As noted earlier here, I was able to attend the Lay-Skilling trial for several hours on a couple of afternoons this past week. As I watched Jeff Skilling defend himself against criminal charges amidst the overwhelming societal bias that exists today regarding anything having to do with Enron, one thought kept knawing at me — the enormous waste caused by the government’s policy of criminalizing corporate agency costs.
As noted in this earlier post on the high price of asserting innocence, the known direct costs of the Lay-Skilling trial are sizable. The defense costs are currently in the $75 million range and the cost of the prosecution is at least that high, probably more. Skilling’s remaining net worth — around $50 million — has been frozen by the government, so that wealth has been stagnant for almost three years now. Defending themselves against criminal charges that could put them in prison for the remainder of their lives has been a full-time job for Skilling and Lay, so another cost is that neither of these undeniably-talented businessmen has been in a position to create wealth or jobs for well over three years now. Add in the horrific cost attributable to the Enron Task Force’s dubious decision to prosecute Arthur Andersen out of business and you have quite a direct expense ledger.
However, as enormous as those direct costs are, the indirect costs of criminalizing bad business judgments dwarfs the direct ones. Whether management makes such judgments correctly is a fundamental risk of business ownership. Criminalizing that risk — through the prism of hindsight bias — will simply make executives in the future less likely to take the risks necessary to build wealth and create jobs while not deterring in the slightest the Andy Fastows of the world from embezzling money. Business owners deserve protection from theft, but not from risk taking, and it’s not clear that government prosecutors know — or even care about — the difference.

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One of New York AG Eliot Spitzer‘s misguided regulation-through-litigation forays has been his lawsuit barrage against various radio station owners over payola — i.e., the practice of radio stations owners accepting money from promoters to pay certain types music over the airwaves.
I’m normally sympathetic to companies that have the misfortune of having to deal with Spitzer’s regulatory thrusts, but this WSJ ($) article on a radio owner’s defense to one such Spitzer lawsuit stretches even my liberal sympathy:

To properly file a suit under the consumer-protection laws, Entercom’s lawyers say, [Spitzer] must prove that consumers were harmed as a result of material deception. Entercom argues that, because radio is free, there can be no harm.

As a father of two teenage daughters who insist upon listening to free radio music while riding in the car with me, I can attest that Entercom’s allegation of “no harm” from listening to free radio music is wrong.

This London Daily Telegraph article reports that the Enron-related case of the NatWest Three (previous posts here) — 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 — is back in the news this week. The three former bankers are requesting that the High Court certify that their fight against extradition to face criminal prosecution in Houston raises issues of general public importance and, thus, should be taken up by the U.K.’s highest court.
As noted in the previous posts on the case, the NatWest Three case is being watched closely by the UK business and legal communities, which are alarmed at powers given to United States prosecutors under the 2003 Extradition Act. Under the treaty signed by then UK Home Secretary David Blunkett, the United States government can seek extradition of UK citizens without providing prima facie evidence in the UK that a crime has been committed by the UK citizens in the United States. However, the UK has no such reciprocal power because the US Congress still has not ratified the treaty. Moreover, the use of the treaty to target business executives for extradition is controversial because the treaty was proposed and enacted in the UK in the aftermath of the 9/11 attacks, at which time it was promoted as necessary to make it easier to extradite terrorists.
Recent evidence has come to light that appears to buttress the NatWest Three’s appeal. This earlier Telegraph article reports on discovery of a letter showing that the UK Home Office and its legal team have differing views on where court cases should be heard when more than one country is involved. In the letter, Home Office minister Andy Burnham strongly supported European Union guidelines that, where possible, “a prosecution should take place in the jurisdiction where the majority of the criminality occurred or where the majority of the loss was sustained.” However, in the case of the NatWest Three, the UK government lawyers have been taking a contrary position in urging the UK courts to allow extradition of the three former bankers to Houston. Another recent Telegraph article reports that UK public opinion appears to be solidly in support of the NatWest Three’s position in the extradition dispute.

This Tom Fowler/Chronicle article reports on the oral argument yesterday at the Fifth Circuit Court of Appeals in New Orleans on former Dynegy executive Jamie Olis’ appeal of U.S. District Judge Sim Lake’s denial of Olis’ motion to be released on bond pending Judge Lake’s re-sentencing of Olis as previously ordered by the Fifth Circuit. Olis is presently held in custody in the Federal Detention facility in downtown Houston as he awaits re-sentencing.
Olis’ appeal on Judge Lake’s denial of his motion for release pending re-sentencing is a long shot. The Fifth Circuit generally leaves such decisions to the discretion of the trial judge, particularly one as competent and well-regarded as Judge Lake. However, the Fifth Circuit did grant a similar request recently in connection with the Enron-related Nigerian Barge case, and there is little question that the government intentionally misrepresented to Judge Lake the market loss attributable to the transaction for which Olis was convicted in order to hammer Olis with the most draconian sentence possible. So, while it is unlikely that the Fifth Circuit will order the release of Olis pending re-sentencing, it would not be unprecedented for the Court to do so.

In the original version of this Chronicle story (since revised) about Jeff Skilling’s upcoming testimony in the Lay-Skilling trial and the importance of witness preparation, Austin-based jury consultant Doug Keene is quoted as making the following observation about Martha Stewart:

In contrast, Martha Stewart did herself no favors during testimony in her 2004 trial, in which she was widely seen as being less than contrite.

“She came across as someone who would lie even on a very small matter out of arrogance, who made jurors say, ‘Yeah, what I’ve heard about her is probably true,'” Keene said. “Arrogance is one character trait that a white-collar defendant can’t leave jurors with.”

Sounds reasonable, doesn’t it?

Except when you realize that Stewart elected not to testify during her criminal trial.

But then, isn’t the point that Keene is really making is that all high-profile executives of big companies are arrogant? Right?

So it goes in the wacky world of criminalizing businesspersons in America.

Although overshadowed by the Lay-Skilling trial, former Westar Energy, Inc. CEO David Wittig and his corporate right hand man Douglas Lake were sentenced yesterday to 18 and 15 years in prison after being convicted last year of looting the utility of millions of dollars in unapproved compensation. An earlier contentious trial of the two former executives had ended in a mistrial in late 2004 after another federal jury in 2003 convicted Mr. Wittig of bank fraud charges in a case that was not directly related to Westar. Federal prosecutors had sought life sentences against the 50 year-old Wittig and the 55 year-old Lake.
Wittig and Lake each faced charges relating to allegations they looted the largest electric utility in Kansas after the pair left Westar late in 2002 amidst allegations of misuse of corporate funds. Subsequently, Westar under Mr. Wittig was implicated in the scandal surrounding efforts to fund Houston Congressman Tom DeLay’s political action committee. Westar’s contribution of funds during 2002 to the DeLay’s PAC was among the allegations of wrongdoing that led to DeLay’s indictment in Travis County last year.

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In an extraordinary development, the Fifth Circuit Court of Appeals this afternoon — just three weeks after oral argument in the appeal by four Merrill Lynch executives of their convictions in the controversial Enron-related Nigerian Barge case — ordered former Merrill Lynch executive William Fuhs released immediately on bond pending final disposition of his appeal. Here are the NY Times and the Chronicle articles on the order.

From the Fifth Circuit docket of the appeal, it appears that Fuhs was the only one of the Merrill Four who filed a renewed motion for release pending disposition of the appeal after the March 6th oral argument.

The Fifth Circuit’s order came after both U.S. District Judge Ewing Werlein and the Fifth Circuit had previously denied Fuhs’ motion for release pending appeal of his conviction.

Fuhs will make an appearance on Friday at 2 p.m. before a U.S. Magistrate in Oklahoma City (where he was serving his sentence) to establish the terms and conditions of his release. The Fifth Circuit’s unusual action is a strong signal that Fuhs has a winner on the merits of his appeal.

Fuhs is represented by David Spears of Richards Spears Kibbe & Orbe LLP of New York City and on appeal by Seth Waxman, Paul A. Engelmayer, and Anne K. Small of Wilmer Cutler Pickering Hale and Dorr, LLP’s New York and Washington offices.

In the post-Enron era of criminalizing business, a business executive’s attorney-client privilege with the company counsel of the executive has already become largely illusory (posts here, here here and here). Now, according to this Nathan Koppel/WSJ ($) article, the government is now threatening to go Arthur Andersen on a New Hampshire company unless the company breaches its contractual obligation to provide counsel to a company executive that is accused of a crime.
The fee-payment issue has become an issue over the past several years after the 2003 “Thompson Memo,” former Deputy Attorney General Larry Thompson’s dubious directive that advised prosecutors how to induce companies to cooperate with the government in order to avoid an indictment and an Arthur Andersen-type meltdown. The memo advises that a company’s willingness to advance legal fees to “culpable employees” may signal a lack of cooperation. The nonpayment of legal fees has been a huge issue in the ongoing tax-shelter prosecution against former executives of KPMG LLP, where the accounting firm has not reimbursed its former executives since 2004.
In the New Hampshire case, five former executives of technology company Enterasys Networks Inc. are charged with accounting fraud. The case was scheduled to go to trial in Concord this month, but the defense received a three-month reprieve after federal prosecutors were accused of misconduct in pressuring the company to cut off legal fees to the defendants. At a March 7 hearing, U.S. District Judge Paul Barbadoro voiced concern over the prosecutors conduct, but he did not sanction the prosecutors and Enterasys reluctantly agreed to pay past-due fees and costs of defense counsel and to cover future costs.
The article notes that, over the past three years, federal prosecutors in New York, Alabama and now New Hampshire have placed companies at risk of being indicted out of business if they fail to cut off payments to an executive’s defense counsel. Clear Thinkers favorite Ellen Podgor of the White Collar Criminal Prof blog comments in the article:

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This earlier post noted the dust-up over the SEC’s dubious issuance of subpoenas to financial journalists over Overstock.com’s accusation that a hedge fund and a stock-research firm manipulated the media and the market to drive down the price of Overstock.com’s stock for the purpose of profiting through shorting the stock.
Now, this NY Times article reports that the SEC is seeking documents about communications that the stock research firm — Gradient Analytics Inc. — had with journalists and several hedge-fund advisers. The new subpoenas appear to be intended to gather information about Gradient’s contacts with journalists without seeking the information directly from the journalists themselves. If you can’t get the information one way, try another.
The NY Times story reports allegations that SAC, a big hedge fund, persuaded Gradient to generate a misleading and negative report on Biovail, a generic drug firm. Then, the allegation goes, SAC persuaded (bribed?) Gradient to delay publication of the negative report on Biovail so that SAC could profit by shorting Biovail stock. If true, then SAC and Gradient’s scheme is sanctionable under existing securities laws.
Although Biovail stock hasn’t been doing all that well anyway and it’s unclear whether the negative reports had any effect on the company’s stock price, the NY Times article rachets up the “more business regulation” demagogery, anyway:

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Outside the media glare of the trial of the Lay-Skilling trial, decade, a true corporate crook — financier Martin Frankel — was re-sentenced yesterday in a post-Booker hearing to 17 years in prison for pulling off one of the biggest insurance frauds in American history.

Frankel was a small-time New York money manager in the early 1990’s who arranged for the acquisition of a group of financially-troubled insurance companies throughout the 1990’s, which he then used to pull off a several hundred million dollar scam.

With investigators closing in on him in May,1999, Frankel bought millions of dollars worth of diamonds, wired money to accounts all over the world, torched any remaining paper trail and fled the country for Germany under a blaze of publicity.

He was apprehended in Germany several months later, spent a year and a half in a German prison, and then was extradicted to the US to face criminal charges here.

The Wall Street Journal’s Ellen Joan Pollock was a lead writer on the reporting team that covered the FBI’s four-month international manhunt for Frankel, and she eventually wrote a good book about the affair called The Pretender (Free Press 2002).

Meanwhile, as Frankel returns to prison to serve the remainder of his 17-year sentence, Jamie Olis — an honest, hard-working, American success story who did what his bosses told him to do in regard to a merely questionable business transaction — continues to await resentencing after his previous 24-year sentence was overturned on appeal.

Comparing the sentences of Frankel and Olis provides a stark example of the injustice involved in the government criminalizing corporate agency costs to assuage public animus after a business meltdown such as Enron.

If the government cannot tell the difference between Martin Frankel and Jamie Olis, then it is highly unlikely that it can tell the difference between Martin Frankel and you or me.