David Delainey, former CEO of Enron Energy Services, was sentenced on Monday to 2 and a half year in the pokey in connection with his plea deal in which he pled guilty to insider trading charges and sang like a canary for the prosecution during the criminal trial of former key Enron executives Ken Lay and Jeff Skilling.
Delainey went over-the-top in his testimony against Lay and Skilling, so the Enron Task Force didn’t oppose a lenient sentence for him. Moreover, Delainey’s counsel requested a probated sentence from US District Judge Kenneth Hoyt, who is generally considered a relatively light sentencing judge. As a result, it was expected in the local legal community that Delainey would probably receive a similar sentence to that of Timothy DeSpain.
However, Delainey’s desire to placate prosecutors appears to have backfired as Judge Hoyt commented during the sentencing hearing that his criminal conduct was “a lot deeper and a lot wider, . . . than is expressed in this charge.” Thus, the length of the sentence — and particularly the fact that Delainey was hauled off to jail straight from the courtroom — is mildly surprising. It is also tragic in that Delainey’s testimony during the Lay-Skilling trial was not particularly credible. My sense is that he agreed to the plea bargain solely to hedge the risk of a longer prison sentence on the charges.
By the way, this Kristen Hays/Chronicle article outlines the sentencing schedule for former Enron executives in the upcoming months.

John Hasnas is a professor of ethics and law at Georgetown University’s McDonough School of Business and is the author of the book, Trapped: When Acting Ethically is Against the Law (Cato 2006), which is an adaptation of Professor Hasnas’ article Ethics and the Problem of White Collar Crime. This previous post discussed one of Professor Hasnas’ articles on the perverse effect that implementation of the Department of Justice’s Thompson Memo has had on companies serving up their employees as sacrificial lambs to avoid an Arthur Andersen-like meltdown.
Following on that article, Professor Hasnas authored this WSJ ($) op-ed over the weekend on the real problem that underlies such policies as those implemented under the Thompson Memo:

DOJ policy is merely a symptom of the underlying disease: the untenable standard of corporate criminal liability embodied in federal law. Attempting to reform DOJ policy without changing the law is a bit like treating a lung-cancer patient’s cough. It won’t hurt, but it won’t help that much either.
When should corporations be subject to criminal punishment? Perhaps never. These entities cannot be imprisoned, only fined; and the fines are paid by the corporations’ shareholders. The defining characteristic of the modern publicly traded corporation is the separation of ownership and control: Shareholders do not control the actions of corporate employees. Thus, imposing criminal punishment on a corporation, rather than on the employees who committed the offense, punishes shareholders who are innocent of wrongdoing.

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Apparently, “service” such as that described here, here and here will get you an exceptional service award from the U.S. Department of Justice.
Trampling justice and the rule of law while destroying careers, jobs and wealth is “exceptional” governmental service?
God help us all.

In a case that has been swirling around Houston legal and business circles for the past five years, the three former owners of Houston-based Premiere Holdings of Texas — which promoted itself as a high-yield investment fund to prominent Houstonian investors but spiraled into bankuptcy in late 2001 amid allegations of Ponzi scheme-type activity — pled not guilty yesterday in connection with their arraignment in federal court in Houston on securities fraud and money laundering charges in a 24-count indictment (you can download a pdf of the indictment here).
Attorney Ted Murray, securities broker David Lapin, and securities broker Jeffrey Wigginton are charged in the indictment for their roles in the promotion and sale of unregistered security interests to investors through Premiere Holdings between 1999 and late 2001. Although the case has been preliminarity scheduled for trial trial on October 30, 2006, my sense is that a case of this nature will not go to trial that quickly after indictment.
Premiere Holdings has been an item of local interest for quite some time for a couple of reasons. First, the company promoted itself as a high-yield investment fund to mainly wealthy and conservative Houstonians, and often advertised itself through several of the talk show hosts on the Houston conservative radio station KSEV. Moreover, Premiere’s business unraveled soon after the September 11, 2001 attacks on New York and Washington, but that story flew somewhat under the radar screen of the local business media that was preoccupied with the demise of Enron, which was taking place at the same time. Finally, one of the defendants — David Lapin — is related to prominent Houston attorneys Jack Lapin (father) and Bobby Lapin (brother).
The Justice Department’s press release on the indictment is here and a previous press release on an SEC action against the three owners is here. A couple of Houston Business Journal articles on the Premiere Holdings case from late 2001 are here and here.

In the first of many sentencing hearings that will take place this fall n connection with various Enron-related criminal cases, Timothy DeSpain, a 41-year old former assistant treasurer of Enron from 1999 to 2002, was sentenced this morning by U.S. District Judge Ewing Werlein to four years probation in connection with a 2004 plea agreement in which he pled guilty to a single count of securities fraud. Here is an earlier blog post with background on DeSpain’s role at Enron and his plea deal. The Chronicle’s Tom Fowler files a report on the sentencing here.

In a move that may backfire, the Enron Task Force filed this petition requesting that the entire Fifth Circuit Court of Appeals consider and reject the decision of a Fifth Circuit three-judge panel from last month (previous posts here and here) that struck down the wire fraud and conspiracy convictions of four Merrill Lynch executives involved in the controversial Enron-related Nigerian Barge case. The Chronicle’s Kristen Hays reports on the Task Force’s motion here and this post from a year ago provides an extensive thread of posts discussing the case.
The Task Force’s petition — which is focused on the “honest services” issue in the appeal — is somewhat odd, which may reflect the Task Force’s reservations about filing it at all given the considerable risk that a majority of the Fifth Circuit could adopt Judge Harold DeMoss’ dissent in the panel decision. On a threshold basis, the motion does not even mention that the Fifth Circuit panel’s decision reversed and rendered the convictions of Merrill Lynch executive William Fuhs on all counts and then makes the ludicrous suggestion in a footnote that former Enron CEO Jeff Skilling’s anticipated appeal of his conviction and former Enron executive Chris Calger’s recent motion to withdraw his plea agreement are somehow valid reasons for reconsidering the panel’s decision (“we can’t allow those evil former Enron executives be protected by the law!”). Beyond that, the Task Force’s short pleading mischaracterizes the panel’s decision and fails to address the Task Force’s seminal problem with the entire Nigerian Barge prosecution — that the Task Force prosecuted the Merrill Lynch executives for doing their jobs in connection with Enron’s sale of an asset to Merrill for which Enron, not Merrill, may have improperly accounted, although even that issue was never proven by the Task Force during the trial.
Meanwhile, in another interesting development, two of the former Merrill executives involved in the Nigerian Barge appeal, Dan Bayly and Robert Furst, who face the possibility of a retrial as a result of the Fifth Circuit panel’s decision — filed this motion for rehearing in which they request the Fifth Circuit panel to address a key evidentiary issue — the trial court’s decision to allow the Task Force to introduce an email of Brown that was prepared over a year after the barge transaction took place — that the panel did not address in its original decision because of its reversal of the convictions on other grounds. Bayly and Furst argue in the motion that the panel’s ruling on that evidentiary issue will resolve the issue in any re-trial of the case and should be known to the entire Fifth Circuit before it decides whether to grant en banc review of the panel’s decision (if Bayly and Furst are right that the trial court erred in admitting the Brown email, then even an en banc reversal of the panel’s decision on the honest services issue would not alter the reversal of the convictions).

After a hearing in state court yesterday concluded, I was able to attend the conclusion of the resentencing hearing for Jamie Olis in U.S. District Judge Sim Lake’s court (Tom Fowler’s Chronicle article on the hearing is here). My sense is that the hearing went reasonably well for Olis.

Judge Lake allowed Olis to make a personal statement to him during the hearing, and Olis’ statement was equally heartfelt and heart-wrenching.

Olis, who was not allowed even to look at his delightful and dedicated family in the courtroom during the two-day hearing, choked back tears as he told Judge Lake that he was sorry that he did not — as a young, mid-level executive at a big, publicly-owned company — question the judgment of proceeding with a transaction (Project Alpha) for which he was convicted, and that he was hugely frustrated that he could not do anything about it now. Although Judge Lake is notoriously hard to read, he was clearly moved by Olis’ statement.

In questioning the attorneys during final argument, Judge Lake was primarily interested in the general deterrent effect of the sentence.

Olis defense attorney David Gerger contended that the prison time that Olis has already served and the other ramifications from his conviction (fines, enjoined from serving as an officer of a public company, public humilation, etc) are more than a sufficient general deterrent for other mid-level executives at publicly-owned companies from engaging in wrongdoing, and that the lengthy sentence being proposed by the prosecution is really just a thinly-veiled deterrent for business executives from exercising their right to assert their innocence at trial.

Unfortunately, not mentioned during the hearing was the hugely detrimental effect that the Olis sentence could have on beneficial risk-taking that creates jobs for communities and wealth for shareholders.

Meanwhile, Judge Lake — who clearly has a sound understanding of the sentencing issues — zeroed in on the prosecution by asking why the government was asking for a sentence of a mid-level company executive who did not personally profit from the transaction for which he was convicted that is equal to or harsher than the recent sentences levied on several more senior executives who actually looted their companies while committing wrongdoing.

In what I thought was the defining moment of the portion of the hearing that I attended, the lead prosecutor could not answer Judge Lake’s pointed question and blathered on about how it was important to make Olis a poster boy for what can happen to a business executive who engages in corporate crime. There is no question that Judge Lake noticed the evasiveness of the prosecution on that key point.

So, what will Judge Lake do?

Given that he originally levied the 24+ year sentence on Olis and generally has a reputation of levying stiff sentences, a couple of fellow courtroom spectators predicted afterward that Judge Lake would come back with a 10-12 year sentence.

However, I know that Judge Lake is a man of compassion and grace, and the circumstances of Olis’ case simply do not call for a sentence of that length.

Thus, I’m betting that the sentence lands in the 4-7 year range, with the hope that it will fall into the lower part of that range and that Judge Lake will allow a portion of the sentence to be served in home detention or at least near Olis’ wife and young daughter. Judge Lake stated at the end of the hearing that he will likely issue his ruling late next week, so stay tuned.

The hearing phase of the re-sentencing of former Dynegy executive Jamie Olis involving the key market loss issue is taking place yesterday and today before U.S. District Judge Sim Lake, and the Chronicle’s Tom Fowler files this report on yesterday’s proceedings.

The hearing is expected to conclude today and Judge Lake — who is usually quite prompt in rendering rulings — is expected to issue his decision on the market loss issue shortly.

By the way, according to the Chronicle article, the prosecutor in the Olis case used the same “deep” line of questioning in attempting to impeach the testimony of Olis expert Joseph Grundfest that the Enron Task Force prosecutors used during the Lay-Skilling trial:

During cross examination, Assistant U.S. Attorney Jimmy Sledge challenged Grundfest’s motive for getting involved in the case, noting a number of news articles that mentioned he is doing this pro bono.

“Does it warm your heart to read nice things about yourself?” Sledge asked.

That a prosecutor stoops to that level of questioning (in front of a sophisticated judge rather than a jury, no less!) in an attempt to impeach the testimony of a noted expert who is donating his time to address a gross injustice is an appalling reminder of the lack of adult supervision that presently plagues the Department of Justice.

Under mounting criticism over its dubious tactics in regard to threatening to go Arthur Andersen on KPMG in the prosecution of the firm’s promotion of questionable tax shelters, the Justice Department is now making nice in Congress.

Yesterday, deputy attorney general, Paul J. McNulty testified during a hearing of the Senate Judiciary Committee and, while defending such dubious tactics as criminalizing a potential defendant’s rights to counsel and to assert the privilege against self-incrimination, suggested that the DOJ might consider some changes on the margin to its corporate crime guidelines such as the odious Thompson Memo. Here is a link to McNulty’s testimony and to that of other witnesses at the hearing.

But McNulty’s arrogance in defending the Justice Department’s campaign to criminalize business in the post-Enron era was not even the most appalling part of the hearing.

That occurred when Andrew Weissmann, the former chief of the Enron Task Force, presented a written statement in which he calls for revision of the Thompson memo and a “rethinking of corporate criminal liability.”

According to the Weissmann, who parleyed his Enron Task Force job into a partnership at Jenner & Block, the Thompson memo “should be revised so that it no longer encourages an environment where employees risk losing their jobs or legal defense merely for exercising their constitutional right not to speak to the government . . . ” He went on to observe the following:

In determining whether to indict a company, the Department of Justice should not permit consideration of the company’s treatment of an employee who has asserted her Fifth Amendment right. This factor should simply not come into play in the analysis of whether a corporation has or has not cooperated. Although a company itself can properly fire an employee or cut off legal fees based on whether she cooperates with an investigation, the Department of Justice should not weigh in on this determination ñ and not because a court may ultimately deem the company’s actions as government conduct. Rather, for policy reasons, the Department of Justice should simply not base its decision to prosecute a company on whether a person has been punished by her employer for asserting a constitutionally guaranteed right.

And then Weissmann — appearing to be far more open-minded than he was during his prosecutor days — calls for a “rethinking of corporate criminal liability:”

Although the Thompson Memorandum has recently received significant negative attention, and is in some ways an easy target, it is not the real source of the problem. The root cause that renders the Thompson Memorandum such a sharp weapon is the standard for criminal corporate liability and the absence of systemic checks to restrict the government’s power to charge corporations whenever an employee strays. The current standard for corporate criminal responsibility affords prosecutors enormous and unduly disproportionate leverage and power. In this climate, a corporation has little choice but to conform its conduct to the Thompson Memorandum factors, even in the absence of a prosecutor’s overt threats.

Of course, Weissmann then proposes a feckless change for the standard for corporate criminal liability in which the government would be required to take into account “a companyís attempts to deter the criminal conduct of its employees”:

Holding the government to the additional burden of establishing that a company did not implement reasonably effective policies and procedures to prevent misconduct would both dull the threat inherent in the Thompson Memorandum as well as help correct the imbalance in power between the government and the corporation facing possible prosecution for the acts of an errant employee. A more stringent criminal standard, one that ties criminal liability to a company’s lack of an effective compliance program, would have the added benefit of maximizing the chances that criminality will not take root in the first place since corporations will be greatly incentivized to create and monitor a strong and effective compliance program. The objectives of law-abiding society, the criminal law, and even of the Department of Justice’s Thompson Memorandum itself, would then be well served.

So, in short, unless a company has what the DOJ deems as a satisfactory compliance program to deter bad conduct, Weissmann contends that it is acceptable for the government to go Arthur Andersen on companies that pay for the defense costs of employees who assert such fundamental rights as the privilege against self-incrimination.

Neither mentioned nor challenged is Weissmann’s dubious judgment in contributing to billions of dollars in economic loss and inestimable human hardship from pre-emptively prosecuting Arthur Andersen out of business, Weissmann’s continual threats to go Arthur Andersen on Merrill Lynch because of its payment of defense costs for the four former Merrill executives involved in the equally reprehensible Nigerian Barge prosecution and the long line of serious prosecutorial abuses that Weissmann was involved in with regard to the Enron criminal cases.

That the Senate Judiciary Committee is seeking guidance from someone such as Weissmann with a questionable background in abusing fundamental principles of our justice system speaks volumes regarding the unlevel playing field that business interests face in defending against the government’s increasing regulation-through-criminalization policy.

As Geoffrey Manne appropriately asked awhile back, “Where’s the outrage?“

Washington attorney Alykhan Velshi writing in this New English Review op-ed examines the Conrad Black indictment and doesn’t like what he sees:

The trial by attrition of Conrad Black has exposed the dark underbelly of the legal system, where the government can ruin a man, take his property, his means of livelihood, and make him a social pariah ñ all without the hassle of securing a conviction. There is an insidious little worm that has crept into the legal system, an iconoclastic mentality that is distorting the rule of law. Focused less on securing justice than on bringing down the high and mighty, all the while pandering to the politics of envy, it affects the entire system of corporate governance.
This is highlighted by three developments in the law of corporate governance: the concentration of power in the hands of minority shareholders, the criminalization of technical regulatory violations, the abandonment of the rule of law in favor of aggressive prosecutorial tactics, and the entrenchment of a culture that penalizes success.

Velshi doesn’t get everything right, but his piece is nevertheless worth reading for his analysis of the troubling (and all-too-common) characteristics of the Black prosecution. Check it out.