Houston's Clear Thinkers

February 5, 2010

Justice Kennedy notices a couple of troubling issues

Overcriminalization of life and the appalling condition of our country’s prison facilities have been frequent subjects on this blog over the years. At least one member of the U.S. Supreme Court has taken notice:

U.S. Supreme Court Justice Anthony M. Kennedy criticized California sentencing policies and crowded prisons Wednesday night, calling the influence that unionized prison guards had in passing the three-strikes law "sick."

In an otherwise courtly and humorous address to the Los Angeles legal community, Kennedy expressed obvious dismay over the state of corrections and rehabilitation in the country. He said U.S. sentences are eight times longer than those issued by European courts.

"California now has 185,000 people in prison at $32,500 a year" each, he said. He then urged voters and officials to compare that expense to what taxpayers spend per pupil in elementary schools.

"The three-strikes law sponsor is the correctional officers' union and that is sick!" Kennedy said of the measure mandating life sentences for third-time criminal offenders.

As Doug Berman points out, perhaps Justice Kennedy’s remarks are a prelude to the Supreme Court’s consideration of several important sentencing cases in its upcoming term. At some point, we need to ask ourselves the question – why are we doing this to ourselves?

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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.

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January 21, 2010

We sure have progressed, haven’t we?

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

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

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

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

On the other hand .   .   .

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January 20, 2010

The growing threat of prosecutorial power

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

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

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

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

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

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

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

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

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

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January 18, 2010

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

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

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

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

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

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

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

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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 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.

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December 26, 2009

Again, why bother with a trial?

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

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

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

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

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

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

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

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

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

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

Mtn for Reconsideration of Detention Order

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December 19, 2009

Unreliable eyewitness

This video demonstrates one of the reasons that eyewitness accounts are often unreliable.

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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

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December 16, 2009

Criminalizing the neighborhood pharmacist

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

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

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

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

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

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

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

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

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

A truly civil society would find a better way.

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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. Silvergate 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.

Silvergate 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?

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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

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December 10, 2009

Differing compensation under a corrupt -- but entertaining -- system

A frequent topic on this blog has been the NCAA and its member institutions' corrupt regulation of intercollegiate sports.

It's an entertaining system of corruption, but corrupt nonetheless.

Particularly appalling is the NCAA's restriction of compensation to football and basketball players, who are the people who actually generate most of the wealth for the university athletic programs.

In that regard, a couple of news items from yesterday highlight the absurdities that often arise from this perverse regulatory scheme.

First, the University of Texas announced that it has increased the annual salary of its head football coach, Mack Brown, to a cool $5 million.

Now, Brown is a good coach who has done a fine job over the past 12 seasons at Texas. And he is a wonderful man who is a great representative for the University of Texas.

But the only way that UT can rationalize or afford to pay him $5 million per year is that it is not paying a portion of its football income as compensation to the players who create the income in the first place.

By way of comparison, in the National Football League -- which is simply a higher level of professional football than big-time college football -- very few coaches earn $5 million per year despite the fact that NFL franchises generate far more income than UT's football program does.

One of the primary reasons that NFL teams do not generally pay such amounts to their coaches is that a substantial portion of the each NFL team's income is paid to players as compensation.

So, to put it bluntly, Brown makes $5 million annually because UT and the NCAA prevent Longhorn players from receiving fair compensation for the considerable risks that they take.

Meanwhile, excess regulation almost always generates creative efforts to get around those regulations.

Thus, many big-time college football programs provide indirect compensation to their athletes through exclusive use of luxurious "resort" facilities, such as private housing, elaborate workout centers and special academic services.

But those elaborate resort facilities all look alike after awhile.

So, what additional form of indirect compensation can a football program offer to attract the best athletes?

The University of Tennessee has apparently came up with one by utilizing upon one of the oldest forms of compensation known to man.

The NCAA Rules and Regulation Manual already rivals the Internal Revenue Code in terms of length and mind-numbing detail.

Perhaps the Tennessee investigation may at least result in a new section of the NCAA Manual that the football coaches and college administrators might actually enjoy reading?

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December 8, 2009

Society's New Lepers

The increasingly draconian nature of child pornography laws in the U.S. has been a frequent topic on this blog over the years.

In an effort to punish child predators, the laws have become so broadly interpreted and enforced that many citizens have become branded as child predators and forced to serve long prison sentences merely as a result of viewing child pornography.

Even after serving severe sentences, the victims of this modern day witch hunt are demonized further by being branded as child predators for life and prevented by law from living in anything but the least desirable neighborhoods in many communities.

As this NPR/All Things Considered article (H/T Doug Berman) explains, a Florida minister is trying to do something constructive for the society's new lepers:

More than 20 states, including Florida, limit where convicted sex offenders can live — keeping them away from schools, parks and other places where children congregate.

In Miami, dozens of homeless sex offenders live under a bridge because there are few, if any, options nearby. But 90 miles away, there's a community dedicated to housing sex offenders. [.  .  .]

This is the church at Miracle Park, a community mostly made up of sex offenders. Dick Witherow is their pastor. [.  .  .]

Witherow once had a ranch for sex offenders in Okeechobee County. But zoning law changes forced that facility to close. His search for another spot brought him here, to a small community he renamed Miracle Park. It's a collection of duplexes about 3 miles east of the town of Pahokee, in rural Palm Beach County.

It's surrounded on every side by sugar cane fields. About 40 of those living there now are sex offenders. [.  .  .]

Witherow has authored a book about sex offenders called The Modern Day Leper. He says he could have worn the same label as the men at Miracle Park. He was 18 years old when he met his first wife. She was just 14, and before long she was pregnant. A judge allowed them to get married but told Witherow he could have been charged with statutory rape.

"If that would have happened in today's society, I would have been charged with sexual battery on a minor, been given anywhere from 10 to 25 years in prison, plus extended probation time after that, and then been labeled a sex offender," he says.

Witherow knows that there are those who argue that's what should have happened.

Something to think about during a season that celebrates the birth of a savior who embraced the lepers of his day.

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November 28, 2009

Noticing injustice

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

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

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

Witch hunts do not reflect well on the participants.

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November 25, 2009

"People get put in jail for importing lobsters"

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

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

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

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

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

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

“People get put in jail for importing lobsters.”

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

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November 18, 2009

Thinking about financial regulation

Peter Wallison and Steve Randy Waldman have each written a thought-provoking and important analysis of the effect of regulation on the recent financial crisis.

First Wallison:

What caused the financial crisis?

The widely accepted narrative, prominent in the media and pressed by the Obama administration, is that the crisis was caused by deregulation--the "repeal" of the Glass-Steagall Act and the failure to regulate both derivatives and mortgage brokers--which allowed excessive financial innovation, risk taking, and greed among financial players from mortgage brokers to Wall Street bankers.

With this diagnosis, the proposed remedy is more regulation and government control of the financial system, from the over-the-counter derivative markets to mortgage brokers and the compensation of CEOs.

The alternative explanation is that the crisis was caused by the government's own housing policies, which fostered the creation of 25 million subprime and other low-quality mortgages--almost 50 percent of all mortgages in the United States--that are now defaulting at unprecedented rates.

In this narrative, the fact that two-thirds of all these weak mortgages are now held by government agencies, or were produced by government requirements, shows that the demand for these mortgages--and the financial crisis itself--originated in Washington.

The problem for the administration's narrative is that its principal examples do not stand up to analysis: the repeal of a portion of the Glass-Steagall Act did not eliminate the restrictions on banks' securities activities (they were left unchanged), the mortgage brokers were responding to demand created by the government, and, there is no evidence that the failure to regulate credit default swaps (CDS) had any effect in causing or enhancing the financial crisis.

Without a persuasive explanation for the cause of the financial crisis, the administration's regulatory proposals rest on a mythic foundation.

And Waldman:

An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing.

Remember -- it's the incentives, folks.

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November 13, 2009

The easiest question for a lawyer to answer

Should I talk to the police?

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November 11, 2009

Refusing to throw in the towel is not a crime

Thank goodness.

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

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

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

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

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

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

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

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

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

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October 30, 2009

John O'Quinn, R.I.P.

The Houston legal community remains in shock over the death yesterday in a car accident of famed trial lawyer, John O'Quinn. He was 68 years old at the time of his death.

O'Quinn was a remarkably talented plaintiff's lawyer and became one of the wealthiest attorneys in the country as a result. And a controversial one at times, too (also see here).

But those who only knew John through news reports never knew the man. John had a heart as big as Texas, as reflected by his generous donations over the years to the University of Houston, Texas Medical Center institutions and numerous other charitable organizations.

Moreover, John's big heart extended into legal cases, too. Most recently, John took on the case of former mid-level Dynegy executive Jamie Olis, whose criminal case epitomizes the brutal nature of the government's criminalization of business in the aftermath of Enron's demise.

After taking on the case, John told me that his review of many of my blog posts on the Olis case was one of the reasons that he decided to take on the case. He never received a dime for the work he did on the case, but he didn't care a lick. He simply was appalled by what the government had done to a decent young man and his family, and he was intent on doing something about it.

My most recent contact with John was at University of Houston Law Foundation board meetings, which he attended faithfully for many years (he was the law school's largest benefactor). John was a delight to work with at such meetings, intensely interested in what was going on at the law school, but always wonderfully good-natured about the inherent limitations of such boards to do much more than raise money and encourage the Dean to hire good people.

My lasting memory of John will be leaving our last such meeting together, talking about the Olis case as we walked to our cars. We observed to each other on just how difficult it had become to be a wealthy businessperson in America. He cracked that it was almost enough to turn him into a criminal defense attorney.

Make no doubt about it, John O'Quinn was one of the most talented trial lawyers of his time. His preparation regimen for trial was legendary, and his ability to connect with jurors was the best that I have ever seen in the courtroom.

I will miss John very much.

Funeral arrangements for John O'Quinn:

Viewing Tuesday, November 3, 4:00pm to 8:00pm
George H. Lewis Funeral Home
1010 Bering Drive
Houston, Texas 77057
(713) 789-3005

Funeral Wednesday, November 4, 11:00am
Second Baptist Church
6400 Woodway
Houston, Texas 77057
(713) 465-3408

Update: Links on Q'Quinn's life and death:

John Council and Brenda Sapino Jeffreys

Rick Casey

Observations of colleagues

O'Quinn and the medical community (see also here)

Q'Quinn's environmental legacy

Q'Quinn's real estate investments

O'Quinn's car collection with Tim Spell's anecdotes

O'Quinn's obituary

Mary Flood on O'Quinn's funeral

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October 27, 2009

Ellen Podgor on the trial penalty

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

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

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

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

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

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

We live in scary times indeed.

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October 22, 2009

More thoughts on business "crimes"

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

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

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

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

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

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

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

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

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

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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?

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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.

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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.

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September 29, 2009

Why pay even more?

In addition to being quite frustrating from a purely football standpoint, attending Houston Texans games is incredibly expensive. And as ESPN.com's Lestor Munson points out, if the NFL has its way in the American Needle case currently pending before the U.S. Supreme Court, then professional franchises will have virtual carte blanche to coordinate high prices with other clubs in their leagues.

A group of sports economists led by Roger Noll have filed the brief below with the Supreme Court explaining how the NFL position in favor of an exemption from anti-trust laws will likely result in a loss of consumer welfare. In short, the economists argue that economic research provides a firm basis for distinguishing between collaborative activities of league members that enhance economic efficiency and benefit consumers, on one hand, from collusive activities that are not essential for the efficient operation of a league and that simply benefit league members by reducing competition among teams.

The owners of professional sports leagues have already received a dramatic financial benefit from the billions of dollars of public financing for stadiums that local governments have thrown their way over the past generation. Providing an unnecessary anti-trust exemption that will provide anti-competitive incentives for league members while providing no economic benefit to the members' customers will only make matters worse.

Food for thought as Houston leaders prepare to gift-wrap another dubious public subsidy for the owners of a professional sports franchise.

Sports Economists Amicus Brief in American Needle Case

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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?

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September 8, 2009

Understanding storytelling

When young attorneys ask me how they can become more effective advocates in the courtroom, I usually tell them: "Become better at telling stories."

Several years ago, Derek Sivers interviewed the late Kurt Vonnegut, who was no slouch as a storyteller. Check out Vonnegut's views on story-telling, which he believed promotes the need for drama in people's lives.

Essential reading for anyone who seeks to persuade.

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September 6, 2009

Confession and Avoidance

As our own country confronts the difficult issues involved in conducting war, it seems appropriate to recall the closing defense argument in one of the all-time great lawyer movies, Breaker Morant.

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August 31, 2009

Rationing health care in a disaster

If you read one article health care-related this week, make it this extraordinary Sheri Fink/NY Times Magazine article on the impossible choices that the heroic doctors -- including Dr. Anna Pou -- faced at the former Memorial Medical Center in New Orleans in rationing limited medical and evacuation services for their patients during the chaotic aftermath of Hurricane Katrina.

Ms. Fink summarizes the issues raised by the issues that Dr. Pou and her colleagues well:

The story of Memorial Medical Center raises other questions:

Which patients should get a share of limited resources, and who decides?

What does it mean to do the greatest good for the greatest number, and does that end justify all means?

Where is the line between appropriate comfort care and mercy killing?

How, if at all, should doctors and nurses be held accountable for their actions in the most desperate of circumstances, especially when their government fails them?

Interestingly, after the federal, state and local governments largely failed the doctors, other workers and patients at Memorial in the aftermath of Katrina, get a load of how the government forces acted once the decision was made to arrest Dr. Pou:

AT ABOUT 9 P.M. on July 17, 2006 — nearly a year after floodwaters from Katrina swamped Memorial hospital — Pou opened the door of her home to find state and federal agents, clad in body armor and carrying weapons. They told her they had a warrant for her arrest on four counts of principal to second-degree murder.

Pou was wearing rumpled surgical scrubs from several hours of surgery she performed earlier in the day. She knew she was a target of the investigation, but her lawyer thought he had assurance that she could surrender voluntarily. “What about my patients?” she asked reflexively. An agent suggested that Pou call a colleague to take over their care. She was allowed to freshen up and then was read her rights, handcuffed and ultimately driven to the Orleans Parish jail.  .   .   .

Read the entire article. Whose judgment do you trust more? Dr. Pou and her colleagues? Or that of those governmental officials who decided to arrest her?

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August 28, 2009

A real head scratcher

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

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

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

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

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

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

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

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

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

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August 21, 2009

Scalding Scalia

Never one to avoid a lively debate, Harvard law prof Alan S. Dershowitz (previous posts here) lays the wood to Supreme Court Justices Antonin Scalia and Clarence Thomas in this Daily Beast op-ed over the extent of their rationalizations to avoid restricting application of the death penalty:

I never thought I would live to see the day when a justice of the Supreme Court would publish the following words:

“This court has never held that the Constitution forbids the execution of a convicted defendant who has had a full and fair trial but is later able to convince a habeas court that he is ‘actually’ innocent. Quite to the contrary, we have repeatedly left that question unresolved, while expressing considerable doubt that any claim based on alleged ‘actual innocence’ is constitutionally cognizable.”

Yet these words appeared in a dissenting opinion issued by Justices Antonin Scalia and Clarence Thomas on Monday. Let us be clear precisely what this means.

If a defendant were convicted, after a constitutionally unflawed trial, of murdering his wife, and then came to the Supreme Court with his very much alive wife at his side, and sought a new trial based on newly discovered evidence (namely that his wife was alive), these two justices would tell him, in effect: “Look, your wife may be alive as a matter of fact, but as a matter of constitutional law, she’s dead, and as for you, Mr. Innocent Defendant, you’re dead, too, since there is no constitutional right not to be executed merely because you’re innocent.”

You know, he's got a point. As noted earlier here, Justices Scalia and Thomas' rigid reasoning sure do lead to some dubious decisions.

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August 17, 2009

Where is the outrage?

A couple of stories caught my eye over the weekend.

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

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

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

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

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

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

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

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

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August 13, 2009

The Stanford D&O Policy

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

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

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

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

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

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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.

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July 29, 2009

The real message of the Gates affair

Despite America's dubious legacy of exercising state power to oppress minorities, that legacy really was not the most important dynamic in play in regard to the improper arrest of Harvard professor Henry Louis Gates.

Rather, the real issue here is the increasing arrogance of America's governmental officials to condone arrest of citizens as punishment for non-criminal behavior that police or prosecutors simply don't like.

Interestingly, as Alice Ristroph explains, the judicial acquiescence to this increasing problem has Texas roots. Gail Atwater was an Austin-area soccer mom who got into it with police officer and was arrested for a seatbelt violation, a "crime" that calls for no jail time. Atwater fought the charges, but the U.S. Supreme Court held in a 5-4 decision (what were Justices Souter, Kennedy, Scalia, Thomas and Rehnquist thinking?) that police officers may arrest citizens even for perceived offenses that call for no jail time. In short, the Court concluded that the "gratuitous humiliations" that the police officer imposed on Atwater were within the scope of the officer's discretion. Thus, Sergeant Crowley's exercise of power to put Professor Gates through the same humiliations over a bullshit disorderly conduct charge is protected by the Supreme Court.

Couple the foregoing with America's penchant for increasing criminalization of virtually everything and you have a very troubling trend. As Glenn Loury notes in this NY Times op-ed, "anyone who looks closely into the issue of crime and punishment in America cannot fail to notice that the institutions of domestic security — policing, surveillance, prisons, anti-drug policy, post-release parole supervision — have grown hugely over the past two generations." Similarly, given the expansion of the federal criminal code over the past generation, Radley Balko notes that "you're probably a federal criminal, too." Indeed, the Cato Institute for years has been criticizing what it calls the "overcriminalization of conduct and the overfederalization of criminal law." We already know all about that here in Houston, now don't we?

As I first noted in 2004 in regard to Martha Stewart's conviction on criminal charges, and as I've noted many times over the years in regard to other examples of overreaching prosecutions, Sir Thomas More in A Man for All Seasons alerts us on why we should all be concerned with such increasing judicial deference to the overwhelming prosecutorial power of the state. The context is the scene in which Sir Thomas explains to his wife, his daughter and her fiance why he won't misuse his power as Chancellor of England to arrest his student Richard Rich, despite the fact that Rich is preparing to betray Sir Thomas to Thomas Cromwell and Henry VIII:

Lady Alice (Sir Thomas' Wife): "Arrest him!"

Sir Thomas: "For what?"

Lady Alice: "He's dangerous!"

Roper: "For all we know he's a spy!"

Daughter Margaret: "Father, that man is bad!"

Sir Thomas: "There's no law against that!"

Roper: "But there is, God's law!"

Sir Thomas: "Then let God arrest him!"

Lady Alice: "While you talk he's gone!"

Sir Thomas: "And go he should, if he were the Devil himself, until he broke the law!"

Roper: "So, now you give the Devil the benefit of law!"

Sir Thomas: "Yes! What would you do? Cut a great road through the law to get after the Devil?"

Roper: "Why, yes! I'd cut down every law in England to do that!"

Sir Thomas: "Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down--and you're just the man to do it, Roper!--do you really think you could stand upright in the winds that would blow then?"

"Yes, I'd give the Devil the benefit of the law. For my own safety's sake."

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July 10, 2009

Marc Dreier's letter to his sentencing judge

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

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

The webs we weave.

Marc Dreier Letter to Judge

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June 20, 2009

The Defense of Freedom

There is no question that President Obama is confronted with a delicate diplomatic situation in regard to the ongoing political unrest in Iran. But it is ironic that the main issue that is bubbling over on the streets of Tehran is the same one that John Quincy Adams addressed in the U.S. Supreme Court in the case of the illegally imported slaves that is wonderfully portrayed in the Stephen Spielberg movie, Amistad. In a magnificent performance, Anthony Hopkins plays the elderly Adams defending the slaves before the Supreme Court. Enjoy.

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June 18, 2009

Final Argument

The late Paul Newman in The Verdict playing a talented but alcoholic lawyer who gets a final opportunity to redeem a disappointing career in a difficult medical malpractice case. Enjoy.

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June 12, 2009

Not a good week for freedom

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

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

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

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

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June 10, 2009

A continuing civic shame

My first blog post on the chronically shameful condition of the Harris County Jail was four years ago. There have been quite a few others since then.

Still, nothing has changed.

Despite my libertarian leanings, it's way past time for the federal government to intervene and correct the inhumane conditions of the Harris County Jail.

The Harris County Commissioners have proven themselves to be incapable of administering the jail properly, reflected by County Judge Ed Emmett's most recent suspension of belief over the scathing report: "Actually, if you read the report, it is fairly positive. It has some episodic events but it does not show a pattern of problems.” Moreover, many years of over-sentencing by local criminal district judges hasn't helped the situation, either. On a day in which most of the civilized world is decrying North Korea's imprisonment of two American reporters in one of that country's horrific labor camps, it's worth reminding ourselves that we do not have to travel any further than our local jail to witness barbaric prison conditions.

Houston possesses many things of which to be proud. Sadly, the Harris County Jail is not one of them.

Update: Scott Henson agrees with me.

Update II: Chris Bradford recounts his experience on the in capability of Harris County administrators to operate the jail humanely.

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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.

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May 19, 2009

SCOTUS takes up the honest services issue

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

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

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

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

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

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

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

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

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

Lord Black is a genuine piece of work.

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May 14, 2009

Thinking about the Chrysler deal

Unworkable credit situation, UAW ownership and Italian engineering. What could possibly go wrong?

The blogosphere has really stepped up in analyzing the government-pushed and government-subsidized asset sale by Chrysler out of its only recently-filed chapter 11 case (handy site on the chapter 11 case is here). The best technical bankruptcy analysis has been provided by Steve Jakubowski, while Larry Ribstein, Professor Bainbridge, Mark Roe and the Epicurean Dealmaker have weighed in ably on the policy considerations of the deal. But Todd Zywicki in this W$J op-ed does the best job of summing up the long-range risk of what the Obama Administration is doing here:

By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?

Chrysler's proposed asset sale is unusual, but not unprecedented. Still, the legality of what is going on here is certainly sketchy. And what is unprecedented about this case is the participation of the government in financing the deal and the new Chrysler. Theoretically, another bidder could emerge and top the new Chrysler's bid for the assets. However, such a competing bid simply could not be financed under current market conditions absent a subsidy from another government.

So, what to make of all this? Here's what I will be watching.

Will the government market in Chrysler debt? If so, how will the market price it?

Or will the government simply hold the Chrysler debt as the company attempts to re-invent itself, turning the debt into a type of quasi-equity?

And will a company owned predominantly by a union and the government be able to attract the type of creative management and engineering talent that will be necessary to create wealth for the owners?

Frankly, the government bailout is the easy part. Creating wealth is a whole lot tougher.

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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.

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May 12, 2009

How did it come to this?

That's the question I kept asking myself as I watched former U.S. District Judge Sam Kent be sentenced to 33 months in federal prison yesterday (previous posts here).

I had an early-morning hearing in federal court yesterday and another one in the mid-afternoon. So, instead of returning to my office between hearings, I decided to attend the sentencing hearing for Judge Kent. It's not every day that a federal judge is sentenced to prison.

The first hour or so of the hearing was stupefying as prosecutors and Kent defense attorney Dick DeGuerin argued over objections to the government's pre-sentencing report. The main reason for the boredom was that, for the most part, no one except the lawyers in involved in the case and U.S. District Judge Roger Vinson knew what they were talking about. That vacuum of information was a direct result of Judge Vinson's dubious decision to keep a substantial amount of the information about the charges against Kent under seal and away from public scrutiny.

Judge Vinson's decision in that regard might have been somewhat defensible had the two victims of Kent's sexual assaults requested secrecy to preserve what little privacy they could salvage from this ordeal. But neither of the victims requested such treatment, and my sense is that Kent didn't want it, either.

So, Judge Vinson decided to conduct this case largely outside the public eye for his own reasons. In my 30 years of practicing law, I have never seen the volume of information in a case placed under seal as was done in this case.

In sentencing Kent, Judge Vinson claimed that he was upholding the justice system by showing that even a powerful judge is not above the law. Unfortunately, he undermined that same system by preventing the public from learning the details of the accusations against Kent and Kent's responses to those allegations.

Although the first part of the hearing could have induced a snooze, the pace picked up dramatically when the two victims of Kent's assaults made their way to the podium to make their victim statements to the court (one of the victim's statements is here, courtesy of the Houston Chronicle). Both victims were extremely impressive in their presentations, describing the emotional and family carnage that Kent's assaults and abuse of power caused. We also learned tidbits of information that likely would have been already been revealed had Judge Vinson not maintained such tight control over information:

The case manager reported Kent's assaults to her supervisor, who did not take appropriate steps to report it to higher authorities out of fear for her job;

A "culture of fear" existed among employees at the Galveston federal courthouse as a result of Kent's manipulative behavior and frequent drunkenness; and

Kent is estranged from much of his family.

There was a good bit of discussion from the victims and the lawyers regarding Kent's alcoholism and his "serious" psychological issues, for which Judge Vinson ordered him to continue treatment. Also, Kent has been rendered virtually insolvent from his funding of the cost of defense of the case.

For his part, Kent did a good job in his statement to the court, apologizing to his accusers, his staff, his family, other judges and "the system." He promised Judge Vinson that he would continue to rehabilitate himself regardless of the sentence. My sense was that Kent was sincere.

I do not know Kent personally. I handled several hearings in his court over the years and never had a problem with him.

However, I know plenty of lawyers who found Kent insufferable and rude (see also here), and I heard the rumors about his alleged favoritism of certain Galveston lawyers, particularly in admiralty cases. In 2001, the Chief Judge of the Southern District of Texas took the unprecedented step of reassigning 85 cases away from Kent that were being handled by one of Kent's best friends.

And now it appears that Kent was drinking heavily for much of the past decade and that he was frequently intoxicated while at the courthouse. You have to wonder whether concerns about Kent's behavior impacted out-of-town parties' decisions in cases such as this one?

So, I circle back to the question I asked at the beginning of this post -- how did the judicial career of Sam Kent come to this sordid and sad ending?

Where were Kent's "friends" who knew about his excessive drinking and other personal problems, and were in a position to intervene and help him before it was too late?

What are we to make of the federal government's human resources apparatus that an entire federal courthouse could have been placed under a culture of fear by the abusive behavior of one man?

And doesn't the Fifth Circuit Judicial Council have some explaining to do on why it issued its agreed order of public reprimand of Kent without interviewing either of the victims during the council's investigation?

Finally what are we to conclude about our justice system that the Houston Chronicle -- which, along with its coverage of Hurricane Ike, should have been won a Pulitzer Prize for its reporting on the Kent case -- provides much more information to the public about the crimes of an abusive judge than the prosecution of that judge?

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May 11, 2009

Is the case against Sir Allen getting more complicated?

On first blush, the criminal case against Sir Allen Stanford, the mercurial chairman of Stanford Financial Group, would appear to be pretty straightforward.

On the other hand, why was the Securities and Exchange Commission apparently falling over itself for years to avoid closing down Stanford Capital, even in the face of credible, inside information provided to the agency regarding Stanford's scam nature?

Could Sir Allen have been keeping the regulators at bay by playing several agencies of the federal government off against one another?:

A Panorama (BBC) investigation has suggested that Sir Allen was shielded from an earlier inquiry into his activities because he co-operated with a US Drug Enforcement Administration (DEA) attempt to track money laundering by Latin American drug cartels. [. . .]

Panorama claimed some US officials were aware of Sir Allen's cartel links as long ago as 1990. It reported that Sir Allen, paid a $3.1 million (£2.05 million) cheque to the DEA in 1999 after that sum was invested in his bank by another Mexican drug gang, the Juarez cartel of Amada Carillo Fuentes.

According to Panorama, whose investigation will air on Monday, Sir Allen was initially investigated by the SEC over suspicions he was running a Ponzi scheme in the summer of 2006, but the inquiry was over by the winter of that year.

The BBC claims the decision to close the investigation followed a request by another government agency.

Panorama says it is aware of "strong evidence" that Sir Allen was a "confidential agent" for the DEA as far back as 1999 and turned over details of money laundering by clients from Colombia, Mexico and Ecuador.

Rodney Gallagher, a British financial investigator, who knew Sir Allen in the 1980s said it was clear to him that the Texan had "a very close relationship with the DEA" and occasionally hired former agency staff to work for him.

The DEA declined to comment to the BBC on its allegations.  .   .  .

If Sir Allen bought time for a scam by playing nice with the DEA, the federal government's dubious prohibition policy toward certain drugs will have added an entirely new layer of costs.

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April 20, 2009

Clear Thinking to begin the week

Former Cardinals and Pirates outfielder Andy Van Slyke from this recent interview ($) in Baseball Prospectus:

"Well, [former Astros pitcher] Mike Scott, to me, is the best pitcher to ever pitch in the big leagues. I went 1-for-38 against him.  .  .  . Mike Scott, when he was at the apex of his career, was actually cheating very well. When he threw that forkball, and he scuffed it all up... he threw 97-98 mph, and then he'd throw a forkball that was in the 90s and I just couldn't hit him."

Q: Were there a lot of guys "cheating very well" in your era?

"I think there was more of it going on back then than there is today. You don't really see guys scuffing balls—you don't see guys with sandpaper—but it was very prevalent when I came to the big leagues. The guys... everybody knew who was doing it. It was just hard to catch them."

Arnold Kling on an upcoming debate that he will be having with Robert Kuttner regarding health care finance:

The debate should be about how the cost-benefit trade-offs and rationing will take place. I will argue that most health care spending should be paid for out of pocket, with insurance reimbursement only for very large expenses over a multi-year period. With consumers paying out of pocket, they will take price into account in making their choices, and they will self-ration. The alternative is to have government officials make the choices about what treatments people are to obtain. I do not think that this is a one-sided debate, in which one position is clearly better than the other. But I hope that Kuttner and I can have this debate, rather than go off into red herrings like drug company profits.

The Financial Times' Clive Cook chimes in on America's intractable but nonsensical drug prohibition policy ($) (other posts on drug prohibition are here):

How much misery can a policy cause before it is acknowledged as a failure and reversed?

The US “war on drugs” suggests there is no upper limit. The country’s implacable blend of prohibition and punitive criminal justice is wrong-headed in every way: immoral in principle, since it prosecutes victimless crimes, and in practice a disaster of remarkable proportions. Yet for a US politician to suggest wholesale reform of this brainless regime is still seen as an act of reckless self-harm. [.  .  .]

Strict enforcement,  .   .   .  has reduced drug use only modestly – supposing for the moment that this is even a legitimate objective. The collateral damage is of a different order altogether. Violence related to drug crimes has surged in Mexico and in US cities close to the border, giving rise to renewed interest in the topic.  .  .  . [.  .  .]

Few policies manage to fail so comprehensively, and what makes it all the odder is that the US has seen it all before. Everybody understands that alcohol prohibition in the 1920s suffered from many of the same pathologies – albeit on a smaller scale – and was eventually abandoned. [.  .  .]

Is an outbreak of common sense on this subject likely? Unfortunately, no. Only the most daring politicians seem willing to think about it seriously.  .  .   . [.  .  .]

Somebody in the White House should take a look. This national calamity is no laughing matter.

And finally, Mark Steyn notes the insidious nature of encroaching government regulation over citizens:

The proper response of free men to the trivial but degrading impositions of the state is to answer as [gun owner] Pierre Lemieux did. But it requires a kind of 24/7 tenacity few can muster - and the machinery of bureaucracy barely pauses to scoff: In an age of mass communication and computer records, the screen blips for the merest nano-second, and your gun rights disappear. The remorseless, incremental annexation of "individual existence" by technologically all-pervasive micro-regulation is a profound threat to free peoples. But do we have the will to resist it?

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April 13, 2009

The Trial of Sir Thomas More

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April 1, 2009

The Wavering Rule of Law

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

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

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

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

Update: Larry Ribstein chimes in, too.

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March 28, 2009

Our Congress at work

I swear, you can't make this stuff up.

As regular readers of this blog know, I thought the federal bailout of AIG and various other Wall Street firms was a bad idea from the start because it prevented our bankruptcy system from allocating the risk of loss among the creditors of the financially-troubled firms.

Nevertheless, after various forces stoked a climate of fear, Congress approved broad bailout legislation even though it was clear at the time that few of the legislators understood what they were approving.

Not surprisingly, various large creditors of the financially-troubled firms did very well for themselves under the bailout legislation. Can't blame them for protecting their shareholders' interests, now can you?

So now, confronted with the fact that the bailout primarily benefited these large institutional creditors, various members of Congress and New York AG ("Attorney General" or "Aspiring Governor," take your pick) Andrew Cuomo are starting investigations into why AIG did precisely what it was supposed to do -- i.e., pay its bills -- with the bailout funds.

A little late, don't you think?

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March 6, 2009

Insightful thoughts to close the week

Writing in 1951 about popular attitudes toward income inequality in "The Ethics of Redistribution," Bertrand de Jouvenel observed the following (H/T WSJ):

The film-star or the crooner is not grudged the income that is grudged to the oil magnate, because the people appreciate the entertainer's accomplishment and not the entrepreneur's, and because the former's personality is liked and the latter's is not. They feel that consumption of the entertainer's income is itself an entertainment, while the capitalist's is not, and somehow think that what the entertainer enjoys is deliberately given by them while the capitalist's income is somehow filched from them.

In arguably the best financial blog post to date in 2009, the Epicurean Dealmaker analyzes the skewed dynamics that led to the Merrill Lynch high-level executive bonus pool and observes, among other things:

It would not be outlandish to consider the Merrill executives' bonus pool as the latest and largest campaign gift toward Mr. [Andrew] Cuomo's 2010 gubernatorial run.

Meanwhile, Andrew Morris wrote the following in a letter to the WSJ editor (H/T Don Boudreaux):

At first, when I read your headline “States give gambling a closer look” (Mar. 3) I thought you were reporting on yet another “stimulus” or “bailout” bill in which politicians played games of chance with taxpayers’ money. Hardly news -- just another “dog bites man” story.

Then I realized it was just a story about allowing ordinary people to risk their own money  --  now that’s a “man bites dog” story!

Along the same lines, the WSJ's Notable and Quotable series provided the following excerpt from Friedrich A. Hayek's "The Constitution of Liberty" (1960) on the illusory nature of progressive taxation and large increases in governmental spending:

Not only is the revenue derived from the high rates levied on large incomes, particularly in the highest brackets, so small compared with the total revenue as to make hardly any difference to the burden borne by the rest; but for a long time . . . it was not the poorest who benefited from it but entirely the better-off working class and the lower strata of the middle class who provided the largest number of voters.

It would probably be true, on the other hand, to say that the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.

And Jason Kottke noted the technological irony of the week:

Now you can go to the iTunes Store to buy the Kindle app from Amazon that lets you read ebooks made for the Kindle device on the iPhone.

Finally, legendary Houston trial lawyer Joe Jamail passes along this anecdote about the late, great Houston criminal defense lawyer, Percy Foreman:

In the early 1980s, Jamail represented his courtroom idol, Houston criminal defense attorney Percy Foreman, whose neck was injured when his car was rear-ended by a commercial truck. On direct examination, Foreman testified that he had not experienced any neck problems before the accident, and that he was entitled to $75,000 for lost income due to the injury.

But on cross-examination, the defense revealed that Foreman had been hospitalized nine times for neck problems prior to this accident.

“The jury looked at me, expecting me to give them an answer,” says Jamail. “So I told them that Percy had been a great lawyer throughout his life, but that he was now just an old man and was growing senile.”

At that moment, Foreman jumped up and yelled out across the courtroom, “You goddamned son of a bitch!”

“See what I mean,” Jamail immediately told jurors. “He doesn’t even know where he is right now.”

The jury awarded Foreman the sum of $75,004. Jamail says he never figured out why the extra $4.

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February 24, 2009

Judge Kent cops a plea

As most local lawyers expected, U.S. District Judge Sam Kent entered into a plea bargain on the courthouse steps today. The deal derailed what would have been an extremely ugly trial on sexual abuse and obstruction of justice charges, and ended Judge Kent's 18-year career as a federal judge. Here is the factual basis for the plea deal and also the plea agreement. Earlier posts on the case against Judge Kent are here.

As noted, Judge Kent's plea deal was not a surprise, although the courthouse steps nature of it was. It looks as if defense attorney Dick DeGuerin -- one of Houston's best criminal defense attorneys for this type of case -- pushed the case to the brink in an attempt to gain the best possible deal, which it appears he did.

In the factual basis for the plea, Judge Kent admitted only to lying to the Fifth Circuit Judicial Council about unwanted sexual advances that he made toward a subordinate. That leaves out any admissions regarding the serious sexual abuse charges that the prosecution dismissed as a part of the plea deal. Those non-admissions have to be considered a victory for the defense in a case such as this.

Moreover, Judge Kent's retirement will likely avoid impeachment. If so, then Judge Kent he will be able to collect his federal pension.

However, those victories probably won't prevent Judge Kent from being sentenced to do some serious prison time. The prosecution agreed only not to recommend any more than a three-year sentence in regard to the maximum 20-year sentence that Judge Kent could receive on the obstruction charge, and visiting U.S. District Judge Roger Vinson has a reputation of handing down relatively harsh sentences. I'm no expert on sentencing, but my initial sense is that Judge Kent is looking at between a 3-5 year sentence.

That's probably lighter than the sentence that Judge Kent would have assessed to a defendant convicted of the same charge in a similar case in his court.

But it's not going to be a picnic, either.

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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.

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February 18, 2009

Stanford blows up

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

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

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

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

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February 10, 2009

The real A-Rod tragedy

As predicted here last year, the names of the MLB players who tested positive for steroids or other performance-enhancing drug use in MLB's 2003 survey test of 240 players are finally being leaked to the media (previous posts on PED use in sports are here).

That survey test was done under a deal between MLB and the MLB Players' Association for the purpose of encouraging voluntary and confidential disclosure of PED use by players so that MLB and the Players' Association could develop a productive program for helping the players get off the juice and monitor future use.

With the leaking of A-Rod's name and the ensuing public outcry, so much for the notion of encouraging players to get help by assuring confidentiality.

Predictably, the mainstream media and much of the public are castigating Rodriguez, who is an easy target.

Of course, much of that same mainstream media and public contribute to the pathologically competitive MLB culture by regularly reveling in players who risk career-threatening disability by taking painkilling drugs so that they can play through injuries.

But players who used PED's in in an effort to strengthen their bodies to avoid or minimize the inevitable injuries of the physically-brutal MLB season are pariahs. Go figure.

Meanwhile, the fact that MLB players have been using PED's for at least the past two generations to enhance their performance is not even mentioned in the mind-numbingly superficial analysis of the PED issue that is being trotted out by most media outlets. Sure, Barry Bonds hit quite a few home runs during a time in which he was apparently using PED's. But should Pete Rose be denied the record for breaking Ty Cobb's total base hits standard simply because he used performance-enhancing amphetamines throughout his MLB career?

As noted here last year in connection with release of the Mitchell Commission report, witch hunts, investigations, criminal indictments, morality plays and public shaming episodes are not advancing a dispassionate debate regarding the complex issues that are at the heart of the use of PED's in baseball and other sports. On a very basic level, it is not even clear that the controlled use of PED's to enhance athletic performance is as dangerous to health as many of the sports in which the users compete.

A truly civilized society would find a better way to address these issues.

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January 27, 2009

The potential consequences of being tricky

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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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.

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January 19, 2009

An entertaining upcoming week in Houston

No one in Houston this week can complain about lack of opportunity for intellectual stimulation.

First, well-known legal blogger and Clear Thinkers favorite Larry Ribstein will be lecturing on Thursday afternoon from noon to 2 p.m. at the University of Houston Law Center as the first speaker of the semester in UH Law Professor Lonny Hoffman's “Colloquium” course that brings noted legal scholars from around the country to UH each year to give presentations on the scholar's work in progress.

Great teachers are a popular topic on this blog (see here and here), so I'm particularly pleased that Professor Ribstein is taking the time out of his busy schedule to visit Houston. As regular HCT readers know, Professor Ribstein is one of the premier business law scholars in the country.

The holder of the Mildred Van Voorhis Jones Chair at the University of Illinois College of Law, Professor Ribstein's widely-read Ideoblog has been at the forefront of the blawgosphere's enormous impact on legal analysis and education, literally pushing legal scholarship from what had been mostly closed conversations between fellow academics into a hugely valuable resource that is now readily available to anyone over the Web. Already the leading expert in the U.S. in the area of unincorporated business associations, Professor Ribstein is also one of the blawgosphere's most insightful thinkers on corporate governance issues and the effects of regulation on markets and business. His blog has contributed as much to the understanding and appreciation of business law issues over the past five years as any resource of which I am aware.

Professor Ribstein's talk on Thursday will be on this paper that he co-authored with George Mason University law professor Bruce Kobiyashi that examines the empirical factors that influence limited liability companies' choice of where to organize. Seating for the talk is limited, so contact Professor Hoffman at Lhoffman@central.uh.edu or 713.743.5206 as soon as possible to reserve a seat. The lecture will be held in the Heritage Room of the UH Law Center.

Meanwhile, on Wednesday from 11:30-1:30 p.m., popular author and journalist Malcolm Gladwell will be giving a talk on his new book, Outliers, at the Hilton-Americas Houston hotel (Chron article here). Tickets are $75 and include a copy of the book and the luncheon, which is co-sponsored by Inprint, the Greater Houston Partnership and Brazos Bookstore. Contact Jill Reese at 713.844.3682 or jreese@houston.org to make reservations, the deadline for which is noon on Tuesday.

Finally, author and former Houstonian Larry McMurtry -- the pre-eminent Texas writer of the past 30 years -- will be giving the lecture on Wednesday evening from 7-8:00 p.m. in Rice University's Distinguished Lecture series. The lecture will be held in the Grand Hall of Rice's Ley Student Center and is open to the public.

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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.

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January 9, 2009

Can Judge Kent receive a fair trial in Houston?

By now, most folks have heard that the government has filed a superceding indictment against U.S. District Judge Sam Kent alleging sexual abuse against a second federal employee and also obstruction of justice in connection with the Fifth Circuit's previous investigation into the allegations. The previous posts on Judge Kent's case are here.

As this Mary Flood/Chronicle article notes, Judge Kent faces an enormously difficult fight for his life in the upcoming trial. Given the latest allegations, my sense is that his chances are remote of finding a Houston jury that is not tainted by the lurid local news reports on the case.

As of this date, Judge Kent's formidable defense attorney -- Dick DeGuerin -- has still not requested a change of venue. Should he now?

Although Racehorse Haynes is still trying cases well into his 70's, DeGuerin is now widely regarded as having accepted the baton from Haynes as being the dean of Houston's outstanding criminal defense bar. Given the difficulty of the case against Judge Kent, could this case be DeGuerin's equivalent of Hayes' career-defining T. Cullen Davis case?

Stay tuned.

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January 8, 2009

Another Angry Mob

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

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

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

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

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December 30, 2008

Those pesky unexpected consequences

On the heels of this post from a couple of days ago that addressed Tyler Cowen's recent NY Times op-ed that speculated that expectations generated from the 1998 government bailout of Long Term Capital Management hedge fund were not such a good thing, this W$J article on the Lehman Brothers bankruptcy case bemoans the enormous cost attributable to lack of reorganization planning in connection with the Lehman Brothers case:

As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm's bankruptcy filing in September, according to an internal analysis by the company's restructuring advisers.

A less-hurried Chapter 11 bankruptcy filing likely would have preserved tens of billions of dollars of value, according to a three-month study by the advisory firm, Alvarez & Marsal. An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says. [.  .  .]

"While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down plan should have been pursued. It was an unconscionable waste of value," said Bryan Marsal, co-chief executive of the advisory firm who now serves as Lehman's chief restructuring officer.

Mr. Marsal estimates that the total value destruction at Lehman will reach between $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined.

Losses are a natural part of the risk allocation that occurs in big reorganization cases. But anyone who has been involved in such cases knows that it takes at least a couple of months to prepare a big reorganization case properly.

Friends who are closely involved in the Lehman Brothers case have confided to me that Lehman CEO Richard Fuld never in his wildest imagination thought, after the precedent of Bear Stearns, that the Fed and the U.S. Treasury would fail to bail out Lehman Brothers. When that proved wrong, Lehman Brothers had to file its chapter 11 case on a relatively unplanned, emergency basis. That miscalculation cost creditors even more than they would have lost had Lehman's management taken the normal step of planning the case when they saw the writing on the wall. I've got my doubts that the additional losses are $50-75 billion as suggested by the consultant's report (could the Lehman-related parties be using that report as a liability shield?), but there is little question that an emergency bankruptcy filing generally costs creditors more than a properly planned one.

As John Carney notes, maybe the conventional wisdom is wrong that the Fed made matters worse by failing to bailout Lehman Brothers.

It's hard enough to evaluate the risk of insolvency in regard to a trust-based business under normal circumstances. It becomes a real crapshoot when there exists an expectation that the federal government will provide stop-gap financing for a big trust-based company's losses. And crapshoots generate some pretty bad risk-taking.

It really isn't rocket science.

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December 28, 2008

Lessons of LTCM

Marginal Revolution's Tyler Cowen makes a similar point in this NY Times op-ed about the 1998 federal bailout of the Long-Term Capital Management hedge fund that this earlier post made about Enron and the current Treasury bailout:

At the time, it may have seemed that regulators did the right thing [in bailing out LTM]. The bailout did not require upfront money from the government, and the world avoided an even bigger financial crisis. Today, however, that ad hoc intervention by the government no longer looks so wise. With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed. [ .  .  .}

The major creditors of the fund included Bear Stearns, Merrill Lynch and Lehman Brothers, all of which went on to lend and invest recklessly and, to one degree or another, pay the consequences. But 1998 should have been the time to send a credible warning that bad loans to overleveraged institutions would mean losses, and that neither the Fed nor the Treasury would make these losses good.

Absent allocation of risk consequences to the parties who entered into transactions with financially-troubled companies, markets have a difficult time accurately pricing risk in regard to future investment and transactions. Such indecision plays a big part in delaying recovery in financial markets.

Similarly, without cleaning up the balance sheets of troubled companies (and putting the hopelessly insolvent ones out of their misery), extending additional credit to financially-strapped companies only makes them an even poorer risk for investment. That doesn't facilitate recovery in the financial markets, either.

Amidst many blunders, the Bush Administration's failure to tap corporate reorganization experts in connection with its policy-making regarding the financial crisis was one of the worst. Hopefully, Obama's advisors note the mistake and correct it in the next Administration.

Update: Barry Ritholtz agrees with Tyler and me.

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December 20, 2008

Any connection?

As Bill Henderson notes, many big law firms are going to have trouble surviving in these turbulent financial markets.

Financial markets aside, though, I wonder whether this type of news is an even larger part of big law's problem?

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December 18, 2008

Making sense of Madoff

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

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

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

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

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

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

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

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

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

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

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

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

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November 22, 2008

Do as I say, not as I do

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

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

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

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

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

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

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

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

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November 15, 2008

The Obama choices

Jan Greenburg sizes up the most likely chances that Obama will have to nominate justices to the U.S. Supreme Court.

The bottom line -- despite the advanced age of several of the justices, perhaps not as many as one would think.

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November 11, 2008

A stubbornly bad system

So, now that the Democrats have swept in a slate of judges to replace many longstanding GOP state district judges in Houston, the Chronicle runs an article about how some Republicans are calling for an alternative system for appointing judges.

Not surprisingly, the Democrats are not as enthusiastic, at least right now.

Of course, while the Republican judges have been controlling the courthouse over most of the past two decades, they weren't interested in rocking the boat to change the system, either.

However, the problem remains that, partisanship aside, doing nothing about the current Texas system of electing judges simply perpetuates a very bad system.

Thankfully, as Don Cruse reports, Chief Justice Wallace Jefferson of the Texas Supreme Court is showing leadership on the issue, just as the late John Hill and Tom Phillips did before him during their stints as Chief Justice.

But the potential for corruption in the Texas judicial election system perhaps best summed up by the following joke:

Taking his seat in his chambers, the judge faced the opposing lawyers.

"So," said the judge. "Each of you has presented me with a bribe."

Both lawyers squirmed uncomfortably.

"You, attorney Mohanty, gave me $50,000," observed the judge. "And you, attorney Venkat, gave
me $60,000."

The judge reached into his pocket, pulled out $10,000, and handed it to attorney Venkat.

"Now that I've returned $10,000 to attorney Venkat," exclaimed the judge proudly, "I'm going to
decide this case solely on its merits!"

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November 4, 2008

Tom Alexander, R.I.P.

I lost an old friend and Houston lost one of its most colorful characters on this past Sunday morning -- legendary trial attorney Tom Alexander died of a heart attack at the age of 78 (the Chronicle story on Alexander's death is here and Richard Connelly of the Houston Press chimes in here). The memorial service will be held at 11 a.m. tomorrow morning at St. Paul's United Methodist Church, 5501 Fannin in the Museum District of Houston.

Alexander was one of Houston's most accomplished trial lawyers, the kind of rare quick-read who could prepare for a trial by reading the case file on his way to the courthouse. Inasmuch as he had such an engaging personality, articulate delivery and quick wit, judges and jurors naturally gravitated toward him.

But Alexander was one of those larger-than-life characters who was much more than just a fine trial lawyer. He was a loving husband, father and grandfather. He was a true sportsman who loved and supported intercollegiate and professional sports of all kinds. He loved to golf and was an original member of Champions Golf Club, where he owned a weekend cottage that allowed him to keep up with his good friend, Champions owner Jack Burke. Born and raised in Kentucky, Alexander was also an avid horseman who could handicap thoroughbreds with the best of them.

Moreover, it wasn't all trial tactics and sports with Alexander. Whether the subject was opera, politics, philosophy, poker, theology (he gave a lay sermon at church once entitled "Can You Fistfight and Still Be a Christian?") or simply the latest gossip in Houston's professional community, Tom Alexander would engage and stimulate you. Perhaps not always the way you wanted, but always in a way that would make you think about the basis of your beliefs.

Alexander's vivacious wit and personality is perhaps best summed up by one of the funniest Houston courthouse stories that I've ever heard.

Years ago, Alexander was hired by the rich husband in an ugly divorce. The vengeful wife hired another veteran of the Houston legal community, the late Robert Scardino, Sr., the father of noted Houston criminal defense attorney, Robert Scardino, Jr.

Inasmuch as there were no children of the marriage and the value of the community estate was well-established, there was really nothing for Alexander and Scardino to fight about in the divorce. However, the husband and wife hated each other, so they directed Alexander and Scardino to be nasty with each other for as long as possible. And these two old warhorses were happy to oblige.

After about a year or so of bickering, the Family Court finally set the case for trial. Realizing that there was really no reason to use precious court time to split a well-defined community estate, the Family Court Judge called Alexander and Scardino into his chambers before the trial was scheduled to begin and hammered out a property settlement in an acrimonious two-hour session.

Exhausted from dealing with the squabbling between Alexander and Scardino, the Family Court Judge addressed the final issue in the case at the conclusion of the session:

"Mr. Alexander and Mr. Scardino, thank you for working with me in settling this case and saving the court time for other cases."

"Now, the final issue is the amount of Mr. Scardino's fee for representing the wife in this case. Mr. Scardino, what do you think is fair?"

"Well, Judge," replied Scardino. "This has been a hard-fought case and I don't want the amount of my fee to be the final problem in the case. So, I tell you what I'm willing to do."

"I don't know what the amount of Mr. Alexander's fee has been for representing the husband in this case," Scardino observed. "But I trust Mr. Alexander."

"So, to put this all behind us," concluded Scardino. "Whatever Mr. Alexander's fee has been for representing the husband in this case, I'm willing to take the same amount for representing the wife. Whatever amount Mr. Alexander has accepted as a fee is acceptable to me."

"Why, Mr. Scardino," gushed the judge. "Thank you for that creative and statesmanlike approach to resolving this final issue. I really appreciate that."

Turning toward Alexander, the judge asked: "Mr. Alexander, what do you think about Mr. Scardino's eminently reasonable proposal?"

Alexander sat in deep thought for a moment. Then, he leaned toward Scardino, got right up in his face and -- undoubtedly with a twinkle in his eye -- declared:

"You greedy sonuvabitch!"

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October 11, 2008

230 years?

So, the Justice Department is seeking a sentence of 230 years for former General Re senior counsel Robert Graham, a 60-year old man who has never been involved in any wrongdoing in his life.

Mercifully, the pre-sentencing report recommends a sentence of "only" 12-17 years.

Graham was convicted earlier this year of securities fraud in connection with his involvement in a finite risk transaction between General Re and AIG that was one of the transactions that led to the downfall of former AIG CEO, Hank Greenberg (prior posts here).

Ironically, AIG is now fighting for its life -- even after receiving loans from the Fed in amounts approaching $150 billion -- as a result of thousands of transaction decisions that were far more questionable than the one Graham made.

230 years. For involvement in a transaction that was not even clearly improper, much less criminal in nature.

230 years. As a result of a prosecution that required application of the Buffett rule.

230 years. What does that portend for the AIG executives who engaged in this bit of bad judgment? Or those who were involved in this? Did they commit a crime because they breached an obligation to throw in the towel?

This is our government doing such things, folks. It is a reflection of us. And that reflection is not particularly attractive these days.

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September 9, 2008

Not a good start

The Chronicle's Mary Flood reports that visiting U.S. District Judge Roger Vinson of Pensacola, Florida is not off to an auspicious start in handling the criminal prosecution of U.S. District Judge Sam Kent:

The Florida judge who will oversee the criminal trial of U.S. District Judge Samuel Kent issued a gag order in the case to prevent public discussion by parties or court personnel that could interfere with the trial.

Senior U.S. District Judge Roger Vinson of Pensacola late Friday issued the order that also allows him to hold arguments and hearings in chambers and outside of the presence of the public and forbids courthouse personnel from relating information from those hearings to the public.

Vinson said he found it necessary to gag the attorneys and courthouse personnel on his own, without a request from prosecutors or Kent, "to preserve a fair trial by an impartial jury by shielding jurors and potential jurors from prejudicial statements." He said he found a "substantial likelihood" that comments made outside court would "taint the jury pool and will undermine a fair trial to which both the accused and the public are entitled." [.  .  .]

The order specifically forbids "divulgence of information concerning arguments and hearings held in chambers or otherwise outside the presence of the public."

A copy of the order is here.

The Fifth Circuit Judicial Council's confidential investigation and resulting sanction of Judge Kent has already been the subject of substantial criticism. Now, in his first action in the case, Judge Vinson enters a dubious gag order and raises the specter that he will conduct frequent non-public hearings. This is not the way to instill confidence that Judge Kent's case will be handled in a manner similar to other criminal cases of prominent defendants. Like these.

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September 2, 2008

Richard Justice crosses the line

As regular readers of this blog know, I have often wondered why Chronicle sports columnist Richard Justice is writing about sports. He is highly subjective in his views, does not back them up with objective facts and doesn't reason well. Beyond that, he does just fine.

As a result of the foregoing, Justice is a controversial fellow among Houston sports fans. His blog is a rollicking place where mostly anonymous readers who comment on Justice's blog posts regularly engage in competing insults with Justice. Not my cup of tea, but different strokes for different folks.

At any rate, after the Texans' meaningless pre-season loss against Dallas a couple of weeks ago, Justice published this post in which he harshly criticized Texans offensive line coach Alex Gibbs -- who is widely-regarded as one of the best offensive line coaches in the NFL -- for yelling at his players. The post was odd, but nothing out of the ordinary for Justice, who had applauded the hiring of Gibbs this past January. Inasmuch as Justice noted that Gibbs has a policy of not talking to the media, many readers commenting on the post speculated that Justice's criticism of Gibbs was simply sour grapes for Gibbs' refusal to talk with Justice.

However, one particular reader who commented on Justice's post was not interested in engaging in the usual name-calling that is common on Justice's blog. Stephanie Stradley, who previously blogged on the Texans for the Chronicle and who now blogs on the Texans over at AOL Sports Fanhouse, posted a comment to Justice's post in which she challenged the factual basis of Justice's assertion that Gibbs' players were tuning him out because of his yelling. Stradley is a first-class blogger who analyzes the Texans much more objectively and effectively than Justice does.

In response to Stradley's comment, Justice responded with shrill comment (since deleted) in which he reiterated his point about yelling and then insulted Stradley. Despite Justice's insult, Stradley inquired in a subsequent comment about the basis of Justice's contention that Gibbs' players did not respond to him, to which Justice responded with another condescending comment. Tasteless, but again nothing out of the ordinary for the often childish nature of Justice's blog.

But what Justice did next may very well have crossed the line. Inasmuch as Justice's criticism of Gibbs was so poorly-reasoned, readers continued to mock Justice in the comments to his blog post, prompting Justice to post a follow-up post to defend his position. But in so doing, Justice made the following comment (scroll down to comment at 9:49 AM) in response to a reader who suggested that he owed Stradley an apology for his earlier tasteless comment:

I don't know what Stephanie's real name is, but she creeps me out. She writes a little too often, wants to discuss and debate. She has her own blog, so why is she so interested in mine? Ask yourself that question. Maybe I've watched Fatal Attraction too many times. If something happens to one of my rabbits, she's going to be in big trouble.--Richard

Incredibly, if that weren't bad enough, Justice followed up that libelous comment with this one in responding to another reader's comment (scroll down to comment at 10:13 PM):

Oh so you only use English when you feel like it? Be sure and put that on your resume. Listen, Cronkite, don't get into an insult contest with me. You'll end up in a fetal position whimpering and begging me to ease up. Find something you're good at and dedicate yourself to that. I don't know what that would be, but this ain't it. Go hang out with that Glenn Close woman. She'd probably find you fascinating. Speaking of Stephanie Stradley, I woke up this morning and saw our rabbit cage was empty. ''Stephanie!'' I screamed. Turns out, the little feller was sleeping beneath a chair.--Richard

In a patient and classy manner, Stradley recounts the entire bizarre episode here.

But beyond their utter tastelessness, both of Justice's comments associating Stradley with a homicidal maniac appear to meet the requirements of defamation per se. As a result, Stradley has viable damage claims against both Justice personally and the Chronicle.

Ironically, Justice's Monday blog post asserts that many Stros fans owe GM Ed Wade an apology. Absent the Chronicle and Justice heeding his advice and issuing an immediate public apology to Stradley, I hope she tees off on both of them.

The Chronicle has some very good reporters. But in these challenging times for newspapers, can the Chronicle survive the likes of Richard Justice?

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August 29, 2008

The shoe drops on Judge Kent

Here is the Chronicle article on the unusual federal aggravated sexual harassment abuse and contact indictment against U.S. District Judge Sam Kent. The previous posts on this matter are here. Here are the public statements of Judge Kent and his main accuser, and a related article (see also here) on Judge Kent.

Judge Kent will apparently defend himself by what amounts to confession and avoidance -- that is, conceding that sexual advances were made, but that they were consensual in nature. In my view, that will be an extremely difficult defense for a defendant-judge to sustain in front of a jury.

This one has the potential to be very ugly indeed.

Update: Serious questions (see also here) are already being raised about the Fifth Circuit Judicial Council's handling of the investigation and sanctioning of Judge Kent.

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July 21, 2008

Update on the Judge Kent investigation

It looks as if the heat is being turned up again on embattled U.S. District Judge Sam Kent. Here is the latest by Chron reporter Lise Olsen:

Justice Department broadening investigation of Kent
Sale of home and gift reporting being examined

A Justice Department investigation into the sexual conduct of U.S. District Judge Samuel Kent has expanded to include allegations that he accepted but failed to report gifts and also sold his home in a deal arranged by a lawyer with dozens of cases in his court, Kent's own attorney and other lawyers have confirmed.

The ongoing investigation was launched last year after Kent's former case manager complained that the judge sexually molested her. Since then, several prominent attorneys have been subpoenaed by federal prosecutors to appear before a Houston grand jury involving other allegations of judicial misconduct, according to documents and interviews obtained by the Chronicle.

Months ago, investigators began asking about parties, a 2001 trip to London and meals attorneys had bought for Kent at Galveston restaurants — often on days they did business in his court, lawyers and former co-workers said.

According to Kent's attorney, Dick DeGuerin, they also requested records about a real estate deal in which one of those attorneys, Kurt Arnold, helped persuade his mother to buy Kent's home in the city of Galveston.

[.  .  .]

The 2006 sale price was $339,500 for the 64-year-old house in the Denver Court neighborhood a few blocks inland from the seawall. The property is valued at $224,090 by the Galveston County Appraisal District. However, appraisals obtained by the buyer and seller were closer to the sale price,  .   .  .

Arnold is a former law clerk of Judge Kent who had cases pending in Judge Kent's court, so the implication of the article is that Arnold arranged for his mother to make a favorable purchase of Judge Kent's house. Nevertheless, it appears that the sale was for fair market value, although Judge Kent was able to negotiate a reduced commission on the deal because Arnold's mother didn't use a realtor. The article suggests that the reduced commission was an effective gift to Judge Kent from Arnold, which is a stretch.

The grand jury is also investigating possible gifts that Judge Kent received from attorneys practicing in his court, including a 2001 trip to London and lunches at various Galveston restaurants. The Chron reports that "at least" 10 attorneys have been subpoenaed to testify before the grand jury, although several have given sworn statements in lieu of testifying. Judge Kent has already given a statement to the FBI and has offered to cooperate with prosecutors, but has not yet been requested to do so, according to his defense counsel, Dick DeGuerin.

It's still too early to say what all this means for Judge Kent, but the extent of the grand jury investigation is not good news for him. Stay tuned.

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July 4, 2008

Nice job, but what about that other case?

This Wall Street Journal editorial pats itself on the back justifiably for swimming against the mainstream media tide in opposing from the outset former New York Attorney General Eliot's Spitzer's popular but dubious litigation and propaganda campaign against former New York Stock Exchange chief executive officer, Richard Grasso. The Spitzer-inspired case against Grasso fell apart earlier this week under the weight of multiple negative appellate decisions.

The Journal deserves much credit for standing up to Spitzer's bullying tactics when few others in the mainstream media were willing to do so. But what does the Journal say about turning a relative blind eye toward this even worse prosecutorial abuse?

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June 25, 2008

The Future of Law Firm Advertising?

Clear Lake-area plaintiff's lawyers Ron and Scott Krist use the YouTube video below to explain why helicopter crash victims should hire their firm. Not exactly To Kill A Mockingbird, but pretty darn effective nonetheless. By the way, I wonder who the defense attorney was that Scott got fired?

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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.

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May 30, 2008

The Bear Stearns lesson

Yesterday brought the final installment of Kate Kelly's extraordinary three-part W$J series on the fall of Bear Stearns (Kelly also contributed to today's story on Bear's final shareholders meeting). My goodness, was Kelly a fly on the wall over at Bear's office during all of this? Dear John Thain has an interesting critical analysis of the series here, here and here, while Larry Ribstein and John Carney point out that Kelly apparently fell for what has become known as "the loophole legend" in regard to JP Morgan's buyout of Bear.

Although all the articles in the series are fun reading, Kelly's most insightful observation comes from the second installment:

It was the beginning of a frantic 72 hours that would bring the Wall Street firm to its knees and threaten the stability of the global financial system.  .  .  . The brokerage's sudden fall was a stark reminder of the fragility and ferocity of a financial system built to a remarkable degree on trust. Billions of dollars in securities are traded each day with nothing more than an implicit agreement that trading partners will pay up when asked. When investors became concerned that Bear Stearns wouldn't be able to settle its trades with clients, that confidence evaporated in a flash. Trading partners, eager to avoid losses, began to disappear almost as quickly. That further fueled rumors of trouble. Some partners, spotting a chance to profit, made bets against Bear Stearns, helping accelerate its demise.  .  .  .

Even after the Bear Stearns lesson, our understanding of the pesky trust-based business model is still not what it should be. Improving the investing public's understanding of how best to hedge the risk of investing in trust-based businesses is a far more productive response to Bear Stearns-type business failures than this. 

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May 24, 2008

Opting out with meaning

Earlier this week, the owners of the National Football League elected to opt out of the final two years of the league's Collective Bargaining Agreement with its Players Association. The Mile High Report and Stacey Brook do good jobs of analyzing the impact of the owners' election and neither believe that a lockout or strike is likely before a new deal is struck. My sense is that they are probably right, but I did chuckle when I saw this AmLaw Daily blog post on the owners' decision in regard to hiring counsel for the upcoming labor negotiations:

.   .   . [The NFL owners] hired L. Robert Batterman of Proskauer Rose. Batterman is well known in labor circles for his National Hockey League work. It was Batterman who presided over the NHL labor negotiations that scuttled the league's 2004-05 season, making it the first North American pro sports league to lose a full year to labor strife. "Batterman bullied [the union] into submission," says one sports labor lawyer who requested anonymity. "If one accepts the conspiracy theory of collective bargaining, this means the NFL must be looking for trouble," says another. [.  .  .]

No official negotiations have been held. But the hiring of Batterman sent a clear signal to the union. Gene Upshaw, president of the NFL Players Association, told SportsBusiness Journal in April that his "concerns were heightened" when he heard Batterman had been retained, noting that NHL players crumbled before Batterman's hard line. The NFLPA's outside counsel, James Quinn of Weil, Gotshal & Manges, says that the owners "have this bizarre notion that they want to get tough, so they go get Bob Batterman." (Jeffrey Kessler of Dewey & LeBoeuf is also counsel to the NFLPA.)

Doesn't sound exactly as if the NFL owners are preparing to play nice, now does it? ;^)

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May 23, 2008

Reflecting on the raid

The Third Court of Appeals' decision yesterday ruling that the State of Texas had illegally seized over 450 children from their homes at a polygamist West Texas ranch threw a large monkey wrench into the largest custody case in (at least) recent American history (the court's decision is here). However, the decision is almost certainly the correct one. As Scott Henson has diligently reported over the past two months, the state's case for taking such pervasive action was shaky, at best, and has clearly deprived many parents and children of their due process rights.

The appellate court concluded the state had offered no evidence that all of the children were in danger other than an investigator's vague opinion that the church's "belief system" encouraged teenage pregnancies. State investigators have identified 20 females at the ranch who had become pregnant before age 18, but most of them are now adults. "Even if one views the FLDS belief system as creating a danger of sexual abuse, there is no evidence that this danger is 'immediate' or 'urgent' .  .  . with respect to every child in the community, " the court observed.

As Henson has noted, Texas authorities' handling of the case has been dubious from the get-go. The state raided the compound last month after a sobbing woman called a family-violence hotline and identified herself as a 16-year-old girl who had been forced into marriage at the compound. Authorities never found the girl and now believe the call may have been a hoax. Then, at a mass custody hearing in mid-April that can only be described as a gross miscarriage of justice, one of the state's chief witnesses testified that he did not really know whether the young girls and boys removed from the ranch truly had been in danger. Given that context, the appellate court's decision is not surprising.

Notwithstanding the foregoing, it is difficult not to feel a profound sense of sadness over the many women and children who are subjected to a stifling existence at the Eldorado compound by a relatively small number of sexual tyrants who hold sway over them. Anthropologist Lionel Tiger addressed the genesis of the cruelty recently in this Wall $treet Journal op-ed:

The fact is that, despite all the blather about faith and freedom of religion, the men operating the various compounds in question are behaving in virtually the same manner as countless dominant males in countless primate troops observed over the years.

The essence of the case is that the men who control the politics of the group (as well as the hapless women and children who live there) have used junk theology about heaven, hell, paradise and salvation to maintain their unquestioned access to all females of reproductive age (or younger).

That's the reproductive fantasy of any adult male primate.

In this blow to simple decency, the Texas polygamists are not pathfinders. Multiple wives are of course permitted in the Islamic religion, and co-wives are a feature of dozens of human groups in which powerful men control sufficient resources to be able to support more than one woman.

This is usually because the societies in which they live are sharply unequal. Sex and offspring flow to those with resources.

One of the triumphs of Western arrangements is the institution of monogamy, which has in principle made it possible for each male and female to enjoy a plausible shot at the reproductive outcome which all the apparatus of nature demands. Even Karl Marx did not fully appreciate the immense radicalism of this form of equity.

The Texans' faith-flaunting is morally disgraceful and crudely cynical. It also raises bewildering questions about human gullibility on one hand and the efficacy of the Big Lie on the other.

Can anyone really believe that the notorious communal bed to which senior men command 16-year-old girls is part of some holy temple apparatus? Apparently some people do, and the few escapees from the fetid zoo have testified to the power the ridiculous theory wields.

The victims are not only young women but young men too. They are reproductively and productively disenfranchised, and are in effect forced to leave the communities to become hopeless, ill-schooled misfits in the towns of normal life. No dignified lives as celibate monks with colorful costumes for them.

Again, the issue is cross-cultural. Osama bin Laden has at least five wives, which means that four young men of his tribe have no date on Saturday night and forever. They may become willing jihadists, or desperate suicides eager to soothe their god by killing infidels and Americans.

Elsewhere, preference for sons has meant a sharp shortage of women in China. It is known that raiding parties from there cross into bordering countries with more regular sex ratios to steal women.

The deranged cults have been operating in plain sight for years in Texan communities whose police forces have been earnestly writing parking tickets while ignoring what is obvious major criminality. Some 400 young children have been drastically separated from their mothers – who among other derogations of civil life are allegedly part of longstanding welfare fraud engineered by their sexual tyrants.

And now what? It will be intensely depressing but probably useful to acknowledge this is at bottom a natural matter, a product of our inner behavioral nature. Understanding the shadowy sources of this nightmare may help our community cope with its victims.

John Calvin would say that the Eldorado compound is a reflection of the depravity of man. A nation of laws that protect the individual from the overwhelming power of the state may prove inadequate to deter the men who perpetrate such cruelty. But a special place in hell awaits them.

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May 20, 2008

And you thought the Mitchell Report was ugly?

So, the controversy over the Mitchell Commission Report has pretty much died down, right? Well, it looks as if another potential public relations nightmare is brewing for Major League Baseball:

Tucked away inside the United States attorney’s office in the Northern District of California are documents that link more than 100 major league baseball players to positive tests for steroids conducted in 2003.

The test results were meant to be anonymous, and a battle over access to them has wound its way through the federal court system. The players union has tried to protect its members by arguing that the government illegally obtained the information.

But now, more than four years after federal agents seized the test results as part of the investigation into the drug-distribution activities of the Bay Area Laboratory Co-operative, the government appears close to prevailing in the legal battle, which could set off another round of federal drug investigations.

According to a lawyer who spoke on condition of anonymity because the government’s plans are supposed to remain confidential, federal authorities will seek to question each of the 104 players about where and how they obtained the substance detected in their urine samples.

The authorities then intend to distribute the information they receive to federal prosecutors around the country.

Distributors, not users, have been the focus of the government’s investigations into performance-enhancing drugs ever since the authorities began seriously looking into the issue in 2002. But the 104 players would be asked to provide testimony — to federal agents or before grand juries — to lead investigators to the distributors. The players’ identities could become public if their testimony is used in government documents to obtain search warrants or to charge individuals. The players could also be called as witnesses at trials.

Regardless of how many of the 104 names eventually become public, the notion of simultaneous drug investigations being conducted by various federal attorney’s offices around the country would be a significant setback to Major League Baseball, which has struggled to get control of the issues related to performance-enhancing drugs. [.  .  .]

Read the entire article. The MLB Players Association has to be kicking itself for not insisting on the destruction of the "anonymous" drug tests, which were conducted during the 2003 season. Under public pressure to agree to some regulation of performance-enhancing drugs, the Players Association had agreed to the 2003 testing as a "survey" under which all players would be tested one time and 240 players would be randomly tested a second time with neither group being under any threat of punishment. Subsequently, discovery in connection with the investigation into the Balco case in Northern California transcended the deal between Major League Baseball and the Players Association, so now it appears that there is a good chance that a master list of all players who tested positive during the 2003 testing may well become public information. The list won't be released tomorrow or even next week, so most of the mainstream media will continue to focus on such sideshows as the Mindy McCready affair. But you can bet that Major League Baseball and the Players Association can hear the clock ticking on this one.

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May 18, 2008

Nice comeback

Legendary defense lawyer Gerry Spence is defending Geoffrey Fieger on campaign finance charges in Detroit. Former Spence student Norm Pattis flew into the Motor City and took in a day of the trial last week. He passes along the following exchange that occurred while Spence was cross-examining a government witness:

Spence:  "Can you tell me a case in the history of the world in which ..."

Prosecutor:  "Objection."

Spence:  "Okay, the United States."

Pattis' collected posts on the Fieger trial are here. Very interesting, to say the least.

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May 10, 2008

Worth a watch

For those of you interested in the vexing issues involved in application of the death penalty and child predator laws, the scene below from Boston Legal is worth ten minutes of your time (H/T David Feige). I don't agree with everything that Alan Shore says in his argument to the U.S. Supreme Court, and the scene is certainly far-fetched, but it's a thought-provoking performance nonetheless:

 

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May 3, 2008

The stench of injustice

Scott Henson reports on the 17th exoneration (see also here) of a citizen in Dallas who had previously been wrongly convicted. This time prosecutors withheld exculpatory evidence from the defendant's lawyers and police failed to investigate it. New Dallas District Attorney Craig Watkins continues to investigate what appears to be have been a culture of abject injustice within the Dallas County D.A.'s office. I will not be surprised if there are more exonerations.

By the way, the rest of the country is noticing this outrage.

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May 1, 2008

Neuroscience and the Law

I am always on the lookout for creative and interesting Continuing Legal Education seminars. This one clearly fits the bill:

Baylor College of Medicine’s Initiative on Neuroscience and Law is proud to announce its 2008 Conference. This conference showcases talks from experts in several aspects of neurolaw. Topics include responsibility, punishment, prediction, rehabilitation, brain death, genetics, competence, intention, and ethics – all with an eye toward understanding how cutting edge neuroscience will touch the current practice of law.

The conference, which is worth 3.5 hours of CLE credit, will take place on Friday, May 23, 2008, from 1-5 p.m. at Baylor College of Medicine (Room M321) in the Texas Medical Center. One of the speakers for the conference is Daniel Goldberg, a local attorney and former Texas Supreme Court clerk who is currently working on his PhD at the University of Texas Medical Branch while serving as a Research Professor at Baylor's Initiative on Neuroscience and Law and as a Health Policy Fellow at Baylor's Chronic Disease Prevention & Control Research Center (Daniel is also a frequent commenter on health care and health care finance issues on this blog). The preliminary agenda for the conference is here. Check it out.

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April 27, 2008

Thoughts for a Sunday

The NY Times' Adam Liptak has penned a couple of interesting articles recently (here and here) on a frequent topic of this blog (here, here, here, here, here, here, here, here, here, and here) -- the troubling incarceration rate in the United States.

With only 5% of the world's population, the U.S. now houses almost a quarter (2.3 million!) of the world's prisoners. One in 100 adults in the U.S. is now behind bars and 751 people are in U.S. prisons or jails for every 100,000 in population. The only other major industrialized nation that even comes close to that rate of incarceration is Russia with 627 prisoners for every 100,000 people. England’s rate is 151, Germany’s is 88 and Japan’s is 63. Attempting to keep all of this in perspective, Pepperdine University's James Q. Wilson provides this recent op-ed that puts the U.S. incarceration rate in a more favorable light with regard to reducing serious crime.

Among other things, these incarceration numbers certainly makes one wonder why on earth we are sending folks like Jeff Skilling, the NatWest Three, the Merrill Four and Jamie Olis to prison?

Meanwhile, in this five-part LA Times debate, Reason's Jacob Sullum takes on the Heritage Foundation’s Charles Stimson over one of the main reasons for the high U.S. incarceration rate -- drug prohibition. At least in this first installment, Sullum makes a much more compelling case than Stimson. And Peter Gordon has this sage observation about the genesis of drug prohibition.

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April 11, 2008

Remember Kelo?

Check out this recent Second Circuit decision (H/T to Robert Loblaw) as an example of how the appellate courts are applying the U.S. Supreme Court's controversial 2006 decision in Kelo v. New London. Kelo allows the state to seize private property to facilitate private re-development as a legitimate form of "public use" under the U.S. Constitution.

Kelo has been widely criticized for creating perverse incentives for politically well-connected real estate developers to exercise their political clout where negotiation with private property owners didn't generate the developers' desired result. The Second Circuit case involves the huge redevelopment plan in downtown Brooklyn that will primarily benefit Bruce Ratner, a wealthy New York real estate developer. In addition to the ubiquitous office buildings and high-rise condos involved in such deals, the redevelopment will include a new arena for the New Jersey (soon to be Brooklyn) Nets NBA basketball club. Although most of the property to be contributed to the development is public land, the redevelopment plan also requires the state to seize several tracts of private property through exercise of its eminent domain power.

The private property owners sued and argued that the state's claim of public benefit is a facade, as the Second Circuit puts it, "to benefit Bruce Ratner, the man whose company first proposed it and who serves as the Project’s primary developer. Ratner is also the principal owner of the New Jersey Nets. In short, the plaintiffs argue that all of the 'public uses' the defendants have advanced for the Project are pretexts for a private taking that violates the Fifth Amendment."

The Second Circuit upheld U.S. District Court dismissal of the property owners' claims, explaining that the massive private benefits to Ratner do not trump the state's judgment that the project will also benefit the public. Moreover, even though the costs to the property owners may far outweigh the public benefits, the Second Circuit concludes that type of cost/benefit analysis is irrelevant under Kelo:

At the end of the day, we are left with the distinct impression that the lawsuit is animated by concerns about the wisdom of the Atlantic Yards Project and its effect on the community. While we can well understand why the affected property owners would take this opportunity to air their complaints, such matters of policy are the province of the elected branches, not this Court.

Given such dubious "public" ventures as this, the implications of the foregoing interpretation of Kelo are downright frightening.

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March 30, 2008

Icahn on settling Pennzoil-Texaco with Jamail

This blog is mostly about business and law, so Carl Icahn's activities have been a frequent topic. Likewise, this blog also centers on Houston, where the Pennzoil v. Texaco case from the mid-1980's is a part of the city's storied legal lore. Consequently, the video below of Icahn doing his equivalent of a standup comedy routine describing how he settled the Pennzoil-Texaco case with famed Houston plaintiff's lawyer Joe Jamail is an absolute classic for this blog. A very big hat tip to John Carney at Dealbreaker for the link to the Icahn video.

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March 11, 2008

The Spitzer Lesson

The mainstream media and the blogosphere have been buzzing over the past 24 hours regarding the fall from grace of New York's governor and former Lord of Regulation, Eliot Spitzer. As noted in this previous post, there is an under-appreciated human element in such dubious criminal problems as Spitzer fell into. So, I have a great deal of compassion for the members of Spitzer's family, although Spitzer's many victims would certainly attest that he showed none for them. Larry Ribstein has related and typically insightful thoughts regarding why the revelers in Spitzer's fate should be concerned about the way in which he was brought down.

But I hope that the most important lesson that Spitzer's political career teaches us is not lost amidst the glare of a tawdry sex scandal. As with Rudy Giuliani before him, Spitzer rose to political power through the misuse of the state's overwhelming prosecutorial power to regulate business interests. In so doing, Spitzer manipulated an all-too-accommodating mainstream media, which never misses an opportunity to take down an easy target such as a wealthy businessperson. Spitzer is now learning that the same media dynamic applies to powerful politicians, as well.

However, as noted earlier here, where was the mainstream media's scrutiny when Spitzer was destroying wealth, jobs and careers while threatening to go Arthur Andersen on American Insurance Group and other companies? Where was the healthy skepticism of the unrestrained use of the state's prosecutorial power to regulate business where business had no available regulatory procedure with which to contest Spitzer's actions? As Dealbreaker's John Carney noted at the time of that earlier post:

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

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

And, as noted here, the same prosecution manipulation of the mainstream media contributed to the utter lack of balance in the media's reporting on the Enron criminal prosecutions.

Alas, change does not come easily to the mainstream media. Late last week, this post reported on developments that could well expose an egregious abuse of prosecutorial power in connection with the prosecution for former Enron CEO, Jeff Skilling. Why has no mainstream media outlet intervened in that case and demanded that the information about potentially serious governmental misconduct be made public?

The Spitzer lesson is not easily embraced.

Update: Following on the theme of this post, the W$J's Kimberly Strassel reviews the mainstream media's complicity in portraying Spitzer as something that he is not, and Charlie Gasporino -- who wrote the book about Spitzer that foreshadowed these issues -- comments along the same lines here.

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March 2, 2008

Landry's is worth more because of what?

Did I read right what Steve Scheinthal, general counsel of Houston-based Landry's Restaurants, Inc., said in this Chronicle article?:

Landry's is .   .  . facing a handful of shareholder suits seeking class-action status in the wake of CEO Tilman Fertitta's bid to take the company private.

Fertitta made an offer on Jan. 27 to buy out the company at $23.50 for each unowned share. The $1.3 billion deal, including debt, is being reviewed by a special committee of the Landry's board. [.  .  .]

Scheinthal dismissed the shareholder suits as standard in a going-private transaction.

"Absent Mr. Fertitta's offer, the likelihood is that the company's stock would be trading well below the current market price," he said.

Landry's stock closed Friday at $17.73 a share, down 38 cents.

Fertitta's offer for Landry's was made without a financing commitment in a tough credit market. Yet, the company's general counsel is claiming publicly that such a speculative offer is all that is propping up the company's stock price?

I wonder what the boys over at Long or Short Capital will think about that?

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March 1, 2008

Sanctionable softball parents

Robert Loblaw explains why parents of high school softball players who are upset with their daughters' coach should not vent their criticism in a federal civil rights lawsuit. At least not in the Seventh Circuit.

Meanwhile, lest you think that women's athletics is not serious business, take a moment to watch the video below (H/T Jay Christensen) University of Michigan women's basketball coach Kevin Borseth have a post-game meltdown after his team blew an 18-point lead Thursday night and lost to Wisconsin, 69-67.

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February 28, 2008

Justice for Perverted Justice?

Earlier posts here, here and here addressed NBC's To Catch a Predator series, in which a television crew cooperates with police and a vigilante justice group to create child predator crimes. Then, the television crew follows the police as they apprehend the suspects, which NBC broadcasts for all to see in a sort of modern version of a witch hunt. This dubious combination of law enforcement and "entertainment" resulted in the tragic case of Louis Conradt, Jr., the late North Texas prosecutor who committed suicide with the witch hunters were on his front doorstep.

Now, this Dan Slater/W$J Law Blog post reports that Condradt’s sister is suing NBC in New York for $100 million, claiming, among other things, intentional infliction of emotional distress. Slater reports that her case has already survived the preliminary motion to dismiss stage of the lawsuit.

I don't know about you, but I hope she rings the bell on NBC.

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February 23, 2008

Thoughts on Rusty and Pettitte

This earlier post was one of the first to express reservations regarding Rusty Hardin's handling of Roger Clemens' defense to the allegations contained in the Mitchell Commission Report (previous posts here) and aftermath, but my reservations are nothing compared to those of Minneapolis attorney Ron Rosenbaum:

No one can really explain the strategy followed here," says Ron Rosenbaum, a local attorney and former talk-radio host on KSTP-AM, a station that still features him all too occasionally. "It strikes me as insane." [.  .  .]

"There's a difference of opinion in this town, but from the very beginning I thought this was a textbook case of how to not handle a legal situation like this," Rosenbaum says of his fellow lawyer, adding with incredulity that Hardin would allow Clemens to submit himself to a lie detector test, which the pitcher has said he would take. "At the end of the day, all you can do is recommend advice as an attorney. You can't tell your client directly what to do."

Rosenbaum is even harder on Clemens, who he characterizes as an ego-driven "buffoon."

I know Hardin, who is a first-rate trial attorney. Thus, unlike Rosenbaum, I'm certain that Hardin has fully advised Clemens in writing of the considerable risks of the strategy that Clemens has undertaken in attempting to defend himself against alleged PED use. Nevertheless, the disastrous Clemens defense strategy to date reminds me of the best advice I used to pass along to young attorneys who I trained: "One of the most difficult, yet important, responsibilities of a good lawyer is to tell a potentially lucrative client 'No'."

Meanwhile, Clemens' former teammate and friend, Andy Pettitte, was widely praised across most of the mainstream media (the Chronicle's Jerome Solomon was a notable exception) for his "honesty" in admitting during a press-conference earlier in the week to use of human growth hormone at several times in the past. Now, I'm not much of one for simplistic morality plays being applied to complex issues such as steroids or other PED use in professional sports and society. Moreover, I certainly don't approve of the way ballplayers such as Pettitte and Clemens have been filleted publicly while Major League Baseball owners have largely received a pass on their culpability for promoting an almost pathologically competitive MLB culture that promotes use of PED's and other drugs. Nevertheless, as this C.J. Mahaney post points out, Pettitte's supposed adherence to his avowed Christian faith during his "confession" leaves much to be desired. Sometimes those simple morality plays aren't quite as applicable as they first appear.

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February 21, 2008

Looking for other lines of work

So Professor Buser, what did you plan on doing as a side occupation after your expert witness career? Judge Posner wants to know:

Buser’s initial report proposed that if permitted by Allmerica to continue its market-timing trading, Emerald would have earned an annual rate of return on its investment of 34 percent for 20 years, for a discounted present value of $150 million. That was a preposterous estimate, properly excluded by the district judge under Fed. R. Evid. 702. . . .

Buser’s first report was so irresponsible as to justify the judge’s decision to exclude the second report summarily. Buser had demonstrated a willingness to abandon the norms of his profession in the interest of his client. Such a person cannot be trusted to continue as an expert witness in the case in which he has demonstrated that willingness, and perhaps not in other cases either.

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February 15, 2008

A solid endorsement

I've been enjoying the new local blog Life at the Harris County Criminal Justice Center, which, along with Mark Bennett's blog, provides an interesting daily glimpse of life around the Harris County criminal courthouse. Given the twists and turns of the recent Le Affaire Rosenthal, both blogs have had interesting observations about the players.

In this recent post, the HCCJC blog makes the following common sense endorsement that I hope all Harris County voters will embrace:

In the 176th [Criminal District Court] Judical Race, there is no issue in picking who I recommend.

The race is between Michele Saterelli Oncken and incumbent Brian Rains.

Judge Rains has been on the bench ever since I've been a lawyer. And ever since I've been a lawyer he has had the reputation of being one of the rudest and most unkind judges on the bench since . . . well, Pat Lykos.

He claims that Michele Oncken is running against him "because I made her husband mad."

If only it was that simple, Judge Rains. The fact is that you've upset everybody.

The rudeness from this bench has gone well beyond the boundaries of being a "tough judge", and into the range of just absurd vindictiveness. The fact that a person is a jerk to both sides of the bar doesn't make that person any less of a jerk.

Throughout the years, Rains has steadfastly refused to put people on probation. When probations were agreed to, he would passive-aggressively agree to the probation, but throw in 180 days in the Harris County Jail as a condition (thus nullifying the point of giving probation). He has sworn he considers the full range of punishment on any PSI hearing, but all attorneys know that it just isn't true.

Rains' refusal to consider the full range of punishment has led to more recusal hearings than any other judge that I'm personally aware of. One hearing even had the unlikely alliance of the District Attorney's Office and Dick DeGuerin.

His questionable bond decisions have led to at least two tragic murders committed by people out on bond in his court. His impatience with the pace of a trial has led to at least one capital murder conviction being reversed.

Michele Oncken was the Chief in his court for a year or two. Normally, the Chief/Judge relationship is one of some sort of fondness (or at least mutual respect). The fact that she is running against a Judge where she was previously a chief says a lot, in and of itself. She's been a Chief prosecutor for at least five years now, including stints in Capital Writs, District Court, and now in Juvenile. She certainly has the background for the job.

Sorry, Judge Rains, but its definitely time for you to go. Nobody deserves to be treated the way that you treat people.

Review this earlier post for more information on Judge Rains' dubious sentencing policies.

Posted by Tom at 12:10 AM | Comments (0) | TrackBack (0)

February 14, 2008

The aftermath of the Clemens hearing

Many folks have been asking me about my thoughts on the Roger Clemens saga, but I am so disappointed with the abysmal level of discourse regarding the Mitchell Commission Report and the issues involved with the use of steroids and other PED's in society that I find it hard to drum up much enthusiasm for addressing it. Compare the discussion of the issues from this earlier post with this live blog analysis of the questions and answers from Clemens hearing and you will see what I mean. Sort of makes you want to whipsaw the committee in the same manner as this Colman McCarthy/Washington Post op-ed, doesn't it? Art DeVany expresses similar sentiments.

Although I expressed reservations early on about the unconventional way in which Clemens' legal team has been defending the matter, I don't think the hearing measurably increased Clemens' risk of being charged criminally. In fact, in an odd way, the hearing may have actually mitigated that risk somewhat.

McNamee came across as such a manipulator that my sense is that it's doubtful that prosecutors would base a criminal case against Clemens primarily on McNamee's testimony. Thus, unless investigators come up with a conduit of the PED's who is willing to testify that the PED's were delivered to Clemens and McNamee, Clemens may avoid criminal charges. He is certainly not out of the woods yet, but the Congressional hearing probably hurt him more in the court of public opinion than it did with regard to a potential criminal case (Update: Peter Henning agrees with me).

Nevertheless, I'm not yet ready to bet on that prediction. At least without long odds in my favor.

Posted by Tom at 12:05 AM | Comments (1) | TrackBack (0)

February 13, 2008

On the DeGeurin-DeGuerin brothers and Houston's G-man

A couple of interesting stories have popped up over the past several days regarding Houston lawyers.

First, there was Mary Flood's profile of the DeGuerin (or was that DeGeurin?) brothers, Mike and Dick, two of the best in Houston's formidable criminal defense bar. The criminal defense bar in Houston has essentially branched out from two extraordinary criminal defense lawyers, the late Percy Foreman and Richard "Racehorse" Haynes. Mike and Dick are from the Foreman tree, while such excellent Houston criminal defense lawyers as Dan Cogdell and Jack Zimmermann stem from the Haynes tree. A good follow-up story for Flood would be to track the number of first-rate criminal defense lawyers in Houston who have been influenced by Foreman, Haynes and their many acolytes.

Meanwhile, not to be outdone, this ABA Journal article profiles Houston's $1,100-per-hour lawyer, Stephen Susman. As noted earlier here, Susman has long contended that that he charges in excess of a grand per hour "to discourage anyone hiring me" on an hourly basis. As they say in legal circles, Susman prefers cases with a bit more meat on the bone.

Posted by Tom at 12:05 AM | Comments (1) | TrackBack (0)

The psychotherapist-patient privilege

Gosh, as if Paul the psychotherapist, Gabe Byrne's character in the new HBO series, In Treatment, didn't have enough to worry about.

The Fifth Circuit Court of Appeals has just issued this interesting opinion on the psychotherapist-patient privilege in the case of former Austin police officer, John Auster (H/T Robert Loblaw).

Auster suffers from paranoia, anger, and depression, so the stress of the impending termination of his worker’s comp benefits was not exactly conducive to improvement of those conditions. Auster proceeded to tell two of his therapists that he was prepared to undertake a campaign of violence if his benefits were terminated. Inasmuch as the therapists had a duty under state law to report the threats, the U.S. Attorney's office indicted Auster for extortion.

On a defense motion to suppress Auster's threatening statements, the District Court threw out Auster’s threats on the grounds that they were protected by the psychotherapist-patient privilege and not admissible at trial. The government appealed and the Fifth Circuit reversed, reasoning that Auster knew that his therapists had to report the threats and so he had no expectation that the threats would remain confidential. Accordingly, the Fifth Circuit concluded that such threats are not privileged. As Loblaw points out, there is now a split among the circuit courts over the the psychotherapist-patient privilege, with the Fifth joining the Tenth Circuit in not recognizing the privilege, while the Sixth and Ninth Circuits recognize the privilege.

Posted by Tom at 12:00 AM | Comments (1) | TrackBack (0)

February 12, 2008

Lerach's sentence

Former plaintiff's class action securities lawyer Bill Lerach was sentenced yesterday to two years in prison, fined $250,000 and ordered to complete 1,000 hours of community service (Peter Lattman's W$J interview of Lerach is here and more W$J coverage of blawgosphere reaction is here). Lerach pled guilty last September to a felony count of conspiring to obstruct justice and to submit false testimony in federal judicial proceedings after being investigated by the Department of Justice for the better part of a decade.

My posts from over the years on Lerach and the investigation into his practice are here, and my latest posts summarizing my views on his plea deal are