Houston's Clear Thinkers

October 21, 2009

An Enron Task Force-induced nightmare ends

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

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

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

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

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

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

Posted by Tom at 12:01 AM | Comments (2) | TrackBack (0)

October 15, 2009

The Leader of the Mob reacts

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

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

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

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

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

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

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

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

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

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

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

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

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

So much for fair and balanced reporting, eh?

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

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

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

Posted by Tom at 12:01 AM | Comments (5) | TrackBack (0)

October 14, 2009

The reeling prosecution in the Skilling case

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So, what is going on here?

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

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

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

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

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

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

October 8, 2009

The mind of a true thief

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

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

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

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

September 16, 2009

While you're at it, Judge Rakoff

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

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

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

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

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

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

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

August 10, 2009

Reflecting on astonishing abuses of power

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

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

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

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

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

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

August 5, 2009

What's the purpose of the Madoff sentence?

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

Herb Hoelter agrees:

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

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

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

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

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

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

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (6) | TrackBack (0)

July 2, 2009

The Chronicle's continuing Enron hypocrisy

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

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

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

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

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

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

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

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

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

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

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

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

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

June 9, 2009

The thin line of business criminality

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

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

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

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

That's the basis for a crime?

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

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

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

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

We live in truly perilous times.

Posted by Tom at 12:01 AM | Comments (2) | TrackBack (0)

June 2, 2009

Chalk up another trial penalty deal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted by Tom at 12:01 AM | Comments (2) | TrackBack (0)

May 13, 2009

The state of the Skilling case

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So, what is going on here?

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

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

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

Stay tuned.

Posted by Tom at 12:01 AM | Comments (2) | TrackBack (0)

April 29, 2009

Permanent Enron myopia

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

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

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

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

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

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

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

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

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

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

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

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

Some things never change.

Posted by Tom at 12:01 AM | Comments (5) | TrackBack (0)

April 24, 2009

Remember Ken Lay?

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

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

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

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

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

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

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

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

April 14, 2009

The Chronicle's Enron myopia

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

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

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

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

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

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

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

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

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

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

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

February 23, 2009

The Journal's curious case of myopia

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

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

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

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

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

January 21, 2009

Skilling fires back

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So, where does all this leave Skilling?

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

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

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

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

January 13, 2009

The criminalization-of-business lottery

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

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

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

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

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

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

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

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

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

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

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (3) | TrackBack (0)

January 7, 2009

The Fifth Circuit rules in the Skilling appeal

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

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

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

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

That's certainly better than nothing.

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

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

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

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

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

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

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

Not particularly persuasive reasoning, but there you go.

Some other observations:

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

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

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

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

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

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

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

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

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

November 25, 2008

He should know

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

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

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

A weak case that shouldn't be pursued?

Hueston sure ought to know.

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

November 14, 2008

Ghosts of Enron

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

Fast forward a couple of years. Yesterday,  the W$J reported (NYTimes here) that General Motors may not be able to avoid bankruptcy because of political problems involved in obtaining a bailout loan package from the federal government. GM is "rapidly burning through cash reserves as car sales plummet and their access to credit tightens. GM has warned it may run out of money within months without outside help."

From what I can tell, no one is calling for the scalp of GM CEO Rick Wagoner because of confident public statements that he made just a few months ago about his company.

So, the corporate crime lottery continues. A truly civilized society would find a better way.

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

October 14, 2008

Refracting Enron myopia

One of the more entertaining aspects of the current Wall Street financial crisis has been reading how some of the business columnists have been interpreting it.

Take, for example, Houston Chronicle business columnist, Loren Steffy. You may remember him from his acerbic coverage of the trial of former Enron executives, Jeff Skilling and the late Ken Lay, or his perpetuation of the Enron Myth regardless of the circumstances.

Dismissing me as an Enron apologist, Steffy regularly disputed my long-held theory that the run-on-the-bank that felled Enron could well happen to any trust-based business.

Apparently confused by the fact that what happened to Enron has now happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses impacted by the current credit crunch, Steffy reaches for insight from one of the fellows who set the stage for this mess:

Investigators are poring over the failed firms, looking for signs that executives misled shareholders. Some evidence may be found, but Sam Buell, the former prosecutor who led the effort to indict Enron's Jeff Skilling, doesn't think we'll see widespread prosecutions.

"It's not a conspiracy if everybody's in on it," said Buell, who's now a law professor at Washington University in St. Louis. "In order to have a fraud conspiracy, you've got to have some effort by one group to deceive another group."

In this case, individual investors may not have understood what Wall Street bankers were doing with complex debt securities, but those charged with safeguarding the marketplace were certainly aware.

Regulators knew and approved. So did credit rating agencies. And auditors, both internal and external. With a mouse click, investors could find public documents that described the debt instruments with hundreds of pages of detail. [.   .   .]

"If everybody's in a bubble mentality, if they're betting the price of real estate will keep going up, disclosure doesn't address the problem of what happens when all those assumptions turn out to be wrong," Buell said. "Everybody knows what they're doing. They're just making bad decisions."

Yes, you read that correctly. Buell implies that Skilling was guilty of criminal conspiracy because not "everybody" was "in on it" at the time Enron was making its supposedly opaque disclosures. However, since "everybody's in on it" now, Buell doesn't think there will be widespread prosecutions because "[i]t's not a conspiracy if everybody's in on it."

With such reasoning, is there any doubt now why this outfit generated this record?

For the record, I actually hope Buell is right this time that few businesspeople are prosecuted for misjudging business risk. But for a more rational explanation of how financial regulation fits into the current crisis, check out these Larry Ribstein posts here, here and here and this masterful one by Arnold Kling.

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

August 26, 2008

Glass houses

Dan Slater of the Wall Street Journal's Law Blog notes the Kremlin's recent refusal to grant parole to former OAO Yukos CEO Michael Khodorkovsky, who is serving an eight-year prison sentence in Siberia for tax evasion and fraud.

Khodorkovsky's conviction and prison sentence are widely viewed within the U.S. as evidence that the Russian business and judicial systems remain largely corrupt and not conducive to honest commercial investment.

Maybe so, but what does the same reasoning conclude about a system that produces barbaric injustices such as this, this, this and this, to name just a recent few?

People who live in glass houses .  .  .

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

August 6, 2008

Cutting the Pai

Former Enron executive Lou Pai's recent settlement with the Securities and Exchange Commission confirmed that the Greed Narrative is still embraced by much of mainstream American society. Take, for example, Charles Kuffner's reaction:

Reading this story reminds me why I was bothered less than folks like Tom were about the criminal cases that were brought against the likes of Ken Lay, Jeff Skilling, and so on. Pai was (eventually) punished through the civil process, but the punishment he received doesn't come close to balancing the scales, in my view. He's still a millionaire many times over - assuming he hasn't blown it all, of course - while so many other people, employees and shareholders, got wiped out. I think the only way the civil justice system could really make these guys pay for their wrongdoings is if it left them in the same shape as the people who were affected by their actions - namely, in a situation where they'd have to work for the rest of their lives because they no longer had any accumulated wealth. Here's a bit I wrote from my review of "The Smartest Guys In The Room":

There's a really poignant scene in which Portland General Electric lineman Al Kaseweter matter-of-factly states that he sold his entire retirement portfolio, which was worth $348,000 at its peak, for $1200.

PGE had been bought by Enron before the crash; like most Enron employees were encouraged to do, Kaseweter put the bulk of his retirement funds into Enron stock. Put Lou Pai in Al Kaseweter's shoes, and I'd agree that justice had been served. Same with Skilling and the rest of that crowd. But that's not how it works, so despite the problems associated with the Enron prosecutions, I think they were necessary.

Stated simply, Charles' view is that "Pai got rich at Enron and a bunch of people lost money when Enron went down in flames, so he must have done something criminal and must be punished." Chron business reporter Loren Steffy, who really ought to know better, spews a similar view.

Frankly, given the societal bias against nearly everything related to Enron, such reactions are not particularly surprising. But it remains disappointing -- and, frankly, a reflection of our human instinct to demonize those in regard to whom we feel morally superior -- that reasonably intelligent people dismiss as a virtual white-collar criminal a man of considerable talent without even passing mention of what he supposedly did wrong.

In reality, Pai was a former SEC economist who became one of the commodities traders who helped Jeff Skilling transform Enron into a multi-billion dollar corporation with earnings that rose from a couple of hundred million dollars in 1990 to $1.6 billion in 1998, over half of which was generated by Enron's trading division. By 2000, Enron's revenue had risen to $100 billion and, on in late August of that year, Enron’s stock price peaked at $90 per share.

As virtually every mainstream media article about Pai's settlement reported, Pai had a legendary fondness for strippers and was a frequent patron of Houston's famous topless club near the Galleria, Rick's Cabaret. Pai met a woman at Rick's with whom he had a long affair, leading Pai and his wife to divorce in 2000 (Pai eventually married his mistress). Pai sold a large amount of his Enron stock in 2000 to fund the divorce settlement, so although he was a wealthy man before selling the stock, Pai was a wealthy and liquid man after doing so.

But the SEC charges against Pai did not involve any of that. Rather, the SEC alleged that between May 18, 2001 and June 7, 2001, Pai sold 338,897 shares of Enron stock and exercised stock options that resulted in the sale of 572,818 shares. According to the SEC, before making those sales, Pai -- who previously headed an Enron division called Enron Energy Services ("EES") -- learned from the successor EES management team that it had identified substantial contract-related losses in the division. The SEC theorized that, had Enron reported EES's contract-related losses in its retail energy services segment, that segment would have shown a quarterly loss of at least $60 million rather than the profit of $40 million that Enron reported in its Form 10-Q for the first quarter of 2001. By selling in May and June, the SEC alleged that Pai avoided the substantial losses that he would have suffered had he still been holding the stock when Enron's stock price collapsed in late 2001.

However, the SEC's allegations against Pai were anything but a slam dunk. Mirroring the SEC's theory of the case against Pai, the Enron Task Force attempted in the Lay-Skilling trial to prove that Enron and Skilling had lied about EES’s growth while simultaneously hiding mounting EES losses. Relying on the testimony of plea-bargainers David Delainey and Timothy Belden, the Task Force asserted that EES first moved an allegedly non-collectible account receivable to Enron's profitable Wholesale division in the fourth quarter of 2000 and then transferred the entire EES risk management book to Wholesale in the first quarter of 2001 ("the resegmentation"). According to the Task Force's theory against Skilling and the SEC's theory against Pai, these events occurred solely to make EES look more profitable than it really was.

Unfortunately for the Task Force and the SEC, that's not what the testimony reflected during the Lay-Skilling trial. The various witnesses expressed differing opinions as to the purpose for the moves with regard to EES, but not one of them stated that anyone had told them that the reason for the moves was to bolster EES’ profitability. Likewise, not one of the witnesses attributed knowledge of that alleged motive to Pai (or Skilling, for that matter). With respect to the transfer of the fourth-quarter 2000 receivable, Enron auditor Arthur Andersen had analyzed the transfer and approved the accounting treatment. Indeed, Skilling defense witness Diann Huddleson testified that Enron management believed it could collect on the questionable receivable and ultimately did collect most of it.

As for the resegmentation, Skilling testified that moving the EES risk book to Wholesale made sense from a business standpoint, and former Wholesale division executive Rogers Herndon confirmed Skilling's version by testifying that the Wholesale unit improved the efficiency and value of that risk book. Even Delainey, the Task Force's main witness on this issue, conceded that he ultimately recommended to Skilling that the risk book be moved. Indeed, the only independent accounting expert who testified during the Lay-Skilling trial -- Walter Rush -- testified that the transfer of the risk book complied with applicable accounting rules.

Thus, the SEC's civil case against Pai was similar to what we've seen in most of the criminal cases against former Enron executives -- long on bombast, short on substance.

But the promoters of the Greed Narrative protest, what about the innocent victims who lost their nest eggs as a result of Enron's collapse?

Well, one of the main reasons that those victims' nest eggs ever had value in the first place was because Pai helped Skilling transform Enron into the world's leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers. Although there is nothing wrong with feeling compassion for folks who lose money on an investment, rarely is it mentioned in the Greed Narrative with regard to Enron that many of those "victims" who lost their nest eggs were imprudent in their investment strategy. They should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron's stock price while being protected by a floor in that share price if it fell below a certain value. Such is the risk of investing in the trust-based business model. 

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

Sadly, apart from the its egregious human toll and the serious abuse of state power that its promoters ignore, the Greed Narrative's devastating impact is that it obscures the true nature of investment risk and fuels the myth that investment loss results primarily from someone else's misconduct. As Larry Ribstein has been asking for years, do we really want to be sending a message to investors that risk is bad when it often leads to valuable innovation and wealth creation? For example, self-settled derivative prepay transactions are not particularly intuitive (no product actually changes hands) and are not well-understood outside the trading business. Nevertheless, such transactions provide the valuable benefit of hedging risk for companies, who pass along that benefit to consumers in the form of lower prices for their products and services.

Do we really want to allow prosecutors and regulators to paint such beneficial transactions as frauds and then manipulate the public's ignorance to demonize innovative risk-takers who were attempting to create wealth? How does throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison do anything to educate investors about the true nature of risk and the importance of diversification and hedging?

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

July 8, 2008

The latest Enron book

Harvard Business School issued this press release and interview yesterday of Malcolm S. Salter, the Harvard professor who has written the latest book -- Innovation Corrupted: The Origins and Legacy of Enron's Collapse (Harvard University Press) -- in what seems to be a continuing stream on the demise of Enron. From the looks of it, Professor Salter has figured out that the recent collapse of Bear Stearns is a good hook for his book:

Q: Can an Enron-type calamity happen again? Why or why not?

A: Perverse incentives are legion throughout our system today. For example, perverse incentives for both mortgage brokers and investment bankers helped create the subprime crisis that we are now living through. Many boards are also still struggling to improve their oversight. Preventing future Enron-type disasters will require the kind of attention to board oversight, financial incentives, and ethical discipline that I address in Innovation Corrupted.

You don't say?

Interestingly, Professor Salter notes that Enron's collapse was triggered by its third-quarter 2001 charge against earnings and equity write-down, which were relatively small in comparison to the losses, charges and write-downs that Wall Street firms have endured over the past year during the sub-prime meltdown:

In the third week of October 2001, Arthur Andersen, Enron's highly compromised outside auditor, "discovered" several large accounting irregularities related to the off-balance-sheet partnerships. This forced Lay—who returned as CEO after Skilling resigned that August—to announce a $544 million charge against earnings, and a $1.2 billion write-down in shareholders' equity, largely related to the impending closure of Enron's Raptor partnerships. Within weeks, Enron collapsed into bankruptcy as its trading partners quickly lost faith—proving, once again, that even a hint of negligence or misconduct can be devastating to a company.

Ah, yes. That pesky trust-based business model.

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

June 3, 2008

So, what's the difference?

 Mel Weiss was sentenced to 2.5 years in prison yesterday for making undisclosed payments to class representatives in class action lawsuits that his firm handled. As noted here about a year ago, Weiss didn't have much of a choice given the trial penalty that he was facing.

Meanwhile, in return for being the key witness against former Enron CEO Jeff Skilling, Enron Task Force prosecutors "paid" Andy Fastow with a lighter prison sentence than the one the prosecutors disclosed to the jury and the judge during Skilling's trial. Those same prosecutors also withheld from Skilling's defense team exculpatory statements about Skilling that Fastow made before he elected to accept the prosecutors "payment" of a lighter sentence and testify against him. The lead prosecutors involved in arranging Fastow's testimony have gone on to presumably lucrative careers in private practice. Skilling is serving an effective life prison sentence.

As Larry Ribstein has long contended, paying kickbacks should not be condoned. However, the hyprocrisy reflected by the above-described state of affairs is not going to be solved by demonizing Mel Weiss.

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

May 29, 2008

The instinct against the money-makers

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

As Larry Ribstein cogently explains, Southwest Airlines has taken advantage of futures markets over the past several years to hedge its fuel costs (previous posts on Southwest's hedging program are here). That hedging program has been one of the major factors in allowing Southwest to remain one of the only profitable U.S. airlines. Along the same lines, Bloomberg's Matthew Lynn explains how such markets provide an essential function in re-directing resources in the overall economy.

Meanwhile, Congress is trying to hamstring the very markets (see also here) that provided Southwest and many other businesses with the platform on which they hedged fuel-cost and other business risk. The wealth and lower prices generated from those hedges is not inconsequential.

Finally, the Justice Department continues its advocacy of an effective life sentence for one of the men primarily responsible for developing the robust markets that facilitate Southwest and others' wealth creation for shareholders and lower costs for customers.

And these folks in Congress and the Justice Department are supposed to be representing our interests?

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

May 17, 2008

Look at what Mary Flood has been reading

Chronicle legal reporter Mary Flood covered many of the Enron-related criminal trials, so it was only natural for her to pick up a copy of former Enron Task Force prosecutor, law professor and current Oregon attorney general candidate John Kroger's new book, which includes several chapters on his work in several Enron-related criminal cases.

You may remember Kroger. He is the fellow who tried early on to broker his experience on the Task Force to make a name for himself in academic circles. He was involved in preparing some of the worst carnage that the Task Force generated -- the Arthur Andersen debacle, the Enron Broadband disaster, and the Nigerian Barge abomination.

Ms. Flood reports on her blog that the Enron-related chapters of Kroger's book are downright bizarre:

[Kroger's book] is a self-congratulatory look at Kroger's years as a federal prosecutor. The four somewhat conflicted chapters on Enron talk alternately about his prowess, his lack of knowledge, how careful prosecutors were, how ruthless prosecutors were, how terrific his case against the Enron broadband executives was and how it hasn't been successful in court. [.  .  .]

What may be most surprising about the book is Kroger's admission of a lack of knowledge about how to go about these cases, an admission that the DOJ was out for quick scalps, and an admission that they threatened many witnesses. These are especially odd to see in print given that one of the allegations the defense made was prosecutorial misconduct in this case -- too much threatening and coercing of witnesses. One witness in the 2005 case even testified a member of the task force tried coerce him out of testifying for the defense.

Kroger frequently brags about his own prowess as an interrogator and lawyer, even guessing the broadband cases might be over now if he'd tried them. And he casts doubt on just about everyone else in the process.

Despite talking about the pressure the task force was under to get scalps and how aggressive they were, he creates a hypothetical conversation to illustrate how a defense attorney might try to trick a witness into saying no crimes were committed.

Amid the sometimes stunning hubris seems to be much angst about the decision of others to charge Lea Fastow in order to get to her husband and thus get to Jeff Skilling and Ken Lay.

He questions his colleagues, not just over the Lea Fastow charging decision (even including a mean-spirited comment a fellow prosecutor made about the Fastow children possibly winding up in foster care) but in general saying, in his career as a prosecutor he learned:

". . . that even well-intentioned prosecutors can present false testimony at trial, that a just process and a just result cannot always be obtained at the same time, that informants are both necessary and deceitful, that a certain small percentage of agents are corrupt, that our law enforcement policies often encourage crime rather than prevent it, and that successful interrogation requires the ethically questionable manipulation of other human beings.''

Just another chapter in the increasingly dubious legacy of the Enron Task Force.

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

April 1, 2008

The Wall Street Journal's Enron embarrassment

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

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

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

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

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

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

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

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

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

March 18, 2008

The Economist gets it

Following on recent posts here and here, The Economist produces the best mainstream media article that I've seen to date placing the prosecutorial misconduct of the Enron Task Force toward former Enron executives Jeff Skilling and Ken Lay in the context of the most recent demise of a trust-based business, Bear Stearns:

For many people, the mere fact of Enron’s collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between his conviction and sentencing, presided over a fraudulent house of cards. Yet Mr Skilling has always argued that Enron’s collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run. Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy.

Yet recent events in the financial markets add some weight to Mr Skilling’s story—though nobody is (yet) alleging the sort of fraudulent behaviour on Wall Street that apparently took place at Enron. The hastily arranged purchase of Bear Stearns by JP Morgan Chase is the result of exactly such a bank run on the bank, as Bear’s counterparties lost faith in it. This has seen the destruction of most of its roughly $20-billion market capitalisation since January 2007. By comparison, $65 billion was wiped out at Enron, and $190 billion at Citigroup since May 2007, as the credit crunch turned into a crisis in capitalism.

The Economist article goes on to compare the similarity of certain of Ken Lay's public comments regarding Enron's liquidity in the turbulent post 9/11 markets (for which he was eventually prosecuted) with those of Bear Stearns and Lehman Brothers executives during the current turmoil in the financial markets. As this post from almost two years ago notes, the source of the information upon which Lay based his positive statements is the same fellow (former Enron CFO Andrew Fastow) whose exculpatory statements regarding Skilling and Lay the Enron Task Force improperly withheld in connection with their criminal trial. And the revelations of this latest round of prosecutorial misconduct with regard to Fastow comes on top of the Task Force's blatant misrepresentation (see also here) of Fastow's plea deal to the Lay-Skilling jury during the trial.

As usual, Larry Ribstein places all of this in context:

I'm constructing a "narrative" for the prosecutorial misconduct case: Prosecutors desperate for a conviction, their careers turning on the outcome, have a key witness, Andy Fastow. The problem is, the guy has, in [Enron Task Force prosecutor John] Hueston's words, a "heartstopping history of self-dealing." Obviously the government couldn't afford any additional shadow on Fastow's credibility. Yet in the government interviews it seems his story got more negative on the defendants over time. Could be a big problem for Fastow on the witness stand, as the defense sought on cross to show he was changing his story to suit his jailers. Could the prosecutors afford to give these notes to the defense? Why not just turn over a summary?  By the time the truth came out (if it ever did) they could do a dance about how the differences were inconsequential.

The government is saying the differences are inconsequential. So why, then, didn't they produce the notes as repeatedly requested, rather than summarizing them?  I think those prosecutors have some explaining to do.

Update: Warren Meyer also notes the similarities between Bear Stearns' demise and that of Enron.

Posted by Tom at 6:55 PM | Comments (4) | TrackBack (0)

March 14, 2008

The stench of prosecutorial abuse

The stench of prosecutorial abuse has long hung over the Enron-related criminal cases. But the extent of that abuse became crystal clear this afternoon when the Fifth Circuit Court of Appeals granted former Enron CEO Jeff Skilling's motion to unseal his supplemental brief relating to the government's interview notes of former Enron CFO and chief Skilling accuser, Andrew Fastow. I bookmarked the supplemental brief in Adobe Acrobat to facilitate ease of review.

The brief reveals suppression of exculpatory evidence by the Enron Task Force on a massive scale. The entire brief is devastating to the Task Force's prosecution of Skilling and the late Enron chairman, Ken Lay. But if you do not have time to read the entire brief, read the excellent 11-page introduction, which includes the following passage:

The raw notes are shocking. The 420 pages of contemporaneous notes, which we have spent the last many weeks comparing to the thousands of pages of trial record and the Task Force’s pretrial disclosures, confirm our worst fears. On the most crucial issues in Skilling’s case—especially where it was only Fastow’s word against Skilling’s—the Task Force suppressed vital exculpatory evidence from its “composite” FBI Form 302s for Fastow and all other disclosures given to Skilling. The Task Force then proceeded to present critical testimony and argument at trial it knew was contradicted by the evidence withheld from Skilling.

Much of the suppressed evidence directly relates to—and refutes—the Task Force’s pivotal contention that Skilling orally agreed to “secret side deals” to manipulate Enron’s financial statements. This “side deal” theory underlies every count of conviction against Skilling. By depriving Skilling of key exculpatory evidence that Fastow conveyed in his interviews, the Task Force was able to skew the proof and convince the jury to accept Fastow’s word over Skilling’s. As the Task Force later told Fastow’s sentencing judge and recounted in a law review article, Fastow’s testimony and credibility were the cornerstones to convicting Skilling.  .   .  . Enron Task Force Prosecutor John C. Hueston, Behind the Scenes of the Enron Trial: Creating the Decisive Moments (“Hueston”), 44 AM. CRIM. L. REV. 197, 197-99 (2007). The substantial evidence the Task Force kept from Skilling all shares one chatacteristic—it was harmful to the Task Force’s case against Skilling.  .    .    .

The implications of this brief reach far beyond the Skilling appeal. For example, the already-reeling re-prosecution of the three former Merrill Lynch bankers in the Enron-related Nigerian Barge case would appear to be over -- the Enron Task Force in the first trial of that case not only withheld exculpatory evidence, but put on incriminating testimony from former Enron treasurer and Fastow confidant Ben Glisan that directly contradicted the exculpatory evidence that Fastow provided to Task Force prosecutors during his interviews. Other Enron-related criminal cases -- as well as plea bargains -- could well be affected.

I've often noted on this blog that fair-minded people can disagree over whether the government's prosecutorial power is an appropriate tool to regulate business. However, my fervent hope is that even those who favor using the state's awesome power to criminalize merely questionable business transactions will be appalled by what the prosecution did in the criminal case against Skilling and Lay, as well as the other Enron-related criminal cases. In truth, none of us would be able to survive, as Thomas More reminds us, "in the winds that blow" from the unjust exercise of the government's overwhelming prosecutorial power. I continue to hope that Jeff Skilling's unjust conviction and sentence are reversed on appeal, not only for his and his family's benefit, but also for ours.

Update: The Chronicle's Kristen Hays, who is the only mainstream media reporter who I know of following this story, has an article on the Skilling brief here (the Chronicle story links to the copy of the Skilling supplemental brief that I bookmarked in Adobe Acrobat to facilitate ease of review; the Skilling supplemental brief on file with the Fifth Circuit is not bookmarked).

Probably in response to an off-the-record response from the DOJ, Hays writes that the Skilling supplemental brief contends that "some of [Fastow's] initial statements to authorities were not as damning as those in his testimony." That's a stark understatement of what the Skilling supplemental brief describes.

The initial Fastow statements set out in the Skillling brief were not only not as damning as Fastow's trial testimony, they were irreconcilable with that trial testimony and described completely legal activity, even by Fastow.  Consequently, had the Enron Task Force not been able to to pry Fastow off his original story, the core of the Task Force's case against Skilling and Lay would have have contradicted by Fastow, who was Skilling's main accuser at trial. And the fact that the DOJ did not disclose to the Skilling defense team how Fastow's incriminating testimony evolved over time from his exculpatory initial statements while Fastow and the Task Force were negotiating a dubious plea deal is beyond reprehensible. What is the DOJ going to say now, that they didn't disclose the exculpatory earlier statements to Skilling's defense team because Fastow was protecting Skilling in these initial meetings? Yeah, right.

Update 2: The blogosphere is picking up the story quickly, as Larry Ribstein, Ellen Podgor (see also here) and Warren Meyer have already commented. Curious, isn't it, that the mainstream media is lagging well behind. Could it be that the story simply does not comport with the media's pre-conceived notions of the Enron saga?

Update 3: The WSJ's John Emshwiller, who covered the Lay-Skilling trial for the WSJ despite legitimate questions about his objectivity, reports on the latest developments here.

Update 4: John Hueston, the former Enron Task Force prosecutor who is quite proud of his work in nailing Skilling and Lay on an admittedly weak case (see here, here, here and here), is mentioned often in the Skilling supplemental brief because of the law review article he authored that is cited in the passage above. Hueston's law firm bio used to link to a copy of the article, but the firm took the link down some time ago. However, Cara Ellison, who has followed the Enron-related criminal cases closely, provides this handy link to Hueston's article.

Update 5: A bookmarked copy of the DOJ's reply to the Skilling Supplemental Brief can be downloaded here. The DOJ argues essentially that, put in what the DOJ considers to be the proper context, each portion of the Fastow interview notes on which Skilling relies to establish Brady violations contains information that Skilling already had prior to trial or is evidence that would have had "minimal" value in impeaching Fastow. Frankly, the DOJ's analysis stands Brady on its head. The essence of Brady is that the prosecution does not retain the power to make such determinations regarding exculpatory evidence unilaterally -- that information is a part of the mix that the jury and the Court sort out in determining facts and in applying the law. If what the Enron Task Force withheld here is truly harmless error, then the DOJ's need of 70+ pages to explain why that is the case belies that contention. Ellen Podgor passes along similar thoughts regarding the DOJ's brief here.

Posted by Tom at 6:47 PM | Comments (5) | TrackBack (0)

March 12, 2008

More rumblings in the Skilling appeal

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

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

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

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

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

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

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

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

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

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

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

Posted by Tom at 7:55 AM | Comments (3) | TrackBack (0)

March 7, 2008

What's going on in the Skilling appeal?

First, thank you to all of the many readers who have communicated their concerns and prayers for the family crisis that is precluding me from daily blogging for now. Your kind thoughts and words are comforting and much appreciated.

But now for a quick blog post. While working this week, I was checking the docket of an appeal in which I am involved at the Fifth Circuit Court of Appeals. While there, I ambled over to the docket of the appeal of former Enron CEO Jeff Skilling just to see if there was anything interesting happening. Check out the following recent entries:

3/4/08 Motion filed by Appellant Jeffrey K Skilling to file
       supplemental briefs. [5976818-1]  Supplemental brief
       included? (Y/N): Y, to unseal A's suppl. brief brief
       [5976818-2]    Date of COS: 3/3/08  Sufficient [Y/N]: Y
       [06-20885] (jmw)
 
 3/5/08 Motion filed by Appellant Jeffrey K Skilling [5976825-1] to
        place supplemental brief under seal.    Date of COS: 3/4/08
        Sufficient [Y/N]: Y [06-20885] (jmw)
 
 3/5/08 Response/opposition filed by Appellee USA to motion to file
        supplemental briefs [5976818-1] by Appellant Jeffrey K
        Skilling. Reply to Resp/Opp due on 3/14/08.   Date of COS:
        3/4/08  Sufficient [Y/N]: y [5976831-1] [06-20885] (jmw)
 
 3/7/08 Reply filed by Appellant Jeffrey K Skilling to
        response/opposition [5976831-1], motion to file
        supplemental briefs [5976818-1] Reply to Resp/Opp due ddl
        satisfied., motion to unseal brief [5976818-2]  Sufficient
        [Y/N]: Y [5978302-1] [06-20885] (jmw)

Translated, the foregoing means that Skilling's appellate team filed a motion on Tuesday requesting that the Fifth Circuit grant permission to the parties to file supplemental briefs and, because of confidentiality concerns, requested that the supplemental brief be filed under seal (in other words, not for public consumption). The government must have been expecting the Skilling motion because they filed a response in opposition to it the following day (Wednesday). Not to be outdone in terms of alacrity, the Skilling team filed their response today to the government's opposition and, for good measure, requested that the Fifth Circuit unseal the Skilling supplemental brief and make if available for public review.

Anyone want to bet that these developments might have something to do with this (see also earlier posts here and here)?

Looks to me like a good opportunity for a mainstream media outlet to intervene and demand that the Fifth Circuit order the supplemental briefs be made available for public review, don't you think?

Posted by Tom at 4:47 PM | Comments (2) | TrackBack (0)

January 28, 2008

The power of myths

A common topic on this blog has been the power of anti-business myths within American society. Take Enron, for example. We all know how the myth played out. Enron, which was one of the largest publicly-owned companies in the U.S., was really just an elaborate financial house of cards that a massive conspiracy hid from innocent and unsuspecting investors and employees. The Enron Myth is so widely accepted that otherwise intelligent people reject any notion of ambiguity or fair-minded analysis in addressing facts and issues that call the morality play into question. The primary dynamics by which the myth is perpetuated are scapegoating and resentment, which are common themes of almost every mainstream media report on Enron.

The mainstream media -- always quick to embrace a simple morality play with innocent victims and dastardly villains -- was not about to complicate the story by pointing out that the investors in Enron could have hedged their risk of loss by buying insurance quite similar to that which Enron developed in creating their wealth in the first place. Instead of attempting to examine and tell the nuanced story about what really happened at Enron, much of the mainstream media simply became a part of the mob that ultimately contributed to death of Ken Lay and hailed the barbaric 24 year sentence of Jeff Skilling. Ambitious prosecutors, given wide latitude to obtain convictions of key Enron executives regardless of the evidence, gladly took advantage of the firestorm of anti-Enron public opinion to lead the mob.

Consequently, as Wall Street continues to endure massive equity write-downs that dwarf the $1.1 billion non-recurring charge against earnings that triggered Enron's demise after the 3rd quarter of 2001, I was somewhat surprised to read this common sense analysis from NY Times columnist, David Brooks:

There is roughly a 100 percent chance that we’re going to spend much of this year talking about the subprime mortgage crisis, the financial markets and the worsening economy. The only question is which narrative is going to prevail, the Greed Narrative or the Ecology Narrative.

The Greed Narrative goes something like this: The financial markets are dominated by absurdly overpaid zillionaires. They invent complex financial instruments, like globally securitized subprime mortgages that few really understand. They dump these things onto the unsuspecting, sending destabilizing waves of money sloshing around the globe. Economies melt down. Regular people lose jobs and savings. Meanwhile, the financial insiders still get their obscene bonuses, rain or shine.

The morality of the Greed Narrative is straightforward. A small number of predators destabilize the economy and reap big bonuses. The financial system is fundamentally broken. Government should step in and control the malefactors of great wealth.

The Ecology Narrative is different. It starts with the premise that investors and borrowers cooperate and compete in a complex ecosystem. Everyone seeks wealth while minimizing risk. As Jim Manzi, a software entrepreneur who specializes in applied artificial intelligence, has noted, the chief tension in this ecosystem is between innovation and uncertainty. We could live in a safer world, but we’d have to forswear creativity. [. . .]

The Ecology Narrative is not morally satisfying. I wouldn’t bet on its popularity as a backlash against Wall Street and finance sweeps across a recession-haunted country. But the Ecology Narrative has one thing going for it. It happens to be true.

Along those same lines, this Landon Thomas/NY times story reports on how two Wall Street executives who were intimately involved in $34 billion in write-downs remain reasonably hot properties on the Wall Street employment market. The Greed Narrative apparently hasn't caught up with those two yet, either.

But not so fast. This NY Times article reports that New York attorney general Andrew Cuomo, who replaced Eliot Spitzer as the Lord of Regulation, is currently putting the squeeze on a company that analyzed the quality of home loans for investment banks to provide evidence to prosecutors that the banks had detailed information that they did not reveal to investors about subprime mortgage risk. So, maybe that Greed Narrative still has legs after all.

But for the final word, don't miss this Larry Ribstein post in which he exposes NY Times columnist Gretchen Morgenson's stubborn adherence to the Greed Narrative even when it is clear from the subject of the story (in this case, the troubles of retailer Sears) that the narrative doesn't fit. In short, Morgenson is not one to allow the facts to get in the way of spinning a Greed Narrative morality play.

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

January 25, 2008

The Fastow notes

The big Enron-related news this week was the U.S. Supreme Court's refusal to hear the appeal of the Fifth Circuit's decision to dismiss securities fraud claims against several of Enron's banks (Ted Frank explains the decision). In light of the Supreme Court's recent Stoneridge decision, the denial of the Enron-related appeal was not surprising, although I agree with Larry Ribstein that the Supreme Court should have been clearer in defining the rule against holding third parties liable for another company's alleged securities fraud. Oh well.

Meanwhile, continuing to fly under the mainstream media's radar screen is the growing scandal relating to the Department of Justice's failure to turnover potentially exculpatory evidence to the defense teams in two major Enron-related criminal prosecutions (see previous posts here and here). The DOJ has a long legacy of misconduct in the Enron-related criminal cases that is mirrored by the mainstream media's myopia in ignoring it (see here, here, here and here).

This motion filed recently in the Enron-related Nigerian Barge criminal case describes the DOJ's non-disclosure of hundreds of pages of notes of FBI and DOJ interviews of Andrew Fastow, the former Enron CFO who was a key prosecution witness in the Lay-Skilling trial and a key figure in the Nigerian Barge trial.

Enron Task Force prosecutors withheld the notes of the Fastow interviews from the defense teams prior to the trials in the Lay-Skilling and Nigerian Barge cases. If the Fastow notes turn out to reflect that prosecutors withheld exculpatory evidence or induced Fastow to change his story over time, then that would be strong grounds for reversal of Skilling's conviction and dismissal of the remaining charges against the Merrill Lynch bankers in the Nigerian Barge case. The recent motion underscores the impact of the DOJ's non-disclosure of the Fastow notes in both trials:

The circumstances surrounding the debriefing of Andrew Fastow by the FBI are extraordinary and suspicious. Normally, when the FBI interviews a witness, it creates a 302 contemporaneously with each interview. Here, the government held scores of interviews with Mr. Fastow over 18 months, yet compiled only one composite 302—after apparently destroying any individual 302s or prior drafts of the composite 302 that were created. This does not comport with FBI policy and is highly unusual. . . . Skilling’s Opposition [to the United States’ Motion for Reconsideration by a Three-Judge Panel of Order Requiring it to Produce FBI Raw Notes] sheds light on this troubling and highly unusual practice:

One of Skilling’s claims on appeal is that the government impermissibly thwarted his ability to cross-examine Fastow. It did so by violating FBI policy and Brady, Giglio, and their progeny, inter alia, in (1) failing to prepare an FBI form 302 memoranda for each interview it conducted with Fastow; (b) scripting a 200-plus page “composite” Form 302 that masked inconsistencies, contradictions, and the evolution of Fastow’s story; (c) destroying all drafts of the composite 302s; and (d) refusing to provide Skilling with copies of the underlying raw notes from its more than 1,000 hours of interviews with Fastow.

Moreover, defense counsel in Barge I were never informed by the government that the FBI, contrary to its customary policy, had prepared only one composite 302, rather than a separate 302 for each Fastow interview. This troubling practice of compiling a single 302 to encompass thousands of hours of interviews with Fastow has effectively denied the defendants the benefit of gauging the evolution of Fastow’s story over time, and the shaping by the government of his story. It is not surprising that given these unusual circumstances, and the critical nature of Fastow’s involvement in Enron prosecutions, the Fifth Circuit took the unusual step of ordering the release of the Binders even before final briefing or oral argument in the Skilling appeal.

The motion goes on to describe the DOJ's continued resistance to turning over the Fastow notes, even in the face of the Fifth Circuit order to do so in the Skilling appeal and the DOJ's agreement to do so in open court in the Nigerian Barge case.

So, why is the mainstream media ignoring this scandal? Enron fatigue? Or does it not fit neatly into the media and prosecution-fueled myth that Enron was merely a financial house of cards that its managers knew would ultimately fail? Truth and justice doesn't depend on adherence with such a myth, now does it?

Posted by Tom at 12:10 AM | Comments (5) | TrackBack (0)

January 14, 2008

The rotting Enron criminal prosecutions

You won't read about it much in the mainstream media, but the Enron-related criminal prosecutions increasingly smell like a rotting carcass.

After Jeff Skilling was lynched by an angry mob, most of the mainstream business media moved on to other stories, such as various Wall Street firms taking write downs that are far in excess of the $1.1 billion in non-recurring 3rd quarter 2001 charges that began the media-fueled run on Enron that ended with the firm in bankruptcy and many of its executives in the cross-hairs of federal prosecutors. Contrary to public perception, this earlier post chronicled how the Enron Task Force's actual effort in proving Enron-related crimes was nowhere near as effective as its public relations campaign in demonizing the defendants in the Enron-related criminal cases.

To her credit, the Chronicle's Kristen Hays remains one of the few mainstream media reporters who is following up on the Enron-related prosecutions. In this recent article, Hayes reports on the oral argument at the Fifth Circuit Court of Appeals of the Department of Justice's attempt to salvage at least a smidgen of the dubious conviction that the Task Force obtained in 2006 against former Enron Broadband executive Kevin Howard. U.S. District Judge Vanessa Gilmore threw out the conviction based largely on the Fifth Circuit's prior decision in the Nigerian Barge case (see also here).

During oral argument on its appeal, the DOJ's "best" argument before the Fifth Circuit panel was that the prosecution should not have given Judge Gilmore a flawed jury instruction linking the one count that it contends should survive with the four counts that the DOJ concedes should be tossed out. As Hayes reports, "A skeptical [Fifth Circuit Judge Patrick E.] Higginbotham noted that the prosecution supported the instruction and nearly two years later on appeal is saying it shouldn't have been given."

As they say in appellate circles, that's not a good signal from the bench for the DOJ.

If the Fifth Circuit does as expected and denies the DOJ's appeal, then the DOJ will confront whether to try Howard for a third time on Enron-related charges. And given the DOJ's track record, I wouldn't put it past them.

Meanwhile, in a development that I didn't see picked up by any of the mainstream media, U.S. District Judge Ewing Werlein effectively put off the trial of former Merrill Lynch bankers Daniel Bayly and Robert Furst for a year or so by granting Bayly and Furst an interlocutory appeal of a part of his recent decision denying their motion to dismiss the DOJ's ongoing attempt to re-try them in the Nigerian Barge case. Judge Werlein's decision to grant the interlocutory appeal puts that re-trial off for the better part of a year, at least.

Finally, as this recent post noted, Skilling's defense team and the defense teams for the former Merrill bankers are currently sifting through the notes of FBI and Task Force interviews with former Enron CFO Andrew Fastow, who was a key witness in the Skilling trial and a key player in the Nigerian Barge trial. Inasmuch as Task Force attorneys withheld information from those interviews from both defense teams prior to the trials in both cases, if the notes of the Fastow interviews reflect that prosecutors withheld exculpatory evidence or induced Fastow to change his story over time, then that would be strong grounds for reversal of Skilling's conviction and dismissal of the remaining charges against the Merrill bankers. Stay tuned.

Quite a record of that Enron Task Force, eh?

Update: Larry Ribstein points out that these should have never been criminal cases in the first place.

Posted by Tom at 12:10 AM | Comments (2) | TrackBack (0)

December 24, 2007

Behind the scenes in the Skilling appeal and the Nigerian Barge case

I normally throttle down blogging during the holiday season to just one post a day, but I wanted to pass along something that you don't see every day in connection with former Enron CEO Jeff Skilling's appeal of his convictions and in the Nigerian Barge case involving the re-trial of three former Merrill Lynch bankers.

As this CNBC news release reports, the Fifth Circuit last week ordered -- over the Department of Justice's strenuous opposition -- that the DOJ prosecutors must deliver to Skilling's defense team the FBI's notes of their interviews with former Enron CFO, Andrew Fastow. Then, this past Friday, U.S. District Judge Ewing Werlein cited the Fifth Circuit's order in Skilling's case in granting the Merrill bankers' motion in the Nigerian Barge case requiring the DOJ to turnover the same notes of the Fastow interviews to the bankers' defense teams.

The DOJ's refusal to provide the criminal defense teams the notes of the Fastow interviews has long been a point of contention in several Enron-related criminal cases. The defense teams suspect that the notes will show that Fastow changed his story during his extensive interviews with FBI agents. Prosecutors in the Skilling and Nigerian Barge cases have have previously refused to turnover the notes to defense attorneys and provided only a prosecution-prepared "summary" of Fastow's statements to FBI agents.

Fastow was a key witness against Skilling and was a central figure in the first Nigerian Barge trial. Thus, if the notes of the Fastow interviews reflect that prosecutors withheld exculpatory evidence or induced Fastow to change his story over time, then that would be strong grounds for reversal of Skillings' conviction and dismissal of the remaining charges against the Merrill bankers.

By the way, the re-trial of Merrill bankers Dan Bayly and Robert Furst in the Nigerian Barge case is currently scheduled for January 28th, although the docket reflects a number of dispositive motions that must be ruled on before the case can proceed to trial. The re-trial against the third Merrill banker -- James Brown -- has been severed for a separate trial, which has not yet been scheduled.

Finally, Skilling's appellate team filed his reply brief this past Friday, although my sense is that the document that was filed will likely not be the final version. As with Skilling's first brief, the Skilling team has requested that the Fifth Circuit waive its page limitations for reply briefs. Consequently, once the Fifth Circuit rules on that request, the Skilling team will probably then file the final version of the reply brief, which will include tables of contents and authorities that the current version lacks. I am looking forward to reading the brief over the holidays and will pass along my thoughts after I have done so. In the meantime, both Ellen Podgor and Doug Berman have already posted their typically insightful thoughts on the brief.

Posted by Tom at 12:15 AM | Comments (0) | TrackBack (0)

October 4, 2007

The NACDL's amicus brief in the Skilling appeal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted by Tom at 12:10 AM | Comments (2) | TrackBack (0)

September 10, 2007

The Skilling Appeal Brief

As Ashby Jones and Peter Henning noted on Friday, lawyers for Jeff Skilling filed his appellant's brief this past Friday along with a motion requesting that the Fifth Circuit Court of Appeals waive length-of-brief rules under the special circumstances of Skilling's appeal. Inasmuch as the brief is a 240-page tome, my sense is that it will probably be modified slightly to include tables of contents and authorities when the final version is filed after the Fifth Circuit rules on the the length-of-brief motion (Update: I've since updated the link above to include the final version filed with the Fifth Circuit).

I read the entire brief while watching football over the weekend and it is brilliant. The brief is extremely well-written and organized, and eschews much of the technical legal jargon that often makes appellate briefs a chore to read. It would be extremely difficult to read this brief objectively and come to the conclusion that Jeff Skilling has not been the victim of a gross miscarriage of justice (see earlier posts on that subject here, here and here).

The first statement of the brief -- the usually mundane statement advising the appellate court whether the appellant believes that oral argument would be helpful to the court -- Skilling's appellate team crafted the best such statement that I've ever read:

Defendant-appellant Jeffrey Skilling requests oral argument. This case is perhaps the most prominent and publicized white-collar case ever prosecuted. But with certainty, it is the most misunderstood case, enveloped from the outset by perceptions and myths that bear little resemblance to the actual facts. Almost everyone believes, for instance, that Skilling was indicted, tried, and convicted for causing the 2001 bankruptcy of Enron Corporation and its devastating effects on thousands of Enron employees and shareholders. As the government itself conceded, however, the case against Skilling had nothing to do with Enron’s collapse.

Profound, inherent weaknesses in the government’s case—not just gaps in its evidentiary proof, but doubts about its basic theories of criminality—motivated the government to resort to novel and incorrect legal theories, demand truncated and unfair trial procedures, and use coercive and abusive tactics. Skilling submits that oral argument is essential to assist the Court’s understanding of the remarkable record in this case, including the multiplicity of substantial legal and procedural errors that have put Skilling in prison for 24 years not only for crimes that he did not commit, but for acts of business judgment that are not crimes at all.

Following that statement is an 11-page introduction, which -- if you don't have time to read the entire brief -- is an excellent overview of the arguments presented. My favorite parts of the brief are as follows:

The Statement of the Case (pp. 15-59). This is a marvelously clear description of Enron's business and the superficiality of the evidence that the Enron Task Force presented at trial against Skilling. In discussing Enron with hundreds of folks over the past several years, I understand how few people really understood that Enron was an innovative and successful business before its demise. Fewer still understood the shallowness of the Task Force's case against Skilling. This section of the brief takes on those widely-held misconceptions and dispenses with them cogently.

The Change of Venue Section (pp. 122-175). Given the venomous environment in Houston regarding all things related to Enron, U.S. District Judge Sim Lake's refusal to grant Skilling's motion to change the venue of the trial has always struck me as odd. Skilling's brief provides truly shocking information (heretofore not public) about the enormous bias against Skilling expressed in the answers to the juror questionairres of the jurors who ended up on Skilling's jury! Also provided in this section is heretofore non-public information on Judge Lake's questionable refusal to grant Skilling's proposed multiple strikes for cause on a large number of the jurors who who had expressed clear bias against Skilling and Lay. As the brief notes, if there was ever a trial that called for a change of venue, Lay-Skilling was the one.

The Prosecutorial Misconduct Section (pp. 175-206). The subject of this section has been a common topic on this blog, but this section provides additional unknown evidence of the Task Force's abusive tactics in prosecuting Skilling and other Enron executives. Moreover, the brief sums up brilliantly the prejudicial impact of the Task Force's threats against witnesses who would have provided exculpatory testimony for Skilling (all record citations contained in the brief are excluded here):

At trial, the severe imbalance in witness access was obvious. The Task Force’s case consisted mostly of cooperators from Enron’s senior management—people who worked with Skilling at Enron and who were his friends, including some of his closest friends. With plea or non-prosecution agreements with the Task Force, these witnesses were under the Task Force’s complete domination and control. They were obligated to testify, contractually bound to admit guilt and support the allegations against Skilling, and their ultimate fate rested in the “sole and exclusive discretion” of the Task Force. None of them would meet with Skilling or his counsel. At least two (Rice and Belden)—and probably all of them—were clearly ordered not to.

In contrast, most of Skilling’s key defense witnesses never took the stand. Specifically, Skilling sought to call David Duncan of Arthur Andersen and seven Enron executives: Greg Whalley, Rick Buy, Lou Pai, Jeff McMahon, Georgeanne Hodges, Janet Dietrich, and Joe Hirko. Each possessed critical exculpatory evidence, and would have directly refuted testimony given by Task Force cooperators. Yet all eight invoked the Fifth Amendment, fearing Task Force reprisals. Hoping to overcome this, Skilling asked the Task Force to immunize them, as it did for Ben Glisan (its own witness). The Task Force declined, thereby ensuring that vital exculpatory testimony never saw the light of day.

Without these (and many other) key witnesses, the defendants were forced to rely primarily on their own testimony. Roughly two-thirds of the defense case consisted of Skilling and Lay’s testimony; the remainder was a patchwork of character witnesses, experts, and others—anyone courageous enough to testify. Most could offer relatively narrow testimony on limited issues. Besides Skilling and Lay, only two senior executives testified for the defense, and neither was deeply involved in many transactions at issue.

Compounding the prejudice, the Task Force argued in closing that Skilling’s defense was not credible because it did not square with the testimony of many witnesses. By intimidating witnesses into silence and then refusing to immunize them—knowing they would give testimony favorable to the defense—it was the Task Force that prevented witnesses from corroborating Skilling. U.S. v. Golding, 168 F.3d 700, 702-05 (4th Cir. 1999) (“The government did not stop with the threat. Instead, the prosecutor further abused her power by using the very situation she had created against the defendant in closing argument.”). Skilling, meanwhile, could not explain to the jury why his best witnesses were missing, because the district court explicitly prohibited him from introducing any evidence of the Task Force’s threats and other misconduct.

The prejudice was irreparable. It obstructed Skilling’s preparations before trial, distorted the presentation of evidence at trial, and affected the outcome. Gregory, 369 F.2d at 188-89 (“A criminal trial … is a quest for truth. That quest will more often be successful if both sides have an equal opportunity to interview the persons who have the information from which the truth may be determined.”).

As if on cue, even before the ink on the Skilling brief was dry, some of the more vitriolic members of the mob that lynched Skilling were already dismissing it without so much as a smidgen of analysis. But my bet is that a fair review of this brief will leave most readers shocked over the weakness of the case against Skilling and the government's ruthless tactics in pursuing a conviction despite that weakness.

The popular myth of the mob is that Enron was a house of cards that was propped up by a conspiracy of greedy executives who told lies to trusting but unknowing investors. The truth is that Enron was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation that got caught in a liquidity crunch. That liquidity crisis occurred when the credit and equity markets became spooked by a variety of factors in late October, 2001, including revelations about Fastow's embezzlement of millions and the volatility in markets after the September 11, 2001 attacks on New York and Washington, D.C.

As I've noted many times over the years, Fastow's embezzlement from Enron is a crime, but Enron's unfortunate demise is not, nor should it be. Beyond the shattered lives and families, the real tragedy here is that an angry mob convicted Jeff Skilling, trampling the rule of law and the administration of justice along the way. In truth, none of us would be able to survive, as Thomas More reminds us, "in the winds that blow" from the exercise of the government's overwhelming prosecutorial power in response to the demands of the mob. I continue to hope that Jeff Skilling's unjust conviction and sentence are reversed on appeal. Not only for his and his family's benefit, but also for ours.

Posted by Tom at 12:15 AM | Comments (4) | TrackBack (0)

April 23, 2007

The Glisan Interview

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

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

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

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

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

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

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

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

April 17, 2007

"Somebody was guilty because they were guilty"

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

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

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

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

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

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

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

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

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

February 16, 2007

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

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

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

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

Look, this mess is what happens when government is allowed to bastardize charges (in this case, the honest services charge that is supposed to pertain to bribery or kickback cases) against merely questionable business transactions and then appeal to juror resentment against wealthy businesspeople to procure politically popular convictions. The damage to the defendants, their careers and their families that this abuse of power has caused is bad enough. But the carnage to justice and respect for the rule of law is even more ominous. Does anyone really think that they could stand upright in the winds of such abusive governmental power if those winds turned toward them?

Posted by Tom at 4:54 AM | Comments (1) | TrackBack (0)

January 19, 2007

The price of favorable testimony

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

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

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

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

January 10, 2007

Reacting to Gladwell's Enron article

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted by Tom at 8:32 PM | Comments (3) | TrackBack (0)

January 2, 2007

Malcolm Gladwell on Enron

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

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

Posted by Tom at 12:07 PM | Comments (3) | TrackBack (0)

December 12, 2006

The mob must wait awhile longer

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

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

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

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

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

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

Posted by Tom at 4:16 AM | Comments (1) | TrackBack (0)

December 8, 2006

The injustice of the Jeff Skilling case

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

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

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

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

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

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

The primary justification that the mob gives for the absurdly-long sentence for Skilling almost always is the plight of the innocent employees and investors who lost their nest eggs when Enron went bankrupt. But the main reason that those nest eggs ever had value in the first place was because Skilling had transformed Enron into the world's leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers. Although there is nothing wrong with having compassion for folks who lose money on an investment, rarely is it mentioned in the Enron morality play that many of those investors who lost their nest egg when Enron melted down were imprudent in their investment strategy. They should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron's stock price while being protected by a floor in that share price if things did not go as planned.

Even though virtually all of those innocent Enron investors carry insurance on their homes and cars, one can only speculate why they didn't attempt to hedge the risk of their investment in Enron stock. Probably, most of them simply did not understand how Enron's risk management services created their wealth in the first place. Thus, when that wealth evaporated during Enron's meltdown, they didn't even try to understand what had occurred. They simply joined the unruly mob calling for Skilling's scalp.

The mainstream media -- always quick to embrace a simple morality play with innocent victims and dastardly villians, regardless of its validity -- was not about to complicate the story by pointing out that the investors could have hedged their risk of loss by buying insurance quite similar to that which Skilling developed in creating their wealth in the first place. Thus, instead of attempting to tell the entire story, much of the mainstream media simply became a part of the mob. Ambitious prosecutors, given wide latitude to obtain convictions of key Enron executives regardless of the evidence, gladly took advantage of the firestorm of anti-Enron public opinion to lead the mob to Skilling and others.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Misrepresentation of Enron Energy Services' financial condition;

4. Misrepresentation of Enron Broadband Services financial condition;

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

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

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

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

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

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

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

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

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

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

Enron Energy Services. The Task Force attempted to prove that Enron and Skilling lied about EES’s growth while simultaneously hiding mounting EES debts. Relying on the testimony of Delainey, Timothy Belden, and Wanda Curry, the Task Force asserted that EES first moved an uncollectible receivable to the Wholesale division in the fourth quarter of 2000 and then transferred the entire EES risk management book to Wholesale in the first quarter of 2001 ("the resegmentation issue"). According to the Task Force's theory, these events occurred solely to make EES look more profitable than it really was.

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

As for the resegmentation issue, Skilling testified that moving the risk book made sense from a business standpoint, and former Wholesale division executive Rogers Herndon confirmed Skilling's version by testifying that the Wholesale unit improved the efficiency and value of that risk book. Even Delainey, the government’s primary witness on this issue, conceded that he ultimately recommended to Skilling that the risk book be moved and accounting expert Rush testified that the transfer complied with applicable accounting rules.

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

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

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

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

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

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

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

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

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

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

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

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

So, there you have it. Is that a record that even comes close to being enough to throw a talented and tortured man behind bars for most of the rest of his life? Not in a truly civil society. The truth is that Enron was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation that got caught in a liquidity crunch when the markets became spooked by revelations about Fastow embezzling millions in the volatile months after September 11, 2001.

Fastow's embezzlement is a crime, but Enron's unfortunate demise is not, nor should it be. Beyond the shattered lives and families, the real tragedy here is that the angry anti-Enron mob convicted Jeff Skilling, trumping the rule of law and the dispassionate administration of justice along the way. The truth is that none of us would be able to survive "in the winds that blow" from the exercise of the government's overwhelming prosecutorial power in response to the demands of the mob. Here's hoping that Skilling's unjust conviction and sentence are reversed on appeal. Not only for his benefit, but for ours.

Posted by Tom at 4:49 AM | Comments (12) | TrackBack (0)

November 14, 2006

Another dirty secret of the Enron Task Force

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

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

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

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

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

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

Posted by Tom at 4:55 AM | Comments (2) | TrackBack (0)

November 3, 2006

Berkowitz cashes in

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

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

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

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

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

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

Yeah, right.

Posted by Tom at 4:40 AM | Comments (2) | TrackBack (0)

October 25, 2006

The media's mistreatment of Jeff Skilling

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

The Media's Mistreatment of Jeff Skilling

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

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

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

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

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

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

Posted by Tom at 4:31 AM | Comments (3) | TrackBack (0)

October 24, 2006

What Skilling was really sentenced for

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

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

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

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

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

Posted by Tom at 4:18 AM | Comments (3) | TrackBack (0)

October 22, 2006

The Skilling sentencing hearing

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

By now, we all know the myth -- Enron was merely an elaborate financial house of cards that a massive conspiracy led by the greedy and lying Skilling and the late Enron chairman Ken Lay hid from innocent and unsuspecting investors and employees. The Enron Myth is so thoroughly accepted that otherwise intelligent people reject any notion of ambiguity or fair-minded analysis in addressing facts and issues that call the morality play into question. The primary dynamics by which the myth is perpetuated are scapegoating and resentment, which are common themes of almost every mainstream media report on Skilling and Enron.

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

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

As noted originally here and in many subsequent blog posts, it is far more likely that the truth about Enron is that no massive conspiracy existed, that Skilling and Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation. Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst choppy post-bubble, post-9/11 market conditions when the markets were spooked by revelations of the embezzlement of millions of dollars by the company's CFO and his relative few minions.

That Jeff Skilling did not predict that Enron would fail under those conditions does not make him a criminal. Unlike his main accusers Andy Fastow and Ben Glisan, Skilling didn't embezzle a dime from Enron. Did he tirelessly advocate this highly-leveraged but innovative company that was dealing with difficult post-bubble market conditions during 2001? Sure, but since when is it a crime for a CEO to be optimistic -- even overly-optimistic -- about his company? Beyond the shattered lives and families, the real tragedy here is that the demonization of Skilling has distracted us from examining the tougher issues of what really caused Enron's demise and understanding the how such a company can be structured to survive in even the worst market conditions. It's a lot easier just to throw a good and decent man such as Jeff Skilling in jail and throw away the keys, but examining objectively what really occurred at Enron is far more likely to result in real justice.

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

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

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

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

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

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

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

October 17, 2006

Judge Lake dismisses the indictment against Ken Lay

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

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

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

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

October 14, 2006

The trial penalty issue in the Skilling case

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

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

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

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

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

Posted by Tom at 7:49 AM | Comments (2) | TrackBack (1)

October 13, 2006

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

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

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

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

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

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

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

October 12, 2006

Previewing the Skilling appeal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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September 28, 2006

The surprising Fastow sentence

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

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

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

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

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

Posted by Tom at 4:30 AM | Comments (5) | TrackBack (0)

September 26, 2006

More on the Fastow sentence

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

Q. Does the government decide your sentence?

A. My Judge decides the sentence.

Q. And who is your Judge?

A. Judge Hoyt.

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

A. Yes.

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

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

Q. Yes.

A. Yes. Ten years.

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

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

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

A. Yes.

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

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

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

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

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

Q. Well, not --

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

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

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

A. A 10-year maximum imprisonment.

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

A. It calls for a 10-year sentence.

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

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

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

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

A. I believe that's correct, yes.

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

A. Yes, sir.

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

A. Approximately, yes, sir.

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

A. My understanding is, no.

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

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

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

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

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

A. I'm sorry?

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

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

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

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

Try to make sense of this

Let's see if I get this straight.

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

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

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

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An interesting letter to Judge Lake

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

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

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

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

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

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

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

Posted by Tom at 4:16 AM | Comments (1) | TrackBack (0)

September 21, 2006

The Fastow sentencing memorandum

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

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

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

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

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

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

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

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

Posted by Tom at 6:54 AM | Comments (3) | TrackBack (0)

Wasting talent

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

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

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

Posted by Tom at 4:46 AM | Comments (1) | TrackBack (0)

September 7, 2006

Wanted: Adult supervision at the Enron Task Force

This one takes the cake.

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

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

Posted by Tom at 3:59 AM | Comments (3) | TrackBack (0)

September 3, 2006

They never really had a chance

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

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

Posted by Tom at 8:20 AM | Comments (2) | TrackBack (0)

September 2, 2006

Lay and Skilling's legacy of beneficial risk-taking

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

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

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

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

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

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

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

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

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

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

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

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

August 7, 2006

Perpetuating the Enron Myth

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

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

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

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

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

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

Posted by Tom at 5:30 AM | Comments (1) | TrackBack (0)

July 17, 2006

Can the NatWest Three receive a fair trial in Houston?

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

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

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

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

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

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

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

July 10, 2006

Crashing the Ken Lay funeral?

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

Posted by Tom at 8:20 AM | Comments (2) | TrackBack (0)

July 6, 2006

Ken Lay and the Enron Myth

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

By now, we all know the myth -- Enron was merely an elaborate financial house of cards hidden from innocent and unsuspecting investors and employees by a deceitful management team led by the greedy and lying Mr. Lay. The Enron Myth is so thoroughly accepted that otherwise intelligent people reject any notion of ambiguity or fair-minded analysis in addressing facts and issues that call the morality play into question. The primary dynamics by which the myth is perpetuated are scapegoating and resentment, which are exhibited everywhere:

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

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

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

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

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

These are but a few examples of the frequent eruptions from the cauldron of societal bitterness over Enron that are palpable reminders of the fragile nature of civil society. The Enron Myth conveniently serves to obscure that which most people do not want to confront. Loss, fear, and anger expose our essential human insecurity -- Christians sometimes refer to it as our "brokenness." The vulnerability that underlies such insecurity is scary to behold, so we use myths and the related dynamics of scapegoating and resentment to distract us. Therefore, a wealthy and powerful businessman who is easy to resent becomes a handy scapegoat. We rationalize that he did bad things that we would never do if placed in the same position and thus, he is deserving of our punishment. That the scapegoat is portrayed as greedy and arrogant -- just as we are -- makes the lynch mob even more bloodthirsty as it attempts to purge collectively that which is too sordid for its members to face individually.

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

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

Such syndromes are not only an abuse of our justice system, but a serious affront to civil society. Ken Lay was no criminal. Did he fudge the truth? Maybe. But even if so, did his lies justify public humiliation, a physically-draining criminal trial, and a life prison sentence? Not in a truly civil society. Ken Lay's death is a terrible tragedy for his family and friends, and my family's thoughts and prayers are with them. But the larger tragedy is that a myth has again played out as "justice" in our criminal justice system while distracting us from examining what really happened at Enron, understanding the benefits and risks of such a company, and educating ourselves on how to take advantage of such benefits while hedging those risks prudently. Such a sober undertaking is not as easy as rationalizing a financial failure by calling a rich man a crook and reveling in his demise, but it's far more likely to result in a better -- and far more honest -- understanding of investment and markets, as well as ourselves.

Posted by Tom at 5:35 AM | Comments (8) | TrackBack (4)

July 5, 2006

The death of Ken Lay

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

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

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

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

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

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

July 1, 2006

The Lay-Skilling forfeiture motion

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

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

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

June 27, 2006

Foreshadowing a key issue in the Lay-Skilling appeal

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

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

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

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

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

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

Posted by Tom at 4:50 AM | Comments (2) | TrackBack (0)

June 17, 2006

Skilling talks

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

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

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

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

Posted by Tom at 4:20 AM | Comments (0) | TrackBack (1)

June 13, 2006

Rumblings from the jury room of the first Enron Broadband retrial

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

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

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

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

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

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

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

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

Posted by Tom at 4:33 AM | Comments (1) | TrackBack (0)

June 8, 2006

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

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

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

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

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

Posted by Tom at 10:28 AM | Comments (0) | TrackBack (1)

June 5, 2006

The Ken Lay narratives

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Quick Enron Reality Check?

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

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

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

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

"Here's a Quick Reality Check"

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

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

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

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

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

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

June 1, 2006

The Conglomerate Enron Forum

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

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

Posted by Tom at 5:19 AM | Comments (4) | TrackBack (0)

May 30, 2006

Monday morning QB'ing the Lay defense

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

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

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

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

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

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

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

Posted by Tom at 8:10 AM | Comments (2) | TrackBack (0)

Lessons from an Enron short

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

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

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

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

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

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

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

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

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

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

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

9. Character cannot be compartmentalized.

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

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

Posted by Tom at 6:18 AM | Comments (2) | TrackBack (0)

What might have been

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

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

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

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

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

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

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

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

Posted by Tom at 4:26 AM | Comments (2) | TrackBack (0)

May 26, 2006

Lay-Skilling, Week Seventeen

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

Well, in a strong indication that this trial was already over after the jury was selected, the jury in the Lay-Skilling trial concluded its relatively short deliberation (less than five days) before the long holiday weekend and returned a verdict of guilty on most counts against the two key former Enron executives. The jury convicted former Enron chairman Ken Lay on all six conspiracy, wire fraud and securities fraud charges, and then U.S. District Judge Sim Lake piled on by finding Lay guilty of four more charges of bank fraud in connection with Lay's bench trial over his self-admitted violation of Regulation U in using bank lines of credit improperly in buying stock in publicly-owned companies. Former Enron CEO Jeff Skilling was convicted on 18 counts of conspiracy and securities fraud, but the jury convicted Skilling on o