Category Archives: Legal – Criminalizing Business

The subprime mortgage criminal lottery

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benton J. campbell Well, well, well. Look who is resurfacing in connection with the creation of the Justice Department’s latest criminal Task Force to investigate whether crimes were committed when the subprime-mortgage market collapsed (just what we need — another corporate crime lottery):

Federal prosecutors are stepping up their scrutiny of players in the subprime-mortgage crisis, with a focus on Wall Street firms and mortgage lenders.

Prosecutors in the Eastern District of New York in Brooklyn have formed a task force of federal, state and local agencies that will involve as many as 15 law-enforcement agents and investigators.

The U.S. attorney for the office, Benton J. Campbell, who supervises about 150 prosecutors, said the group will look into potential crimes ranging from mortgage fraud by brokers to securities fraud, insider trading and accounting fraud.

You may remember Campbell. He was the lead prosecutor on the Enron-related criminal trial known in these parts as the first Enron Broadband trial, which ended in an embarrassing loss for Enron Task Force after the prosecution was caught threatening defense witnesses (see also here) and propounding false testimony from one of its key witnesses during the trial. Sort of what you would expect from a trial in which the Task Force advocated an unwarranted expansion of a criminal law intended to punish kickbacks and bribes against business executives who did no such thing.

Interestingly, in the Wall Street investigation, Campbell thinks there actually may be a non-criminal explanation about the meltdown in the sub-prime market:

Mr. Campbell said the "jury is still out" on just how much criminal activity the office might find, particularly on Wall Street, which saw a sudden decline in the value of securities backed by pools of mortgages last year. "There are market forces in play in that area, and that doesn’t necessarily mean there is fraud," said Mr. Campbell, 41 years old.

H’mm. How many damaged lives and careers would have been salvaged had Campbell and his fellow Enron Task Force prosecutors been so open-minded?

The Troubling U.S. Incarceration Rate

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

With only 5% of the world’s population, the U.S. now houses almost a quarter (2.3 million!) of the world’s prisoners. One in 100 adults in the U.S. is now behind bars and 751 people are in U.S. prisons or jails for every 100,000 in population.

The only other major industrialized nation that even comes close to that rate of incarceration is Russia with 627 prisoners for every 100,000 people. England’s rate is 151, Germany’s is 88 and Japan’s is 63.

Attempting to keep all of this in perspective, Pepperdine University’s James Q. Wilson provides this recent op-ed that puts the U.S. incarceration rate in a more favorable light with regard to reducing serious crime.

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

Meanwhile, in this five-part LA Times debate, Reason’s Jacob Sullum takes on the Heritage Foundation’s Charles Stimson over one of the main reasons for the high U.S. incarceration rate — drug prohibition.

At least in this first installment, Sullum makes a much more compelling case than Stimson. And Peter Gordon has this sage observation about the genesis of drug prohibition.

Remember Refco?

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refco 042108 Amidst the current turmoil in the financial markets, the recent conviction on criminal fraud charges of a former Refco Inc executive barely registered on the radar screen. The details from the meltdowns from years past are just old news now.

However, the criminal conviction and plea deals arising from the Refco affair still leave a troubling question unanswered — why did Refco’s owners take it public in the first place?

The Enron Task Force Exposed

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In this previous post on former Enron CEO Jeff Skilling’s Supplemental Brief regarding prosecutorial misconduct in connection with covering up exculpatory evidence contained former Enron CFO Andrew Fastow’s interview notes, I noted that the Skilling brief would likely have a ripple effect on the re-trial of three former Merrill Lynch executives in connection with the Enron-related criminal case known as the Nigerian Barge case.

Well, based on an extraordinary motion filed on behalf of former Merrill executive James Brown, that ripple effect has turned into a tsunami of evidence that includes, but is not limited to, the Fastow interview notes.

As with the Lay-Skilling case, the Nigerian Barge case has long represented much of what is wrong with the Department of Justice’s regulation of business-through-criminalization approach in the post-Enron era.

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

Through a deferred prosecution agreement with Merrill, the Task Force then proceeded to hamstring the defendants’ defense by limiting access to other Merrill Lynch executives involved in the barge transaction. Moreover, the Task Force intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the defense.

After bludgeoning a couple of plea deals from former key witnesses Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the defendants, which was good enough to obtain convictions in the hyper-anti-Enron climate of Houston in 2004.

Of course, most of the convictions were vacated on appeal (and in Fuhs’ case, reversed and rendered), but not before each of the former Merrill defendants and their families had incurred the incalculable human cost of these misguided prosecutions.

Now, Brown’s motion provides a specific and detailed case that the Enron Task Force engaged in not only a wide-ranging cover-up of evidence that was exculpatory to the Merrill defendants, but also offered testimony at trial that the Task Force lawyers knew was contradicted by evidence and testimony that they had in their possession.

The lives and careers that have been damaged in the Nigerian Barge case are the inevitable carnage that results from giving incentivized prosecutors the overwhelming power of government to paint transactions as frauds and manipulate ignorance about them as a means to regulate merely questionable business transactions. A truly civil society would find a better way.

Update: As usual, Ellen Podgor asks the key question — why are the Fastow notes so late in coming?

Update 2: The Chronicle’s Kristen Hays has an article on the Brown motion here.

The Economist Gets It

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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 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.

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.

The Nacchio debacle

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claude rains in casablanca145 I’m shocked, absolutely shocked, that a former Enron Task Force member would have ever been involved in improperly suppressing exculpatory testimony at trial that would ultimately lead to the Tenth Circuit’s reversal of the conviction of former Qwest CEO, Joseph Nacchio.

Larry Ribstein and Ellen Podgor break down and comment on the Tenth Circuit decision. As an aside, the expert witness who was improperly excluded in the Nacchio trial — Daniel Fischel — was the author of the book that exposed the true nature of, and motive behind, Rudolph Giuliani’s prosecution of Michael Milken.

That Pesky Trust-Based Business Model

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Over the weekend, we learned that the Fed had bailed out New York-based investment bank Bear Stearns during this unsettled time in the financial markets.

Almost seven years ago, a much larger company that shared many characteristics with Bear Stearns — Houston-based Enron — did not even generate serious consideration for a Fed bailout before it went under in the turbulent post-9/11 financial markets.

In between those two events, one of the world’s wealthiest insurers and another company that is similar in many respects to Bear Stearns and Enron — American Insurance Group — barely escaped a similar fate by cutting a deal with the now-disgraced former Governor and Attorney General of New York to cut loose the executive primarily responsible for creating AIG’s vast wealth.

The fact of the matter is that Enron was — and Bear Stearns and AIG are — trust-based businesses that fundamentally depend on the trust of the markets to sustain their value.

Once that trust is lost, such companies lose value quickly and dramatically, a case in point being that JP Morgan Chase’s proposed $236 million purchase price for Bear Stearns comes just hours after Bear’s market cap was $3.5 billion this past Friday and $20 billion as of January, 2007.

Although unfortunate for the owners of such companies, such a dramatic loss of wealth does not necessarily mean that any criminal conduct caused or was even involved in the loss. Rather, such loss is simply one of the risks of investing in a company based on a trust-based business model.

The sooner we all recognize and understand this risk — and avoid the mainstream media’s promotion of myths about them — the quicker we can put a stop to injustices such as this while advancing the discussion of how best to hedge the risk of such potential losses.

The Stench of Prosecutorial Misconduct

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skilling.jpgThe 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.

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. The excellent 11-page introduction of the brief 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).

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 may not have been as damning as Fastow’s trial testimony, but 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 pry Fastow off his original story, the core of the Task Force’s case against Skilling and Lay would not have been 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, 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: The DOJ has replied to the Skilling Supplemental Brief. 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.

The Spitzer Lesson

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The mainstream media and the blogosphere have been buzzing over the past 24 hours regarding the fall from grace of New York’s governor and former Lord of Regulation, Eliot Spitzer.

As noted in this previous post, there is an under-appreciated human element in such dubious criminal problems as Spitzer fell into.

So, I have a great deal of compassion for the members of Spitzer’s family, although Spitzer’s many victims would certainly attest that he showed none for them. Larry Ribstein has related and typically insightful thoughts regarding why the revelers in Spitzer’s fate should be concerned about the way in which he was brought down.

But I hope that the most important lesson that Spitzer’s political career teaches us is not lost amidst the glare of a tawdry sex scandal.

As with Rudy Giuliani before him, Spitzer rose to political power through the misuse of the state’s overwhelming prosecutorial power to regulate business interests. In so doing, Spitzer manipulated an all-too-accommodating mainstream media, which never misses an opportunity to take down an easy target such as a wealthy businessperson. Spitzer is now learning that the same media dynamic applies to powerful politicians, as well.

However, as noted earlier here, where was the mainstream media’s scrutiny when Spitzer was destroying wealth, jobs and careers while threatening to go Arthur Andersen on American Insurance Group and other companies?

Where was the healthy skepticism of the unrestrained use of the state’s prosecutorial power to regulate business where business had no available regulatory procedure with which to contest Spitzer’s actions?

As Dealbreaker’s John Carney noted at the time of that earlier post:

Why didn’t [the mainstream media covering Spitzer’s investigation of Grasso] reveal the slimy tactics of the Spitzer squad?

We suspect part of the problem was the fear of being “cut off” of access. Reporters compete for scoops, and often those scoops depend on sources who will leak information to them. In the NYSE case, reporters assigned to the story were largely at the mercy of the investigators, who could cut-off uncooperative reporters, leaving them without copy to bring to their editors while their competitors filed stories with the newest dirt. They probably felt—not unrealistically—that their very jobs were on the line.

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

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

Alas, change does not come easily to the mainstream media.

Late last week, this post reported on developments that could well expose an egregious abuse of prosecutorial power in connection with the prosecution for former Enron CEO, Jeff Skilling. Why has no mainstream media outlet intervened in that case and demanded that the information about potentially serious governmental misconduct be made public?

The Spitzer lesson is not easily embraced.

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

What’s Up in the Skilling appeal?

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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?