraud issues as the alleged Global Galactic agreement and the alleged huge conspiracy at Enron (zero). Just to underscore the weakness of the prosecution's case on those points, the Task Force announced on Thursday that it was not going to call former Enron chief accountant and Lay-Skilling co-defendant Richard Causey as a rebuttal witness. So much for the Global Galactic and conspiracy issues.

Accordingly, at the Week 14 pole, the corporate criminal case of the decade appears to be boiling down to PhotoFete and whether Lay should have disclosed that he was using Enron stock to pay his company line of credit while he was touting Enron. Despite the media's fixation on Hueston's hammering Lay regarding his personal finances, Lay actually acquitted himself reasonably well on cross-examination regarding the issues relating to the Task Force’s core business fraud charges. Moreover, as most of the media fled the courtroom as Lay’s testimony on the lives of the rich and famous ended, a series of expert witnesses continued to poke holes in the foundation of the Task Force's business fraud charges over the latter part of the week. For example, I was able to sit in for a couple of hours during Wednesday afternoon’s testimony as Skilling accounting expert Walter K. Rush schooled Task Force chief Sean Berkowitz — who does not let a disadvantage in specialized knowledge deter him from lengthy cross-examination — on the validity of Enron’s accounting for its reserves and the resegmentation of the EES retail unit. Rush was clear and convincing, and explained application of relevant accounting principles to the jury in a clearer manner than any witness to date. Berkowitz was no match for him.

How all of this is going over with the jury is anyone’s guess. Could a jury convict either or both of the defendants based on such a weak case? Sure, it happens all the time. However, Skilling and Lay have presented — under extraordinarily adverse circumstances — a compelling defense that they were not involved in any criminal wrongdoing at Enron and that the company's failure was, at worst, the result of business misjudgments, such as maintaining too low a credit rating and too much leverage for a company with a huge trading operation to endure the post-bubble and post-9/11 market’s reaction to the negative Fastow/Kopper-fraud disclosures during the fall of 2001. Can a jury immersed in anti-Enron publicity for the past five years see through beguiling theories of massive frauds, conspiracies and high lifestyles to grasp that simple truth? That’s the key question still to be answered in Houston as the corporate criminal case of the decade enters its final two weeks.

Posted by Tom at 4:11 AM | Comments (8) |

April 28, 2006

Lay-Skilling, Week Thirteen

Week Thirteen of the corporate criminal case of the decade (prior weeks posts here) was the Ken Lay week and, based on the media reports, it was alternately either the most boring or the most entertaining week of testimony in the trial to date.

However, from my vantage point of reading the transcript of each day’s proceedings and sitting in occasionally on the trial when I can, Lay’s testimony underscored what the Enron Task Force’s strategy has become in this case — a show trial to degrade Lay and Skilling for denying the presumption that underlies Task Force’s case. In so doing, the Task Force is hoping that the jury equates humiliation with guilt rather than noticing the gaping holes that have emerged in the Task Force’s case.

Before addressing Lay’s testimony, it’s helpful to step back and review how we got here. Since shortly after the Enron saga began in late 2001, the Task Force and a large number of media outlets have promoted the now common theme that Enron was merely a house of cards and that the company's intrinsic instability was hidden from the investing public by a deceitful management team that Lay and Skilling led.

That view has been readily embraced by a wide-range of societal forces, such as publicity-seeking politicians who don't allow facts to get in the way of demonizing unpopular entrepreneurs for political gain, government prosecutors who improperly expand the reach of criminal laws to further their careers, competing businesspeople and business plaintiffs’ lawyers seeking to profit from Enron's demise and a pliable public that finds it easy to resent wealthy businesspeople, particularly after the bursting of a stock market bubble. As reflected by this discussion over the gross injustice of what happened to the four Merrill Lynch executives in the Nigerian Barge case (one that hopefully is in the process of being righted), these societal forces believe that they understand the Enron morality play so thoroughly that otherwise thoughtful and intelligent people lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at Enron.

This common view of Enron ignores the more nuanced view that has arisen during the Lay-Skilling trial. In many ways, Enron was an innovative firm, both in its primary business activities and in the ways in which it raised money. Experts in structured finance and derivatives recognize this and have already written extensively about Enron's innovation in that regard (see, for example, Christopher Culp and William Niskanen's Corporate Aftershock: The Policy Lessons from Enron and Other Major Corporate Corporations and Culp's subsequent book, Risk Transfer: Derivatives in Theory and Practice).

Even Enron's original purpose in using special purpose entities ("SPE's") was sound and creative, at least before former Enron CFO Andrew Fastow and henchman Michael Kopper hijacked a couple of them. With equity owned primarily by investment banks and other financial institutions, the SPE's were initially intended to be private equity funds with completely separate management from Enron. The main attraction of the SPE's for investors was the funds' preferred right to invest in Enron assets, which benefitted Enron by allowing the company to preserve liquidity and hedge risk.

Thus, the picture that has emerged during Skilling and Lay’s testimony is that Enron was engaged in mostly legitimate and beneficial financial activities, including energy trading, structured finance and other financing transactions that had literally never been attempted before, and certainly never on the scale that Enron generated them. As a result, it is critically important in determining the truth of what happened at Enron — particularly when the futures of two men and their families are at risk — to distinguish between Enron's role as a legitimate, innovative company and the fraud that Fastow and Kopper engineered.

Unfortunately, the Enron Task Force has utterly dispensed with any notion of truth and fairness in pursuing convictions of Lay and Skilling. A case in point is Enron Task Force prosecutor John Hueston’s first questions out of the box to Lay, which I witnessed on Wednesday afternoon. Toward the end of direct examination, Lay and his counsel, Mac Secrest, discussed Lay’s attempts to repay $7.5 million that he still owes Enron, a point that Hueston railed about during opening argument in the case. After the now-insolvent Lay recounted how he and the Enron Creditors’ Committee had worked out a settlement in 2004 under which he would repay the debt, Secrest asked Lay whether the deal had been consummated. The following exchange ensued:

Q. Did you actually execute the document, along with your wife?

A. I -- Linda and I -- I think it was early July 2004 – did execute this agreement, and a lawyer representing the creditors committee also executed it. [. . .]

Q. Okay. Was that agreement actually finalized?

A. It was not finalized. And it was not finalized because John Hueston blocked that deal.

MR. HUESTON: Objection. That is just outrageous.

THE COURT: I sustain the objection.

MR. HUESTON: I wish I had such power.

THE COURT: The jury will disregard the last answer.

Well, that’s certainly a little detail that Hueston conveniently left out during opening argument in disparaging Lay about the non-payment of the debt. With that backdrop, the following is Hueston's opening cross-examination of Lay:

Q. I'd like to start by just writing something up here. Mr. Lay, your attorney, in opening statement, said the following: "By our deeds we are known." You'd agree with that; right?

A. Yes. Yes, at least in part.

Q. Okay. So you're backing way from that? From the statement of your attorney? Maybe? Sometimes?

A. No. Our deeds are more important. Life is a little more complicated than that, though.

Q. Okay. Well, let's elaborate. We're going to come back to that $7.5 million. But just to make it clear, as of today, you have not repaid one dollar of the principal owing on that $7.5 million from Enron as of the end of 2001; correct?

A. We tried to, and you blocked it.

Q. Sir, have you repaid even a single dollar of the principal from November 27th, 2001 until today? It's a simple question.

A. We have not because you blocked it.

Q. Did the Task Force block you from doing that in January of 2002?

A. Mr. Hueston –

Q. It's a simple question.

A. -- you know you blocked it.

Q. Sir, did the Task Force block it in January of 2002?

A. It was not due in January of 2002.

Q. So you didn't repay it in January of 2002?

A. We tried to repay it in 2003, 2004, and you blocked it.

Q. Simple -- simple question.

A. And simple answer.

Q. Zero is the right response for the principal; correct?

A. It's not the right response, but you can write it down.

Q. All right. Is that incorrect? Is there more than a dollar? Have you paid more than zero principal balance?

A. Mr. Hueston, when I was sworn in here, I was sworn in to tell the truth and the whole truth, not partial truths.

Q. Okay. I'm going to try to ask simple questions and --

A. Good.

Q. -- and so, that one again, once more: No principal paid; correct?

A. No principal paid because you blocked the settlement.

Q. We'll get to that later. Let's go to another item.

So, let’s see here. In the corporate criminal case of the decade and the Enron Task Force’s legacy case, the first subject of the Task Force's cross-examination of the former chairman and CEO of Enron is his failure to repay a $7.5 million debt to Enron that is not even a part of the criminal charges against him and that the Task Force blocked him from repaying, to boot. Hueston followed that dubious initial line of questioning with the following subjects, which were not any more substantive:

Making the absurd suggestion that Lay was witness tampering by attempting to make contact with a couple of prospective witnesses in the trial. Since when is it wrong to attempt to talk with potential witnesses in a trial? Only in the Lay-Skilling case, where the Task Force has effectively precluded dozens of important witnesses with exculpatory testimony for Lay and Skilling from testifying at trial by designating those witnesses as unindicted co-conspirators in a conspiracy that the Task Force has not come close to proving during the trial.

Chastising Lay for his attorney Mike Ramsey calling key Task Force witness Ben Glisan a “monkey” to media reporters after Glisan’s testimony several weeks ago. Frankly, Ramsey’s characterization of Glisan was mild in comparison to how Task Force and government representatives have referred to Lay in the media. For good measure, Hueston then bizarrely criticized Lay for approaching Glisan during a courtroom break and expressing his sorrow for what Glisan and his family had been put through by the Task Force.

Paralleling a major cross-examination point with Skilling, criticizing Lay for not following Enron’s Code of Ethics regarding disclosure to the Enron board of his investment PhotoFete, a small Enron vendor operated by a former girlfriend of Skilling. It is one of the more revealing indications of the fundamental weakness of the Task Force’s case that the prosecution has asked dozens – maybe hundreds – of questions to Lay and Skilling over the past two weeks about PhotoFete and none to date about such key issues as the alleged Global Galactic agreement (see also here) and the alleged huge conspiracy that Lay and Skilling supposedly orchestrated at Enron.

On Thursday morning, Hueston made a big deal out of the fact that Lay’s son had shorted Enron stock in 2001. Apparently, Hueston was attempting to cast aspersions on Lay’s earlier testimony that short sellers had contributed to the market panic that prompted Enron’s collapse in late 2001, but Hueston’s questioning was typically disingenuous. Neither Lay nor Skilling have ever blamed legitimate short-sellers as being a material cause of the market panic that doomed Enron. Rather, Lay and Skilling have testified that certain short-sellers’ planting of false and misleading information about Enron in the financial media fanned the flames of the market panic. Not surprisingly, Hueston did not ask Lay if he thought his son had planted any false information about Enron with the media.

Is there any question about what is really going on here? As Larry Ribstein noted last week in regard to the similarly vacuous cross-examination of Skilling, the Task Force is betting that guilt in this case will not be determined by the sometimes messy and difficult process of sorting out the truth, but on ephemeral matters to the charges that the jury can easily understand.

Lay's sales of stock to meet margin calls and use of his line of credit with Enron is another case in point. The Task Force has not charged Lay with insider trading for selling his Enron stock or that Lay did anything illegal with regard to using the board-approved line of credit, but that has not stopped the prosecution from hammering Lay with regard to the sales, which approximated $70 million in 2001. The Task Force's theory is that Lay's entirely legal decision not to advertise his sales of stock back to the company publicly is evidence that Lay was hiding other bad news about Enron from the markets.

"If the market had found out you had sold $70 million of stock in that time, that actually would have caused the stock to tumble?" asked Hueston about the stock sales.

"It depends, Mr. Hueston," responded Lay, who went on explain that using cash from internal stock sales to Enron to preserve his Enron stock as collateral for private loans was a sign that he had faith in Enron stock. Lay shot back at Hueston: "There was no requirement that I disclose any of that. You're trying to mislead the jury as to somehow I was doing something illegal, and I was not."

When the Task Force did dip into the evidence relating to the substance of its charges against Lay -- such as the resegmentation of the retail unit or the international division's water unit (Wessex) -- the dubious nature of its actual charges quickly becomes evident. On Thursday afternoon, Lay calmly but firmly refuted each area that Hueston addressed and -- although one might disagree with Lay's business judgment -- none of his answers came close to indicating that this was a man who was desperately conspiring to cover up a massive fraud so that he could dump more Enron stock.

Finally, late in the day, Lay observed to Hueston: “You can go where you want with this, but I think this is a real waste of the jury’s time.” Judge Sim Lake agreed with Lay and made the following observation upon ending the week a half-hour early: “Any jury that has sat through two-and-a-half hours of alleged Wessex impairment deserves the right to leave early.” Although courtroom observers related to me that the jurors, lawyers and courtroom spectators cracked up over Judge Lake's dry wit, Hueston -- who is wound pretty tight -- was apparently not amused.

Of course, who knows how all of this is playing out with the jury? On Wednesday afternoon, my sense was that the jurors — whose apparent leaders appear to be closer in age to the 64 year-old Lay than Hueston, who is about 40 — appeared put off with Hueston’s initial cross-examination, much in the same way that I perceived them to be in regard to Hueston’s similarly misguided cross-examination of former Enron general counsel Jim Derrick during Week Ten of the trial. Peter Lattman of the WSJ Law Blog noted the same dynamic, although most others in the media simply breathlessly reported that Hueston was having his way with a beleaguered Lay. It’s anyone’s guess what the jurors are really thinking.

As for Lay’s direct examination, it was definitely interesting, although perhaps more so reading it than sitting through it. Almost lost amidst the Task Force’s blather is that all of the charges against Lay in this case relate to the period after which he replaced Skilling as Enron’s CEO in mid-August 2001. Lay denied Fastow and Glisan’s testimony that they were telling him as early as mid-August, 2001 that Enron had serious financial problems, and Lay’s testimony is buttressed by numerous documents and an early October board presentation in which Glisan and Fastow reported that Enron’s liquidity position was strong.

Lay’s testimony was particularly riveting regarding the accelerating crisis in Enron’s credit and equity markets after the series of Wall Street Journal articles beginning on October 17, 2001 that revealed Fastow’s shenanigans with certain SPE’s to the markets. Enron’s fate was literally sealed within three weeks, maybe even less time, and Lay’s testimony provides fascinating insight into the conflicting issues and pressures that he was confronting on a daily basis as unsettled markets were quickly souring on the company.

Lay is clearly a proud man who desperately wants to tell his side of the story, and it is quite a story. Born and raised in a family with little money, Lay worked his way through college and graduate school, landed his first job with Houston-based Humble Oil (the predecessor to ExxonMobil), and then served his country admirably as a Naval officer and Deputy Undersecretary of Interior for Energy for six years during the Vietnam War. After his governmental service, Lay rose quickly through the executive ranks of a couple of gas pipeline companies before assuming the chairman and CEO position of the company that eventually became Enron in 1985. From that perch, Lay accumulated a personal net worth of about $350 million as of 2000 as he oversaw the growth of Enron into one of the largest publicly-owned companies in the U.S., and then saw that net worth evaporate over the past four-plus years since Enron's collapse into bankruptcy.

But as difficult as that fall must have been, Lay does not appear to be the type of man who is bothered all that much by the loss of wealth, and certainly not nearly as much as he is aggravated by the Task Force and media’s ravaging of his reputation over the past five years. According to media reports, Lay and Secrest struggled somewhat during the early stages of Lay’s direct examination, and my sense is that their struggles were attributable largely to Lay’s frustration with not being able to explain to the jurors directly — without the limiting framework of a trial — the utter contradiction between his life story and the nature of the criminal charges against him.

Lay will remain on the stand through at least Monday of next week, and probably into a part of Tuesday. Several character witnesses for the defendants will follow Lay, and the Skilling team still has an impressive group of expert witnesses prepared to testify regarding the Task Force’s allegations that Enron’s business practices were outside the ordinary and customary standards of similarly-situated U.S. public companies. Thus, my sense is that the defense probably has at least two more weeks of testimony, and the Task Force will present another week’s worth of rebuttal testimony. Consequently, my best guess at this point is that the close of evidence will take place around mid-May as the corporate criminal case of the decade turns toward what will likely be a very entertaining home stretch.

Posted by Tom at 4:30 AM | Comments (1) |

April 25, 2006

The real presumption in the Lay-Skilling case

Although the key presumption in the criminal trial of former key Enron executives Ken Lay and Jeff Skilling is supposed to be that the men are innocent of the charges levied against them, a far different presumption is turning out to be the key one in the trial.

The Enron Task Force's case against Lay and Skilling heavily relies on an unstated presumption -- that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something in connection with Enron's descent into bankruptcy. Although the presumption is superficially appealing because of the human instinct to find scapegoats for failure, it is insidious because it is not true.

Yesterday, during his initial direct examination, Lay challenged that presumption by testifying that Enron's meltdown was the result of an unfortunate series of events that coalesced in undermining the market's trust in the company. As regular readers of this blog know, I have studied the Enron case and come to much the same conclusion as Lay. Enron was a "trust-based" business -- that is, Enron's business model required that its customers rely on the company's financial integrity and not necessarily its net worth. Accordingly, when customer confidence in a company such as Enron is undermined, participants in that company's markets become less willing to engage in the purchase or sale of long-term contracts that might not be fulfilled. Consequently, as the "bid-ask" spreads on trading contracts in Enron's trading business diverged in late 2001, Enron's markets unraveled, Enron's formerly profitable trading business collapsed and the company melted down into bankruptcy.

A typical reaction of the media reporters covering the Lay-Skilling trial have labeled the "run on the bank" explanation of what happened to Enron as audacious, but it's really not. Although the bankruptcy of a company as large Enron is unusual, Enronesque experiences for even the largest trust-based companies are not. In fact, over the past couple of years, two of the largest companies in the U.S. -- American International Group and General Motors -- each have had their own Enronesque experience. AIG survived its Enronesque experience; it remains to be seen whether GM will. In understanding how companies deal with such a loss of trust in the marketplace, it is helpful to review a few previous posts about AIG and GM's experience:

AIG's Absolutely Enronesque experience, how AIG was reeling as its experience continued and continued until the company was able to wind it up by serving Hank Greenberg and a few other executives up to the Lord of Regulation.

Thinking about GM's Enronesque experience as the company's Enronesque slide continues.

Finally, although not related to either AIG or GM, this post discusses Allied Capital's strategy for avoiding an Enronesque experience.

Although AIG and GM are trust-based businesses, they are different companies than Enron was, and the market forces that AIG faced and that GM continues to face are different -- and in many ways, more favorable -- than the dicey market conditions that Enron confronted in 2001. However, the point remains that, if any trust-based company loses the trust of the market, then the same thing that happened to Enron could happen to any such company, and such a breach of trust is not necessarily the result of the criminal wrongdoing of its leaders. That's an important point to remember as the Enron Task Force continues to rely on its dubious presumption to prop up a fundamentally weak and flawed case in attempting to place Lay and Skilling in prison for most of the remainder of their lives.

Posted by Tom at 5:31 AM | Comments (11) |

April 24, 2006

Enron point and counterpoint

As former Enron chairman and CEO Ken Lay prepares to take the stand today in Week Thirteen of the corporate criminal case of the decade, I wanted to pass along an interesting exchange of posts from this past week.

This previous post noted this Jim Johnston/Paul Fisher Heartland Institute article that questions the demonization of Enron generally and the validity of the Lay-Skilling prosecution, in particular.

Chronicle business columnist Loren Steffy, who has believed for a long time that the book should be thrown at Lay and Skilling, responded to the Johnston-Fisher piece in this blog post.

In this follow-up post on the Heartland blog, Johnston replies to Steffy's post and concludes by making the point that the type of innovative risk taking that Enron engaged in is often necessary for the creation of new markets, wealth and jobs:

I am glad to hear that the establishment of a once vibrant risk management system for natural gas is not just chopped liver in Mr. Steffy’s opinion. The failed attempts with broadband, water and more importantly electricity, were good attempts and much was learned from the efforts. Maybe someday markets will be established in broadband and water. Electricity markets are even now recovering. It will take entrepreneurial companies with sizable assets to reestablish these markets. These companies will also have to watch out for the politicians.

These companies will need to watch out for the prosecutors, too!

Posted by Tom at 6:21 AM | Comments (0) |

April 21, 2006

Lay-Skilling, Week Twelve

The Jeff Skilling segment of the corporate criminal trial of the decade concluded during Week Twelve (prior week summaries are here) as the former Enron CEO testified for a bit over three days on cross-examination from Enron Task Force director Sean Berkowitz and on re-direct from Skilling attorney, Daniel Petrocelli.

As has been my custom during the Lay-Skilling trial, I continue to read each day's transcript of the trial and pop into the courtroom whenever I am in the federal courthouse on other matters and have an hour or two to spare. This week, I was able to sit it on the final two hours of Berkowitz's cross-examination of Skilling, and that experience reinforced my overall opinion of the trial to date -- the Task Force is presenting a fundamentally flawed and weak case against Skilling and Lay.

Given the societal bias against anything having to do with Enron, it is helpful to review from time to time the case that the Task Force has actually presented in court to date. In short, the Task Force has presented a "pump and dump" case that, to a large extent, relies on a complex jumble of innuendo and opinion. According to the Task Force, Enron was so successful in making money in its trading operations that it allowed Skilling and Lay to soft-pedal to the markets the losses that Enron was incurring in several of the company's less successful units.

Mind you, the Task Force is careful not to contend that either Lay or Skilling was involved in fraudulent accounting. Rather, the Task Force asserts that mainly Skilling understated to the market the losses of a couple of poorly-performing Enron business units, including allegedly hiding one unit's losses underneath the blanket of the trading unit's high profits. The Task Force contends that the alleged hiding of these losses -- along with alleged over-reserving of excess profits in the trading unit -- allowed Skilling and Lay to misrepresent Enron to the investing public as a stable logistics company rather than the more volatile trading company that prosecutors allege that Enron had become. As noted in this earlier post at the beginning of the trial, the Task Force's theory of the case relies on its unstated, but nevertheless key, presumption -- i.e., that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something as a result of Enron's failure.

Berkowitz's entire cross-examination of Skilling played heavily on that presumption. Given that dubious premise, it's not particularly surprising that Berkowitz's cross-examination was long on style but noticeably short on substance. Relying on word games and satirical indignation, Berkowitz often gave Skilling little time to answer questions and frequently cut him off during his answers. Meanwhile, Berkowitz failed to pursue most substantive areas of inquiry related to the 28 charges against Skilling in favor of spending an inordinate amount time on relatively superficial matters that have little to do with the charges.

For example, early in the cross-examination, Berkowitz brought up that Skilling was using a jury consultant to assist him in preparing his defense and even showed the jurors the consultant's webpage on the courtroom's exhibit screen. Given the vacuous nature of the entire line of inquiry, it was a credit to Petrocelli's trial instincts that he didn't bother to object. Since when is working with a jury consultant to help establish one's innocence a sign of guilt?

Similarly, Berkowitz spent a substantial amount of time questioning Skilling about his earlier SEC testimony regarding Skilling's investment in Photofete, a former girlfriend's photography business. The investment was clearly small potatoes, but Berkowitz suggested to the jury that Skilling's mistaken earlier SEC testimony about the size of his investment, possible backdating of an investment check and his failure to disclose to the Enron board that he had invested in a small vendor of Enron was definitive evidence of Skilling's lack of credibility. Maybe so, but what about those 28 charges against Skilling? Larry Ribstein summed it up well in this post:

So the biggest fraud of the century is going to come down to Photofete? As I've pointed out in the post linked above, this is all part of what I've called the "corporate crime lottery," where guilt depends on such things as what juries will understand rather than on the essential wrongfulness of the misconduct.

Despite widespread speculation that Skilling would come unhinged under the pressure of cross-examination, he did not. The only time that Skilling flashed anger was during the second day of cross-examination when Berkowitz suggested in a line of questioning that changing the classification of a public company's preliminary earnings estimates in the company's later published financial results was conclusive evidence of accounting fraud. Under Berkowitz's way of thinking, if a company's initial estimates later change in the company's actual published results, it's prima facie evidence of fraud, which would make virtually every public company in the United States subject to being indicted for fraud. After Berkowitz persisted in such nonsense during a protracted series of questions, Skilling finally lost his temper for a moment and chastised Berkowitz's mendacity. However, from my vantage point, it seemed clear from the exchange that Berkowitz either did not understand what he was talking about or was disingenuously suggesting that a common practice of most large public companies is a crime.

But if the first two days of Berkowitz's cross-examination were somewhat odd for the failure to address substantive issues related to most of the actual charges against Skilling, the final day of cross-examination was downright bizarre. During the morning session that I attended on Wednesday, Berkowitz quizzed Skilling over a substantive area -- i.e., Enron's trading business and the company's disclosures related to it.

Berkowitz continually asked Skilling spurious questions about Enron's trading business, while Skilling patiently explained to Berkowitz how the questions reflected either his misunderstanding or mischaracterization of the business. Don't take my word for it, see for yourself -- the transcript of the final hour or so of that portion of the cross-examination is here (note "VaR" in the transcript means "value at risk," the elaborate methodology that Enron developed to monitor and control trading risk). As one old local lawyer sitting next to me commented right before the lunch break:

"This is not a fair fight. Skilling is schooling him."

Then, after the lunch break, Berkowitz changed directions and began to question Skilling regarding the reasons that he decided to resign as Enron's CEO in mid-August, 2001. After about 45 minutes of meandering and innocuous questioning, the elderly lawyer sitting next to me leaned over and cracked:

"I think Berkowitz really just wants to have a beer with Skilling and talk things over."

About an hour into his post-lunch break questioning, Berkowitz finally suggested that Skilling had told a former McKinsey & Co. partner shortly after his resignation from Enron that he would consider the CEO job at Lucent. When Skilling denied the allegation, Berkowitz snidely retorted to Skilling "[t]hat's another person you disagree with?" and abruptly ended the cross-examination. Thus, rather than ending cross-examination with a bang, Berkowitz ended it with a whimper (check out the transcript of that post-lunch break portion of the cross here).

How all of this is playing with the jury is one of the fascinating imponderables of trial law. Certainly, given the government and much of the media's demonization of both Skilling and Lay, the Task Force may not need anything more than a weak case to obtain convictions. Peter Lattman of the popular WSJ Law Blog attended Skilling's direct testimony and the first part of the cross-examination, and he thought that the jurors responded negatively to Skilling in regard to the Photofete testimony. During my visit at the closing of cross-examination on Wednesday, the jurors appeared bored with Berkowitz's morning questioning over the trading business and somewhat befuddled by his aimless post-lunch break questioning. For what it's worth, the Tradesports contracts predicting a Skilling conviction did not move a lick during the cross-examination, which at least reflects a perception in that market that cross did not go well for the prosecution.

Although I do not have as good a basis for evaluating the jury as those who are in the courtroom on a daily basis, my approach of reading the transcript, writing weekly summaries and occasionally popping into the courtroom does allow me to reflect on the proceedings a bit more than the folks who are under the pressure of reporting on each day's developments. In that regard, none of the pervasive media reports on the trial picked up on the fact that Berkowitz failed to address two key allegations in its case during Skilling's cross-examination -- (i) the alleged Global Galactic agreement that former CFO Andy Fastow testified that he entered into with former Enron chief accountant and former Lay-Skilling co-defendant, Richard Causey, and (ii) the alleged huge conspiracy at Enron.

It doesn't say much about the strength or validity of the Task Force's case that arguably the key issue (see also here) in its case-in-chief is not even addressed during cross-examination of the defendant against whom the issue was directed. Similarly, Berkowitz's failure to question Skilling about the alleged conspiracy within Enron is equally baffling, but at least consistent with the Task Force's paltry presentation of evidence related to its conspiracy charges throughout its case-in-chief.

The Task Force's ducking of the conspiracy issue brings into sharp focus the true reason why the Task Force made the conspiracy allegations against Skilling and Lay in the first place -- to make sure that key witnesses with exculpatory testimony for Lay and Skilling do not testify during the trial. In short, the Task Force is getting away with keeping exculpatory testimony for Lay and Skilling out of this trial by designating key potential witnesses as unindicted participants in a conspiracy that the Task Force has not come close to proving.

Although reasonable people can differ over whether criminalizing corporate agency costs is sound public policy, there is no serious question that the government's effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious violation of the principles of justice and the rule of law upon which our criminal justice system is based. Berkowitz's cheap comment made at the end of Skilling's cross-examination ("That's another person you disagree with?") only underscores that this jury should be allowed to hear from the dozens of former Enron executives who agree with Skilling, and not just the relative few who cut plea deals with the Task Force and testified now that they disagree with him.

As discussions of the Lay-Skilling trial reflect on this blog and others, many otherwise thoughtful and intelligent people believe that they understand the Enron morality play so thoroughly that they seemingly lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at the company. However, against that daunting societal bias, Skilling admirably told his side of the Enron story for over 40 hours on the stand and did not back off from attempting to answer any question posed to him. Regardless of the outcome of this trial, Skilling's performance was both impressive and a daunting reminder of the increasing hazards involved for businesspersons in taking cutting-edge risks to create jobs and build wealth in the current U.S regulatory environment.

When the trial resumes on Monday, Lay will take the stand and my sense is that his testimony will take the remainder of the week. Lay's testimony will be even more focused than Skilling's on the conflicting considerations and pressures that surrounded the process of making tough business judgments for Enron in an unsettled market that was quickly souring on the company. Thus, stay tuned for yet another highly interesting week of testimony as the corporate criminal trial of the decade heads toward conclusion.

Posted by Tom at 4:58 AM | Comments (5) |

April 14, 2006

Lay-Skilling, Week Eleven

Week Eleven of the corporate criminal case of the decade (previous week summaries here) was the Jeff Skilling Week, and the former Enron CEO did not disappoint. In over three and a half days of direct examination (of which I was able to sit in for a couple of hours on Wednesday and Thursday afternoons), Skilling provided a clear, thorough, passionate and at times riveting account of Enron's business and the wide array of issues and considerations that he confronted on a daily basis in helping build the company into one of the largest U.S. companies. In so doing, Skilling's testimony underscored plainly what the Lay-Skilling case has become -- the purest instance of criminalizing corporate agency costs in recent American history.

Skilling's testimony on direct disputed head-on the presumption on which the Enron Task Force's entire case is based -- i.e., that Enron melted down and, thus, Skilling and Lay must be guilty of some crime -- and included the following points:

In educating the jury about Enron's business, Skilling analogized Enron's gas bank -- the creative model for buying and selling natural gas that Skilling devised while working as an Enron consultant for McKinsey & Co. -- to a slaughterhouse. The gas bank was like a cow in that some folks want steak and are willing to pay more for it, while some people want hamburger, and others want waste items such as hooves. Enron got all the cows together, cut'em up and organized them into their various pieces, and then delivered them to customers that distributed them to the public. In so doing, Enron turned itself into an aggregator of natural gas and an intermediary between gas drillers and distributors. In short, Skilling noted that Enron sold "reliable delivery and predictable prices" of natural gas and electricity.

Described the complexity of Enron and the extensive planning and reviews that went into management of the company's business decisions. Skilling's portrayal of the way the company operated was in sharp contrast to the prosecution witnesses who testified under plea deals that many of Enron's key business activities were based upon misrepresentations to the market or secret side deals.

In disputing the Task Force's allegations of wrongdoing regarding Enron's earning-per-share estimates, explained the internal process of continually updated financial information from Enron's various business units after the end of each quarter in explaining how an earnings-per-share estimate could move from 30 cents to 31 cents in one day. Skilling noted that it was not unusual at all for such earnings estimates to change on a daily basis because of the torrent of information that management absorbed from its various business units following the end of a quarter and that such changes occurred systematically within the company.

Defended the purpose and validity of Enron's special purpose entities -- including LJM and the other SPE's involved in the Raptor structures -- as providing valuable hedging and related financial benefits for Enron that were thoroughly reviewed and approved by scores of professionals both within Enron and outside the company.

Denied that he ever pressured former Enron CFO Andrew Fastow to unload any Enron assets into the SPE's in order to hit Wall Street earnings targets and denied ever guaranteeing Fastow that an SPE would not lose money on a transaction with Enron.

Explained the valid business purposes for the reorganization of Enron's EES trading operation into Enron's wholesale unit, and denied the Task Force's allegation that hiding losses of EES in the more profitable wholesale unit was any motivation at all for the reorganization.

Explained his purpose in selling less than half of his Enron stock on the first day that the stock market reopened after the 9/11 attacks and why he simply forgot in prior SEC testimony about his attempt to sell a smaller amount of Enron stock five days before 9/11.

Conceded that Enron's broadband unit turned out to be a mistake, but that nothing about it was criminal in nature. Although ultimately a failed investment of about $1 billion, Skilling noted that -- if Enron's bet on broadband had been correct -- the unit could have been worth as much as $30 billion. That's precisely the type of reasoned bets that companies need to be taking to build wealth for their shareholders, contended Skilling. Moreover, Skilling noted the fallacious nature of the Task Force's allegation that Enron's sales of "dark fiber" and structured finance transactions in its broadband unit were used to cover up how badly the unit was really performing. In fact, Skilling noted that those sales and structured finance transactions were always viable alternatives under the unit's business plan to hit earnings targets.

Reviewed how Enron was in outstanding financial shape when he resigned as CEO in August 2001, even with the shattered telecom industry affecting the broadband business and his failure to sell overvalued international assets sooner. Moreover, while noting that short selling was a legitimate market tool, Skilling blamed the market panic in regard to Enron that occurred two months later on inflammatory and often untrue media reports on Enron that were improperly planted and promoted by short sellers of Enron stock.

Contended that the Enron Task Force intentionally misrepresented Enron's business practices and purposely failed to consider exculpatory evidence in its effort to make a case against him and Lay.

Not only was the substance of Skilling's passionate performance impressive, the method that he and defense attorney Daniel Petrocelli used in presenting it to the jury was equally effective. Inasmuch as the method of the Task Force's presentation of its case-in-chief against Skilling and Lay was essentially to throw as much mud as possible against the wall to see how much might stick, Petrocelli navigated Skilling through direct examination by having Skilling respond to the actual language of each charge in the Task Force's indictment against Skilling, something that the Task Force had sought to prevent (here and here).

In so doing, Petrocelli brought structure to Skilling's defense and provided the jury with a handy framework in which to consider Skilling's defense to the Task Force's charges. Keeping the jury interested in a key witness over a long direct examination is not easy, but my sense is that Petrocelli's method of juxtaposing heavily-scripted questioning on key points with frequent periods where he simply allowed Skilling to defend himself with passionate and knowledgeable explanations to the jury was a particularly effective way to present Skilling's case. The fact that Petrocelli and Skilling seem to have an easy and genuinely-friendly relationship with each other also facilitated the presentation.

By the way, the effervescent Petrocelli and the witty Judge Lake are clearly the jury's favorite lawyers in the trial, and the two of them have developed an engaging relationship through this long case. Yesterday, after the second afternoon break and as a long week of tiring testimony was drawing to a close, Petrocelli used a baseball analogy in advising Judge Lake that he was almost finished and in "the bottom of the ninth." Judge Lake responded with a wry smile: "With two out." Petrocelli, Skilling, the jury and the spectators in the courtroom cracked up.

Although reading a jury is highly speculative business, my sense is that Skilling's direct examination resonated well. The reports early in the week from the major news reporters who are attending the trial daily (Barrionuevo-NY Times; Carrie Johnson/WaPo; Emshwiller-McWilliams/WSJ($); and Mary Flood/Houston Chronicle) described the jurors as responding somewhat coldly toward Skilling during the first stages of his testimony, but by yesterday afternoon the jurors -- particularly the ones who I perceive to be the leaders -- appeared to me as being fully engaged and warming considerably toward Skilling. By the time Skilling noted late yesterday afternoon that he enjoyed working on cars as a hobby and that the reason he owned two Range Rovers was because "they're English cars, so they don't work" and thus, "there's always something to work on," the jurors were laughing heartily and looking as if they were genuinely enjoying Skilling's observations.

So, on the Monday after Easter Sunday, the next key stage of the Lay-Skilling trial takes place as the Task Force begins the difficult task of cross-examining Skilling. Although the conventional wisdom is that the Task Force will attempt to goad Skilling into becoming unattractively angry and self-righteous on the stand, my bet is that Skilling will not take that bait. Moreover, a particularly daunting problem for the Task Force is that Skilling understands Enron's business so much better than the prosecutors could ever hope to that they run the risk of actually allowing Skilling to help himself during cross-examination if they delve too deeply into the nuts and bolts of Enron's business practices.

My sense is that cross-examination and re-direct of Skillling will take most of next week, and then the Skilling team has only a few additional witnesses before they will turnover the defense to the Lay team, probably sometime in Week Thirteen. Accordingly, stay tuned as the corporate criminal case of the decade turns toward home in what will likely be as fascinating a finish as this remarkable trial has proven to be to date.

Posted by Tom at 6:26 AM | Comments (0) |

April 12, 2006

Defending Mr. Skilling

As I look forward to sitting in for a couple of hours this afternoon during the direct examination of former Enron CEO Jeff Skilling in Houston federal court, attorney Paul Fisher and former Amoco economist Jim Johnston provide this interesting Heartland Institute article (hat tip Professor Bainbridge) that defends Skilling and Enron, and hits on many of the same points that I have made over the past two years (here, here, here, here, and here, to cite just a few) about the misguided nature of the Enron-related prosecutions. Fisher and Johnston's thoughtful piece concludes with the following observation:

The Enron story is reminiscent of an earlier political attack on an energy company during the Great Depression of the 1930s. New York Governor Franklin D. Roosevelt was making a political issue out of Samuel Insull, the CEO of Commonwealth Edison in Chicago. The matter helped get FDR elected president in 1932 but forced the ComEd holding company into bankruptcy, even though Insull and his associates were subsequently acquitted of all charges.

We hope the Enron jury will show the same wisdom as the jury in the Samuel Insull case and reject the politically inspired attack on energy risk management. Maybe in time efficient risk management will return to the natural gas and electricity industries. Energy consumers will be the prime beneficiaries.

Posted by Tom at 7:06 AM | Comments (2) |

April 7, 2006

Lay-Skilling, Week Ten

After only one week of the defense's case and the tenth week of trial (prior week summaries here), it has become clearer than ever that the Enron Task Force's prosecution of former key Enron executives Ken Lay and Jeff Skilling has become the purest attempt to criminalize corporate agency costs of any prosecution since the bursting of the stock-market bubble of the late 1990's. After a friend of prosecution witness and former Enron investor relations chief Mark Koenig kicked off the defense case by testifying that Koenig had told her that he lied about wrongdoing at Enron in order to cop a plea deal with the Enron Task Force, the Lay-Skilling defense presented a series of former Enron executives who disputed the testimony of prosecution witnesses on a number of key prosecution allegations, including the following:

That Skilling authorized former Enron CFO Andy Fastow to operate Enron's special purpose entities as parking lots for Enron's underperforming assets while running roughshod over other Enron executives in negotiations;

That Enron had no internal controls regarding Fastow's conflict of interest in managing certain of Enron's SPE's while acting as Enron's chief financial officer;

That there was any wide-ranging criminal conspiracy within Enron;

That Skilling had misrespresented to the marketplace layoffs in Enron's broadband unit as redeployments;

That Skilling had misrepresented to the marketplace the true purpose of a restructuring of Enron's EES business unit and the nature of problems within that unit;

That former finance executives Fastow and Ben Glisan had ever informed Lay that the Dhabol Power Plant in India was highly overvalued; and

That Vinson & Elkins' investigation into the allegations contained in Sherron Watkins' memo was a sham by Lay to cover-up Enron's shaky finances

Business decisions necessarily involve judgments over various possible alternatives, and the nature of business risk means that a number of those decisions will ultimately turn out badly, as certainly occurred at Enron. But rather than allowing the civil justice system to sort out responsibility for such a loss, the Enron Task Force's mindset is to criminalize the loss by appealing to the jurors' hindsight bias and urging them to convict Lay and Skilling of making "the choice of seemingly riskier alternatives." As corporate law experts Stephen Bainbridge and Larry Ribstein have long maintained, shareholders deserve protection from theft, but not from risk taking, and it's not clear that government prosecutors know -- or even care about -- the difference.

Thus, while the Task Force has properly obtained guilty pleas from Fastow, Glisan and the relative few of their cohorts who truly committed crimes by effectively embezzling money from Enron, the Task Force continues to spend an enormous amount of resources criminalizing business judgments that Lay, Skilling and others made in regard to Enron that simply do not involve the black-and-white circumstances of theft or embezzlement. As a result, the Task Force has been forced to engage in a number of highly questionable tactics (see also here) in order to attempt to pull off a win in such cases. The Task Force's record in the three previous Enron-related prosecutions that have actually gone to trial -- the Andersen case, the Enron Broadband case, and the unraveling Nigerian Barge case -- reflects that even those dubious tactics cannot pull the wool over the specious nature of such prosecutions.

The cross-examination of former Enron general counsel James Derrick Thursday afternoon was a case in point. Derrick -- who is a quietly forceful, competent and genuinely nice man -- made the following insight Thursday afternoon when Task Force prosecutor John Hueston accused him of trying to shield himself from civil liability by denying wrongdoing in connection with his involvement in retaining Vinson & Elkins to conduct the investigation into allegations contained in the Watkins' memo:

A. I think it is fair for people to question [Derrick's involvement in the decision to retain V&E], but the reason I haven't admitted to [wrongdoing] is because I am personally confident that I have discharged, and did discharge, my obligation in good faith to the company. It's perfectly proper to challenge my judgment, but in terms of whether I exercised it in good faith in a way that I thought was in the best interest of the company, I have no doubt that I did that. [. . .]

Q. Sir, it certainly helps you claim that you did everything proper by denying ever receiving a memo in that same time from your own internal legal counsel which would corroborate those Watkins allegations; right?

A. I think it serves my interest to tell the truth.

Derrick's analysis is spot on. Sure, his and Lay's decision to retain V&E to handle the investigation over the Watkins' memo is subject to legitimate question. But there is little doubt that the decision was a reasonable business judgment that these two men made after careful consideration of the difficult circumstances and issues that their company faced at the time of the decision. Whether management makes such judgments correctly is a fundamental risk of business ownership, and criminalizing that risk -- through the prism of hindsight bias -- will simply make executives in the future less likely to take the risks necessary to build wealth and create jobs while not deterring in the slightest the Fastows of the world from embezzling money.

How all of this is affecting the Lay-Skilling jury remains decidedly unclear. As Professor Bainbridge pointed out earlier in the week, the betting markets are lining up in favor of conviction, which mirrors public opinion that is conditioned by the mainstream media's presumption in such cases -- i.e., that Enron melted down and, thus, Lay and Skilling must be guilty of something as a result. Although most of the reporters attending the trial each day are providing reasonably objective analysis, that hardly makes a dent in the societal bias against anything having to do with Enron. Heck, the business columnist for Lay and Skilling's hometown newspaper has rarely missed a day during the trial in which he does not call for the conviction of the two men.

Nevertheless, my sense remains that the dynamics in play in the Lay-Skilling courtroom indicate that the outcome is not as certain as conventional wisdom suggests. This week, the defense witnesses have presented an interesting contrast to the prosecution witnesses of the previous nine weeks. Inasmuch as virtually all of the key prosecution witnesses had cut plea deals with the Task Force in return for their testimony against Lay and Skilling, their testimony came after many hours of preparation with prosecutors. In contrast, almost all of the defense witnesses this week had either met only briefly or not at all with the Lay-Skilling team before testifying. The result was testimony that was not as prepared as that of the prosecution witnesses, but maybe just more credible to the jury than the heavily-scripted testimony of the prosecution's plea-bargaining witnesses.

Similarly, the Task Force's cross-examination of the defense witnesses has seemed mostly off-target. For example, during cross-examination of Max Hendrick, a Vinson & Elkins partner involved in the investigation of the allegations in the Watkins memo, a Task Force prosecutor attempted to impeach the testimony of Hendrick with the hearsay statement of an unindicted co-conspirator, even though the statement was exculpatory with regard to the unindicted co-conspirator being involved at all in the alleged conspiracy at Enron. That not-so-subtle point went unreported in the mainstream media accounts of the trial, but it nevertheless highlighted perhaps the biggest injustice of all of the Enron-related prosecutions -- the Task Force tactic of effectively precluding key witnesses with exculpatory testimony from testifying for the Lay-Skilling defense.

Likewise, the Task Force's cross-examination of Derrick on Thursday afternoon was questionable, at best. During direct examination earlier in the day, Derrick had recounted conversations with Skilling on how they both valued the importance of family and how burdensome Enron executive jobs were on their them. Derrick -- who did not prepare his testimony with the Lay-Skilling team before taking the stand -- then expressed appreciation to Skilling and Enron for allowing him to take an extended 1991 vacation trip rafting down the Colorado River with his only son, who died unexpectedly several years ago. "I'll be forever grateful," stated Derrick from the stand regarding Skilling's kindness. An observer of the morning session told me later that the jury's attention was riveted on Derrick during that part of his testimony.

Then, in the afternoon session (which I was able to attend), Task Force prosecutor Hueston attacked -- with an accusatory tone in his voice -- Derrick's credibility and integrity. Never changing his quiet and patient demeanor in the face of Hueston's misguided tone of cross-examination, Derrick politely but firmly refused to give Hueston an inch and, by the end of the day, appeared to have Hueston flustered. After the morning's testimony about Derrick and his son, my sense in the courtroom was that the jury -- which is predominantly female -- was not appreciating the style of Hueston's cross-examination toward Derrick one bit. Sometimes such seemingly small incidents in long trials end up making a big difference in the way jurors ultimately frame the issues.

Derrick returns to testify on Monday for a short time before Skilling takes the stand, probably around mid-morning. Thus, Week Eleven of the corporate criminal case of the decade will be the Jeff Skilling Week, as the former Enron CEO will probably be on the stand for the entire week and probably a portion of the following week. Unlike many white collar business defendants, Skilling is anxious to tell his side of the story, and I expect his testimony will be a fascinating look into the conflicting considerations and pressures that surrounded the process of making tough business judgments for a huge company that was often involved in taking cutting-edge risks. From a business law standpoint, it doesn't get much more interesting than that, so stay tuned.

Posted by Tom at 5:30 AM | Comments (10) |

April 5, 2006

Will the other Merrill Lynch executives be freed?

On the heels of the Fifth Circuit Court of Appeal's extraordinary order last week commanding the release of former Merrill Lynch executive William Fuhs, the three other Merrill Lynch executives convicted in the Enron-related Nigerian Barge case -- including Merrill's former global investment banking division chief, Dan Bayly -- have filed this motion seeking a similar release pending the Fifth Circuit's disposition of their appeals (this earlier post examined Bayly's initial such motion). The government's uninspired response to the Merrill executives' motion is here, and Bayly's succinct reply to the government's response is here.

As noted in these earlier posts, the plight of the four Merrill Lynch executives in the Nigerian Barge case is a prime example of the appalling cost of the government's criminalization of business in the post-Enron era (for a thorough discussion of that subject in the context of the barge case, begin here). In the Nigerian Barge case, the Enron Task Force took a relatively small transaction under which Merrill Lynch bought a stream of dividend payments from an Enron affiliate and criminalized it through a brazen web of distortion, suppression of key testimony, inadmissible hearsay, opposition to the defense's jury instruction on the key issue in the case and prosecutorial misconduct. The Task Force effectively prosecuted the Merrill Four for doing their jobs in connection with Enron's sale of an asset for which Enron may have improperly accounted, although even that issue was never proven at trial.

In reality, the Merrill Four were convicted for having the misfortune of being involved in a legitimate transaction with the social pariah Enron. Here's hoping that the Fifth Circuit begins the process of righting this wrong by ordering the immediate release from prison of Dan Bayly, James Brown and Robert Furst.

Posted by Tom at 5:32 AM | Comments (2) |

April 4, 2006

Charting Lay-Skilling

In connection with this NY Times/Alexei Barrionuevo and Kurt Eichenwald article on the upcoming testimony of former key Enron executives Ken Lay and Jeff Skilling, the Times provides this handy chart of the government's core allegations in the trial.

The chart underscores the point made earlier here and here on why the Enron Task Force does not want the Lay-Skilling jury to see the indictment against Lay and Skilling, and does not want the Lay-Skilling defense team to be allowed to question witnesses about it -- a substantial number of the allegations that the prosecution has elicited from its witnesses to date are simply not in either the indictment or statements in compliance that the prosecution filed against Lay and Skilling.

Moreover, the chart also underscores the Task Force's slimmed down case (just half a dozen key witnesses) and -- despite the conventional wisdom -- that the limited areas of alleged wrongdoing make this an eminently defensible case for Lay and Skilling.

Posted by Tom at 10:37 AM | Comments (0) |

March 31, 2006

Lay-Skilling, Week Nine

U.S. District Judge Sim Lake declared "Spring Break" at the conclusion of a short Week Nine of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling as the prosecution concluded its case-in-chief and the Lay-Skilling team made final preparations for putting on its case. The break was certainly appreciated by the participants in the energy-draining trial and allowed everyone else who is following the case to step back and evaluate where the trial stands.

My experience is that it is almost impossible to understand the dynamics of a particular trial fully unless one sits in the courtroom and watches the trial each day. Although I have read the entire trial transcript to date, I have only been able to sit in on the trial on a few occasions, so I certainly do not have as good a perch to view the trial proceedings as the primary beat reporters who are in the courtroom almost every day -- Alexei Barrionuevo of the NY Times, Mary Flood of the Houston Chronicle, John Emshwiller and Gary McWilliams of the Wall Street Journal, and Carrie Johnson of the Washington Post. Interestingly, although each has dutifully reported the presentation of the Enron Task Force's case against Lay and Skilling, none of these day-to-day reporters have indicated that they believe the trial is a slam dunk winner for the prosecution.

At the Week Nine pole, my sense is that the prosecution has competently presented a reasonably fast-paced version of a fundamentally weak case. That's not to suggest that the prosecution can't win it -- indeed, weak cases are won all the time and the Task Force still has the huge advantage of the presumption that someone must be guilty of some crime whenever a company melts down in the way Enron did. However, if the jurors have not already decided against Lay and Skilling based on that presumption, a quick glance of the Task Force's case over the past nine weeks reveals more than enough holes through which the Lay-Skilling team could well deliver a good dose of reasonable doubt to the jury.

The week nine testimony was a case in point. Former Enron treasurer Ben Glisan completed his testimony in which, on direct, he contended that he had been advising Lay and others of Enron's dire financial condition since mid-August of 2001 immediately after Skilling's resignation. However, Glisan had no meaningful documentary evidence to support his testimony on that issue, and Lay's attorneys on cross-examination introduced Glisan's own reports from September and October, 2001 detailing Enron's improving finances. In fact, on October 8, Glisan told Enron directors that the company was "on target" to meet its year-end liquidity goals and it would hold onto its investment-grade credit rating, calling a lowered outlook the "most likely worst-rating outcome" from its third-quarter earnings report. Glisan also transmitted an October 17 Deutsche Bank credit analysts' report to Mr. Lay and others that noted Enron's "liquidity remains solid."

But lack of documentary evidence to support testimony and contradictory documentary evidence in regard to such testimony are not the only problems for the prosecution. Virtually every material prosecution witness -- including Glisan -- testified that they initially lied to investigators when they denied that they did anything illegal at Enron. Now, however, those witnesses are claiming that they are telling the truth after cutting a deal with the Task Force in return for their favorable prosecution testimony. Is the jury really going to believe that the biggest corporate conspiracy in history was hidden from everyone except these relative few Enron executives who have copped pleas, struck deals while in prison or entered into non-prosecution agreements?

Moreover, virtually none of the testimony to date has supported a key element of the prosecution's case -- the alleged huge conspiracy within Enron to cover up the wrongdoing at the company. Despite alleging now that Lay and Skilling were involved in lying about Enron to the investment community years ago, none of the prosecution witnesses produced any corroborating documentary evidence that they had any reservations at the time about the statements that Lay and Skilling were making and none of the witnesses have testified that either Lay or Skilling at the time ever confided to them that they thought they were making misleading statements. Doesn't sound like much of a conspiracy, does it?

Meanwhile, the Task Force has several major problems with a number of its witnesses. Mirroring his infamous false testimony in the Enron Broadband Trial and the Task Force's abysmal handling of that false testimony, it now appears that the prosecution team had former Enron Broadband executive Ken Rice testify in Lay-Skilling regarding a dubious presentation document that the prosecution failed to produce to the defense as required before trial. It's usually not a good sign for the prosecution when a key prosecution witness performs so badly that the defense is considering calling the witness back to testify in the defense's case-in-chief.

Likewise, the Task Force's decision to go for a cheap score during the testimony of former Enron Broadband executive Kevin Hannon -- he of "they're on to us" fame -- has turned into a major can of worms for the prosecution. Understandably, the the Lay-Skilling defense is wondering why no other prosecution witness who attended that meeting testified regarding such a supposedly revealing statement by Skilling and, if they didn't hear the statement, why that exculpatory evidence was not disclosed to the defense prior to trial?

Finally, the testimony of key prosecution witness Andy Fastow on his negotiation of a plea deal at the expense of his wife and on the "Global Galactic" memo (also here) was so bizarre that the prosecution simply elected not to attempt to corroborate Fastow's testimony with either former Enron chief accountant Richard Causey or key Fastow henchman, Michael Kopper. Maybe the Task Force brings in Causey as a rebuttal witness later, but, if not, then what did Causey tell the Task Force about Global Galactic?

So, midway through the corporate criminal case of the decade, the Task Force has presented a "pump and dump" case that, to a large extent, relies on a complex mix of innuendo and opinion. According to the Task Force, Enron was so successful in making money in its trading operations that it allowed Lay and Skilling to soft-pedal to the markets the losses that Enron was incurring in a couple of less successful parts of the company's business. The Task Force does not contend that either Lay or Skilling was involved in approving fraudulent accounting, but rather that mainly Skilling engineered a reorganization of a poorly-performing Enron business unit in a manner that hid losses of that unit underneath the blanket of high profits of Enron's trading unit. The alleged hiding of these losses, along with over-reserving to hide excess profits of the trading unit, allowed Skilling and Lay to misrepresent Enron to the investing public as a stable logistics company rather than the more volatile trading company that prosecutors allege that Enron had become. As noted in this earlier post, that theory of the case plays heavily on "the presumption" in such cases -- i.e., that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something as a result of Enron's failure.

Come Monday, the Lay-Skilling team begins presenting its case-in-chief, which I expect to be spirited and entertaining. However, the defense is not without its own problems, the biggest of which is its inability to obtain exculpatory testimony from numerous former Enron executives who are declining to testify on the basis of their Fifth Amendment privilege after the Task Force fingered them as targets of the Enron criminal investigation and designated them as unindicted co-conspirators in the Lay-Skilling case.

That such witnesses will likely not be testifying is a terrible injustice to Lay and Skilling. Although reasonable people can differ over whether criminalizing corporate agency costs is sound public policy, there is no question that the government's effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious violation of the principles of justice and the rule of law upon which our criminal justice system is based. If the government believes that those important principles must be shoved aside to obtain successful prosecutions of questionable business judgments, then isn't that a blue ribbon reason to re-think the prosecution of such cases altogether?

Posted by Tom at 4:11 AM | Comments (3) |

March 24, 2006

Lay-Skilling, Week Eight

Week Eight (previous week summaries here) of the corporate criminal case of the decade drew to a close on Thursday with former Enron treasurer and Andy Fastow protégé Ben Glisan on the stand and with the Enron Task Force announcing that presentation of its case-in-chief was drawing to a close. That's entirely appropriate because, in many ways, Glisan's testimony has been a microcosm of the Task Force's case against former key Enron executives Ken Lay and Jeff Skilling.

During a heavily-scripted direct examination that took a little over a day, the Task Force had Glisan provide a 30,000 foot flyover of the various alleged misrepresentations that, somewhat surprisingly, mostly Lay and, to a lesser extent, Skilling made to the market and Enron employees about the company's finances. Then, during yesterday's cross-examination, defense attorneys began to chip away systematically at Glisan's allegations, focusing much more on the specific circumstances relating to Glisan's allegations of wrongdoing than the prosecution did on direct. Much of the testimony on both direct and cross-examination pertained to dizzying analysis of the financial details of the Raptor financial structures that involved certain of Enron's special purpose entities, a subject that clearly has become a snoozer for the jury and even the ever-patient Judge Lake, who continually encourages both sides to move things along.

Nevertheless, Glisan provided some of the most fascinating testimony to date in regard to the sledghammering manner that the Task Force has handled the biggest corporate criminal investigation in the United States since Rudy Guiliani's prosecution of Drexel Burnham and Michael Milken almost 20 years ago. First, as noted in this earlier post, Glisan disclosed that he had been successfully negotiating with Task Force prosecutors about a better prison deal almost from the beginning of his prison term in September 2003. That important fact was not revealed to the court and the jury during Glisan's key testimony in the earlier Enron-related Nigerian Barge trial in 2004 that resulted in four Merrill Lynch executives being sent to prison for the dubious "crime "of not sufficiently appreciating that Enron may not have accounted properly for an asset sale. The Task Force had presented Glisan in the barge trial as a witness whose testimony was particularly credible because he had not cut any deal with the government in regard to his testimony and was being compelled to testify under a grant of immunity. That presentation of Glisan in the barge trial was disingenuous, at best.

Then, during cross-examination yesterday, Glisan revealed even more sordid details of his negotiations with the government. Soon after Enron went into bankruptcy in early December, 2001, Glisan and his attorney went to prosecutors and the SEC and attempted to minimize his role at Enron while, at the same time, apparently hoping that prosecutors wouldn't discover Glisan's involvement in effectively embezzling about $1 million from Enron in connection with Fastow's Southhampton deal. When that approach didn't work and Glisan was indicted in April, 2003, Glisan changed his story and began singing like a canary about alleged wrongdoing at Enron, but entered into a plea deal with the Task Force that did not include a cooperation agreement so that he could begin serving his five-year prison term immediately at a minimum security prison camp, the best alternative in the bad choices that a prisoner confronts in the federal prison system.

Despite Glisan's turnabout, the Task Force apparently was still interested in extracting a better level of "cooperation" from Glisan. So, rather than sending him to the prison camp that the judge in Glisan's case recommended and for which Glisan qualified, the Task Force apparently arranged with the Bureau of Prisons to send him to a harsher minimum-security prison facility, where Glisan was shockingly thrown into solitary confinement for most of his first two weeks in prison and then forced to share an 8 by 12 ft. prison cell with two other prisoners over most of the following month.

That had the intended effect on Glisan, who immediately began bartering his testimony in other Enron-related cases for the Task Force's assistance in moving to the more-desirable prison camp and in lessening the length of his sentence. That led to arguably the most shocking revelation of all.

In February, 2004, the Task Force arranged to have Glisan brought to Houston so that he would be here during the time that Skilling was indicted. On the day after Skilling's indictment, when the Task Force put Skilling through his "perp walk" before his initial court appearance, the Task Force had Glisan -- in prison jump suit, leg shackles and handcuffs -- meet Skilling and ride with him in the same federal courthouse elevator. In one of the most dramatic exchanges of the trial, Skilling lawyer Daniel Petrocelli asked Glisan the following question about that incident:

"Did you believe for one second, sir, that [meeting Skilling in the elevator] was a coincidence?" asked Petrocelli.

"No, I didn't believe that," replied Glisan.

Although the Task Force's transparent purpose in exposing the defeated Glisan to Skilling in this heavy-handed manner was to shock Skilling into seeking his own plea deal, the Task Force badly miscalculated the strength of Skilling's backbone.

Glisan went on to testify on how he parlayed his testimony in the barge and Lay-Skilling trials into a Task Force-sponsored transfer to the more desirable mininum-security prison camp in Beaumont, liberal furloughs at home while working with the Task Force, and the Task Force's facilitation of a reduction of his prison sentence by over year through his participation in an alcohol-rehab program. As a result, Glisan -- who entered prison in September 2003 to serve a five-year sentence -- is scheduled to be released to home confinement in September of this year and will be released from custody entirely in January, 2007. Not bad for a "non-cooperating" witness, eh?

What effect all of this is having on the Lay-Skilling jury remains decidedly unclear. I was in the courtroom for most of the direct examination of Glisan and it is clear that most the jurors now check out when the testimony turns toward the boring details of Enron's complex financial transactions. On the other hand, reports from courtroom observers from yesterday indicate that most jurors were listening intently during Glisan's testimony about his solitary confinement and his arranged courthouse elevator meeting with Skilling. My sense is that the Task Force has done a competent job of presenting a generally weak case that has some gaping holes, and that the jury is anxious to begin hearing Lay and Skilling's side of the story.

So, at this point, it appears that Lay and Skilling will begin presenting their side of the case on Monday, April 3rd and that the defense's case-in-chief will take about a month to six weeks to put on. My bet is that it will be a vigorous and highly entertaining defense, so stay tuned as the corporate criminal case of the decade -- and arguably the purest attempt to criminalize corporate agency costs in recent memory -- turns toward home.

Posted by Tom at 4:12 AM | Comments (5) |

March 23, 2006

The Glisan Deal

When former Enron treasurer and Andy Fastow henchman Ben Glisan cut his plea deal with the Enron Task Force in September, 2003, he did not -- unlike most other Enron plea bargainers -- enter into a cooperation agreement that required him to cooperate with the Task Force in other Enron-related prosecutions.

Interestingly, in connection with Glisan's plea deal, U.S. District Judge Ken Hoyt recommended that Glisan be assigned to a more-favored minimum-security camp. However, the Bureau of Prisons assigned Glisan to the Bastrop, Texas prison facility, which was contrary to Judge Hoyt's recommendation that Glisan be assigned to the less-restrictive camp. Glisan reportedly was miffed with the BOP's assignment.

Nevertheless, during the previous Enron-related Nigerian Barge case in Sept.-Nov., 2004, Glisan was the key prosecution witness. Because he has no cooperation agreement, Glisan testified in that trial -- as he is currently doing in the Lay-Skilling trial -- under a grant of use immunity so that his testimony cannot be used against him in another prosecution. Accordingly, the Task Force presented Glisan during the Nigerian Barge trial as a witness who was being "forced" to testify under the immunity grant and who had no deal with the Task Force to get a lighter sentence in return for his testimony. Indeed, the prosecutors touted Glisan during the barge trial as a witness who was more credible than the typical prosecution witness who had cut a deal for a reduced sentence under a cooperation agreement with the prosecution.

Well, in a startlnig revelation during Glisan's direct examination in the Lay-Skilling trial yesterday, it appears that the Task Force's presentation of Glisan as a non-cooperating witness during the Nigerian Barge trial was a sham. This 30 September 2005 letter introduced into evidence yesterday sets forth the terms of the cooperation agreement between Glisan and the Task Force. In return for Glisan's cooperation in other Enron-related cases, the Task Force arranged Glisan's transfer to his favored Beaumont, Texas minimum-security camp (from the his disfavored Bastrop, Tx. prison facility) and helped Glisan shave a year off of his five-year prison sentence by facilitating his involvement in a prison alcohol-rehab program. As a result of the deal, Glisan is now scheduled to complete his five-year prison sentence in January, 2007 and is scheduled to be released to home confinement in September.

Moreover, although the letter between the Task Force and Glisan's suggests that Glisan's lawyer had proposed "the deal" in early 2005 after the completion of the Nigerian Barge case in November, 2004, it's clear that Glisan and the Task Force were negotiating the deal well before the trial of the Nigerian Barge case. The final paragraph of this 1 June 2004 letter from the Task Force to the defense counsel in the Nigerian Barge case contains the following statement about Glisan's negotiations with the Task Force:

In May, 2004, Glisan, through his counsel, requested that the government support his request to be transferred to a minimum security camp in Beaumont, Texas. The government responded to Glisan's attorney as follows: the government will not weigh in on BOP's decision to designate Glisan to a particular facility; that is a matter for BOP. However, if BOP inquired, the government would advise BOP of the government's assessment of Glisan's truthfulness in [the Nigerian Barge case].

Contrary to the foregoing statement, it now appears clear that the prosecution did weigh in on Glisan's transfer to the Beaumont facility, in addition to helping Glisan shave a year off of his sentence. Moreover, contrary to the suggestion in the June 1 letter that the BOP is independent of the Task Force, the September 30 Task Force letter exposes that the BOP is, in fact, a cooperating agency with the Task Force (the BOP's Houston office is on the same floor of the federal courthouse as the Task Force's offices).

Does anyone really believe that Glisan's original assignment to the more restrictive Bastrop prison facility was the result of "administrative necessity?" Or that the assignments of Nigerian Barge defendants Dan Bayly and William Fuhs to more-restrictive facilities far away from their families was not the product of Task Force intervention with the BOP? Remember, Task Force prosecutors were clearly upset with U.S. District Judge Ewing Werlein's refusal to accept their draconian recommendation regarding the length of the prison sentences for the four Merrill Lynch defendants convicted in the barge case.

Glisan's testimony helped place four Merrill Lynch executives in prison for doing their jobs in connection with the firm's purchase of a dividend stream for which Enron, not Merrill, may have improperly accounted, although even that issue was never proven during the barge trial. Now it appears that the true motivation for Glisan's testimony during that trial was not disclosed to either the defense or the jury. Chalk it up as yet another example of the lengths that prosecutors must go to justify the criminalization of the unpopular businesspersons of the moment in the post-Enron era.

Posted by Tom at 4:51 AM | Comments (3) |

March 21, 2006

Did Fastow forge Causey's initials on Global Galactic?

As noted on several occasions previously, the Lay-Skilling trial has settled into a rhythm during the Enron Task Force's case-in-chief in which long stretches of boring testimony regarding rather dry topics is interrupted intermittently with a tidbit that really appears to capture the jury's attention. The same routine took place yesterday and surprisingly, only the Chronicle's John Roper among the major news media reporters covering the trial appears to have picked up on the most riveting testimony for the jury.

For most of Monday, the jury and spectators endured testimony from a couple of former Arthur Andersen partners who worked on the Enron account and testified how they thought Enron violated various accounting rules. Most of it was pretty dry, but prosecutor Sean Berkowitz had the following exchange with Tom Bauer, one of the former Andersen accountants who worked closely with former Lay-Skilling defendant and former Enron chief accountant, Richard Causey, regarding the Global Galactic agreement between Causey and former Enron CFO, Andy Fastow:

Q: Do you recognize anybody's initials on this document, Mr. Bauer?

A: I recognize what appears to Mr. Causey's initials.

Q: And are you familiar with Mr. Causey's initials from having worked with -- having worked with him?

A: I'd seen Mr. Causey's initials on a number of documents that I have reviewed during the course of my work.

Q: And do the initials on each of these three pages appear, to the best as you can tell, to be Mr. Causey's initials, based on your -- your knowledge and recollection of his initials?

A: They appear to be.

During Fastow's testimony, the Lay-Skilling defense raised substantial questions regarding the validity and authenticity of the Global Galactic agreement, and those questions have become even more compelling by the revelation that the Task Force has chosen not to have Causey corroborate Fastow's testimony on Global Galactic, at least during the presentation of the prosecution's case-in-chief.

During cross-examination yesterday, Skilling lawyer Randy Oppenheimer displayed for Bauer and the jury a handy graphic that contained several examples of Causey and Fastow's initials, including Causey's alleged initials on Global Galactic. As the jury looked on with keen interest, Oppenheimer led Bauer through a review of the various initials, getting Bauer to admit that the alleged Causey initials on Global Galactic indeed looked different from Causey's initials from other documents and that certain characteristics of Fastow's writing appear similar to the alleged Causey initials on Global Galactic. Appearing somewhat dumbfounded, Bauer's final statement to the jury during his testimony yesterday was the following regarding Global Galactic:

"Sir, I can't say who authored this document. When I saw the initials on them, they appeared to me to be the initials of Mr. Causey, but I'm not a handwriting expert. I can't testify with regard to who authored this document."

Where is Waldo? er, I mean Causey?, indeed.

Posted by Tom at 4:59 AM | Comments (4) |

March 20, 2006

More on the risk of going for the cheap score

Remember Kevin Hannon? He is the former Enron Broadband executive whose testimony was the subject of this earlier post on the risk for the Enron Task Force of attempting to score points with the jury by eliciting seemingly helpful testimony about a statement that Skilling allegedly made ("they're on to us") that, upon reflection, actually turns out to be contrary to the Task Force's case.

Well, based on this Lay-Skilling motion filed this past Friday, the Task Force's attempt at a cheap score may have an even more negative effect on the Enron Task Force's case against Lay and Skilling than first thought. According to the motion, the Task Force apparently has not turned over to the Lay-Skilling team other witness statements team regarding the "they're on to us" statement that Hannon contends that Skilling made.

Prior to Hannon's testimony, at least a couple of other prosecution witnesses previously testified that they were at the same meeting in which Hannon alleges that Skilling made the statement. However, no other prosecution witness has testified that Skilling made any such statement. Accordingly, the Lay-Skilling team points out that the prosecution witnesses' pre-trial statements that they did not remember such a statement from Skilling would be potentially exculpatory to Skilling and Lay, thus, should have been turned over by the prosecution to the defense. Moreover, given that the Task Force placed such emphasis on Hannon's allegation regarding the alleged Skilling statement, the Lay-Skilling team observes that it's highly unlikely that the Task Force didn't at least ask its other witnesses who attended the meeting about the alleged statement.

Meanwhile, as the Task Force's case winds down, the NY Times' Alexei Barrionuevo previews the upcoming week's testimony, which includes a couple of former Arthur Andersen accountants and former Enron treasurer and Andy Fastow protege, Ben Glisan.

Posted by Tom at 5:02 AM | Comments (0) |

March 17, 2006

Lay-Skilling, Week Seven

As the seventh week (earlier week summaries here) of the epic corporate criminal trial of former key Enron executives Ken Lay and Jeff Skilling drew to a close, U.S. District Judge Sim Lake gave the lawyers and the jurors an extra day off to prepare for the closing witnesses of a slimmed-down prosecution case and the beginning of what will almost certainly be one of the most interesting defense presentations in recent memory.

In some ways, Week Seven of Lay-Skilling reflected the Enron Task Force's case to date -- long on hype, but short on substance. The week began with the Task Force's star witness, Andy Fastow, and closed with the self-promoted Enron media star, Sherron Watkins. However, my sense is that there is a method to the prosecution's approach to presenting its case. After the disastrous result in the Enron Broadband trial last year in which the jury was put to sleep during long stretches and a glacial opening pace to the Lay-Skilling trial, the Task Force prosecutors have quickened the pace of their presentation and are now on course to finish their case-in-chief in about another week or so. If that schedule holds, then not only will the Task Force have presented their case in substantially less time than prosecutors initially predicted, they will have avoided the trap of forcing jurors to endure long stretches of mind-numbingly boring testimony.

In fact, the trial has settled into a fairly standard routine with most witnesses. Each prosecution witness has gone through a heavily-scripted direct examination in which they confidently accuse Skilling, and to a lesser extent Lay, of making various misleading statements to the investing public and employees. Then, defense attorneys on cross-examination chip away at the prosecution witnesses' testimony and the witnesses generally become far less decisive in, or defensive about, their accusations. Much of the testimony is quite boring and technical, but there are usually enough short bursts of interesting exchanges to keep the jury engaged and Judge Lake moves things along with a steady hand and a dry wit.

So, after filing and publicizing a 66-page indictment (which the Task Force doesn't want the jury to see and the Lay-Skilling team does) that asserts a wide array of alleged corporate crimes, the Task Force has slimmed down its case to a plain "pump and dump" case -- i.e., Skilling and Lay touted the failing company's shares while selling their own. As noted in this earlier post, that theory of the case plays heavily on "the presumption" in corporate criminal cases -- Lay and Skilling are rich and Enron collapsed, so they must be guilty of something for failing to announce to the investing public that Enron might collapse if something such as Fastow's effective embezzlement of funds using Enron's special purpose entities ever was revealed to the markets.

Although clearly a smart move from an appeal-to-jury standpoint, the Task Force's slimmed-down case is not without risks. To a large extent, the case still relies on a complex jumble of innuendo and opinion that requires the jury to connect the dots of amorphous points in finding a crime. For example, one Task Force theme has been that Enron was so successful in making money in its trading operations that it allowed Lay and Skilling to soft-pedal to the markets the losses that Enron was incurring in a couple of less successful parts of its business. The Task Force does not contend that either Lay or Skilling was involved in approving fraudulent accounting, but rather that mainly Skilling engineered a reorganization of a poorly-performing Enron business unit in a manner that hid losses of that unit underneath the blanket of high profits of Enron's trading unit. According to the Task Force, the hiding of these losses, along with over-reserving to hide excess profits of the trading unit, allowed Skilling and Lay to misrepresent Enron to the investing public as a stable logistics company rather than the more volatile trading company that prosecutors allege that it had become.

Another risk to the Task Force is whether the jury really even recalls much of that after the highly-publicized and sometimes bizarre testimony of Fastow. Although Fastow implicated Skilling in "secret side deals" and undisclosed "bear hug" guaranties, Fastow is such a despicable character that it remains decidedly unclear whether the prosecution gained much of anything with the jury from his testimony. Moreover, the prosecution's emphasis with Fastow on the Global Galactic memo certainly raises the question of why the Task Force is not corroborating Fastow's testimony on that key issue with the testimony of former Enron chief accountant, Richard Causey, who the Task Force has announced will not be called in its case-in-chief. Perhaps the Task Force is planning on saving Causey to testify as a rebuttal witness after the defense presents its case, but the Task Force's emphasis on Global Galactic during Fastow's testimony creates a huge hole in its case unless the more credible Causey corroborates Fastow's testimony at some point on that key issue.

Meanwhile, almost forgotten in the mainstream media reports on the trial to date is that virtually none of the testimony from prosecution witnesses and even less documentary evidence over seven weeks of trial has supported the prosecution's allegation of an alleged huge conspiracy within Enron to cover up wrongdoing at the company. As a result of the paucity of evidence on that key issue, the Lay-Skilling defense would seem to have a reasonably strong basis for seeking immunity grants from either the prosecution or Judge Lake in regard to the testimony of dozens of former Enron executives who are currently invoking the Fifth Amendment privilege in the face of the Task Force's designation of them as unindicted co-conspirators, but who could provide exculpatory testimony for Lay and Skilling during presentation of the defense's case-in-chief. Stay tuned on that issue.

As the prosecution's case winds down, the Task Force will call two former Arthur Andersen accountants as witnesses early next week, and then likely end the week with its final major witness, former Enron treasurer and Fastow confidant, Ben Glisan. Glisan was arguably the Task Force's most-effective witness in the 2004 trial of the Nigerian Barge case, which appears to be unraveling somewhat for the Task Force. As a result, Glisan's testimony in Lay-Skilling could turn out to be very interesting, indeed.

Posted by Tom at 4:35 AM | Comments (0) |

March 16, 2006

The insufferable Sherron Watkins

Yesterday was Sherron Watkins day at the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, and despite her self-portrayal as a paragon of virtue amidst a cauldron of corruption at Enron, Watkins came off in person as an insufferable know-it-all. Even when it's not particularly in her interest to do so.

Everyone who follows the Enron saga knows Ms. Watkins. She is the former mid-level Enron executive who parleyed this mid-August 2001 warning memo to Mr. Lay into a lucrative talk show-pundit career of waxing eloquent on all things Enron. She testified to fawning Congressional subcommittees, co-authored an Enron book, was one of the primary Enron employees interviewed during the Enron movie, and has made a tidy living over the past several years on the rubber-chicken circuit portraying herself as a whistleblower with special expertise on the subject of leadership. Wherever there is a light and a camera, Ms. Watkins is ready to pontificate about Enron.

The fact that Ms. Watkins was not a whistleblower (she never alerted anyone outside of Enron or Arthur Andersen about alleged accounting improprieties) and that her memo to Lay characterized Enron's problems as primarily a public relations issue has gotten lost in the Enron milieu. In fact, the specific LJM transactions that she criticized in her memo had been approved by accountants and attorneys inside and outside of Enron. At the time of her memo, Lay listened courteously to her concerns, ordered an investigation, protected her from Mr. Fastow's threats to fire her for going around him to Lay, and ultimately ordered the unwinding of the Raptor financial vehicles that resulted in more than a $500 million charge to earnings in the third quarter of 2001. Nevertheless, Watkins insisted self-righteously yesterday that Lay committed fraud in connection with his handling of the matter, primarily because he did not follow each and every one of her recommendations to him.

Meanwhile, Watkins' testimony was downright bizarre regarding her $47,000 in insider trades of Enron stock that she made after delivering her memo to Lay and prior to the company's announcement of the charge to earnings. Despite having certified in a 2002 Enron employment agreement and sworn in Congressional testimony that she had not engaged in any illegal insider trading while at Enron, Watkins yesterday conceded on direct examination that the trades were not "proper" because "I had more information than the marketplace did."

But then, on cross-examination, Lay lawyer Chip Lewis courteously attempted to defend Watkins from a charge of insider trading by pointing out that, at the time of the trades, it was still unclear whether there was anything wrong about the accounting for the Raptor financial vehicles and, thus, she was not trading on material, non-public information.

In the ensuing exchange, Watkins proceeded to dispute Lewis' attempt to portray her trades as not illegal. Tip to Watkins -- keep that defense attorney on your payroll.

Also, Watkins is not going to be getting any holiday greeting cards from Houston-based Vinson & Elkins, which was Enron's primary outside counsel. After accusing V&E of engaging in criminal acts with regard to its handling of the Lay-ordered investigation of the matters raised in her memo, Watkins engaged in the following exchange with Lewis:

Q: Now, in talking about V&E, you would acknowledge with me that they're one of our country's most prominent legal institutions, wouldn't you?

A: Not anymore.

Finally, U.S. District Judge Sim Lake -- who has the patience of Job and administers the trial proceedings with a delightful combination of firmness and grace -- probably had the best observation about Watkins' testimony. After enduring Watkins' continual refusal to respond directly to the question asked on cross-examination, Judge Lake finally turned in exasperation to her and observed:

"You've got to respond to [Mr. Lewis'] questions. We'll be here through the weekend if this keeps up."

Posted by Tom at 4:28 AM | Comments (29) |

March 15, 2006

Where is Waldo?, er, I mean Causey?

The mainstream media covering the criminal trial of former key Enron executives Ken Lay and Jeff Skilling continues mostly to miss the point that the prosecution's case over almost seven weeks now has been extraordinarily weak for a case of this magnitude. Virtually all of the substantive testimony has come from prosecution witnesses testifying under draconian plea deals, most of the testimony alleging wrongdoing has been uncorroborated, and documentary evidence to back up claims of wrongdoing has been almost non-existent. Of course, no one knows what effect any of this is having on the jurors, some of whom may already have been swayed to convict simply by the overwhelming media bias against Lay and Skilling.

Yesterday's testimony was a case in point. Three witnesses testified and not one of them came close to implicating either Lay or Skilling in a crime. Vince Kaminski, a former high-level Enron risk analyst, testified that he warned that some of Enron's special purpose entity structures were inherently risky, but that management went ahead with the deals, anyway. Johnnie Nelson, a colorful former Enron pipeline worker who was offered by the prosecution for the transparent purpose of entertaining the jury, testified that he was angry with Lay because he, like Lay, invested virtually all of his personal savings in Enron stock that turned out to be worthless. Finally, Chris Loehr, a seemingly nice young man who worked for one of the special purpose entities that Fastow managed, confirmed that Fastow told him about Fastow's secret "Global Galactic" agreement that supposedly guaranteed that the SPE's would not lose money on a number of their deals with Enron, but could not corroborate Fastow's testimony that Skilling knew about it.

Now, as noted earlier here, there is a prosecution witness who could corroborate Fastow's testimony about the Global Galactic agreement -- former Enron CFO and former Lay-Skilling co-defendant, Richard Causey. Fastow claimed that he worked out the terms of the Global Galactic deal with Causey, who Fastow claimed disclosed it to Skilling. Causey entered into a plea deal with the Enron Task Force on the eve of trial and, thus, is readily available to testify.

But in a stunning development that has gone largely unreported in the media covering the trial, it now appears that the Enron Task Force will not call Causey as a witness to corroborate Fastow's testimony. The NY Times' Alexei Barrionuevo -- Kurt Eichenwald's colleague who is one of the few reporters covering the trial expressing increasing skepticism regarding the prosecution's case -- reports on this development in his latest dispatch on the trial:

A looming question is when, or if, Richard A. Causey, Enron's former chief accounting officer, will testify in the case. He could be crucial to supporting Mr. Fastow's claims that Mr. Skilling was shown a list of side deals that Mr. Fastow kept track of.

Mr. Causey is not on the government's witness list. But prosecutors say that does not preclude them from calling him in a rebuttal that would follow the expected testimony of Mr. Skilling and Mr. Lay. Mr. Causey pleaded guilty to fraud in December, just one month before the trial started.

Mr. Fastow testified for four days about the partnerships and about secret side deals he said he made with Mr. Skilling that guaranteed the partnerships would profit from purchasing distressed Enron assets. But during three days of cross-examination by defense lawyers, Mr. Fastow admitted to stealing tens of millions of dollars from Enron while deceiving his bosses and even his own wife about much of his illicit activity.

The government knew that calling Mr. Fastow brought inherent risks, but chose to call him anyway.

Barrionuevo is spot on. If the Task Force does not call Causey, then that means he cannot corroborate the key testimony of the primary prosecution witness in the trial to date. That would blow a huge hole in what is already a shaky prosecution case and -- if the jurors have not already made up their minds to convict -- could well be the basis of reasonable doubt about the prosecution's entire case.

Where is Waldo?, indeed.

Posted by Tom at 4:20 AM | Comments (5) |

March 13, 2006

The Enron Task Force's unraveling Nigerian Barge case

Early last week, oral arguments were heard in the Fifth Circuit Court of Appeals on the appeal of the four Merrill Lynch executives who were convicted of wire fraud and conspiracy charges in November 2004 in the trial of the Enron-related case known as the Nigerian Barge case.

Reports from those who attended the oral argument indicate that it went well for the appellants, but it may have gone even better had counsel for the Merrill Four known about former Enron CFO Andy Fastow's testimony from this past Thursday afternoon in the ongoing criminal trial of former key Enron executives Ken Lay and Jeff Skilling.

The Enron Task Force contended in the Nigerian Barge case that the Merrill Four were guilty of conspiring with Enron executives to mislead Enron investors in connection with Merrill's purchase of a dividend stream attributable to an ownership interest in some power-generating barges moored off the coast of Nigeria. On a threshold basis, the Task Force's case against the Merrill Four was bizarre because it was Enron, not Merrill, that may have improperly accounted for the transaction, although even that issue was never proven at trial. For its part, Merrill was simply buying a relatively small asset that Enron wanted to sell in Merrill's ongoing effort to ingratiate itself to a potentially good customer of Merrill's investment banking services.

The prosecution's case against the Merrill Four rested almost entirely on the testimony of former Fastow henchmen, Michael Kopper and Ben Glisan, both of whom were deeply involved with Fastow in effectively embezzling money from Enron in connection with Fastow's management of certain special purpose entities. Kopper and Glisan both testified on the key issue in the trial -- i.e., that Fastow made during a December 1999 telephone call a legally unenforceable oral inducement to Bayly that Enron would either buy Merrill's interest in the barges back or broker the interest to a third party, such as LJM2, an Enron SPE -- despite the fact that neither Kopper nor Glisan participated in the telephone call. Inasmuch as Fastow's oral inducement allegedly constituted a "hidden side deal" for Enron to "buy-back the barges," the Task Force argued that Enron's accounting of the transaction as a "true sale" was fraudulent and that the Merrill Four should have known that, so they were guilty of conspiracy.

Remarkably, the prosecution did not call either Fastow or anyone else who actually participated in the key December 1999 telephone call to testify during the trial of the Nigerian Barge case. Nevertheless, the Task Force represented to defense counsel for the Merrill Four that Fastow's testimony in regard to the transaction was consistent with that of Kopper and Glisan. Based on that representation and the weakness of the prosecution's case at trial generally, the defense team of the Merrill Four elected not to call Fastow as a witness during the trial. The jury convicted the Merrill Four, anyway.

With that backdrop, imagine the surprise of counsel for the Merrill Four when they heard about Fastow's following testimony on cross-examination this past Thursday afternoon in the Lay-Skilling trial. After reading a portion of Kopper and Glisan's testimony from the barge trial, Fastow testified as follows:

Q. Now, after having read through those pages [of Glisan and Kopper's testimony], does that refresh your recollection at all about the events that transpired in December of '99 concerning LJM[2] having been approached and what it did in response to that approach about these barges?

A. No, sir. They're largely contradictory to my recollection of events.

Fastow went on to testify at some length on the barge transaction and contradicted key portions of both Kopper and Glisan's testimony from the barge trial, such as the reason why LJM2 elected not to buy the interest in the barges at the time that Merrill bought the interest.

As noted earlier here (see also the thread here), this is not the first example of key testimony from prosecution witnesses in the Nigerian Barge trial being contradicted by testimony of prosecution witnesses in the Lay-Skilling trial. Meanwhile, four former Merrill Lynch executives sit in prison with their lives turned upside down based largely on testimony of prosecution witnesses that the Enron Task Force knew contradicted that of another key prosecution witness who the Task Force elected not to call.

The Department of Coercion, indeed.

Posted by Tom at 4:33 AM | Comments (5) |

March 10, 2006

Lay-Skilling, Week Six

The Andy Fastow Week of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling drew to a quiet close on Thursday afternoon, which contrasted sharply with the crispness of his heavily-scripted direct examination and the combative opening cross-examination of Skilling lawyer, Daniel Petrocelli. Thus, the corporate criminal trial of the decade is now through six weeks (prior weeks' summaries here), and the Enron Task Force's case against Lay and Skilling continues to shrink before our eyes.

Fastow's testimony drew the largest crowds of trial spectators to date, who appeared to be drawn to Fastow's appearance in much the same way many fans are drawn to NASCAR events to see the collisions. Fastow really is a train-wreck of a witness, and his gaunt appearance on the stand dramatically contrasted with the ebullient nature of Petrocelli, who clearly has become a jury favorite during his entertaining cross-examinations of Task Force witnesses. Normally, a defeated and somewhat pathetic person such as Fastow would tend to draw sympathy from the jury, but Fastow admitted to doing such despicable things that it is decidedly unclear whether even his repeated apologies could generate much juror empathy. Even grizzled courthouse veterans were shaking their heads in disbelief over Fastow's duplicity.

Fastow's brazen conduct in regard to his wife Lea is a case in point. During direct examination, Fastow played the part of a loving and protective husband in resolutely maintaining that his wife was innocent of the tax fraud charges for which she served a year in prison from mid-2004 through mid-2005. However, during the electric opening moments of Petrocelli's cross-examination, it became clear that Fastow had actually hung his wife out to dry while negotiating his own plea deal with the Task Force, and that his gaming of Lea's fate almost certainly contributed to the fact that prosecutors did not believe Fastow's eventual protestations of his wife's innocence. Incredibly, Fastow was apparently so insistent upon negotiating retention of a substantial net worth under his plea deal that he agreed that his and Lea's plea deals would be "cross-collateralized" -- i.e., if Fastow breaches his plea deal, then the Task Force can pursue additional charges against Lea!

Fastow's testimony in regard to his hidden "Global Galactic" memo was almost as bizarre. Fastow testified that the memo outlined a series of secret guaranties that former Enron chief accountant and former Lay-Skilling defendant Richard Causey had supposedly approved with Skilling's alleged blessing. However, Fastow admitted that he had never had Skilling approve the memo directly and that he destroyed the original of the memo soon after he was canned as Enron's CFO. Only after Fastow had cut his plea deal with prosecutors and was attempting to negotiate a better deal for Lea did he come up with a copy of the memo, which Fastow testified that Lea fetched from a safe-deposit box.

However, even that part of Fastow's story was put into question on Thursday when Petrocelli clearly surprised Fastow by showing him that Lea and her attorney -- well-known Houston-based criminal defense attorney, Mike DeGeurin -- had visited the safe-deposit several months earlier and apparently had either not found the copy of the memo in the box or decided not to bring it to Fastow's attention at the time. That bizarre revelation prompted Petrocelli to ask Fastow, "Mr. Degeurin wasn't going to your safe deposit box to retrieve your wife's jewelry, was he?"

So, although Fastow did implicate Skilling in "secret side deals" and undisclosed "bear hug" guaranties, and Lay in supposedly misrepresenting Enron's financial condition after Skilling's resignation, Fastow is such a despicable character that it remains decidedly unclear whether the prosecution gained much of anything with the jury from his testimony. Likewise, it's not a feather in the cap of the Task Force that prosecutors were forced to allow the jury to understand that even they thought the Task Force's most-publicized witness to date was lying to them about his wife's case at the same time while he was cooperating with them in regard to the Lay-Skilling case. However, one thing is absolutely clear from Fastow's testimony -- the prosecution is going to have to put Causey on the witness stand to corroborate Fastow's story on the Global Galactic memo or else the jury is going to sense a massive hole in the prosecution's case.

Moreover, that is not the only problem in the prosecution's case. Through six weeks of its case, the prosecution still has not presented a substantive witness who has not testified under either a plea deal or a non-prosecution agreement. Although that approach is partly the result of the prosecution's strategy in regard to freezing-out testimony that would be exculpatory for Lay and Skilling, the Task Force faces a substantial risk of jury skepticism regarding the prosecution's case if the primary witnesses alleging wrongdoing are doing so under deals in which the are retaining large amounts of money and hedging the risk of a long prison sentence. Perhaps sensing that dynamic, the prosecution plans to call a couple of witnesses next week -- former Enron risk analyst Vince Kaminski and trading analyst David Port -- who apparently will not be testifying under either a plea deal or a non-prosecution agreement with the Task Force.

Consequently, despite the enormous public relations advantage that the Enron Task Force enjoys in this case, my sense continues to be that the Task Force has big problems in making its case in court. Although the Task Force is probably 75% through its case-in-chief, all of the Task Force's substantive witnesses have initially lied to investigators for years until copping a plea in which they bargained for a reduced prison term and a substantial net worth in return for testifying against Lay and Skilling. Virtually none of the testimony from Task Force witnesses has supported a key element of the prosecution's case -- the alleged huge conspiracy within Enron to cover up the wrongdoing at the company -- and documentary evidence that corroborates the allegations of wrongdoing has been practically non-existent. On the other hand, the Lay-Skilling defense has been able to submit mounds of documentary evidence that casts doubt on much of the allegations of wrongdoing by prosecution witnesses and the defense has not even begun what will almost certainly be a vigorous and well-orchestrated case-in-chief.

In short, this does not appear to be the stuff of a clear-cut winner for the prosecution.

Posted by Tom at 6:21 AM | Comments (12) |

March 8, 2006

The increasingly bizarre case of Lea Fastow

As expected, the media is all over the well-scripted direct examination of former Enron CFO Andy Fastow, although some media sources are already questioning the credibility of some of Fastow's direct testimony. However, given the breadth of Fastow's direct examination, the media has not yet focused on the absolutely bizarre testimony that Fastow gave yesterday on the sad case of his wife, Lea Fastow.

As noted in these previous posts, the Enron Task Force prosecuted Mrs. Fastow on tax fraud charges more harshly than normal -- and she endured longer and harsher punishment (one year in prison) -- because of her relationship to Mr. Fastow. In that regard, as noted in this previous post, Fastow filed an affidavit in his wife's criminal case during 2003 in which he swore that "I never, and to my knowledge and belief, Michael Kopper never, agreed or conspired with Lea Fastow to commit the crimes alleged in Counts 1 and 2 of Lea's indictment."

The purpose of that affidavit was to support a motion requesting that Mrs. Fastow's trial be put off until after Mr. Fastow's criminal trial so that Mr. Fastow could testify on his wife's behalf without waiving his Fifth Amendment privilege against self-incrimination, although Mr. Fastow's affidavit comes pretty darn close to waiving it, at least in regard to the tax fraud charges. U.S. District Judge David Hittner ultimately denied that motion and scheduled the case against Mrs. Fastow to trial, which prompted both Fastows to have their plea deals with the Enron Task Force approved in May, 2004. By that time, Mr. Fastow had been cooperating with Task Force prosecutors for since at least January, 2004 and Mrs. Fastow had withdrawn from an earlier plea deal with prosecutors after Judge Hittner had rejected it. Judge Hittner proceeded to sentence Mrs. Fastow to a year in prison, which she has completed.

With that backdrop, Fastow attempted to explain during the early afternoon portion of his testimony yesterday the statements that he made in the affidavit that he filed in his wife's criminal case. Apparently, Fastow contends that his affidavit was technically truthful because it says that he and Kopper did not conspire with Mrs. Fastow to commit tax fraud. Left unsaid in the affidavit is that Fastow and Kopper did conspire with each other to commit tax fraud; they just didn't include Mrs. Fastow in that conspiracy.

So, let's get this straight. While cooperating with Task Force prosecutors, Fastow tells prosecutors that his wife is innocent of the tax fraud charges. Either the Task Force prosecutors did not believe him and proceeded with the criminal case against Mrs. Fastow, anyway, or the Task Force prosecutors believed him and proceeded with the criminal case against Mrs. Fastow, anyway.

If the reason that the Task Force proceeded against Mrs. Fastow is that they didn't believe Mr. Fastow, that certainly doesn't say much for the credibility of one of the prosecution's key witnesses in the case against Skilling and Lay. On the other hand, if the prosecutors believed Mr. Fastow and proceeded with the criminal case against an innocent Mrs. Fastow, anyway, that is an egregious example of the type of prosecutorial misconduct that has plagued the Task Force's entire investigation of the Enron scandal.

Cross-examination of Mr. Fastow is going to be very interesting.

Posted by Tom at 5:57 AM | Comments (6) |

Be careful what you ask on re-direct

As predicted yesterday, the media frenzy over former Enron CFO Andy Fastow's testimony relegated the previous Enron Task Force witness -- former Enron Broadband chief operating officer Kevin Hannon -- to obscurity rather quickly. However, before leaving the stand, the final moments of Hannon's testimony yesterday reminded me that a lawyer should always be extra-careful about what to ask the witness during re-direct examination.

As noted here, one of the Enron Task Force's main themes last week during the testimony of former Enron Energy Services executive David Delainey and a couple of other witnesses was that Skilling engineered a reorganization of the Enron Energy Services ("EES") unit in a manner that hid trading losses of that unit underneath the blanket of high profits being generated by Enron's top-flight trading unit, Enron Wholesale. During cross-examination, Skilling's lawyers challenged Delainey and the others by suggesting that the true purpose of the reorganization was simply business efficiency -- to combine EES' poorly-performing trading operation with the better trading expertise of the Wholesale unit. Delainey, in particular, generally contested that defense contention during cross-examination.

Which leads us to the following exchange between Task Force prosecutor Cliff Stricklin and Hannon during redirect examination yesterday:

Q. And what did [Enron Wholesale CEO] Mr. Whalley, first of all, remind the jury who Mr. Whalley was at the time?

A. He was the CEO of Wholesale.

Q. And what did Mr. Whalley tell you about the rationale for Mr. Skilling moving EES into Wholesale?

A. He said he had met with Dave Delainey, who was depressed over the state of the EES business and he said we had to do something. I didn't want Dave to quit, so we made the argument to Arthur Andersen that we should move the risk folks [from EES] into Wholesale.

Q. And why?

A. To improve the operation of EES [was] my impression.

Mr. Stricklin quickly moved on to another line of questioning, but it's hard to downplay testimony of a prosecution witness that directly contradicts a major theme of the testimony of the prosecution's previous witness.

Be careful what you ask on re-direct.

Posted by Tom at 4:27 AM | Comments (7) |

March 7, 2006

The risk of going for the cheap score

Former Enron Broadband chief operating officer Kevin Hannon will finish his testimony today in the trial of former key Enron executives Ken Lay and Jeff Skilling. Most likely, with the testimony of former Enron CFO Andy Fastow to follow, Hannon's testimony will quickly fade into obscurity.

However, the nature of the media reporting on Hannon's testimony from last Thursday afternoon got me to thinking. The prosecution went for a cheap score with Hannon by eliciting from him that Skilling had supposedly admitted during a May 2001 meeting with a group of other Enron executives that "they're on to us" after a small analyst firm had produced a research note critical of some Enron transactions. Most of the media covering the trial (representative examples: NY Times and Houston Chronicle) seized on Hannon's statement as gripping testimony that could prove to be highly probative in the government's case against Skilling.

Well, maybe so, but doesn't Hannon's testimony really undermine the government's case? The report that supposedly prompted Skilling's remark was based on negative information about Enron that the company had made available to the efficient securities market. The report was not even a particularly novel analysis of Enron, given that it came a couple of months after Peter Elkind and Bethany McLean's much-bantered Fortune article that suggested that Enron stock was overpriced. Despite the negative inference that Hannon attributed to Skilling's alleged comment, it's at least just as likely that Skilling -- if he made the statement at all -- was making light of the report to a group of company executives while emphasizing that his more optimistic opinion of the same information should also be made known to the markets.

But more importantly, how does the Enron Task Force square the report's negative evaluation based upon information that Enron disclosed to the efficient securities markets with its core allegation that Skilling withheld such information from the markets?

Call it the risk of going for the cheap score. The prosecution went for testimony that seemed damaging to Skilling on its face, but in substance is counterproductive to the prosecution's case. By the time Skilling lawyer Mark Holscher had elicited from Hannon on cross-examination yesterday that previous anti-Skilling witness David Delainey had also attended the meeting and heard Skilling's supposed dramatic admission, but somehow failed to recall it in his testimony last week, it would not be surprising if the jury is, might we say, skeptical of Hannon's testimony about Skilling's statement and of the prosecution's motive in eliciting it.

All of which just reinforces that Lay and Skilling will never win their case in the court of public opinion. But they still just might win it in court.

Posted by Tom at 3:00 AM | Comments (2) |

March 6, 2006

Oral argument today in the Nigerian Barge appeal

Oral argument takes place today at the Fifth Circuit Court of Appeals in New Orleans in the appeals of Dan Bayly, Robert Furst, James Brown and William Fuhs, the former Merrill Lynch executives who were convicted of wire fraud and conspiracy charges in November 2004 in the trial of the Enron-related case known as the Nigerian Barge case.

The plight of the Merrill Four in the Nigerian Barge case is a case study in the dubious nature of the government's criminalization of business in the post-Enron era (for a thorough discussion of that subject, begin here). In the barge case, the Task Force took a finance transaction between Enron and Merrill Lynch and criminalized it through a brazen web of distortion, suppression of key testimony, inadmissible hearsay, opposition to the defense's jury instruction on the key issue in the case and prosecutorial misconduct. In short, the Task Force effectively prosecuted the Merrill Four for doing their jobs in connection with the firm's purchase of a dividend stream for which Enron, not Merrill, may have improperly accounted, although even that issue was never proven at trial.

Then, to make matters worse, the Task Force at trial played on the jury's hindsight bias and presented to the panel a fictional screenplay of the underlying transaction while effectively effectively preventing the Merrill Four from presenting exculpatory testimony and evidence that contradicted the Task Force's fictional account. The Task Force is deploying precisely the same deplorable tactics in the ongoing trial of former key Enron executives Ken Lay and Jeff Skilling.

Interestingly, part of the key testimony that the Task Force has elicited to date during the Lay-Skilling trial contradicts an important part of the testimony that it presented in convicting the Merrill Four during the Nigerian Barge trial. In Lay-Skilling, the Task Force had former Enron investor relations chief Mark Koenig testify that he learned on January 14, 2000 -- just days before Enron was scheduled to publish its fourth-quarter 1999 financial statement -- that earnings were likely to be 30 cents a share, a penny below the 31 cents a share that had been forecast on Wall Street. Koenig then testified that he alerted Enron's CFO, Richard Causey, that the company would miss its forecast and that, on January 17 -- the day before the earnings report was scheduled to be publicly released -- he saw a draft memo saying that the company would earn 31 cents a share. On Jan. 19, the day after the earnings release, Koenig testified that he discussed the sudden change with Lay, who seemed surprised and allegedly observed to Koenig that "he went to bed and we were at 30 cents and, when he woke up, we were at 31 cents."

In contrast, during the barge trial, the Task Force elicited extensive testimony and contended during closing argument that Enron's motivation to arrange the barge transaction with Merrill Lynch in December 1999 was to help Enron hit its earnings target of 31 cents per share, not the 30 cent-per-share target that Koenig in his Lay-Skilling testimony suggested was the company's true target until just days before the January 18 earnings release. Thus, the Task Force's evidence in the barge trial that Enron's earnings target in December 1999 was 31 cents per share directly contradicts Koenig's testimony in Lay-Skilling that the company increased its earnings target by a penny-per-share just days before the January 18, 2000 earnings release.

So it goes in the wacky world of criminalizing corporate agency costs.

Meanwhile, Alexei Barrionuevo and Kurt Eichenwald of the NY Times provide this article today in which they summarize the testimony to date in the Lay-Skilling trial and observe that this week's star witness -- demonized former Enron CFO Andy Fastow -- may end up being just another witness in the trial.

Posted by Tom at 4:09 AM | Comments (1) |

March 3, 2006

Lay-Skilling, Week Five

The pace of the Enron Task Force's legacy case against former key Enron executives Ken Lay and Jeff Skilling continued to pick up pace during its fifth week (earlier weekly summary posts here), but that quicker pace is highlighting an unusual aspect of the trial -- that is, the Task Force's case appears to be shrinking dramatically before our very eyes.

After years of a highly-publicized propaganda campaign against anything having to do with Enron, after bludgeoning plea bargains from over a dozen former Enron executives, after alleging the biggest criminal conspiracy in the history of federal prosecutions and after issuing a 66-page indictment against Lay and Skilling that is so far afield from what is going on in court that the prosecutors don't want the jury to see it, the Task Force's case is coming down to a complex jumble that relies heavily on innuendo and requires the jury to connect the dots of amorphous points that the Task Force is hoping will be enough to convict Lay and Skilling.

This week's testimony was a case in point. The Task Force's main theme was that Enron was so successful in making money in its trading operations that it allowed Lay and Skilling to soft-pedal to the investing public the losses that Enron was incurring in a couple parts of its business. Mind you, the Task Force is not suggesting that Lay or Skilling was involved in approving fraudulent accounting; rather, the Task Force alleges that Skilling engineered a reorganization of an Enron business unit in a manner that hid losses of the poorly-operating unit underneath the blanket of high profits of Enron's trading unit. According to the Task Force, the hiding of these losses, along with over-reserving to hide excess profits of the trading unit, allowed Skilling -- and presumably Lay, although he was almost an afterthought this week -- to misrepresent Enron as a stable logistics company than a more volatile trading company, which the Task Force contends would not have been as highly valued in the marketplace.

Thus, as noted in this earlier post, the prosecution of Lay and Skilling is shaping up as the purest prosecution of corporate agency costs in the post-Enron era. The underlying message of this prosecution is that an executive of any publicly-owned corporation better disclose every bit of bad news about their company or risk prosecution -- under the sharp lens of hindsight bias -- for misleading the investing public about the true health of the company. If the Task Force's approach is successful against Lay and Skilling, one would wonder why any executive of a publicly-owned corporation would risk saying anything to analysts and the investing public other than "go read the financial statements in our regulatory filings. It's all there."

Amidst this muddle, the Task Force continues to show clear signs of desperation. One such sign is that the Task Force continues to fumble about in regard to the order of its witnesses, a problem that drew the rare ire of the remarkably patient Judge Lake early this week. Moreover, the Task Force continues to rely heavily on testimony from witnesses who are testifying under cooperation agreements with the Task Force under which the witnesses hedged the risk of a long prison term and the loss of millions in return for their testimony. Is the jury really going to believe that the biggest corporate conspiracy in history was hidden from everyone except the relative few Enron executives who have copped pleas or entered into non-prosecution agreements?

An even bigger problem for the Task Force is that the testimony of the cooperating witnesses has been all over the map in regard to their conduct. Mark Koenig testified that he lied a few times while touting Enron. Paula Rieker testified that others lied, but she did not -- she only "overstretched" a few times. This week's star prosectution witness, former Enron Energy Services executive David Delainey, testified that he lied all the time. Wes Colwell, a former Enron trading unit accountant, incredibly testified that he was involved at Enron in defrauding Tom Bauer, a former Andersen accountant with whom Colwell is now in business!

Meanwhile, there is no documentary evidence that any of these cooperating witnesses thought they were lying at the time of the alleged crimes and no meaningful evidence that they even told anyone that they thought they were lying. Meanwhile, the defense has introduced on cross-examination large amounts of documentary and video evidence that the cooperating witnesses appeared to be working hard under difficult conditions to help Enron's cause. Is the jury going to believe that all of these witnesses were such good liars? And, if so, will the jury believe that they were lying then or lying now on the stand?

Seemingly sensing this dynamic, the Task Force elicited testimony at the end of the week from its latest cooperating witness -- former Enron Broadband executive Kevin Hannon -- that Hannon had actually participated in a meeting with Skilling, Lay and others in May 2001 in which Skilling supposedly admitted that an analyst's report at the time had finally figured out his elaborate fraud on the market. Testimony for the week closed with Hannon still under direct examination from the prosecution, so no cross-examination has occurred. But just how likely is it that such a significant meeting took place and Skilling made such incriminating statements, and yet none of the half-dozen previous former Enron executives who have testified during the trial were told about it by either Hannon or any other participant in such meeting? Stay tuned on that issue.

Consistent with the shrinking nature of the prosecution's case, the Task Force announced this week that it is over halfway through with putting on its case in chief and expects to be through presenting its case by the end of this month. Inasmuch as the Task Force originally estimated that it would take 36 days (i.e., nine weeks) to put on its case, assuming an equal amount of time on cross-examination to that spend on direct. Even though the Task Force took more time than was necessary or advisable with its initial witness Koenig and cross-examination has been taking far longer than direct, the Task Force is now over halfway through presenting its case. That's another indication that the Task Force is literally adjusting its theory of the case "on the fly" during the trial, and that it has concluded that it cannot prove the vast majority of what it alleged in its charging documents against Lay and Skilling.

Next week should be particularly interesting as demonized former Enron CFO Andy Fastow -- the architect of Enron's special purpose entities or "SPE's" -- takes the stand after Hannon. Fastow was a notoriously volatile fellow -- at least to subordinates -- while at Enron, and it will be interesting to see whether his demeanor has changed since he copped a plea deal with prosecutors back in early 2004. On the other hand, the Task Force's case to date has wandered away from the SPE's, so there is a decent chance that a difficult-to-control Fastow could end up being a not-so-important witness in the ever-changing big scheme of this corporate criminal case of the decade.

Posted by Tom at 5:07 AM | Comments (4) |

February 28, 2006

What is the presumption in the Lay-Skilling trial?

Chronicle business columnist Loren Steffy responds to this weekend post on the high price of asserting innocence and hindsight bias in prosecutions of corporate agency costs by urging us to remember the supposed lies that Ken Lay and Jeff Skilling told in regard to Enron.

Steffy is a talented writer and has consistently pulled no punches in expressing his belief that Lay and Skilling are guilty, although his guilty verdict at this point in the trial is a bit difficult to square with this prior column. In fact, Steffy's blog post reminded me of this funny story about one of my experiences on jury duty. Still, I admire Steffy's honest stance more than the disingenuous positions taken by some in the media, who cloak an anti-Lay-Skilling bias with a transparent jacket of objectivity.

In the Lay-Skilling trial, the prosecution is only through about a third to 40% of its case in chief. Four out of the five substantive prosecution witnesses to date have testified under agreements with the prosecution in which they hedged the risk of a long prison sentence and loss of virtually all of their net worth in return for their testimony against Lay and Skilling. Moreover, the prosecution's case to date bears little resemblance to the highly-publicized indictment and related charge pleadings against Lay and Skilling, and the prosecution has gone to great lengths to chill witnesses from testifying who have potentially exculpatory testimony for Lay and Skilling. Meanwhile, Lay and Skilling patiently wait for the opportunity to tell their side of the story.

Against that backdrop, Steffy has already decided that Lay and Skilling are guilty. That's his perogative, but I prefer to view Lay and Skilling as innocent until the entire story is told and the prosecution has proven -- beyond a reasonable doubt -- that these men are guilty of a crime.

Posted by Tom at 5:35 AM | Comments (0) |

February 26, 2006

While the price of asserting innocence is high, pleading guilty is lucrative

Alexei Barrionuevo, who has been doing a fine job covering the day-to-day developments in the Lay-Skilling trial for the New York Times, and his Times colleague Kurt Eichenwald -- who has written the best overall book on the Enron scandal, Conspiracy of Fools (Broadway 2005) -- collaborated on this article in today's Sunday Times that addresses one of the more troubling aspects of the government policy of criminalizing corporate agency costs (see previous posts here, here and here, among others) -- the exorbitant cost of a defense to charges in such a case.

The article lucidly points out that Ken Lay -- who at one time was worth about half-a-billion dollars and now is almost broke -- has paid or dedicated about $10 million to his defense team, which is on top of another $20 million that his lawyers were paid from Enron's D&O insurance policies before the proceeds of those policies were locked up in connection with the directors' settlement in the Enron class action securities litigation last year. Inasmuch as Lay's co-defendant, Jeff Skilling, has reportedly paid over twice as much out of his pocket than Lay to his defense team and presumably received about as much of the insurance proceeds as Lay, an estimate of $70 million in defense costs for the case is certainly well within the ballpark of accuracy.

And as enormous as the defense expenditures have been, you can bet that the cost of the prosecution is much higher.

So, what are we to make of this extraordinary expenditure of resources? My sense is that it is a stark reflection of the folly of engaging in the the type of criminalization of corporate agency costs -- which is legalese for the prosecution of merely questionable business decisions -- that has been a large part of the Enron Task Force's largely ineffective trials to date in the Enron-related cases.

While the Task Force has properly obtained plea bargains from former Enron CFO Andrew Fastow and the relative few of his cohorts who effectively embezzled money from Enron, the Task Force prosecutors have not limited themselves to such clear cases of theft and fraud. Rather, the Task Force has spent an enormous amount of time and resources criminalizing business decisions that simply do not involve the black-and-white circumstances of theft. Indeed, these types of business decisions involve judgments over various possible alternatives, a number of which -- given the nature of business risk -- will turn out badly and result in a loss for the company.

As Stephen Bainbridge points out in this insightful TCS Daily column, hindsight bias of juries with regard to such bad outcomes results in penalizing beneficial risk-taking rather than punishing true criminal conduct. Many judges and most lay juries usually have only a minimal understanding of the nature of business risk-taking and, therefore, improperly conclude that a bad result from a business decision had a high probability of occurring (and, thus, should have been prevented by the decision-maker) simply because the bad result occurred. Consequently, juries are generally biased in favor of finding criminal liability against a business executive under such circumstances even if, at the time the business judgment was made, the probability of the bad result was reasonably low and hedging the risk of the bad result was too expensive. Professor Bainbridge explains the counterproductive effects of this syndrome:

[T]here is a substantial risk that juries will be unable to distinguish between competent and negligent management because bad outcomes often will be regarded, [viewed with 20-20 hindsight], as having been foreseeable and, therefore, preventable. . . . If liability results from bad outcomes, without regard to the [looking forward] quality of the decision and/or the decisionmaking process, however, managers will be discouraged from taking risks. If it is true that lack of gumption is the single largest source of agency costs, as somebody once said, rational shareholders will disfavor liability rules discouraging risk-taking, as Judge Ralph Winter opined in Joy v. North:

[B]ecause potential profit often corresponds to the potential risk, it is very much in the interest of shareholders that the law not create incentives for overly cautious corporate decisions. . . . Shareholders can reduce the volatility of risk by diversifying their holdings. In the case of the diversified shareholder, the seemingly more risky alternatives may well be the best choice since great losses in some stocks will over time be offset by even greater gains in others. . . . A rule which penalizes the choice of seemingly riskier alternatives thus may not be in the interest of shareholders generally.

Hence, when juries review the merits of even bad corporate governance, they run the risk of effectively penalizing "the choice of seemingly riskier alternatives."

In sum, shareholders deserve protection from theft, but not from risk taking, . . . Unfortunately, it's not clear that prosecutors know the difference -- or even care.

Meanwhile, the flipside of the high-cost of asserting innocence is the financial pressure to plead guilty, which is underscored by this motion that former Lay-Skilling co-defendant Richard Causey (plea deal posts here, here and here) filed late last week.

As a result of his plea deal, Causey in his motion requests (with the Enron Task Force's approval) that U.S. District Judge Sim Lake release several million dollars of property to Causey that the government had previously frozen and not allowed Causey to use (except to pay some living expenses) while he was defending himself from the government's charges.

Thus, as noted earlier here, the first three substantive prosecution witnesses in the Lay-Skilling trial were each able to preserve a significant net worth by copping a plea deal with the Task Force. While some continue to surmise that Causey's decision to plead guilty was the result of a personal revelation of wrongdoing, Causey's motion and other circumstantial evidence reflects that the true reasons for that decision are far more nuanced and troubling.

Posted by Tom at 5:14 AM | Comments (5) |

February 25, 2006

The criminalization of business mindset

Peter Lattman -- whose WSJ Law Blog has quickly become essential daily reading on business law matters -- points us to this Corporate Crime Reporter article on former Enron Task Force director Andrew Weissmann, who is leaving the Justice Department for a position in the white collar criminal defense section of Jenner & Block.

As this Mary Morrison article explains in detail, Weissmann's dubious decision to prosecute American accounting icon Arthur Andersen out of business over the firm's work for Enron was an egregious breach of prosecutorial discretion. In the Corporate Crime Reporter article, Weissman is asked about his decision to prosecute Andersen:

Weissmann defends the prosecution of Andersen against a growing consensus in the defense bar that the firm should not have been prosecuted.

"The company through its choices had given the Department of Justice an 'all or nothing' ultimatum," Weissmann said. "People need to remember that Andersen had been offered a deferred prosecution agreement and rejected it."

He believes that as a result of the Andersen prosecution, more and more corporations are jumping at deferred and non-prosecution agreements when offered.

"One of the fallouts from Andersen is that corporations are much more willing to say yes to deferred prosecution agreements, because they can see what happened to Andersen," Weissmann said. "What major corporation is now going to gamble that the Justice Department is going to go away and issue a declination? That's one of the reasons you are seeing a dramatic rise in deferred prosecution agreements and non-prosecution agreements."

H'mm, let's break this reasoning down. An improper prosecution that cost people and communities in the U.S. over 30,000 jobs was really Andersen's fault because the firm didn't agree to a deferred prosecution agreement in regard to crimes that the firm did not commit. Besides, despite the cost of thousands of jobs and millions of dollars in retirement benefits, the improper prosecution was still justified because it achieved the better good of scaring other companies into selling out their employees and copping deferred prosecution agreements.

That such appalling reasoning goes unchallenged in the article is a daunting sign of our times. Prosecution of business crimes has become a game of roulette for prosecutors such as Weissmann, who play on an ugly cauldron of public cynicism, resentment, and tolerance for abusive use of governmental power to prosecute the unpopular business executive of the moment. When the frightening loss of thousands of jobs and the destruction of careers and families is glibly rationalized by a former high governmental official as merely a tolerable cost of the use of the state's awesome prosecutorial power for the better good of society, we are well on our way to a time when, as Sir Thomas warns us, we will not be able to "stand upright in the winds" of abusive state power that will blow then.

And what about the criminalization of business mindset that Weissmann reflects? Ayn Rand summed it up well with regard to her observation about socialism (courtesy of Bryan Caplan):

[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 6:23 AM | Comments (26) |

February 24, 2006

Lay-Skilling, Week Four

Long trials tend to settle into a rhythm, and the criminal trial against former key Enron executives Ken Lay and Jeff Skilling is no exception.

After four weeks of trial, the prosecution has put on three substantive witnesses. Each one has gone through a heavily-scripted direct examination in which they confidently accuse Lay and Skilling of making various misleading statements to the investing public and employees. Then, defense attorneys on cross-examination chip away at the prosecution witnesses' testimony on direct, and the witnesses gradually become far less decisive in their accusations than they were during their testimony on direct examination. Much of the testimony is quite boring, but -- as with a baseball game -- short bursts of really interesting activity breaks up the tedium. And U.S. District Judge Sim Lake provides a steady hand and a dry wit to the proceedings.

The testimony this week of former Enron investor relations executive Paula Rieker was a case in point. The prosecution rolled through direct examination of the business-like Ms. Rieker in a little less than a day, and the prosecution appeared to score some jury points when she testified on Tuesday afternoon that an Enron director characterized (how was this not excluded as inadmissible hearsay?) Lay's use of the line of credit component of his compensation package "as an ATM machine." Then, Bruce Collins, the member of the Lay defense team who handled cross-examination of Ms. Rieker, opened his cross-examination on a questionable note, suggesting in a question to Rieker that Lay's draw of about a million dollars on his company line of credit days before the company filed its chapter 11 case was just "a drop in the bucket" given the magnitude of the company's other matured liabilities at the time. Inasmuch as Rieker's "no, sir" response was probably what every juror would have answered if asked the same question, Tuesday concluded as a good day for the prosecution, particularly in its case against Lay, who had barely been mentioned by the first two witnesses, Mark Koenig and Ken Rice.

Collins steadied himself over the next day and a half of cross-examination and methodically took Rieker through each one of her accusations against Lay, and she conceded that Lay had never asked her to make any misleading statements or to do anything wrong, for that matter. However, Rieker was composed responding to questions from Collins and she often extrapolated on her answers despite Collins' attempts to cut off her off. Thus, a day and a half of initial cross-examination was rather dull in comparison to the relative excitement of Rieker's Tuesday afternoon testimony.

But that all changed quickly when Skilling lawyer Daniel Petrocelli began his cross-examination late yesterday morning.

In as effective cross-examination of a difficult prosecution witness that I have seen in awhile, Petrocelli immediately disassembled Rieker, catching her right off the bat in a lie about her duties at Enron ("I overstretched," conceded Rieker) and then took her through the extraordinary compensation that she had earned ($5 million combined in 2000 and 2001 alone) and the confidential $300,000 bonus that she had accepted from the company just three days before Enron declared bankruptcy (how on earth did the prosecution not attempt to diffuse that fact by bringing it out on direct?). You were being paid all this money and you never told Skilling or Lay that they were making misleading statements?, Petrocelli effectively asked Rieker repeatedly.

Almost instantaneously, the previously poised Rieker became tense and agitated, and her answers to Petrocelli's questions increasingly were evasive and often simply non-responsive. The prosecution's frequent objections (most of which were overruled) to Petrocelli's questioning only underscored how effective Petrocelli's cross-examination was in bringing the best prosecution witness in the trial to date back down to earth. By the time Petrocelli had Rieker admitting that neither Skilling nor Lay had ever asked her to do anything wrong and that she had not been involved in any criminal activity in her position at Enron other than the insider trade on which her plea deal is based, the Enron Task Force lawyers had to be asking themselves "what happened to that advantage we had after Tuesday?"

Consequently, as noted in this previous post and despite the enormous public relations advantage that the Enron Task Force enjoys in this case, my sense is that the Task Force continues to have big problems in making its case in court. Almost a month into the trial, each of the Task Force's substantive witnesses have initially lied to investigators for years until copping a plea in which they bargained for a reduced prison term and a substantial net worth in return for testifying against Lay and Skilling. Virtually none of the testimony has supported a key element of the prosecution's case -- the alleged huge conspiracy within Enron to cover up the wrongdoing at the company -- and Rieker admitted under questioning from Petrocelli that she had engaged in nothing of the sort while at Enron. Despite alleging now that Lay and Skilling were involved in lying about Enron to the investment community years ago, none of the witnesses have produced any corroborating documentary evidence that they had any reservations at the time about the statements that Lay and Skilling were making. Similarly, none of the witnesses have testified that Lay or Skilling at the time ever admitted that they thought they were making misleading statements.

Doesn't sound like much of a conspiracy, does it?

Meanwhile, a couple of behind-the-scenes developments also reflect disarray in the Task Force camp. Mirroring Rice's infamous false testimony in the Enron Broadband Trial and the Task Force's abysmal handling of that false testimony, it now appears that the prosecution had Rice testify, during the late stages of his testimony last week, regarding a dubious presentation document that the prosecution had failed to produce to the defense as required before trial, prompting the Lay-Skilling defense to consider bringing Rice back to testify regarding that suspicious document during the defense's case-in-chief. It's usually not a good sign for the prosecution when a key prosecution witness performs so badly that the defense wants to use the witness in the defense's case-in-chief.

But even more telling of the problems in the prosecution's case is how little it has to do with the indictment against Lay and Skilling. As earlier posts here and here pointed out, the prosecution does not want the jury to see the indictment and does not even want the Lay-Skilling defense team to be able to question witnesses about it. Based on the prosecution's presentation of its case to date, it's easy to see why -- a substantial amount of the testimony that the prosecution has elicited from its witnesses is simply not in either the indictment or the statements in compliance against Lay and Skilling.

While reading the transcripts from the trial, I keep a copy of the indictment and the statements in compliance handy so that I can refer to them when I read about something in the transcripts that I had not previously read about in those documents. I have counted at least three substantive areas that the prosecution has raised extensively during direct examination of its witnesses that are not in either the indictment or the statements in compliance -- disclosure issues relating to sales of the "Peaker plants" in 2001, the alleged "newfound" penny of earnings in the fourth quarter of 1999, and issues relating to warrants and monetizations on something called ResCo.

Apart from the Constitutional issue that defendants must be given fair notice of what the government intends to prove at trial -- particularly in regard to an indictment that paints as broad a brush as this one does -- the raising of new issues during trial is yet another indication that the Task Force is not confident in its case and is willing to take substantial trial risks in an attempt to make a case against Lay and Skilling. Such tactics are at least consistent with the Task Force's fingering of dozens of unindicted co-conspirators under its increasingly hollow conspiracy theory, which is a transparent tactic to induce former Enron executives who have exculpatory testimony for Lay and Skilling to assert their Fifth Amendment privilege and not testify out of fear of being indicted themselves.

After the typical three day weekend break, the trial cranks back up Monday as the prosecution calls former Enron trading unit accountant Wes Colwell, who cut a deal with SEC and who apparently has been cooperating with the Task Force under some sort of non-prosecution agreement. After Colwell, the order of witnesses is currently expected to be accountant Wanda Curry, former trader Timothy Belden (related post here) and former trading executive David Delainey.

Posted by Tom at 3:50 AM | Comments (4) |

February 23, 2006

The wit and wisdom of Sim Lake

U.S. District Judge Sim Lake is widely-considered to be one of the best jurists in Houston, and his no-nonsense handling so far of the criminal trial of former Enron executives Ken Lay and Jeff Skilling reflects why he is so well-thought of in local bar circles.

Time limitations have prevented me from sitting in on the Lay-Skilling trial as much as I would have liked to date, but I have access to the transcripts from the trial, so I'm able to keep up with what goes on in court each day. From reading the transcripts, I have found that Judge Lake's most interesting and witty observations often occur before and after the jury is in the courtroom, such as the following exchange that occurred yesterday afternoon after testimony had concluded for the day and the jurors had been excused:

COURT: Be seated, please. (To Bruce Collins, one of Lay's attorneys) How much more do you have left in your cross-examination?

MR. COLLINS: It's hard to estimate. I think I'll be done by lunch tomorrow.

THE COURT (to Skilling lawyer, Daniel Petrocelli): How much do you have, Mr. Petrocelli?

MR. PETROCELLI: I have less than a day.

THE COURT: So it's doubtful that we will finish (on Thursday)?

MR. PETROCELLI: I don't think so.

THE COURT: Okay. Is there anything else we need to go into this afternoon?

MR. (Prosecutor John) HUESTON: Your Honor, I'd like to suggest something, and just maybe hear that. I worked hard to keep my direct to less than a day. And I'd like to introduce the thought of some rule of reasonableness when we work to get directs confined and moving quickly, and cross just goes on for days. I think two times the amount, over two times the amount of the direct time for cross, should have been more than sufficient, and I was hoping we would be done with all of this by tomorrow.

THE COURT: Well, probably you're not the only one who hoped that, but the government covered a lot of discrete information in a very general way that opens the -- creates the need by defendants to explore in greater detail. And if you think cross-examination is beyond the scope or it's not relevant, you can make an objection and I'll sustain it. But it's not appropriate, I don't believe, to impose a timing order in a criminal case where there are liberty issues at stake and there's a Sixth Amendment right. I will say, in response to a lot of your objections today that I overruled, that cross-examination entitles the questioner to some leeway and to ask leading questions. So fewer objections by you might move things along a little bit.

MR. HUESTON: Yes, sir.

THE COURT: Do you need to respond?

MR. PETROCELLI and MR. COLLINS: No, sir.

THE COURT: Anything else we need to take up?

MR. PETROCELLI: No, Your Honor.

THE COURT (to Mr. Hueston): And I'm perfectly willing to cut off unreasonable and irrelevant questioning, but there hasn't been much today.

MR. PETROCELLI: Thank you, Judge.

THE COURT (to Mr. Petrocelli, I'm sure with a wry grin): But don't take that as an encouragement. We'll see you-all tomorrow morning.

Posted by Tom at 8:49 AM | Comments (0) |

February 17, 2006

Lay-Skilling, Week Three

The glacial pace of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling quickened this week, as former Enron Broadband CEO Ken Rice finished his testimony after not quite three days on the stand. Although the mainstream media accounts of the trial continue to be generally favorable for the prosecution and, as such, the trial remains an extremely difficult one for the defense, my sense is that the biggest news after three weeks is that this trial is settling in to being a very difficult one for the prosecution.

The holes in the prosecution's case are apparent after just two witnesses. The Task Force inexplicably spent almost three times longer with its first witness -- Mark Koenig -- than it did with Rice, which put the trial on its initial glacial pace. Then, in an apparent reaction to that miscue, the prosecution seemingly hurried through Rice's testimony, who is arguably the more important witness of the first two.

Moreover, much of the substance of the testimony of both witnesses was rather odd. Koenig claimed that he believed that Skilling and Lay misled the investment community in various ways, but he didn't know the mechanics of how that was supposedly accomplished. On the other hand, Rice asserted that Skilling misled the investment community on the prospects of Enron's broadband unit, but he didn't implicate Lay in any alleged wrongdoing at all. Then, on cross-examination, Rice conceded that he believed Enron Broadband had great long-term potential, but that Skilling and he were involved in improperly hiding some of the unit's short-term problems.

To make matters worse for the Task Force, the testimony of both men barely touched on a key element of the prosecution's case -- the alleged huge conspiracy within Enron to cover up the wrongdoing at the company. Indeed, when the prosecution asked Rice on re-direct about whether he was involved in such a conspiracy, Rice replied unenthusiastically that "Mr. Skilling and I had misled investors on a number of occasions about the prospects of our business" at the broadband unit. So much for the biggest conspiracy of all time.

But perhaps most importantly, both Koenig and Rice admitted during cross-examination that, despite testifying now that they were involved in lying about Enron to the investment community years ago, neither of them made any statement to Skilling, Lay or anyone else at the time of the supposed lies about the wrongdoing. Similarly, neither of these key prosecution witnesses testified that either defendant ever once acknowledged telling a lie. That lack of evidence of fraudulent intent dovetails with the defense's theory that Koenig and Rice are only now claiming that they were involved in wrongdoing to hedge their risk of long prison sentences under their plea deals with the prosecution. That the prosecution had Rice dead to rights on illegal insider trading charges at the time he cut his plea deal also didn't help his credibility, either.

So, after filing and publicizing a lengthy indictment against Lay and Skilling that asserts a wide array of alleged corporate crimes, the Task Force doesn't want the jury to see that indictment (although the Lay-Skilling team does) and the Task Force's case appears to have come down to a plain "pump and dump" case -- Skilling and, to a lesser extent, Lay touted the failing company's shares while selling their own (that Lay's sales were forced under margin calls is a knawing problem with that theory that the Task Force has not even addressed, yet). As noted in this earlier post, that theory of the case plays on "the presumption" in such cases -- i.e., that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something for failing to announce to the investing public that Enron was really just a highly-volatile trading company rather than the more stable logistics company that they contended Enron had become. After three weeks of trial, it would not be surprising if some of the jurors are saying to themselves about that theory: "Is that all you've got?"

Finally, sometimes small things in big trials are the best indicators of problems. Throughout the trial, Judge Lake has ordered the prosecution to advise the defense of its next five witnesses. As late as yesterday evening, the prosecution still hadn't even decided on its next five witnesses, and at least one of those witnesses -- Koenig's former aide, Paula Rieker -- will likely be largely duplicative of Koenig's earlier testimony. That the prosecution is fumbling over the order of its witnesses at this early stage of the trial is a pretty darn good indication that this is not a prosecution team that is confident in its case.

Posted by Tom at 4:13 AM | Comments (6) |

February 15, 2006

Give me a break

The Chronicle's Mary Flood reports that, upon completion of Mark Koenig's testimony earlier today in the Lay-Skilling trial, Koenig's lawyer released the following statement:

"Mark Koenig has completed his testimony, and he will have nothing more to say until this case is concluded. However, I would like to offer an observation."

"When a person makes wrongful choices and violates the law, that person confronts another choice. Mark Koenig chose to confront and admit his wrongdoing, and to undertake the most meaningful effort available to him to begin making up for his offense. Over the past year and a half, and especially over the past two weeks, that's exactly what he has done. He embraced responsibility for what he knew to be wrong, and spoke truth about what happened. And in doing that, he displayed a great deal of courage and strength of character."

H'mm, "displayed a great deal of courage and strength of character?"

While working for Enron, Koenig was operating under one of two circumstances. Either he was lying to the investment community about Enron or he did not intend to mislead anyone and was simply doing the best he could in the financial storm that ultimately cratered the company.

If it was the former, then Koenig continued to lie to investigators for years until he copped a plea in 2004 in which he bargained for a reduced prison term and a substantial net worth in return for testifying against Lay and Skilling. Moreover, Koenig didn't even cut that deal with prosecutors until after his assistant -- former Enron managing director of investor relations Paula Rieker -- had cut her plea deal with prosecutors and agreed to testify against Koenig, among others.

On the other hand, if it was the latter, then Koenig has sold his soul to prosecutors and lied on the witness stand in return for a lighter prison sentence and retention of a substantial net worth.

In short, Koenig is either a liar or a perjurer who cut a deal to hedge his risk of a long jail term and to save some money. Either way, Koenig is not trustworthy and certainly did not display "a great deal of courage and strength of character."

Posted by Tom at 3:57 AM | Comments (0) |

February 14, 2006

"That you didn't really mean it is why we want to use it"

Even though most of the action is in the courtroom during the ongoing trial of former key Enron executives Ken Lay and Jeff Skilling, a few interesting tidbits still arise from time to time on the docket of the case.

You may recall this post from awhile back that focused on this rather odd Enron Task Force motion requesting that U.S. District Judge Sim Lake not allow the Lay-Skilling defense to use the Task Force's own indictment during cross-examination of the Task Force's witnesses in the trial because, among other things, to do so would risk "unfair prejudice, confusion of the issues [and] misleading the jury. . . "

Well, as you might expect, the Lay-Skilling is having a little fun with the Task Force's unusual request. In this opposition, the Lay-Skilling team notes that the Task Force's motion stands due process of law on its head:

Due process considerations may keep the indictment from going to the jury where publishing it would cause defendant prejudice. . . . Invoking defendants' right to keep the indictment from the jury where it contains "inflammatory or pejorative language," . . . and arguing that asking questions about the indictment may cause prejudice and confusion, the Task Force seeks to prevent defendants from showing the indictment to witnesses and questioning them about its allegations. . . The most efficient and effective means of cross-examining witnesses on certain topics includes asking them if specified allegations in the indictment are, in fact, true. To impose a blanket prohibition on such questions would interfere with defendants' constitutional rights to present a defense and fully and effectively cross-examine their accusers.

Then, for good measure, the Lay-Skilling team tweaks the Task Force about its sudden change of opinion regarding the quality of the prose in the indictment:

The Task Force argues defendants might cross-examine witnesses about portions of the indictment that are surplusage, thereby confusing the jury. . . [However, the Task Force] previously, and successfully, argued exactly the opposite -- that the indictment contained no surplusage -- in opposing defendants' motion to strike [portions of the indictment].

Meanwhile, down the hall from the relative levity of such motion sparring, the defense finished cross-examination of Mark Koenig (who may have unwittingly helped the defense) and the prosecution finished its re-direct on Monday afternoon. Judge Lake is going to allow a limited amount of re-cross of Koenig on Tuesday morning, then it's time for the next prosecution witness -- former Enron Broadband co-CEO, Ken Rice. Direct examination of Rice is expected to last at least the remainder of Tuesday, which means that cross-examination will likely take up the remainder of the week.

Posted by Tom at 3:35 AM | Comments (0) |

February 13, 2006

Week Three Lay-Skilling trial schedule

As second week of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling comes to a lumbering close, the beginning of the third week will bring a new witness and renewed interest in the trial.

My sense is that the remainder of cross and redirect examination of the prosecution's first witness -- former Enron investor relations chief, Mark Koenig -- will take the remainder of today and probably a part of Tuesday. Then, former Enron Broadband CEO Ken Rice will take the stand, and expect direct examination of Rice to take at least a day. Inasmuch as cross-examination of Rice will likely take longer than direct examination, expect Rice to remain on the stand for the remainder of this week.

Posted by Tom at 7:12 AM | Comments (0) |

February 10, 2006

Lay-Skilling, Week Two

At the outset of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, the Enron Task Force prosecutors estimated that it would take nine weeks to put on its case-in-chief against the defendants. Inasmuch as that prediction assumed four days of trial time each week and that the defense would use the same amount of time on cross-examination of each witness as the prosecution used on direct, the prosecution's prediction effectively meant that the Task Force believed that it could put on its entire case against Lay and Skilling in 18 days of testimony.

Well, the Task Force's prediction has pretty well gone by the wayside with its first witness, former Enron investor relations chief, Mark Koenig. After the Task Force took two-and-a-half days on Koenig's direct examination, the defense has used the past three-and-a-half days for cross-examination, and it now looks as if Koenig's testimony will continue for at least another day-and-a-half, which means that the prosecution will not be in a position to present its second witness -- former Enron Broadband co-CEO Ken Rice -- until next Tuesday afternoon at the earliest. Next Tuesday marks the beginning of the third week of the trial.

Moreover, when Koenig is finally through testifying, the prosecution will have used over three days of its original 36-day prediction (over 16% of its case-in-chief) on examination of Koenig. There is no way that the testimony of Koenig -- who is primarily a background witness who was not involved in the mechanics of how Enron's earnings and finances were evaluated -- represents over 16% of the prosecution's case-in-chief.

This is shaping up to be one very long slog.

Posted by Tom at 3:50 AM | Comments (0) |

February 8, 2006

The second Lay-Skilling prosecution witness

The NY Times Alexei Barrionuevo, who is writing some of the best background pieces in connection with the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, profiles former Enron Broadband CEO Ken Rice today, who is expected to be the prosecution's second witness in the trial if the parties ever get done with the first witness, former Enron investor relations chief, Mark Koenig.

In addition to noting Rice's disastrous testimony in the Enron Broadband trial last year, Barrionuevo's piece points out the little-reported fact (mentioned earlier here) that Rice copped his plea deal after prosecutors discovered circumstantial evidence that strongly indicated that Rice engaged in insider trading shortly before Skilling's resignation in August, 2001:

More than $9 million of [Rice's $40.3 million in profits from Enron stock trades] came from three trades on July 13, 2001, about a month before Mr. Skilling officially resigned from Enron, according to records from the Securities and Exchange Commission, and around the same time that Mr. Skilling privately told Mr. Lay of his intention to resign, according to earlier testimony by Mark E. Koenig, Enron's former investor relations chief.

Meanwhile, the prosecution's decision to spend an inordinate amount of time on direct examination with Koenig appears to be backfiring. The prosecution spent almost two and a half days on direct examination of Koenig, who has now admitted on cross-examination that he really does not have much knowledge of the underlying evaluation process upon which Lay and Skilling based their public statements regarding Enron's finances. Thus, Koenig is a quintessential witness whose knowledge is a mile wide and an inch deep, and the defense is now hammering his basis for asserting on direct that Lay and Skilling intentionally misled investors. To make matters worse for the Enron Task Force, the prosecution took so much time with Koenig on direct that it is really not in a position to object to the length of time that the defense is spending with Koenig on cross-examination.

Moreover, my old friend, Joel Androphy, blogging the Lay-Skilling trial over at KTRK-TV, observes the following about another prosecution mistake in dealing with Koenig:

The government allowed Koenig to keep $5 million to fight the civil cases and provide for his family, not the families of the victims. The plea bargain could have required Koenig to pay the maximum fine, and full restitution to the victims even if he provided influential testimony. That would have supported his credibility. Although the judge has the final say on restitution and fines, the government could have required mandatory surrender of funds. Now it looks like he could get reduced jail time and a large pension unlike most former employees. Koenig's attorney did a commendable job.

It now appears that Rice's testimony will not begin until Thursday of this week at the earliest, and may not even begin this week at all. Therefore, unless the prosecution pares down its case-in-chief dramatically on the fly, the prosecution's pre-trial prediction of completing its case-in-chief in nine weeks is looking more and more like a pipe dream.

Posted by Tom at 4:25 AM | Comments (2) |

February 7, 2006

"You didn't think we really meant that, did you?"

During opening arguments last week in the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, Lay defense attorney Mike Ramsey made the following observation to the jury about the Enron Task Force's indictment against the two men:

"This is the indictment . . .[It] is 66 pages long. Someday you may be called upon -- God save you -- to have to read it. If you do, you'll find it is enormously complex. I don't blame the [prosecutors] at the table here; I think their predecessors wrote it. But with all the power and precision of the English language, it is a babbling kind of indictment [that makes it] very hard to pin down, very hard to determine what you are actually charged with. . ."

Well, it turns out that that the Task Force pretty much agrees with Ramsey's characterization of the indictment. In this motion that showed up on the docket of the case yesterday, the Task Force requests that U.S. District Judge Sim Lake not allow the Lay-Skilling defense to use the Task Force's indictment during cross-examination of the Task Force's witnesses in the trial because, among other things, to do so would risk "unfair prejudice, confusion of the issues [and] misleading the jury. . . "

Not exactly a sterling self-endorsement of the Task Force's writing skills, would you say? ;^)

Meanwhile, after the Task Force took almost all of Monday morning to complete direct examination of its first (and relatively minor) witness, Mark Koenig, cross-examination of Koenig continues today (Chronicle/Flood - Fowler; NY Times/Barrionuevo - Evans; WaPo/Carrie Johnson).

Posted by Tom at 3:15 AM | Comments (2) |

February 6, 2006

Week Two Lay-Skilling trial schedule

After a slumbering close to Week One of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, the prosecution will almost certainly attempt to pick up the pace of the trial this week.

The prosecution will probably complete direct examination this morning of its first witness, former Enron investor relations chief Mark Koenig. Inasmuch as cross-examination of Koenig will likely take at least as long as direct (over two days), the prosecution's second witness -- former Enron Broadband co-CEO Ken Rice -- will probably not take the stand until Wednesday afternoon, at the earliest.

If you have been following the Enron cases, then you will remember Rice. He was on the witness stand when the prosecution's case began unraveling in the Enron Broadband trial last year. As noted at the time here, Rice testified falsely on direct examination during the Broadband trial about what he had seen at an analyst conference. After the Broadband defense team impeached Rice with his false testimony, the prosecution attempted to rehabilitate Rice's false testimony by putting former Enron video consultant Beth Stier on the stand, a move that backfired when Stier testified to the prosecution's intimidation tactics. Thus, in a case that looked like a layup for the prosecution at the outset, Rice and Stier's testimony began a downward spiral in the prosecution's case that ultimately resulted in a disastrous mix of acquittals and no verdicts on the charges in the Broadband case.

By the way, a little reported fact about Rice is that he entered into his plea deal with the Enron Task Force after the Task Force had discovered that he sold a substantial amount of Enron stock under rather suspicious circumstances. Shortly before Skilling announced his resignation as Enron CEO in August, 2001, Rice met with Skilling. After that meeting and before Skilling's resignation announcement, Rice unloaded a boatload of his Enron stock. Thus, regardless of what other crimes that Rice contends on the stand that he and others committed at Enron, it's pretty clear that he was guilty of illegal insider trading.

Posted by Tom at 4:52 AM | Comments (0) |

February 3, 2006

Lay-Skilling, Week One

So, week one of the Lay-Skilling trial is in the books. Let's review what we've learned.

U.S. District Judge Sim Lake handles matters faster than the prosecutors and the defense attorneys do.

Opening arguments are too long.

The key evidentiary issue in the trial has not yet been addressed, but another court expressed interest in the issue.

Former Enron investor relations chief Mark Koenig thinks that he and Messrs. Lay and Skilling misled investors about Enron's financial condition, but -- over five years after doing so -- he still cannot explain why he did it.

Sheila Jackson Lee knows where the cameras are (don't miss Slampo's comments on SJL), and could one or more of the trial participants end up on What Not to Wear?

As is usually the case, it's difficult, if not downright impossible, to predict what effect all of this is having on the jurors. But the prosecution has to be concerned about the glacial pace of the trial. The prosecution lost a similar trial last year after putting the jury to sleep during long stretches of the Enron Broadband trial. Anticipating such problems in Lay-Skilling, the prosecution promised the jurors during opening argument that the trial would be about lying and not about boring financial matters. Then, with its first witness, the prosecution proceeded to take a good part of the first two days of testimony going over mind-numbingly boring financial matters, resulting in the prosecution failing to finish its direct examination of that first witness before the week concluded. That is not the way to win friends on a jury.

This is not meant as a criticism of the Task Force prosecutors. Indeed, I suspect that they are among the best in the Justice Department for handling such trials. Rather, this type of chloroforming slog is the inevitable result of criminalizing what amount to business judgments over which people can reasonably differ. Justice would be much better served with the prosecution taking a third of the time that it took with Koenig and, instead, bringing to the witness stand every top-level former Enron executive to testify about how Enron's management actually evaluated Enron's finances and reported them to the public. But if that were to occur, then the prosecution might lose the trial. So, the prosecution effectively prevents those potentially more truth-revealing witnesses from testifying and spends an inordinate amount of time with a witness such as Koenig, who wasn't even involved in the mechanics of how Enron's management evaluated its finances.

As a result, rather than being allowed to handle the messy process of sorting out the truth, the jury gets a prosecution script of what it thinks the truth should be. As we saw in the Enron Broadband trial, juries have a way of figuring such things out.

Posted by Tom at 3:56 AM | Comments (6) |

February 2, 2006

The long slog begins

Former Enron investor relations chief Mark Koenig led off the prosecution's presentation of evidence yesterday in the criminal trial of his former bosses, Ken Lay and Jeff Skilling, and it quickly became clear that the Enron Task Force's boring approach to putting on a case that almost caused a jury uprising in the earlier Enron Broadband trial may also be a problem for the prosecution in the Lay-Skilling trial.

As the Mary Flood/Chronicle, Carrie Johnson/WaPo, and Alexei Barrionuevo/NY Times articles all report, Koenig testified about several instances in which he allegedly prepared reports and presentations at the direction of Skilling and Lay that misled investors and analysts about the performance of Enron's Broadband unit and Energy Services units. However, to get to the nuggets of relatively exciting testimony, the jury had to endure hours of mind-numbing and largely irrelevant testimony regarding Enron's structure, the company's bankruptcy and related matters. As a result, the prosecution could not finish its direct examination in an entire day of testimony and apparently is going to use a good part of today for further direct examination. If that schedule holds, cross-examination of Koenig will almost certainly take a couple of days, which means that the second witness in the case -- former Enron Broadband executive Ken Rice -- may not begin until Tuesday afternoon or Wednesday of next week.

So much for the prosecution's earlier prediction that it will take nine weeks to put on its case.

At any rate, one of the problems with Koenig's testimony -- which is being given under a plea deal with the government -- is that it is not based on any meaningful involvement in the mechanics of how Enron's executives evaluated its financial affairs and earnings. Stated another way, Koenig was involved in how Enron's financial matters were presented, but not in how they were determined. As a result, his knowledge of the company's financial affairs is a mile wide and an inch deep, a point that will almost certainly be hammered home by the defense on cross.

Meanwhile, the fact that the prosecution is relying so heavily on witnesses such as Koenig who have copped plea deals in return for favorable prosecution testimony will become an increasingly important issue as the the trial proceeds. Houston criminal defense attorney Kent Schaffer -- one of the half-dozen attorneys providing legal analysis for the Chronicle on the trial -- provides this excellent overview of why people such as Koenig enter into plea bargains. The sad fact is that people often do plead guilty to crimes that they do not think that they really committed, particularly when the defendant sees the draconian sentence that can result from protesting one's innocence. As Schaffer notes:

"Get ready to see grown men in Oxford suits and wingtip shoes rolling over, playing dead, and barking while on their hind legs; trying to earn a few extra biscuits."

Posted by Tom at 4:35 AM | Comments (5) |

February 1, 2006

Lay-Skilling, Round One

Well, I wasn't able to put other pressing matters aside to attend opening arguments yesterday in the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, but I did score a transcript yesterday evening and was able to read it. In doing so, I was reminded of a point that a wise, old trial attorney-mentor made to me early in my legal career:

Most opening arguments are too long.

Now, Lay-Skilling is a complicated business case, so there is a lot of explaining to do. And when the prosecution takes an hour and a half in opening, the defense often feels that it is necessary at least to match that length in opening or the jury might presume that the defense doesn't really have an answer for everything that the prosecution alleged. So, there are valid reasons for long opening arguments.

Nevertheless, my experience is that, even during the most spellbinding opening arguments, the attention of jurors tends to begin wandering after 30 minutes or so. My wise old mentor also advised me: "Make all your important points in the first 20 minutes of your opening -- sort of like a sermon at church -- because those jurors tend to wander off after that -- just like in church." As I read the transcript last night, it occurred to me that, if jurors were allowed to ask a question of the attorneys during opening arguments, one of them would have almost certainly raised their hand and asked: "Could you go over that whole 'reserve account thing' again?"

At any rate, the first round of the trial is done and it's reasonably clear from the reading the transcript and the first hand accounts (Chronicle Enron team blog and Loren Steffy's blog) and the reports (NY Times/Alexei Barronuevo and WaPo/Carrie Johnson) that neither side scored any early knockdowns. As noted earlier here, opening arguments are for helping jurors establish a framework within which they can evaluate the evidence to come, so it's risky to try and land a haymaker that could put the other side on its back early. Neither side took that risk.

The Enron Task Force's John Hueston continued to push a theme in the prosecution's case that has become apparent since the Task Force's earlier failures in both the Arthur Andersen case and the Enron Broadband case -- i.e., that the case against Messrs. Lay and Skilling is really a simple case of non-disclosure about Enron's true financial condition. In a nutshell, Hueston contended that Enron was a formerly successful company that was having severe financial problems by 2001 that both Skilling and Lay covered up so that they could unload their company stock at higher prices than what they would have gotten had they disclosed the true financial condition of the company to the investing public.

From reading the transcript, Hueston's argument appeared to be competent and reasonably well-organized. However, I was left wondering whether the Task Force may have overdone its goal of simplicity. I mean, did Lay and Skilling really orchestrate this alleged massive fraud simply because they are greedy men? Indeed, as the defense attorneys proceeded to point out, there is certainly much in Lay and Skilling's life stories that indicates that they are not particularly greedy. After reading Hueston's opening, I could almost imagine a juror thinking: "Well, fine. But with all this hubbub, don't you have more of a story than that?"

Defense attorneys Dan Petrocelli (Skilling) and Mike Ramsey (Lay) clearly understood this dynamic, as both of them emphasized their respective client's humble backgrounds and continually pointed out the conflict between the prosecution's simple case theory and the wide-ranging and almost indecipherable allegations contained in the government's indictment against two defendants. In that connection, Mr. Ramsey pointed out what appeared to me to be the biggest oversight of the day -- the government's failure to mention the word "conspiracy" in its opening remarks even though the prosecution is banking a large part of its case on Lay and Skilling's alleged orchestration of one of the largest criminal conspiracies in history. Similarly, it also appeared that Hueston made a mistake in opening by failing to acknowledge that Lay's stock sales were pursuant to margin calls. How can the government accuse Lay of being greedy because of his stock sales when those sales were involuntary?, Ramsey reasoned.

By the way, as Mr. Steffy noted on his blog during the arguments yesterday, Ramsey's courtroom style really appeared to resonate with the jury. Here are just a few of Ramsey's gems:

"Now, there's a lot of talk about Andy Fastow and and the various thefts that he committed at Enron. [The money that] Andy stole [was] peanuts. Andy stole crumbs. What Andy stole [of importance] from Enron was its good name."

"[Fastow's] thefts themselves spread out over a three-year period probably wouldn't be coffee money and Coke money for Enron during that period of time. Nowhere near enough to sink a company the size of, and successful as, Enron. What happened was the odor of the wolf got into the flock and the flock stampeded."

"Bankruptcy is not a crime. If it were, we would have to turn Oklahoma back into a penal colony because there would be so many people to lock up. It might help [University of Texas] football, but it won't solve much else."

"The point of the matter is people will not accept risk if failure means you go to prison. And bankruptcy is not a crime. In order to commit a crime you have to specifically intend to do something the law forbids. And failure in and of itself is not a crime."

"This is the indictment . . .[It] is 66 pages long. Someday you may be called upon -- God save you -- to have to read it. If you do, you'll find it is enormously complex. I don't blame the [prosecutors] at the table here; I think their predecessors wrote it. But with all the power and precision of the English language, it is a babbling kind of indictment [that makes it] very hard to pin down, very hard to determine what you are actually charged with. . ."

"When you don't have a case, you talk about something else, and that's what [the prosecution is] doing when they are trying to make Ken Lay look greedy and when they start talking about him selling stock based on inside information."

Several months ago, I was attending a hearing in the Lay-Skilling case on a day in which Mr. Ramsey was not fairing particularly well with U.S. District Judge Lake. On multiple occasions, Judge Lake refused to do what Mr. Ramsey requested and then finally told him to sit down and stop arguing. A lawyer from the East Coast who was also attending the hearing leaned over and remarked to me: "Gee, it sure doesn't appear as if Ramsey is particularly effective in presenting matters to Judge Lake, does it?" I replied:

"Mike Ramsey is not on the defense team for his ability to persuade Judge Lake. But wait until you see him talk to a jury."

The trial cranks back up at 8:30 a.m. today with former Enron investor relations chief Mark Koenig expected to be the first prosecution witness.

Posted by Tom at 3:35 AM | Comments (2) |

January 31, 2006

The logistics of blogging the Lay-Skilling trial

Dwight Silverman is the technology columnist for the Houston Chronicle and is primarily responsible for ushering the local newspaper into the forefront of media and citizen blogging.

In this timely post, Dwight outlines the logistics involved in gearing up the Chronicle team of reporters for blogging on and reporting the developments in the criminal trial for former key Enron executives Ken Lay and Jeff Skilling.

Take note, mainstream media, what Dwight and the Chronicle are doing -- and what the Wall Street Journal has done with Peter Lattman's blog -- is the wave of the future. Adapt or be left behind. Quickly.

Posted by Tom at 2:52 PM | Comments (0) |

Speaking of that key evidentiary issue . . .

Peter Lattman posts this interesting piece on the oral argument in the Bernie Ebbers appeal that could well impact the key evidentiary issue in the ongoing trial of former Enron executives Ken Lay and Jeff Skilling.

In the Ebbers appeal, Ebbers counsel Reid Weingarten -- who is also counsel for former Enron chief accountant Richard Causey -- is arguing that the Ebbers prosecution team unfairly prevented the defense from calling key defense witnesses by fingering them as targets of the WorldCom criminal investigation. In so doing, Weingarten is arguing that the prosecution effectively prevented the defense from presenting exculpatory testimony to the jury because each of the targeted witnesses declined to testify on the basis of their privilege against self-incrimination under the Fifth Amendment of the U.S. Constitution. The Second Circuit panel appeared sympathetic to the argument during oral argument of the Ebbers appeal, which is potentially bad news for a prosecution team that has taken the tactic of chilling potential defense witnesses to an entirely new level in the Lay-Skilling case and other Enron-related prosecutions. Ellen Podgor comments here along the same lines.

Posted by Tom at 8:10 AM | Comments (0) |

Are you ready to rumble?

To the surprise of no one who has ever tried a case before U.S. District Judge Sim Lake, a jury was empaneled yesterday (NY Times article here) in the Enron Task Force's legacy case against former key Enron executives Ken Lay and Jeff Skilling, which means that opening arguments will proceed in the trial this morning. Judge Lake has a way of keeping matters on schedule.

Opening arguments are always anxiously anticipated in high-profile cases such as this, particularly in view of the fact that many of the preliminary matters -- such as jury selection -- are downright boring. Contrary to popular belief, jurors do not often make up their minds during either opening or closing arguments, but it remains reasonably clear that jurors often form during opening arguments the framework within which they consider the evidence that is presented during the trial. Thus, the goal of opening arguments is to establish broad themes that resonate with the jurors. Leave the details for later.

In this case, the prosecution clearly has the advantage in opening arguments because of "the presumption" in business cases. No, that's not the presumption of innocence. Rather, it's the presumption that most lay people have that at least some criminal conduct is involved in any business enterprise that collapses, particularly one that does so in such spectacular style as Enron. The Enron Task Force has played up the presumption effectively in its public relations campaign and in its previous Enron-related prosecutions, so the Task Force prosecutors will hammer the jurors with that presumption throughout their opening argument. Conversely, one of the primary goals of defense attorneys Dan Petrocelli (Skilling) and Mike Ramsey (Lay) during opening argument will be to challenge the validity of the presumption so that the jurors can form a framework that views the presumption with skepticism while evaluating the evidence that is presented during the trial.

Although the prosecution has the easier task during opening arguments, its job gets much tougher once it has to put on its case. As noted here, the Task Force has been much more successful in bludgeoning plea bargains out of former Enron executives than actually obtaining convictions in court. The only "successful" Enron-related trial for the Task Force to date has been the trial of Nigerian Barge case, which was a narrow trial of a specific transaction. Even then, one of the two Enron executives who were prosecuted in that case was acquitted, and the conviction of the Merrill Lynch executives in that case was anything but a clear-cut victory for the Task Force.

In comparison, in the two other Enron-related trials -- the Arthur Andersen case and the Enron Broadband case -- the prosecution alleged broad conspiracies and amorphus charges, and both cases ended disastrously for the Task Force. Inasmuch as the charges in the Lay-Skilling trial have much more in common with the Andersen and Broadband cases than the Nigerian Barge case, the prosecution has been attempting to shift its strategy and simplify its case against Lay and Skilling during the weeks preceding the trial. Nevertheless, it remains unclear whether the Task Force will be successful in that approach, particularly when a good part of its case against Lay and Skilling will be based on testimony of impeachable witnesses who have copped pleas and other statements that may not even get into evidence based on how Judge Lake rules on the key evidentiary issue in the case.

Thus, expect a lot of talk today about the presumption of criminal conduct in business collapse cases from the prosecution and broad themes challenging that presumption from the defense. Frameworks may be built today, but the tougher work of actually filling those frameworks with substance is what will, in the end, determine which side succeeds or fails during this trial.

Posted by Tom at 5:43 AM | Comments (0) |

January 30, 2006

The schedule for the trial of the Enron legacy case

9 a.m. today: Jury selection, Ceremonial Courtroom, 11th floor, Bob Casey Federal Courthouse, 515 Rusk. The NY Times' Alexei Barrionuevo and Simon Romero report on the all-important jury selection process, which U.S. District Judge Sim Lake will handle himself and will complete today.

9 a.m., Tuesday, January 31: Opening arguments, Courtroom 9B, ninth floor. Prosecution gets two hours and each defendant gets two hours.

Late Tuesday afternoon or 8:30 a.m. Wednesday, Feb. 1: The prosecution puts on its first witness, which I am betting is former Enron investor relations chief, Mark Koenig. Given Judge Lake's desire to move things along, it would not surprise me if he requires the prosecution to put its first witness on the stand on Tuesday afternoon, even after six hours of opening arguments.

The trial will run four days a week with each Friday generally being an off day. The prosecution currently estimates that its case-in-chief will take 36 days of court-time to present. There are about 60-65 spaces available on a first come basis for the general public in courtroom 9B, but a closed circuit telecast of the proceedings is available for overflow spectators on the fourth floor of the courthouse in one of the old Bankruptcy Court courtrooms.

By the way, Chronicle Enron reporter Mary Flood and Chronicle business columnist Loren Steffy are live-blogging the trial, and my old friend Joel Androphy is blogging the trial as KTRK-13's legal analyst.

Posted by Tom at 3:56 AM | Comments (1) |

January 27, 2006

The key evidentiary issue in the Lay-Skilling case

The Chronicle's Mary Flood leads today with this timely article on the key evidentiary issue in the upcoming criminal trial of top Enron executives, Ken Lay and Jeff Skilling -- to what extent the prosecution will be able to get around the hearsay rule by using out-of-court statements made by alleged co-conspirators against Messrs. Lay and Skilling. The issue is important because, according to the Enron Task Force, just about anybody who worked in Enron's upper management ranks was a co-conspirator.

In an unprecedented move, the Task Force has named over 100 co-conspirators in the case. So, the potential definitely exists for substantial testimony about out-of-court statements going to the jury without the defense ever having an opportunity to cross-examine the persons who made the alleged statements. Moreover, fingering unindicted co-conspirators is an equally effective technique for the Task Force to prevent testimony that is favorable to the defense because persons named as unindicted co-conspirators are likely to the assert their Fifth Amendment privilege against self-incrimination and thus, not be defense witnesses during the trial. Thus, the Task Force's liberal use of the co-conspirator tag has a double-whammy effect -- not only does it allow the Task Force to use out-of-court statements against defendants without having the declarant of the statements subjected to cross-examination, it has also effectively prevented previous Enron-related defendants from obtaining crucial exculpatory testimony from alleged co-conspirators who have elected to take the Fifth and declined to testify.

The co-conspirator tactic has had a huge impact on two of the previous Enron-related trials. During the Nigerian Barge trial, the Task Force used out-of-court statements of co-conspirators regarding the key factual issue in the case -- that is, what was said during a conference call between several Merrill and Enron executives, including former Enron CFO Andrew Fastow -- without ever having to put a witness on the stand who actually participated in the call. Similarly, none of the dozens of unindicted co-conspirators testified on behalf of the defendants during that trial, so the Task Force's use of the tactic effectively prevented the Merrill Lynch executives in that case from providing the jury with exculpatory testimony. Not surprisingly, the Task Force's liberal use of the co-conspirator tactic has become a key appellate point for the Merrill executives in the appeal of their convictions.

Similarly, the importance of the co-conspirator issue on freezing out exculpatory testimony was brought into full focus during the trial of the Enron Broadband case last year. In a trial that, at the outset, appeared to be a sure-thing for the prosecution, the Task Force's case unraveled quickly as witnesses Lawrence Ciscon and Beth Stier both testified to a riveted jury about how the Task Force's threats of prosecution against them gave them second thoughts about providing the exculpatory testimony that they gave during the trial. That trial ended in a disastrous mix of acquittals and jury deadlock on the prosecution's charges.

Thus, Judge Lake's handling of the issue could have an equally dramatic effect on the Lay-Skilling trial. Although reasonable people can disagree about whether the charges against executives such as Lay and Skilling would be better sorted out in a civil case rather than a criminal one, there is no reasonable justification for allowing the government to prejudice Lay and Skilling's right to a fair trial by manipulating the unindicted co-conspirator tactic to use otherwise inadmissible hearsay testimony and to chill witnesses from providing exculpatory testimony. That the government feels compelled to use such dubious tactics to obtain convictions of Lay and Skilling is strong evidence that the government's criminalization of agency costs in the post-Enron era is contrary to justice and the rule of law.

Posted by Tom at 4:25 AM | Comments (2) |

January 26, 2006

Lay-Skilling trial is a tough ticket

The Chronicle's Claudia Feldman reports on the logistical challenge of accomodating the overflow of media representatives and spectators during the upcoming trial of former key Enron executives Ken Lay and Jeff Skilling. Inasmuch as U.S. District Judge Sim Lake's courtroom will only accomodate 30 spaces for media, the District Clerk has arranged for a simulcast room at the courthouse that will provide another 120 seats on a first-come basis. The article notes that gibberish from certain of the media has already begun, perhaps best reflected by a BBC reporter's over-the-top assessment of the case:

"Enron made the ground shake. This was the granddaddy of corporate scandals — the one that made us doubt what we were being told as investors, the one that made us look at corporations in a whole new light."

My sense is that the BBC needs to work on its story line a bit. That whole "corporations are evil" thing is so "1980's/Gordon Gekko," don't you think?

Meanwhile, the Chronicle's Mary Flood reports that the Lay-Skilling defense team are taking an interlocutory appeal to the Fifth Circuit Court of Appeals in New Orleans of Judge Lake's most recent order denying the defense's request for a change of venue for the upcoming trial. Inasmuch as the Fifth Circuit will evaluate the appeal under the extremely difficult-to-meet standard of whether Judge Lake abused his discretion in denying the change-of-venue request, the interlocutory appeal is almost a sure loser.

Finally, the NY Times Kurt Eichenwald -- whose Conspiracy of Fools (Broadway 2005) remains the best book written to date about the Enron scandal -- weighs in with colleague Alexei Barrionuevo in setting the stage for the trial, which includes the following insight into the Enron Task Force's ever-shifting theory of the case:

The government's case is built not so much on showing that Enron was destroyed by fraud, but rather on showing that fraud, including the suspected deceptions by Mr. Lay and Mr. Skilling, prevented the marketplace from knowing how badly things were going inside the company.

Posted by Tom at 4:34 AM | Comments (0) |

January 25, 2006

Are you ready to rumble Enron-style?

As the scheduled Monday commencement of the criminal trial of former key Enron executives Ken Lay and Jeff Skilling draws nearer, the Chronicle's Mary Flood -- who has spent more time on the frontlines of Enron-related cases than any other reporter -- provides this overview of what to expect from the upcoming trial and John Roper follows this earlier Chronicle profile of Mr. Skilling with this article on Mr. Lay's preprarations for the trial.

Meanwhile, over at the sparring ring where the respective legal teams prepare for battle, it looks as if the Enron Task Force is continuing to have a bit of trouble deciding on what to present to the jury. In a pleading (download here) filed earlier in the week, the Lay-Skilling defense teams reveal that the Task Force is attempting to add about a dozen, previously undisclosed allegations of wrongdoing against Messrs. Lay and Skilling in the week before trial. Such last-minute modifications reflect a prosecution team that is not particularly confident in its case. U.S. District Judge Sim Lake is expected to rule on that matter and other remaining pre-trial issues in a final pre-trial conference tomorrow afternoon.

Posted by Tom at 5:49 AM | Comments (1) |

January 24, 2006

The focused Mr. Skilling

Following on this earlier profile, the Chronicle's Mike Tolson provides this extensive profile today of former Enron CEO Jeff Skilling as he gears up for the commencement of the Super Bowl of Enron criminal trials next Monday.

Echoing thoughts that have long been presented on this blog, Skilling in the article talks about the difficulty of defending himself in an intensely anti-Enron environment:

Skilling, as ever, insists Enron was a great, innovative company that did not deserve the fate that befell it.

"It was a complicated business, and the fact that it was complicated led to misrepresentations and a lot of what I call the urban myth of Enron," [Skilling] said.

Rather than gather enough information to understand it, he said, people accept popular notions that it was a house of cards, perpetuated by fraud, and that Skilling was a master manipulator of impressionable young MBAs and a supersmart bamboozler who persuaded investors to buy overpriced stock so he could keep raking in fortunes in stock options.

"The way I have been portrayed is a caricature," he said. "I don't care what book or movie or article you are talking about, the caricature has been created and the real person kind of loses out in the process."

Then, Skilling asks a very common sense question:

"If I were who I have been made out to be, could I have built a company? Who would have followed such a guy that has been portrayed like that?"

Posted by Tom at 3:34 AM | Comments (6) |

January 20, 2006

Emshwiller's Enron surprise

John Emshwiller of the Wall Street Journal ($) weighs in today on the defense strategy of former Enron key executives Ken Lay and Jeff Skilling for their upcoming criminal trial, and he is surprised to find that Lay and Skilling are not conceding the government's theory that the former executives covered up a financial house of cards at Enron:

Four years of investigations and intense news coverage have made Enron a synonym for fraud and sleaze. But when the trial of former top executives Jeffrey Skilling and Kenneth Lay begins Jan. 30, defense lawyers will make a bold argument: Everything their company did was legal.

That approach stands in stark contrast to some other big-name corporate defendants in recent history. Lawyers for former WorldCom Inc. Chief Executive Bernard Ebbers and former HealthSouth Corp. chief Richard Scrushy didn't dispute that large-scale financial shenanigans had occurred at the companies. They simply argued that their clients didn't know about the wrongdoing. . .

The government wants to persuade jurors that the case is simply about two rich and powerful men lying to protect their troubled business empire. [Skilling lawyer Daniel] Petrocelli's task is to show that it wasn't so simple. The matters at the heart of the government's indictment involve sophisticated accounting and financial decisions that were fully vetted by Enron's outside lawyers and auditors, says Mr. Petrocelli.

Read the entire article, which is really one of the best articles about the defense strategy in the case that has appeared in a major newspaper to date. But it's an interesting dynamic that Mr. Emshwiller -- who has covered the Enron scandal from the beginning -- thinks that Lay and Skilling's defense is "audacious." In point of fact, there is nothing in his article about the Lay-Skilling defense strategy that has not already appeared in the many previous posts about the Enron case on this blog, although I must concede that the WSJ's readership is a tad larger than that of this modest forum. ;^)

Nevertheless, Emshwiller's surprise over the defense strategy reinforces just how the conventional Enron story -- i.e., that the company was merely a house of cards and that the company's intrinsic instability was hidden from the investing public by a greedy and deceitful management team -- has become engrained in the psyche of American society. Indeed, as reflected by this discussion over the injustice of what happened to the Merrill Lynch executives in the Nigerian Barge case, many otherwise thoughtful and intelligent people believe that they understand the Enron morality play so thoroughly that they seemingly lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at Enron.

It's better late than never that Emshwiller is providing a fair piece on Lay and Skilling's story about what happened at Enron. But the shattered lives and companies that result from the witch-hunt mentality of cases such as Enron and Michael Milken is a stark reminder of the enormous societal cost of criminalizing corporate agency costs rather than allowing responsibilty for alleged wrongdoing in such cases to be sorted out in a civil context.

Update: Don't miss Larry Ribstein's typically insightful comment on the Emshwiller article, which includes the following foreboding observation for the next executives who are subjected to prosecution in the criminalization-of-agency-cost lottery:

But it’s worth noting that future Skillings may not even have the opportunity to mount a defense like this. The CEO of the next Enron that goes down will be criminally prosecuted under SOX section 906 for signing off on financials when they “knew,” at least in hindsight, there were defective “internal controls,” whatever that means. I guess after the next $40 million defense (and God knows how much taxpayer money for the prosecution) we’ll find out.

Posted by Tom at 4:23 AM | Comments (6) |

January 19, 2006

Jeff Skilling, interior designer

Fresh off this informative article on the energy trading industry from over the weekend, the NY Times' Alexei Barrionuevo scores again with this entertaining article on how former Enron chief executive officer Jeff Skilling designed and outfitted his defense team's offices across the street from Houston's federal courthouse.

One of the most interesting nuggets of information in the article is that Skilling's younger brother -- who is an attorney -- moved to Houston from Istanbul over the past two years to help his older brother in his time of need. That type of brotherly devotion and sacrifice is unusual and impressive, and is another indication that Skilling's true human nature is far different and more nuanced than the overwhelmingly negative portrayals of Skilling's character that are common in the mainstream media.

Posted by Tom at 8:18 AM | Comments (0) |

And in this corner . . .

Although not as well-known as John Emshwiller of the Wall Street Journal and Kurt Eichenwald of the NY Times when it comes to covering the Enron scandal, Carrie Johnson of the Washington Post has been doing some of the best and most balanced reporting on Enron, and she scores again today with this interesting article profiling the Enron Task Force prosecution team that will be handling the upcoming trial of the Task Force's legacy case against former key Enron executives, Ken Lay and Jeff Skilling.

Ms. Johnson notes that the stakes are high for the prosecution team, which has had a decidedly better record in cutting plea deals than in actually obtaining convictions in court:

For all its success in dealmaking, the task force's record when it takes cases to a jury has been mixed.

The trial last year of former executives in Enron's broadband Internet unit dragged on for three months under the weight of testimony about the division's technological capabilities. The case ended in a hung jury in July. Weeks earlier, the U.S. Supreme Court unanimously tossed out the government's groundbreaking conviction of audit firm Arthur Andersen LLP because of faulty jury instructions. Both cases were prosecuted by the task force, but lawyers involved in the coming Lay trial had little involvement in investigating those defendants.

The prosecution team is led by 38-year-old Chicago lawyer Sean Berkowitz, who replaced the controversial Andrew Weissmann as Task Force director at the conclusion of the Enron Broadband trial in July of last year. Interestingly, it appears that the prosecutors on the Task Force trial team in the Lay-Skilling case did not have much to do in preparing the sweeping indictment against Lay and Skilling, which may explain why the prosecution is narrowing its case against the defendants as the commencement of the trial approaches.

Even with such narrowing, however, the Chronicle's Mary Flood reports that the Task Force is currently predicting that it will take over two months for the prosecution to present its case in chief in the Lay-Skilling trial. Such predictions are notoriously speculative, but two months is a long time to present a case and poses a substantial risk of juror rebellion.

Posted by Tom at 3:57 AM | Comments (0) |

January 18, 2006

Missing the point

Chronicle business columnist Loren Steffy has been a harsh critic of Enron and its former key executives, Ken Lay and Jeff Skilling. In their motion to transfer venue of their upcoming criminal trial, Lay and Skilling have used Steffy's past columns as examples of the biased and negative reporting in Houston that makes it far less likely that an unbiased jury can be found here than in, say, Denver, Phoenix or Atlanta.

In his column today (blog post here), Steffy responds by conceding that he has been critical and mocking of Lay and Skilling, but arguing that jurors can put aside inflamed passions and biased reporting to render a verdict based solely on the evidence presented in court. Besides, Steffy snipes, that Lay and Skilling are entitled to a fair trial does not mean that he shouldn't be allowed to express his outrage in his columns over what happened at Enron.

Well, it's pretty clear that Steffy has missed the point of Lay and Skilling's use of his columns, which is not uncommon for someone who is promoting a certain view toward a case rather than a more balanced one. Lay and Skilling's pleadings never question Steffy's right to express whatever viewpoint he wants in regard to Enron or their case. Rather, Lay and Skilling's point is that the Chronicle and local media's almost total failure to provide a counterbalance to the one-sided views of those expressed by Steffy and others has greatly contributed to the overwhelmingly negative views toward Lay and Skilling that are expressed in the responses to the juror questionairre that was transmitted to prospective jurors several months ago.

As noted many times on this blog (examples are here, here and here), there does exist a different view toward what happened at Enron than that which Steffy shares with the vast majority of the mainstream media. The problem is not with Steffy's viewpoint. Rather, the problem is with the effect on potential jurors of the promotion of that viewpoint to the almost total excluson of the contrary view.

On a related note, Larry Ribstein and Thom Lambert (of the terrific new blog, Truth on the Market) comment on the effect of bloggers expressing balancing views to those of the mainstream business media.

Posted by Tom at 7:01 AM | Comments (0) |

January 13, 2006

Getting ready to rumble

The Chronicle's Mary Flood reports on one of the final pre-trial hearings before the commencement of the January 30 criminal trial against former key Enron executives Ken Lay and Jeff Skilling, and while it looks as if U.S. District Judge Sim Lake is going to let the parties put on their respective cases, he left little doubt that monkey business will not be tolerated. Thus, the Task Force won't be able to use tape recordings Enron traders joking about stealing money from grandmothers during the California energy crisis while the defense won't be able to bring up key prosecution witness Andrew Fastow's apparent penchant for viewing pornography on his company computer.

However, the most important ruling that Judge Lake made was denying most of the Task Force's motion to exclude an impressive group of expert witnesses that the Lay-Skilling defense team has assembled to assist the defense in explaining to the jury their version of what happened to Enron. Given the bias of most mainstream media accounts of what occurred at Enron, Lay and Skilling have already been indicted, tried and convicted by the media outlets that have generated those one-sided accounts. Accordingly, it is vitally important for the Lay-Skilling defense to be able to present independent experts to explain objectively to the jury that there is a far more nuanced story about what happened to Enron than most of the mainstream media accounts provide.

Speaking of which, it's a bit hard to get a handle on the Task Force's theory about what happened at Enron at this point. There is little doubt that the Task Force is going to present the case against Lay and Skilling as a material non-disclosure case, but the Task Force appears to be having a bit of a problem getting the rest of its story straight on what went wrong at Enron.

Initially, the prosecution alleged that Lay and Skilling presided over a house of cards at the company that was hidden from the investing public by the fraudulent behavior of Enron management and its auditor, Arthur Andersen. Then, after putting Andersen out of business with an over-the-top prosecution that was later rebuked by a unanimous Supreme Court, the Task Force modified that story to allege that Lay and Skilling had also fooled Andersen about the company's true nature. More recently, the Task Force's story has evolved into allegations that Enron was in fact a highly-profitable trading company, but that Lay and particularly Skilling hid the company's enormous trading profits to fool the investing public into thinking that the company was a stable "logistics" company rather than a volatile trading company.

The Task Force is required to file with the Court today its final statement before trial explaining what charges it actually intends to pursue against Lay and Skilling. One can only wonder at this point which of the above stories about Enron that the Task Force will choose to use. So it goes in the wacky world of criminalizing agency costs.

Posted by Tom at 4:24 AM | Comments (0) |

January 12, 2006

Lay-Skilling trial no lay up for the Enron Task Force

Professors Bainbridge and Ribstein point to this Roger Parloff/Fortune magazine article that does a good job of summarizing the problems that confront the Enron Task Force in making its case against former key Enron executives Ken Lay and Jeff Skilling, a point that has been addressed in recent posts here, here, here and here. Professor Ribstein places the particular problems with the Task Force's case against Lay and Skilling in the larger context of how justice and respect for the rule of law is eroded by such criminalization of corporate agency costs:

Lay and Skilling were not the best managers money could buy. But to apportion guilt in a way that maximizes the law's deterrence function requires a scalpel, not the bludgeon of the criminal law.

And the moral force of the criminal law should be reserved for the cases that deserve it. Even if Lay and Skilling are convicted, the question won’t turn on, for example, whether they were at the scene of the crime. Of course they were. But the jury has to make a very difficult determination as to the precise positions of their eyes and ears. Years in jail should not hang on such details.

Just as years in jail should not hang on one's duty to handle the closing of a presumably legal deal or one's obtaining of an unenforceable oral assurance related to such a deal.

Peter Elkind and Bethany McLean, authors of the Enron book The Smartest Guys in the Room (Portfolio 2003), also weigh in here with a more extensive background piece on the case, which includes numerous examples of their decidedly biased view toward the Lay-Skilling defense. The piece is another example of the conflict of interest in covering the Lay-Skilling case that is common among certain mainstream media sources who have a vested interest in presenting the case in a light that is consistent with the view embraced in their book (that point was addressed earlier here).

Posted by Tom at 7:53 AM | Comments (0) |

January 10, 2006

The drift of the Lay-Skilling case

As noted earlier here, the clear drift over the past several weeks of the Enron Task Force's case against former key Enron executives Ken Lay and Jeff Skilling has been toward the charges relating to alleged misleading disclosure of material facts relating to Enron's business and away from the more technical charges pertaining to alleged fraud in Enron's accounting and structured finance transactions.

Well, this Mary Flood/Chronicle article provides even more confirmation that the Task Force has chosen to make the Lay-Skilling trial a material non-disclosure case. As Ms. Flood notes, the Task Force last week quietly arranged for Mark Koenig, the former head of Enron's investor relations section, to alter the statement that he made in connection with an August 2004 cooperation agreement with the Task Force under which Koenig pled guilty to a single count of aiding and abetting securities fraud. Koenig faces a possible 10 year sentence on the charge, but he clearly expects to receive a lesser sentence through his cooperation with the Task Force. A copy of Koenig's explanation of his revised statement is here, a copy of his revised statement is here and a copy of the transcript of the hearing in which Koenig agreed to his plea deal can be downloaded here.

The gist of Koenig's revised plea bargain statement is that he misrepresented in his initial statement what occurred during a July 12 2001 conference call between Enron executives and securities analysts. In his initial statement, Koenig confessed to telling analysts during that call that Enron Energy Services was reorganized "to get some more efficiency" when the true purpose of the reorganization was simply to conceal losses. You may recall that EES also figured prominently in former Enron chief accountant Richard Causey's statement in connection with his plea deal.

In his revised statement, Koenig now contends that -- based on a recent review of an audiotape of the July 12 2001 conference call -- it was Skilling who made the "get some more efficiency" representation to analysts and not Koenig, after all. Koenig's revised plea statement clearly is intended to head off the type of impeachment that occurred with regard to the testimony of key prosecution witness Ken Rice during last year's Enron Broadband trial.

Nevertheless, Koenig's revised statement raises almost as many questions as it answers, not the least of which is why Koenig -- who was under treatment and medication for depression at the time of his plea deal -- agreed to a relatively harsh plea deal and admitted to making the key false statement in the charge against him in the first place when, in fact, he didn't make the statement? Similarly, how did Koenig's lawyer miss such a key error in the original plea deal?

Meanwhile, Ms. Flood also reports that the Lay-Skilling defense team filed a pleading yesterday that could certainly liven up the examination of witnesses during the upcoming trial. The pleading requests that U.S. District Judge Sim Lake allow the defense to attempt to impeach the credibility of certain government witnesses during the trial by allowing the defense to cross-exam those witnesses regarding such matters as their use of pornography, unlawful drug use, solicitation of prostitutes and/or extramarital affairs. This Carrie Johnson/Washington Post article reports that the defense motion is pointed particularly toward former Enron CFO, Andrew Fastow:

One unnamed witness, described by a source familiar with the case as former finance chief Andrew S. Fastow, had "pornography habits, which were so extensive that when his computer files were seized they were submitted to the FBI for criminal investigation," defense lawyers claimed in court filings.

Looks as if at least the defense wants to avoid what occurred during a large portion of the trial of the Enron Broadband case last year.

Posted by Tom at 4:59 AM | Comments (3) |

January 8, 2006

The Talented Mr. Kopper

The NY Times' Landon Thomas, Jr. -- whose interesting article on former Merrill Lynch executive Nigerian Barge defendant Daniel Bayly was highlighted in this previous post -- scores again today with this fascinating article on Michael J. Kopper, the former Enron executive who orchestrated along with with former Enron CFO Andrew Fastow the effective embezzlement of millions from Enron through the company's transactions with special purpose entities that the two controlled. Despite Kopper's role in orchestrating the embezzlement and the resulting breach of trust that ultimately led to Enron's demise into bankruptcy, Mr. Thomas notes that Kopper's plea bargain with the Enron Task Force is likely to result in a relatively light prison sentence, perhaps even probation. One has to wonder how former Enron chief accountant Richard Causey -- who didn't receive a penny from the tens of millions that Fastow and Kopper embezzled from Enron -- feels about that turn of events. Larry Ribstein comments along those same lines here.

Given the societal bias against all things related to Enron, it's easy to overlook the key role that Kopper had in Enron's collapse. As noted here earlier, a good case can be made that the true criminal acts at Enron were limited to Fastow, Kopper and a relatively small group of their underlings who also profited from the transactions between Enron and the SPE's that Fastow and Kopper controlled.

The original concept of the SPE's -- before Fastow and Kopper hijacked them -- was actually sound and creative. With equity owned primarily by investment banks and other financial institutions, the SPE's were initially intended to be private equity funds with completely seperate management from Enron. The main attraction of the SPE's for investors was the funds' preferred right to invest in Enron assets, which benefitted Enron by allowing the company to preserve liquidity and hedge risk.

Former Enron treasurer Jeff McMahon -- who often clashed with Fastow over Fastow's machinations with the SPE's and ultimately lost his treasurer's position because of those clashes -- recruited a bright investment banker from Bankers Trust in London named Michael Jakubik in 1998 to run the SPE's. However, after Jakubik had moved to Houston to take the position of running the equity funds, Fastow engineered a last-minute coup in which he installed Kopper in the position with the SPE's intended for Jakubik and directed McMahon to put Jakubik in another position with Enron. That set the stage for Fastow and Kopper's embezzlement from Enron using the SPE's, the public disclosure of which triggered the the breach of trust that caused the markets to turn on Enron.

Mr. Thomas' colleague at the Times, Kurt Eichenwald does a good job of describing the foregoing events on pp. 194-219 of his book on the Enron scandal, Conspiracy of Fools (Broadway 2005).

Posted by Tom at 6:01 AM | Comments (1) |

January 7, 2006

Causey still not on Task Force's witness list

The Chronicle's Mary Flood reports that former Enron chief accountant Richard Causey, who pled guilty to a single count of securities fraud last week under an plea deal in which he agreed to serve seven years in prison, is still not listed on the most recent witness list that the Enron Task Force was required to provide yesterday to the defense teams of Causey's co-defendants, former key Enron executives Ken Lay and Jeff Skilling. Ms. Flood reports that the Task Force also dropped several witnesses on three topics -- Enron Broadband, the Coyote Springs deal and the valuation of an Enron asset dubbed "Mariner."

As noted earlier here, here and here, the Task Force's indecision on whether to use Causey as a witness is really not surprising despite much of the mainstream media's expectation that he would transform into a key witness against his former co-defendants simply because he agreed to a plea deal. Unlike discredited former Enron Broadband CEO Ken Rice, Mr. Causey's plea deal with the Task Force is not a cooperation agreement, so he is under no obligation to assist the Task Force in its prosecution of Messrs. Lay and Skilling. Moreover, as Ms. Flood notes, the Task Force may still elect to revise its witness list closer to trial to add Causey as a witness and may gain a small tactical advantage in doing so by delaying the delivery of his witness statements to the Lay-Skilling defense team. However, the Task Force better not wait too long if they want to use Causey because U.S. District Judge Sim Lake probably would not look kindly upon such gamesmanship.

The lastest revelation is just more confirmation (see earlier posts here and here) that the Task Force is dispensing with a substantial number of its allegations in its indictment against Lay and Skilling regarding alleged accounting fraud and focusing on developing a case that is based on alleged false or non-disclosure of material information to the investing public. Given the Task Force's experience in the Enron Broadband case, simplification of its case against Lay and Skilling is probably a prudent move, although it sure opens up legitimate questions that the defense can raise with the jury on why the Task Force alleged in the indictment dozens of other inflammatory allegations against particularly Skilling and then didn't pursue them.

Finally, the Chronicle's business columnist Loren Steffy wrote this interesting column in which he speculates that Causey's plea deal was the result of a good man coming to terms with his wrongdoing. Maybe so, but the circumstantial evidence indicates that my explanation is closer to the truth.

Posted by Tom at 6:33 AM | Comments (0) |

January 4, 2006

Is the Task Force gripping in preparation for the Lay-Skilling trial?

An unusually high number of the prospective jury pool for the upcoming trial of former key Enron executives Ken Lay and Jeff Skilling already have concluded that the two men are guilty of various business crimes merely because of their connection with the social pariah, Enron. Although such widespread bias against the two defendants would seem to be great source of comfort for Enron Task Force prosecutors, there are increasing signs that the Task Force is not sanguine about its case against Messrs. Lay and Skilling. As Larry Ribstein points out, that's part of the conunbrum of the lottery-style system of criminalizing agency costs in the first place.

The Wall Street Journal's John Emshwiller, who has as good an information pipeline into the Task Force as any reporter covering the Enron case, has a couple of W$J articles today (here and here) in which he reports that the Task Force -- less than a month before trial -- has made a new allegation of wrongdoing against Skilling relating to the former Enron CEO's December 6, 2001 SEC deposition testimony. The gist of the new allegations are that the Task Force contends that Skilling lied when he testified that he sold over $15 million of Enron stock on September 17, 2001 because of concerns over the impact of the 9/11 attacks on the stock market (Skilling resigned from Enron in August, 2001). The Task Force contends that Skilling lied about the reason for that September 17 stock sale and that evidence of the lie is that he failed to inform the SEC during the deposition that he had inquired with a broker on September 6th about selling less than half as much Enron stock as he sold on September 17th.

H'mm, cranking up a new allegation of wrongdoing less than a month before trial based on those dubious facts? Sure looks like a bunny trail to me.

Meanwhile, as I speculated in this earlier post, this Emshwiller article confirms that, even though Richard Causey's plea bargain last week simplifies the Task Force's case against Lay and Skilling, the Task Force's post-plea bargain debriefing of Causey has apparently left prosecutors undecided on whether even to use the former Enron chief accountant as a witness against Lay and Skilling.

Last minute preparations for a big trial are usually somewhat chaotic and often involve minor alterations in strategy. However, adding new allegations of misconduct and wondering whether even to use a key witness involved in the allegations are not the type of strategy decisions that one normally wants to be making less than a month before trial. As with the Task Force's schizophrenic approach to Arthur Andersen, the latest revelations about the Task Force's preparations for the Lay-Skilling trial do not reflect that the Task Force is particularly confident about its case. Although the Task Force has already won the public relations battle regarding the Enron scandal, winning its legacy case in the courtroom may prove to be far more difficult.

Posted by Tom at 4:44 AM | Comments (0) |

December 29, 2005

Causey pleads to seven years

As expected, former Enron chief accountant Richard Causey pled guilty Wednesday afternoon to a single count of securities fraud while agreeing to a prison sentence of seven years and a fine of $1.250 million. A bookmarked copy of the plea agreement is here, and here are the Houston Chronicle, NY Times (Eichenwald's here), W$J, and Washington Post articles on the plea deal. As a result of the timing of Causey's plea deal, U.S. District Judge Sim Lake postponed the commencement of the Lay-Skilling trial for two weeks to January 30, 2006.

In agreeing to the seven-year plea deal, the 45 year-old Causey took on the second-longest prison sentence of the 16 former Enron executives who have pled guilty to date under plea bargains, less only than former Enron CFO Andrew Fastow's minimum ten year sentence. It's a surprisingly long sentence given that Causey, unlike Fastow, did not peel tens of millions of dollars off of Enron and various special purpose entities for his own benefit. Causey has two years' worth of incentive to be a compelling Task Force witness against his co-defendants Ken Lay and Jeff Skilling because the only way that he can obtain a reduced sentence (to five years from seven) is if the Task Force, in its sole discretion, determines that Causey has been a good helper.

However, unlike most other former Enron executives who have copped pleas, Causey did not sign a cooperation agreement with the Task Force and thus, is not obligated to cooperate with the government. Even though he has two years' worth of motivation to ingratiate himself to Task Force prosecutors, Causey cannot lose his plea deal if the Task Force finds that his assistance is not particularly helpful.

During its almost four year existence, the Task Force has been much more successful in bludgeoning plea bargains out of former Enron executives than in obtaining convictions of such executives at trial -- only one former Enron executive (Dan Boyle in the Nigerian Barge case) has been convicted out of the seven former Enron executives who have defended themselves at trial against a Task Force prosecution. Causey had been facing trial on 36 counts of conspiracy, fraud, insider trading, lying to auditors and money laundering, and also faced a potential, effective life sentence if convicted on all or most of the counts. The securities fraud charge that Causey pled to has a maximum prison sentence of 10 years.

Exhibit A to Causey's plea agreement contains his specific admissions, which reflect that the Task Force is now focusing more on non-disclosure of material facts relating to Enron's financial performance than the allegations of fraudulent accounting that permeate the indictment against Causey. Nevertheless, it remains unclear to what extent, if any, Causey's testimony will be used against Lay and Skilling in their upcoming trial.

Causey's admissions on exhibit A are limited in nature and are based on the generic statement that he participated with "others in Enron senior management" to defraud the investing public by misleading them about the company's true financial performance. However, the affidavit only cites two examples, and they do not involve some of the broader accounting allegations related to Fastow's SPE's that have been the focus of the Task Force's case against Causey and his co-defendants to date. Similarly, the affidavit makes no reference to secret handshake deals involving alleged oral promises (undisclosed to Enron's auditor) to pay back money provided by third parties such as the Task Force parlayed into convictions of Boyle and four former Merrill Lynch executives in the Nigerian Barge trial. Surprisingly, Causey's admissions involve one-time deals that do not, in and of themselves, reflect a management team that was -- as the Task Force contends -- engaged in a conspiracy to hide a house of cards from investors for several years before Enron's bankruptcy.

In one instance, Causey admitted that he and other unnamed Enron executives removed a hedge from a partnership that Enron partly owned and which held Enron stock. Inasmuch as the Enron executives knew that positive news about Enron was about to push the value of the stock upward, the value of a related investment would go down if the hedge was still in place. Once the hedge was removed, Enron reported the stock price increase as recurring profits in the first quarter of 2000, which Causey now contends was improper.

The second Causey admission involves Enron's retail electricity business, Enron Energy Services. Causey admitted that EES -- which he contends was an important promotional tool for Enron to investors -- had hundreds of millions of dollars of unexpected first quarter of 2001 trading losses, which far exceeded the unit's projected income for the year. In order to maintain the unit's attractiveness as a promotional tool, Causey contends that Enron shifted the unit's trading losses into a more profitable unit and thus, avoided direct reporting of the losses that might have chilled investor fervor for Enron.

Finally, inasmuch as Causey and his counsel have participated under a joint defense agreement with the Lay and Skilling defense teams for over two years now, virtually any of Causey's testimony would be subject to challenge as being derived from that joint defense effort. Moreover, as noted in this earlier post, Causey had problems in defending himself against the charges that Lay and Skilling do not, and his credibility may be subject to impeachment at trial through portrayal of the eve-of-trial plea deal as an effort to save his skin at the expense of his co-defendants.

Thus, even though Causey's plea is disconcerting for Lay and Skilling, it remains to be seen whether it really changes the dynamics of the government's case against the two key former Enron executives. As the Task Force debriefs Causey, the nature of his potential testimony will likely become better known over the next couple of weeks.

Meanwhile, in the lottery that has become the criminalization of business in this country, former Qwest Communications International Inc. executive Marc Weisberg agreed yesterday to plead guilty to a single count of wire fraud and will cooperate with prosecutors in Denver who have charged Qwest's former chief executive, Joseph Nacchio, with insider trading. Weisberg had been scheduled to begin trial next week on eleven counts of wire fraud and money laundering for allegedly abusing his position at Qwest for personal gain by using his access to shares of Qwest vendors' initial public offerings to benefit himself, his friends and his family to the tune of approximately $3 million. As did Causey, Weisberg faced decades in prison if convicted on all those counts.

Weisberg's deal? 60 days of home detention, two years probation, a fine of $250,000 and a two-year ban on him serving as an officer or director of a public company.

Posted by Tom at 4:00 AM | Comments (4) |

December 28, 2005

Causey plea deal expected today

The Chronicle, the Wall Street Journal ($), the NY Times and the Washington Post began reporting last night that former Enron chief accountant Richard Causey will enter into a plea bargain with the Enron Task Force this afternoon in Houston federal court. The plea deal hedges Causey's risk of an effective life sentence if he were to stand trial and be found guilty on 36 criminal counts in the Task Force's legacy case against Causey and his co-defendants, former Enron chairman Ken Lay and former CEO Jeff Skilling. Earlier posts on the impending plea deal are here and here.

Although the initial news reports speculate that a key part of Causey's plea deal will be his agreement to testify against Messrs. Lay and Skilling at trial, I'll reserve judgment on the probable impact of such testimony until I've reviewed the terms of Causey's cooperation agreement. It is always troublesome for the other co-defendants to have one of their brethen cop a plea on the eve of trial, particularly when the plea bargaining co-defendant has been part of a joint defense agreement with the two other defendants and has participated in discussions both about his defense and the defenses of his co-defendants. But Causey has always been the most likely of the three to cop a plea, both for financial and tactical reasons. In fact, the latest Task Force initiative to pressure Causey into plea bargain negotiations began months ago in regard to Causey-approved accounting over a transaction called Coyote Springs (here and here) that does not appear to involve either Lay nor Skilling. That pressure was reinforced earlier this month when the Task Force threatened more indictments over the Coyote Springs transaction. Ellen Podgor has additional thoughts on the possible reasons for the late timing of Causey's plea deals.

On the tactical side, Causey was far more involved than either Lay or Skilling in the details of questionable accounting in regard to certain transactions between Enron and special purpose entities effectively run by former Enron CFO, Andrew Fastow. An apparent "side" agreement between Causey and Fastow relating to those SPE's that allegedly was not disclosed to Enron's auditors has long been considered a key element in the Task Force's case against Causey. Lay and Skilling have both denied any knowledge of that Causey-Fastow side deal at the time they were running Enron.

Similarly, over the past couple of months, the Task Force has signaled a change of trial strategy that did not bode well for Causey, in particular. The Task Force had previously demonized former Enron auditor Arthur Andersen, alleged in previous Enron-related prosecutions that a number of the firm's former partners were co-conspirators with the defendants and prosecuted the firm out of business. However, the Task Force recently embraced several former Andersen partners as prosecution witnesses in the upcoming trial against Lay, Skiling and Causey on the theory that Enron duped Andersen just like everyone else. Inasmuch as Causey had primary responsibility for Enron's accounting, that change in prosecution strategy impacted Causey more than either Lay or Skilling.

Finally, because the government froze his assets upon his indictment, Causey was not able to pay compensation to his criminal defense attorney (Reid Weingarten) that would normally be expected in a case of this size and complexity. As a result, Causey's defense team has been forced to ride the coattails of both Skilling and Lay's defense teams in preparing for trial, which meant that, from a practical standpoint, the particular problems involved in defending Causey were not likely to be at the forefront of the defense effort.

Thus, it is not entirely clear that Causey will be a particularly effective witness on the core charges that the Task Force is pursuing against Lay and Skilling. We have already seen that the prior testimony of a key Enron executive under a plea bargain did not turn out well for the Enron Task Force. In fact, the plea could actually work to simplify the defense of the remaining two defendants by shifting the focus of the trial away from technical accounting issues over which neither Lay nor Skilling had primary responsibility. Moreover, even if Causey ends up testifying as a prosecution witness against Lay and Skilling, the defense will be able to use the eve-of-trial timing of the plea deal and Causey's previous protestations of innocence to impeach the credibility of any such testimony and to present Causey as a witness who -- much like former Andersen partner David Duncan -- copped a plea to hedge the risk of a long prison sentence even though he really does not think he is guilty of a crime. Along those lines, the WaPo article on Causey's plea deal includes the following from a neighbor of Causey:

For friends of Causey, including his next-door neighbor Steve Huey, word of the advanced plea negotiations is bittersweet. They say Causey is devoted to his three children, the youngest of whom is in eighth grade, and is a devout Catholic who helped raise funds for a new church in the Woodlands, an upscale suburb of Houston.

"I don't think Rick has ever believed he did anything wrong," said Huey, who shared a Christmas Eve dinner with Causey and his wife, Elizabeth. "I think that Rick's concern is over the family and what the eventual outcome will be for the family. As you get closer to trial, you start to weigh the options and weigh the odds and the resources the federal government has."

The most probable immediate impact of the plea deal is that the Lay and Skilling defense teams will request a delay of the beginning of the now-scheduled January 17, 2006 trial and renew their request that the trial be moved out of Houston. Although the Lay and Skilling teams have already made a persuasive case that the trial should be moved out of Houston because of extraordinary pre-trial publicity and a Houston jury pool that is clearly biased against Lay and Skilling in regard to Enron-related matters, U.S. District Judge Sim Lake's previous rulings in the case indicate that he will decline to grant either a delay in the trial or a change of its venue.

Posted by Tom at 4:35 AM | Comments (0) |

December 24, 2005

Thinking about the WSJ's Enron conflict of interest

The Chronicle's Loren Steffy thinks I'm stretching a bit in noting the conflict of interest that the Wall Street Journal has apparently decided to overlook in allowing John Emshwiller to report on the upcoming trial of the Enron Task Force's legacy case against key former Enron executives Ken Lay, Jeff Skilling and Richard Causey. Candidly, I don't think the point is a stretch at all. The following explains why.

Along with many others, Emshwiller has promoted the now common theme that Enron was merely a house of cards and that the company's intrinsic instability was hidden from the investing public by a deceitful management team. That view has been readily embraced by a wide-range of societal forces, such as publicity-seeking politicians who don't allow facts to get in the way of demonizing unpopular entreprenuers for political gain, government prosecutors who improperly expand the reach of criminal laws to further their careers, competing businesspeople and lawyers seeking to profit from Enron's demise, and a general public that finds it easy to resent wealthy businesspeople, particularly after the bursting of a stock market bubble. These societal forces believe that they understand the Enron morality play so thoroughly that otherwise thoughtful and intelligent people lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at Enron.

Unfortunately, this common view of Enron ignores the more nuanced view of a growing number of business experts who have studied Enron's core businesses and have a far better understanding of Enron's business practices than most of those who have promoted the Enron morality play. In many ways, Enron was an innovative firm, both in its primary business activities and in the ways in which it raised money. Experts in structured finance and derivatives recognize this and have already written extensively about Enron's remarkable innovation (see, for example, Christopher Culp and William Niskanen's Corporate Aftershock: The Policy Lessons from Enron and Other Major Corporate Corporations and Culp's subsequent book, Risk Transfer: Derivatives in Theory and Practice). Even Enron's original purpose in using special purpose entities ("SPE's") -- at least before former Enron CFO Andrew Fastow and henchman Michael Kopper hijacked them -- was sound and creative. With equity owned primarily by investment banks and other financial institutions, the SPE's were initially intended to be private equity funds with completely seperate management from Enron. The main attraction of the SPE's for investors was the funds' preferred right to invest in Enron assets, which benefitted Enron by allowing the company to preserve liquidity and hedge risk.

A side effect of this drive toward innovation was that Enron pushed the edge of the envelope between beneficial innovation, on one hand, and excessively complicated transactions that appear to have been designed to confuse more than to accomplish a legitimate business purpose, on the other. Fastow and Kopper's shenanigans with certain of Enron's SPE's are a good example of the latter type of activity.

Nevertheless, Enron was engaged in mostly legitimate and beneficial financial activities, including energy trading, structured finance and other financing transactions that had literally never been attempted before, and certainly never on the scale that Enron generated them. The societal demonization of Enron contributed substantially to an enormous amount of unnecessary wealth loss as many of the markets for such beneficial and innovative financial transactions shriveled in the wake of Enron's liquidation. Consequently, it is critically important in determining the truth of what happened at Enron -- particularly when the futures of three men and their families are at risk -- to distinguish between Enron's role as a legitimate, innovative company and the fraud that took place. Emshwiller's already published views toward Enron reflect that he is a poor choice to make that key distinction.

In fact, the situation with Emshwillier, the WSJ and Enron is eerily reminiscent of a situation that arose at the Journal almost 20 years ago in connection with Rudolf Giuliani's career-boosting prosecution of Michael Milken. Back then, it was WSJ reporter James Stewart who became the mouthpiece for Giuliani's propaganda campaign that demonized Milken's revolutionary financing techniques that literally unlocked billions in shareholder wealth during the 1980's. Stewart followed up his highly misleading WSJ reporting on Milken with a book that perpetuated the same prosecutorial myths about Milken and utterly ignored Milken's role in the tremendous wealth creation and innovation in financial markets that occurred during the 1980's. Daniel Fischel brilliantly exposed both Stewart and Giuliani's duplicity with regard to Milken in his 1995 book, Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution. Despite the wise perspective that Fischel provides regarding the grave danger to justice, the rule of law and wealth creation that results from unleashing the power of government against the unpopular businessperson of the moment, precious few of the hundreds of people with whom I have spoken or corresponded regarding the Enron case even know about Fischel's book, much less have read it.

Given the WSJ's experience with Stewart in the Milken debacle, it's at least odd that the Journal appears to be overlooking the high risk that a similar journalistic failure may occur in regard to Emshwiller's coverage of the Lay-Skilling-Causey trial. The warning signs are clearly there -- Emshwiller completely missed on the government's overreaching destruction of Arthur Andersen and has largely ignored the prosecutorial misconduct that has marred the Enron Task Force's handling of all of the Enron-related prosecutions. Perhaps most notably, Emshwiller has said virtually nothing about the outrageous miscarriage of justice that landed four Merrill Lynch executives in jail for doing nothing other than being involved in a relatively small transaction with the social pariah Enron.

So, count me as skeptical that Emshwiller is capable of providing the type of objective reporting regarding the Lay-Skilling-Causey trial that readers of America's leading financial newspaper deserve. The Wall Street Journal can do much better.

Posted by Tom at 6:10 AM | Comments (4) |

December 23, 2005

The Wall Street Journal's Enron conflict of interest

The Wall Street Journal's ($) John Emshwiller reports that former Enron chief accountant Richard Causey is currently negotiating with Task Force prosecutors regarding a possible plea bargain under which he would testify against his former bosses, Ken Lay and Jeff Skilling, in the upcoming Enron legacy criminal trial scheduled to begin in Houston federal court on January 17, 2006. A subsequent WaPo article on Causey's plea bargain negotiations is here and the Chronicle story is here.

The gist of Emswiller's piece is that the Task Force is focusing on statements that Causey made to investigators early in the Enron criminal investigation to the effect that Enron had adequate internal controls in place to limit the risk of Andrew Fastow using his position as both Enron's CFO and as the control person in various special purpose entities doing business with Enron to harm the company. The prosecution contends that Causey's statements to investigators -- as well as Lay and Skilling's similar public statements regarding the controls -- were false and that the executives knew that the controls on Fastow's dual positions were inadequate. The three executives contend that Enron's internal controls were both extensive and reasonable, but that no control can absolutely prevent someone such as Fastow from using his position to perpetrate a fraud on the company if he is intent on doing so.

Frankly, neither Causey's plea bargain negotiations nor Emshwiller's story are particularly surprising. Given that Causey is facing the equivalent of a life sentence if he chooses to defend himself without access to his full net worth in a case in which much of media (including Mr. Emshwiller -- see his Enron book, 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America) has already concluded that he is guilty, it is understandable that Causey would at least explore all options that would hedge that substantial risk of loss. Likewise, the Enron Task Force has frequently used the media throughout its dubious handling of the criminal investigation of Enron to pressure former Enron executives into questionable plea bargains.

By the way, Emshwiller has already published questionable conclusions about Enron that are clearly adverse to the three former executives. Moreover, through his book, he has a financial interest in seeing that even his most dubious conclusions are confirmed during the upcoming trial. Why on earth is a media publication of the Wall Street Journal's caliber having someone with such an obvious conflict of interest covering the Lay-Skilling-Causey trial?

Posted by Tom at 4:23 AM | Comments (0) |

December 14, 2005

Lunch with Ken Lay

Lunch was interesting in Houston yesterday as former Enron CEO and federal criminal defendant Ken Lay was the featured speaker at the Houston Forum's monthly luncheon. An earlier post on the lunch is here and the NY Times article on Mr. Lay's talk is here.

From Mary Flood's article on the talk, it sounds as if Mr. Lay has been reading this blog as he bones up for testifying at trial (which decision to testify, as Ellen Podgor notes, may be premature):

Flanked on the podium by Texas and U.S. flags, and a gold- and red-trimmed Christmas tree, Lay read from a prepared text in which he attacked the Justice Department for prosecuting the accounting firm Arthur Andersen, destroying the company and dropping the case. He said the prosecutors have been trying to criminalize normal business practices.

"If asked, I am certain that the Enron Task Force would say they have taken so much time because the crimes at Enron are so complicated," he said. "However, I would say the Enron Task Force has taken so much time because it is complicated to find crimes where they do not exist."

He said he doubts most of those who pleaded guilty in this case were criminals — rather they were bullied into their pleas by prosecutors. . . .

Prosecutors want to narrow the case, and defendants want more witnesses and experts, Lay said.

"Why do we want the truth in the case, and why does the Enron Task Force want the truth out of the case?" Lay asked.

Frankly, that's a darn good question. Despite that, Chronicle business columnist Loren Steffy is not impressed with Mr. Lay's talk (blog post here).

Mr. Steffy's skeptical reaction to Mr. Lay's proclamation of innocence is quite common, but misses the difference between being held responsible in civil context as opposed to a criminal one. Few people -- probably not even Mr. Lay -- would contend that Mr. Lay should not share at least some responsibilty in a civil lawsuit for Enron's demise. However, absent the state making a clear presentation of an alleged criminal act, the responsibility for Enron's descent into insolvency should be sorted out among all responsible parties in a civil lawsuit, not a criminal case against a few of the more prominent responsible parties. In that regard, the Enron Task Force's indictment (download pdf here) and current statement of its criminal case against Mr. Lay and his co-defendants (download pdf here) reveals that the Task Force's presentation of criminal charges against Mr. Lay is anything but clear. Indeed, a lack of coherence in the presentation of criminal charges against Enron-related defendants has been a recurring problem for the Enron Task Force.

Taking risk is how entreprenuers create jobs for communities and wealth for business owners. Risk takers sometimes make dubious or plain bad decisions, but that's an essential part of the price that we pay to enjoy the jobs and wealth that are derived from a bustling market economy. Criminalizing merely bad business decisions dampens that essential entreprenurial spirit and will ultimately lead to job loss and dimunition of shareholder wealth. That is simply not a coherent use of our criminal justice system.

Posted by Tom at 3:50 AM | Comments (3) |

December 2, 2005

More Enron indictments on the way?

As anticipated in this earlier post, U.S. District Judge Sim Lake concluded in a hearing yesterday that the defense team of former key Enron executives Ken Lay, Jeff Skilling and Richard Causey had not established in his mind that prosecutorial misconduct caused several clients of two Houston criminal defense attorneys not to assist the defense in preparation for the upcoming trial of the Enron Task Force's legacy case of its four year Enron investigation.

Judge Lake's ruling on the witness intimidation evidence was not surprising, as the Lay-Skilling-Causey defense team has struggled with the reality that no witness under the threat of retaliation from the Task Force is going to testify -- or allow their attorney to testify -- about that threat. However, compelling evidence of the Task Force's intimidation of witnesses in Enron-related prosecuctions still exists (see also here), and the larger issue in the trial -- the Task Force's unprecedented fingering of over 100 unindicted co-conspirators -- remains unresolved and clearly troubling to Judge Lake.

In addition to the chilling effect on exculpatory testimony from potential defense witnesses who have been fingered as unindicted co-conspirators, the Task Force intends to rely heavily during the Lay-Skilling-Causy trial on hearsay testimony from prosecution witnesses who have copped pleas about alleged statements made by various of those alleged co-conspirators. The defense is attempting to limit the prosecution's use of such hearsay testimony, and Judge Lake ordered the parties yesterday to brief him as he wrestles with the issue of whether to allow any such testimony -- and, if so, how much -- to come into evidence during the trial.

Finally, during the hearing yesterday, comments of the Task Force prosecutors and the other attorneys involved in the hearing indicated that the Task Force is preparing to have the grand jury investigating Enron issue another indictment in the near future against other former Enron executives who have not yet been indicted on any charges. The timing of the new indictments is transparent, given that the Task Force knows that publicity about more Enron executives being arrested will be beneficial for the jury pool to hear immediately before the beginning of the upcoming Lay-Skilling-Causey trial. You might recall that the Task Force pulled a similar stunt by publicly announcing the plea bargain of former Enron North America executive Chris Calger on the day that the jury in the trial of the Enron Broadband case began deliberations. The subject of the upcoming indictments remains unclear, but I suspect that it probably relates to the transaction involved in the Calger plea bargain (related post here).

Posted by Tom at 4:16 AM | Comments (0) |

November 23, 2005

How does the Enron Task Force really feel about Arthur Andersen?

This earlier post noted the 180 that the Enron Task Force has recently taken in regard to defunct accounting firm Arthur Andersen. After demonizing the firm, gutting it with a misguided prosecution, and alleging that a number of the firm's former partners were co-conspirators in several Enron-related prosecutions, the Task Force is now embracing several former Andersen partners as prosecution witnesses in its upcoming legacy trial against former key Enron executives Ken Lay, Jeff Skilling, and Richard Causey. In short, after putting Andersen out of business as an accomplice of the evil Enron, the Task Force is now contending that Enron duped Andersen just like everyone else.

On the heels of that development, David Duncan, the former Andersen partner-in-charge of the Enron account at the time of the company's demise, earlier this week requested -- without opposition from the Enron Task Force -- that U.S. District Judge Melinda Harmon allow him to withdraw his previous guilty plea under this cooperation agreement for allegedly obstructing the federal investigation of Enron. Duncan had testified -- albeit ineffectively -- during the Andersen trial in 2002 as a Task Force witness against Andersen, and has been awaiting sentencing ever since.

Meanwhile, the Task Force also requested dismissal of its criminal case against Andersen after publicly stating that it was prepared to retry the case just a couple of weeks ago. As a result, the Task Force will not be providing an "Andersen annuity" for Andersen defense attorney Rusty Hardin after all.

The Task Force's decision to drop the misguided Andersen prosecution is at least somewhat consistent with the Supreme Court decision overturning the Andersen conviction and the Task Force's recent change of heart toward Andersen. However, the Task Force's decision not to oppose Duncan's motion to withdraw his acceptance of his plea deal with the Task Force is another clear sign of desperation in the Task Force as it prepares to go to trial in less than two months in its legacy case against Messrs. Lay, Skilling and Causey. My bet is that the Task Force is playing nice with Duncan to send him a signal that if he elects not to testify in the Lay-Skilling-Causey trial, then the Task Force will quietly back off the criminal case against him after conclusion of that trial. Such an approach with Duncan would be consistent with Task Force's tactic of trying to avoid having all relevant testimony and evidence considered during the Lay-Skilling-Causey trial.

Stepping back for a moment from the details of trial tactics, however, the Task Force's recent change of heart toward Arthur Andersen simply highlights the dubious nature of the Task Force's decision to prosecute Andersen out of business in the first place, depriving over a dozen communities of thousands of jobs in the process. Is there any adult supervision whatsoever within the Bush Administration's Justice Department? Ellen Podgor has more cogent thoughts here.

Update: The best mainstream media article that I have read on this development in the Enron-related criminal cases is this Carrie Johnson/Washington Post article, which includes the following quote from Clear Thinkers favorite, Larry Ribstein:

"There was an initial outbreak of moral condemnation after Enron and the bubble burst," said Larry E. Ribstein, a corporate law professor at the University of Illinois at Urbana-Champaign. "That was a time for people to take a deep breath. Instead, a lot of these things were rushed into prosecution, and now we're seeing the fallout."

Update II: Peter Henning agrees with me regarding the Task Force's purpose in not opposing Duncan's request to withdraw his plea bargain.

Posted by Tom at 4:00 AM | Comments (7) |

November 21, 2005

USA Today scoops the majors in analyzing the Enron Task Force's legacy case

Is it just me or does anyone else find it odd that this USA Today article is doing a better job of covering the prosecutorial abuse that is taking place in the Enron-related criminal cases than supposedly more thorough national newspapers such as The New York Times and The Wall Street Journal?

Following up on this post from over the weekend, the USA Today article notes the utterly absurd and abusive tactic of the Task Force in fingering about 100 unindicted co-conspirators in its legacy case against former key Enron executives Ken Lay, Jeff Skilling and Richard Causey. The transparent purpose of the tactic is twofold:

First, to suppress exculpatory testimony in favor of the defendants from the unindicted co-conspirators, all or whom have declined to testify under their Fifth Amendment privilege out of fear of being indicted; and

Second, to have the testimony of the Task Force's own witnesses about the alleged hearsay statements of the unindicted co-conspirators introduced into evidence as an exception to the hearsay rule. Not surprisingly, most of the Task Force's witnesses are "cooperating witnesses" -- i.e., former Enron executives who attempting to reduce their prison time by testifying against the defendants pursuant to plea bargains with the Task Force.

Of this tactic, the USA Today article notes the comments of Stanley Twardy, a former U.S. attorney who is now a defense lawyer in Connecticut, that "'extremely rare' for a case to have as many unindicted co-conspirators as [the Lay-Skilling-Causey] case does. It's unusual to have them at all outside of drug and Mafia cases."

As noted in this other post from over the weekend, the Task Force's tactic has already resulted in a grave injustice in the Nigerian Barge case, where four Merrill Lynch executives are now serving prison terms because large amounts of exculpatory testimony for the defendants never came into evidence at trial. To avoid the same injustice from occurring in the Lay-Skilling-Causey trial, Judge Sim Lake should give the Task Force a deadline in which to indict any of the unindicted co-conspirators against whom the Task Force has a viable case, and then grant immunity from prosecution for all of the remaining unindicted co-conspirators. Only with such key testimony will the jury be able to sort out the truth of the Task Force's allegations that the defendants engaged in criminal wrongdoing at Enron. Without such testimony, the jury will be deliberating on nothing more than the Task Force's fictional screenplay of the defendants' role in Enron's demise.

Posted by Tom at 6:00 AM | Comments (10) |

November 19, 2005

Lay-Skilling-Causey witness intimidation allegations scheduled for hearing

This Mary Flood/Chronicle article reports that U.S. District Judge Sim Lake has scheduled a hearing in the Enron Task Force's legacy case against former key Enron executives Ken Lay, Jeff Skilling and Richard Causey over the defendants' allegations that the Task Force has engaged in wide-ranging witness intimidation in an effort to suppress exculpatory testimony in favor of the defendants, whose criminal trial is scheduled to commence in less than two months.

Ms. Flood reports that Judge Lake has ordered two Houston criminal defense attorneys and four of their clients to testify in the hearing. The two attorneys are Bob Sussman and Wendell Odom, and one of the client that will be called is Larry Lawyer, a former mid-level Enron executive who previously pled guilty under a cooperation agreement to a tax-related charge arising from a payment that he received in connection with one of former Enron CFO Andy Fastow's infamous deals in which Fastow and several of his Enron associates enriched themselves.

The witness intimidation issue has been festering throughout both of the prior Enron-related criminal trials. It first arose in connection with the trial of the Nigerian Barge case in which the Task Force effectively suppressed exculpatory testimony for the defendants in that case by fingering as unindicted co-conspirators dozens of former Enron and Merrill Lynch executives who were involved in the transaction that was the basis of the prosecution. Every one of the unindicted co-conspirators declined to testify in the Nigerian Barge trial on the basis of their Fifth Amendment privilege against self-incrimination. Consequently, four Merrill Lynch executives are serving prison sentences without having had the opportunity to present substantial amounts of exculpatory testimony and related evidence to the jury.

Then, as noted in this earlier post, the witness intimidation issue boiled over in public during the trial of the Enron Broadband case when former Enron Broadband engineer Lawrence Ciscon dramatically testified that Enron Task Force prosecutors had repeatedly threatened him and had fingered him as a target of an indictment in attempting to dissuade him from testifying on behalf of the five Enron Broadband defendants. That dramatic testimony came on the heels of the Task Force eliciting false testimony from former Enron Broadband co-CEO Ken Rice during that trial, which was then followed by the Task Force threatening another witness in connection with her testimony regarding Rice's false testimony. As noted in this post, The Enron Broadband jury ultimately acquitted the defendants on some of the charges and could not reach a decision on the balance of the charges, resulting in re-trials of the defendants next year.

The Task Force then deployed the same tactic earlier in the Lay-Skilling-Causey case by taking the extraordinary step of naming 114 unindicted co-conspirators, which they have subsequently "reduced" to a number just under 100. That tactic -- coupled with the Task Force's control over the communications of any Enron-related defendant who has entered into a plea bargain with the Task Force -- has effectively prevented defense counsel for Lay, Skilling and Causey to develop exculpatory testimony on behalf the three men. The Task Force's control of plea bargainers' communications and its fingering of the unprecedented number of unindicted co-conspirators prompted prominent law professor Michael Tigarto comment in connection with the Lay-Skilling-Causey motion to dismiss that "this level of silence is not normal" from witnesses and that "I have never seen defendants in a major public trial, especially a white-collar trial, so completely ostracized by witnesses with pertinent information."

Finally, Ms. Flood also passes along that the Lay-Skilling-Causey defense team has informed the Fifth Circuit Court of Appeals that it should not jump to conclusions despite the pervasive presumption of guilt against all things related to Enron. In a letter to the Court, attorneys for Lay, Skilling and Causey asked the Fifth Circuit to delete a reference to Enron in its recent opinion reversing the long sentence in the sad case of Jamie Olis: