On the heels of the Fifth Circuit ordering the release from prison yesterday of two other business executives who have been subjected to the Justice Department’s demonization of business in the post-Enron era, U.S. District Judge Sim Lake will conduct a scheduling conference this afternoon in Houston in the sad case of Jamie Olis in an effort to kick-start the resentencing of Olis that the Fifth Circuit ordered seven months ago after throwing out Judge Lake’s original 24-year sentence of Olis.
Judge Lake, who has been preoccupied with a rather long trial in another case over the past several months, is not the type of judge to allow pending matters to linger on his docket, so expect him to use today’s hearing to schedule a final resentencing hearing in the near future. The key issue in the resentencing is the amount of market loss attributable to the transaction on which Olis’ conviction is based, and the prosecution has been dragging its feet since the resentencing was ordered in an apparent effort to buttress its untenable market loss theory upon which Judge Lake based the original sentence of Olis. Judge Lake has not yet tipped his hand on how he intends to view the market loss issue on the resentencing of Olis, so today’s hearing may provide a forum for the judge to give the parties some direction for preparing the evidence on that key issue for the final resentencing hearing.

With the announcement yesterday of Houston-based Vinson & Elkins’ $30 million settlement of one of the myriad of lawsuits pending against the firm as a result of its representation of Enron, the WSJ’s Peter Lattman notes this BusinessWeek Online article that reviews some of the evidence that the plaintiffs in the main Enron class action securities fraud lawsuit are marshalling against VE:

[P]laintiffs’ lawyers are preparing to unleash a new volley of evidence on June 13 to support allegations that V&E should be liable for some of the $40 billion in investor losses resulting from the energy giant’s collapse. [. . .]

[D]ocuments and transcripts reviewed by BusinessWeek indicate that V&E attorneys had doubts about the legitimacy of Enron’s business practices. Sometimes they even made light of the company’s aggressive accounting. At the end of 1997, as Enron scrambled to complete a series of deals aimed partly at burnishing its financials, it dumped a pile of paperwork on V&E. On Christmas Eve, Dilg sent an e-mail to buck up his beleaguered troops. It contained a poem, which read in part: “no sooner than you could say ‘mark to market’/Our client’s year end financials began to sparkle.” That passage referred to Enron’s use of mark-to-market accounting, which allowed it to recognize the entire revenues from a 20-year gas contract, say, in the first year.

In a 1999 voicemail that was forwarded to Dilg, V&E partner Boyd Carano expressed concern after learning that the now-notorious entity known as LJM, which was buying part of Enron’s interest in a Brazilian power plant, was actually controlled by the company’s chief financial officer, Andrew Fastow. “Basically, this is a fund that he set up in order to do these deals with Enron, where Enron pays him a 13 and then 25% return in order to get stuff off the balance sheet,” he said. “Frankly, I don’t approve.”

In another voicemail, Carano told fellow V&E partner Mark Spradling that he had not been able to speak directly to Enron Chief Accounting Officer Richard Causey to get assurances that Enron had not secretly guaranteed Fastow’s LJM investments. Instead, Carano had been forced to rely on the assurances of Kent Castleman, a lower-ranking employee. In his response to Carano’s concerns, Spradling said: “I think the problem is that anything we do either calls into question the truthfulness of Kent Castleman or imbues this whole issue with our view that there may be fraud going on here” . . .

Given Sherron Watkins’ highly-publicized testimony in the Lay-Skilling trial criticizing VE and publicity surrounding the firm’s involvement in the the San Diego pension fund debacle, it has not been a pleasant past few months for VE.

Moreover, the plaintiff’s firms in the main Enron class action securities fraud lawsuit probably consider the $30 million that VE is paying to settle the Enron estate’s lawsuit as the equivalent of a nominal “slip and fall” settlement payment. Thus, that settlement amount may not have much to do with the price of extracting VE from that even more troubling lawsuit.

As Lay and Skilling discovered, the societal morality play regarding Enron makes it enormously difficult to defend in a jury trial against allegations of wrongdoing involving the company. It’s even harder when the defendent is a law firm, which juries generally don’t mind hammering.

VE remains in a tough spot, so stay tuned.

As noted earlier here, the indictment of Milberg Weiss Bershad & Schulman is likely to put the firm out of business regardless of the outcome, although the firm is officially keeping a stiff upper lip and making a go of it.
Nevertheless, as the Arthur Andersen experience showed us, the odds of survival are long for a professional service firm under indictment. In that regard, Peter Lattman and Ashby Jones of the Wall Street Journal Law Blog have been doing a good job of keeping up with partner and client defections from Milberg Weiss, the latest of which is the New York State Common Retirement Fund’s decision to seek replacement of Milberg Weiss as lead counsel in the Bayer AG class action litigation. This client defection comes on the heels of this Justin Scheck/The Recorder article that reports that several Milberg Weiss partners and associates have left the firm since the indictment, and that “competing class action plaintiffs firms say they’re being bombarded with phone calls and resumes of Milberg lawyers seeking jobs.”
Paragraph 83 of the indictment is probably the clincher in the decision of many lawyers and clients to bail out on Milberg Weiss:

Pursuant to Title 28, United States Code, Section 2461(c), Title 18, United States Code, Section 981(a)(1)(C), and Title 21, United States Code, Section 853, each of defendants MILBERG WEISS, DAVID J. BERSHAD, STEVEN G. SCHULMAN, and SEYMOUR M. LAZAR convicted under Count One of this Indictment shall forfeit to the United States any and all property, real or personal, which constitutes or is derived from proceeds traceable to such offense, including the following:

a. with respect to MILBERG WEISS, the more than approximately $ 216.1 million in attorneysí fees obtained by MILBERG WEISS in the Lawsuits and litigation resolving the Lawsuits (the ìtainted attorneysí feesî).

A $216.1 million contingent forfeiture liability to the federal government has a way of inducing the search for greener pastures.

The jury in the first re-trial of the Enron Broadband case that ended in a mess of acquittals and a mistrial last year convicted former EBS CFO Kevin Howard (picture on the left) this afternoon on all five counts — three counts of wire fraud, two counts of falsification of books and records and conspiracy to falsify books and records. Howard’s co-defendant — former EBS accountant Michael Krautz — was acquitted on all counts. The previous posts on this case are here, including this recent one on the closing arguments of the trial.
U.S. District Judge Vanessa Gilmore scheduled sentencing for the morning of September 11, 2006, the same day on which former key Enron executives Ken Lay and Jeff Skilling will be sentenced by U.S. District Judge Sim Lake on the same floor of the Federal Courthouse in downtown Houston. Howard faces possible penalties of five years in prison on the conspiracy charge and each of the three wire fraud counts, and 10 years on the falsification of books and records count.
Given the unavoidable torrent of adverse publicity regarding all things related to Enron that has occurred since the Lay-Skilling jury returned its verdict last Thursday, it’s highly unfortunate that the re-trial of Howard and Krautz was not postponed until a reasonable period of time had passed after the completion of the Lay-Skilling trial. The freedom of a 43 year-old family man and father of two young children now hangs in the balance of that dubious decision.

The ever-alert Doug Berman notes that, in an expected decision, the Fifth Circuit Court of Appeals has denied Jamie Olis’ appeal of U.S. District Judge Sim Lake’s denial of Olis’ motion for release pending the Judge’s re-sentencing of Olis after the Fifth Circuit late last year reversed Olis’ original 24-year sentence and ordered re-sentencing. Although yet another unfortunate decision for Olis and his family, the Fifth Circuit traditionally defers to the trial judge in regard to such matters, particularly when the judge is as well-regarded as Judge Lake.
Judge Lake has scheduled a status conference in regard to Olis’ resentencing for June 9th as the Justice Department continues to drag its feet in regard to the re-sentencing hearing. With the Lay-Skilling case finally coming to a close, my sense is that Judge Lake will use that conference to put the Olis resentencing on a fast track.

Amidst an overwhelmingly negative media drumbeat, former Enron executives Ken Lay and Jeff Skilling await a jury verdict that could send them to prison for most of the rest of their lives. Meanwhile, in Amsterdam, such matters are handled a bit differently:

The executives in charge of the Dutch retailer Royal Ahold when it plunged into a financial scandal were convicted of fraud on Monday but were sentenced to a fine and no prison time, as judges found they bore little criminal guilt.
The former chief executive, Cees van der Hoeven, and the former chief financial officer, Michiel Meurs, were fined 225,000 euros ($288,000) each and they were given nine-month suspended sentences.
The verdict comes more than three years after Ahold ó which operates grocery stores around the world, including the Stop & Shop and Giant chains ó went to the brink of bankruptcy in February 2003.

An earlier post on the Royal Ahold case is here.
Meanwhile, if the prospect of fairness for Lay and Skilling is simply too difficult to fathom, then how do you square the resolution of the Ahold case with that of this case, this case, or this one?
So it goes as an unattractive cauldron of resentment towards business and wealth continues to produce the lottery-style results of prosecuting corporate crime in America.

Inasmuch as I had a couple of hearings yesterday in federal court, I was able to slip in and watch most of the closing arguments of the Enron Task Force’s case against former EBS CFO Kevin Howard (picture on the far left) and former EBS accounting director Michael Krautz. Based solely on the closing arguments — which are not always a good indicator of how the evidentiary phase of the trial went for either party — my sense is that acquittals of both men are likely.
Call the Howard-Krautz part of the Enron Broadband re-trials the “Nigerian Barge II case.” As with its basic theory in that case, the Enron Task Force in this one contends that Howard and Krautz engineered a series of secret side deals that undermined the validity of Enron’s accounting treatment for an otherwise valid joint venture deal with a small computer outfit named nCube. The purpose of the joint venture was to monetize Enron’s video on demand (“VOD”) contract with Blockbuster, which Enron used to buttress its earnings in a couple of quarters to the tune of around $100 million during 2000-2001. Although there is nothing wrong such a deal in theory, says the Task Force, the deal was a sham because nCube’s equity in the joint venture was never at risk because Enron orally promised to take nCube out at a stated rate of return, Enron controlled the joint venture and the parties operated no real business in the joint venture. The Task Force contends that Howard and Krautz were at the center of the sham deal.

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The indefatigable Walter Olson, senior fellow at the Manhattan Institute for Policy Research and editor of the popular blawgs Overlawyered.com and PointOfLaw.com, chimes in today with this Wall Street Journal ($) op-ed that provides a fine overview of the key issues raised by the Milberg Weiss indictment. Olson’s op-ed runs along side this WSJ ($) editorial that also comments on the Milberg Weiss indictment.
In reviewing the issues raised by the indictment, Olson notes the irony of Milberg Weiss being indicted for allegedly paying illegal kickbacks when Milberg Weiss has profited from making similar accusations in a large number of its class action securities fraud cases over the years:

Milberg Weiss lawyers have been in the forefront of efforts to define kickbacks broadly and punish them with rigor. The firm’s Web site boasts that it “has sued major providers of private mortgage insurance for kickback violations, resulting in substantial settlements.” Melvyn Weiss and others at the firm have expressed indignation at, and filed lawsuits over, alleged kickbacks in the contexts of Wall Street initial public offerings, mutual fund sales, insurance brokerage commissions and doctors’ prescribing of pharmaceuticals.

Meanwhile, although no great fan of many of the class action securities fraud lawsuits that Milberg Weiss has pursued, Larry Ribstein remains troubled by the indictment:

We (and I) may not like Milbergís business. But the class action part of it was one enabled by legal rules. The right way to deal with the problems of this business is to change the rules, as Iíve argued for securities class actions in my Fraud on a Noisy Market. When we criminally condemn firms like Milberg because we don’t like their business, we set a precedent for other firms in controversial lines of work — e.g., Drexel Burnham.
More seriously, the power to criminalize a firm puts a potent tool in the governmentís hands to get the firm to cooperate in sacrificing the rights of criminal defendants. Here the cure seems patently worse the disease. The questions are no less in Milberg than in KPMG just because Milberg was in an unpopular line of work.

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Almost ignored amidst the media’s unprecedented focus on the Lay-Skilling trial, the first re-trial in the Enron Broadband case will go to the jury today after the prosecution and defense attorneys complete their closing arguments, which are expected to last most of the day. The trial is taking place in the courtroom of U.S. District Judge Vanessa Gilmore in Houston’s federal courthouse just down the hall from where the Lay-Skilling jurors resume deliberations this morning.
As noted earlier, the defendants in this first re-trial are Kevin Howard, the former Enron Broadband (“EBS”) CFO, and Michael Krautz, the former EBS senior accounting director, who are being tried together on four counts alleging that they conspired to commit wire fraud and falsify books and records in connection with a sale of video-on-demand profits. The charges relate to a April 2000 structured finance transaction known as Project Braveheart that was designed to allow EBS to monetize a 20-year agreement with Blockbuster Inc. EBS’ agreement with Blockbuster provided that Blockbuster would obtain digital rights to films that EBS would encode and stream over its network to customers’ homes.
The government contends that Howard and Krautz understood the accounting rules relating to the structured finance transaction, but that they intentionally violated those rules and withheld key information from Enron’s auditors so that the Braveheart transaction could be booked and allow Enron to post about $110 million in revenue in 2000-01. Howard and Krautz assert that the sale was an entirely legal and creative structured finance transaction that allowed EBS to generate earnings in an industry that was undergoing a deep shakeout amidst intense competition and fast-changing technology.
As noted earlier here, the Enron Broadband case is a part of a troubling trend in the post-Enron era in which individuals involved in legitimate structured finance transactions are targeted for indictment and prosecution, resulting in yet another disincentive for those individuals and their companies to engage in innovative risk-taking that generates wealth and jobs.