After five years, two trials, an appeal, two regulatory investigations, thousands of hours of tedious legal work, multi-millions of dollars in legal cost and untold damage to the attorney-client privilege, the Justice Department has finally decided to cut its losses with regard to its misguided harassment of former Credit Suisse investment banker Frank Quattrone (previous posts here). This NY Times article reports that Mr. Quattrone has entered into a deferred-prosecution agreement with the Justice Department that will impose no penalty and will not require Quattrone to admit any wrongdoing. The deal is scheduled for court approval this coming Tuesday in New York City.
So, yet another chapter closes in the story of the Great Waste of the federal government’s dubious criminalization of business in this post-bubble era.

Christine Hurt, Conglomerate blogger, former Houstonian and currently the Richard W. and Marie L. Corman Scholar in the University of Illinois College of Law, is working on an interesting paper that she describes here:

The prosecutorial response to white collar crime post-Enron has had some setbacks. In both the Arthur Andersen case and the Enron Nigerian Barge case, appellate courts eventually said that the fact pattern did not constitute the crime in question. However, as welcomed as these decisions are, they cannot turn back time. Arthur Andersen was destroyed by the investigation and conviction and, like a corpse after an autopsy, cannot be brought back to life. The defendants in the Nigerian barge case will never get back the years they spent defending themselves and actually living in prison, not to mention the untold defense costs. I am writing a paper on the relative burdens on the various parties in criminal and civil corporate misconduct cases, and I find it interesting that we have so many requirements and presumptions to save corporate civil defendants from vexatious litigation and exorbitant discovery costs, but we seem not to care about the corporate criminal defendant who must wait until a jury verdict or an appellate ruling to determine whether the prosecution was without merit.

Music to my ears! ;^)

The Wall Street Journal has had a spotty record in covering the corporate scandals that emanated from the stock market bubble of the late 1990’s, as noted earlier here and here) in regard to its coverage of the Enron case.

In the better-late-than-never department, the WSJ Editorial Board published this editorial ($) today entitled “Enron Overkill” that decries the Enron Task Force’s hyper-aggressive use of the honest services statute to obtain unjust convictions of the four Merrill Lynch executives in the Nigerian Barge case, which resulted in a rebuke of the Task Force’s tactics from the Fifth Circuit Court of Appeals.

The WSJ editorial criticizes the federal government’s broad use of the vague honest services statute as a trump card in white-collar criminal prosecutions. But after failing to place the issue in the context of the more troubling trend of the government wrongfully prosecuting business interests, the WSJ editorial ends with this doozy of an observation about the Enron Task Force:

[The] Enron Task Force has a good record overall, bringing solid fraud cases and winning some 30 convictions. In the Merrill case, however, it stretched the law to send a political message — and has now received a well deserved rebuke.

The WSJ lauds the Task Force for doing a good job overall, but notes that they messed up in this one particular case and got caught?

In what parallel universe is America’s leading business newspaper living? Does the WSJ Editorial Board really believe that the following amounts to “a good record overall?”:

The Task Force’s inflammatory public relations campaign demonizing anything having to do with Enron;

The Task Force’s poor trial record involving former Enron executives (four convictions out of nine Enron executives tried to date) in a venue severely-biased against such executives;

The Task Force’s questionable tactic of bludgeoning former Enron executives into plea bargains;

The Task Force’s disingenuous market loss arguments in connection with the sentencings of the four Merrill Lynch executives in the Nigerian Barge case, which argument contradicted the Justice Department’s position in a case pending before the U.S. Supreme Court at the time;

The overreaching nature of the Task Force’s decision to prosecute Arthur Andersen out of business, which the Supreme Court noted in its unanimous reversal of that conviction, and the incalculable cost of such prosecutions;

The Task Force’s elicitation of false testimony from former Enron executive Ken Rice, its key witness in the Task Force’s miserably failed first Enron Broadband prosecution;

The Task Force threats toward two witnesses in the Broadband trial — Beth Stier and Lawrence Ciscon — who testified favorably for the defense in the first Enron Broadband trial and a Task Force prosecutor’s violation of the judge’s instruction not to question witnesses on certain subjects during that trial;

The Task Force’s dubious policy of fingering potential defense witnesses as either unindicted co-conspirators or targets of the Enron criminal investigation to deter such witnesses from testifying for defendants in the Enron criminal trials, including the strong evidence that the Task Force threatened witnesses favorable for the defense in the Lay-Skilling trial;

After bagging the conviction of Ken Lay, the Task Force prosecutors bragging to the NY Times that they had trumped up a weak case against Lay in order to get a conviction of the former Enron chairman;

The Task Force’s characterization of “harmless error” in regard to strong evidence of jury misconduct in the trial of former Enron Broadband executive Kevin Howard;

The appallingly arrogant “end justifies the means” attitude expressed by the former head of the Enron Task Force in regard to the prosecution of Arthur Andersen and other Enron-related cases;

The negative effect that the Justice Department’s criminalization of business mindset is having on how foreigners perceive the risk of investment in American business markets; and

The negative ripple effect that the Task Force’s tactics have had on such fundamental rights as the attorney-client privilege and the presumption of innocence in prosecutions of business executives.

If the WSJ editorial board considers the foregoing “a good record overall,” then I shudder to think about the carnage to justice and the rule of law that would result from a record in such matters that the WSJ would consider poor.

In reality, the WSJ has fumbled the ball badly in defending business from the federal government’s increasing criminalization of corporate agency costs in the post-Enron era. A few editorials sniping at isolated issues relating to that criminalization is not going to change the WSJ’s abject failure in that regard.

This earlier post focused on the political controversy that arose in the UK over the case of the NatWest Three, the three former London-based National Westminster Bank PLC bankers who are charged in Houston with bilking their former employer of $7.3 million in one of the schemes allegedly engineered by former Enron CFO Andrew Fastow and his right hand man, Michael Kopper. After the intervention of British Prime Minister Tony Blair, the British Parliament declined to block the extradition of the three former bankers, who are now living in Houston while awaiting trial on the charges.
However, one question that arose immediately after the NatWest Three arrived in Houston was why the three former bankers were not required like other defendants in Enron-related criminal cases to undergo a “perp walk” — i.e., the process by which federal authorities parade white-collar criminal defendants in handcuffs and sometimes leg chains in front of the media as they enter the federal courthouse for their initial appearance in court. Well, according to this Telegraph.co.UK article, Attorney General Alberto Gonzales telephoned the US Marshals Service in Houston on the afternoon the three arrived in Houston and instructed the marshals to remove their hand and leg chains. So much for the ruse that Enron-related criminal cases are not subject to political pressure, wouldn’t you say?
Meanwhile, in another interesting development, the entertainment value of the NatWest Three case increased last this week with the news that famed Houston criminal defense attorney Dick DeGuerin — he of Joseph Durst fame — has been hired by Giles Darby, one of the NatWest Three. With colorful Houston-based criminal defense lawyer Dan Cogdell already representing NatWest Three defendant David Bermingham, the defendants are preparing a formidable legal team and signaling an aggressive defense of the Enron Task Force’s charges.

As noted earlier here and here, the practice of backdating stock options is fundamentally a disclosure issue. However, that has not stopped federal prosecutors from criminalizing the practice as new indictments are now announced almost daily.
In this typically lucid post, Larry Ribstein wonders where this current spike in criminalizing a perhaps unfortunate but nevertheless common corporate practice will end:

The question is where to draw the line between criminal and civil liability for these violations. Are we going to throw a significant fraction of corporate America in jail? . . . backdating could become the Rubicon of criminalizing agency costs.[. . .]
The line-drawing problem becomes particularly clear in light of the news just yesterday that the vaunted Pixar apparently had its own backdating problem, and that one of the grants was to its guiding creative spirit, John Lasseter. So, again, how far are we going to go? Should we say that itís ok to jail the heretofore little known Kobi Alexander, but draw the line at the famous John Lasseter, or Steve Jobs, Pixarís co-founder and board chair?
Or is the key that Jobs himself didnít receive options but Alexander did? But, then, how distinguish Brocade, discussed in my first post on criminalizing backdating, where the indicted ceo apparently also did not gain?
Or is the distinction that the board may have authorized the options in Pixar, but the indicted Comverse agents apparently tricked their board? But the board apparently approved the Brocade options.
Also, the evidence of who did, and knew, what may get a little tricky. A member of the Comverse boardís compensation committee was Alexanderís sister. And note that a lot of this evidence of a coverup is based on affidavits by Comverse board members, who appointed the internal review committee.[ . . .]
In the Pixar case, the WSJ story implies but doesnít say that the board was in on the scheme. It notes that one compensation committee member was Jill Barad, former Mattel ceo, who also served on Microsoftís compensation committee while Microsoft was backdating. Another director was famed lawyer Larry Sonsini, who was also on the Brocade board and had long advised Apple and Jobs. . .
But what difference should it make whether the insiders fooled the board, and therefore the shareholders, or the board was in on the scheme? Is it, again, just that we donít want to send the likes of Barad and Sonsini to jail, but itís ok to catch the small fry? And can we be sure who was in on what?
Or should the key distinction as to criminalization be whether the insiders lied to the auditors, as may have happened in Comverse? If so, why is it worse to lie to the auditors than to your board?
This whole business of fixing responsibility within large organizations, or even not so large, is part of the problem of criminalizing agency costs. As Iíve said in my short paper The Perils of Criminalizing Agency Costs:

Disciplining agents also requires pinning responsibility for corporate failure on particular people in the organization. If someone should be criminally responsible for obscuring Enron’s financial condition, who should it be ñ the midlevel executives who designed the misleading structures, the executive officers who signed off on them, the independent directors who failed to object, the lawyers, accountants, banks and other executives who enabled them, anybody who knew about them and didnít speak up, the whistleblower who told only those within the organization, or all of the above?

Elsewhere on the criminalization of business front, the publicly-owned company BetOnSports — whose CEO David Carruthers was yanked off a plane while changing planes and arrested a couple of weeks ago (previous posts here) and which has provided a recreational service enjoyed by millions of Americans (online betting) — announced yesterday that it was shutting its operations down and “refocusing” its business on the Asian markets. The development represents the first time that I can recall that a publicly-traded company on the London Stock Exchange has shut down its operations under pressure from United States prosecutors.
So, what’s next? Shut down all the popular online Fantasy Football operations? That would be absurd, you say. Well, maybe not. At least the statistics don’t appear to be the property of the professional sports leagues.
Federal prosecutors assert that offshore Internet casinos such as BetOnSports violate the Federal Wire Act of 1961, but that legal theory is wholly untested except arguably in the area of sports betting. BetOnSports raised over $100 million when it went public on the London Exchange in July 2004 and its market cap immediately before the arrest of Carruthers was about $235 million. Some of the company’s largest institutional shareholders are funds controlled by major American investment houses, such as Goldman Sachs, Merrill Lynch and Morgan Stanley.
So, if BetOnSports is truly guilty of racketeering, then does that mean that Goldman Sachs, Merrill Lynch and Morgan Stanley are also criminally responsible for helping to finance that racketeering?
Don’t bet against it.
Update: Christine Hurt over at the Conglomerate provides these related insights into the enormous cost of prosecutorial overreaching.

After being oddly slow in objecting to the prosecutorial abuses of businesspeople that have resulted in this, this and this (among many others), the Wall Street Journal ($) editorial page finally gets it right in this editorial on the outrageous conduct of the Justice Department in arresting BetOnSports executive David Carruthers while he changed planes in Dallas. Read the entire piece, but the conclusion sums up the outrage well:

. . . BetOnSports and Mr. Carruthers are not charged with dishonest behavior toward their customers. They are being told that a business they believed was legal was a criminal enterprise even if it was being run in the open. That suggests that prosecutors believe they have the right to enforce compliance with even ambiguous U.S. laws on any business, wherever based, solely because some of the people accessing their site happen to be Americans. As a legal theory, this is a stretch. But as an excuse to incarcerate a foreign national just passing through, it smacks of a politically opportunistic prosecution.

James Brown — the only former Merrill Lynch executive who remains in prison after last week’s Fifth Circuit decision reversing and vacating the convictions of the four former Merrill Lynch executives in the Nigerian Barge case — appears to be on the verge of being released from prison pending further disposition of his appeal.

In a motion filed with the Fifth Circuit, Brown’s attorneys argue persuasively that the year that Brown has already served in prison in regard to his conviction on perjury and obstruction of justice charges — combined with the fact that substantial issues remain as to whether Brown’s conviction on those charges should stand (read Judge DeMoss’ dissent from the Fifth Circuit decision on that issue) — is more than enough to justify Brown’s release from prison pending further disposition of his appeal.

In a pleasant surprise, the Justice Department filed a short response to Brown’s motion not opposing Brown’s release. Inasmuch as it would be highly unusual for the Fifth Circuit not to grant such an unopposed motion under the circumstances, Brown should be released from prison shortly, perhaps as early as today.

Does the Justice Department’s response signal something?

After last week’s decision in the case, Ellen Podgor, among others, speculated that the DOJ might request that the Fifth Circuit conduct an en banc review of the panel’s decision. That’s certainly possible, but the DOJ should be careful what it asks for — my sense is that a good number of other Fifth Circuit judges would view the case much as DeMoss did.

If the DOJ is concerned that the panel’s decision is going to be dished up to them in virtually every deprivation of honest services case, then just think how often the DOJ would have to confront an en banc decision that adopts Judge DeMoss’ dissent as the majority view. As a result, although the DOJ may still request it, I would not be surprised if the DOJ passes on en banc review in this case.

Update: The Fifth Circuit has now issued an order directing Brown’s release. What a wonderful surprise for the Brown Family and hopefully the beginning of the end to a long nightmare and travesty of justice.

This Paul Davies/Wall Street Journal Weekend ($) article provides a profile of U.S. District Judge Lewis Kaplan, the judge who is at the center of the KPMG tax shelter case.
Judge Kaplan is quite a character, as reflected by his following response to one of the banes of federal judges — the wrong-number caller to the in-court conference speaker phone that is used by out-of-town attorneys to participate in hearings that do not necessitate their in-person appearance in court:

During one hearing, an outside caller was mistakenly connected to the courtroom telephone.

“Hello?” the caller said over the speaker phone.
Judge Kaplan deadpanned: “Punch one if you want to enter your credit card number.”