One can only wonder when the mainstream media will pick up on the outrageous conduct of the Justice Department in the sad case of former mid-level Dynegy executive Jamie Olis?

First, in a prosecution that probably should never have been pursued in the first place, the Justice Department dramatically misrepresented the market loss attributable to the transaction over which Olis was prosecuted, prompting U.S. District Judge Sim Lake to sentence Olis in March 2004 to an absurd 24 years in prison.

Then, after the Fifth Circuit Court of Appeals threw out Olis’ sentence on this past October 31, the Justice Department had over two months to prepare for the hearing on Olis’ resentencing. Despite that time to prepare, the prosecution simply asserted that Olis should be sentenced to an almost as absurd 15 years in prison and failed to prepare any meaningful evidence of market loss to support that position.

On the other hand, Olis’ defense team produced impressive expert reports that establish the impossibility of establishing with any degree of meaningful certainty the market loss attributable to the transaction over which Olis was prosecuted.

Now, in yet another outrage, the Justice Department has requested six additional weeks to prepare market loss evidence for Olis’ resentencing hearing despite the fact that it has been clear since the Fifth Circuit’s decision of October 31 that such evidence would be necessary for Olis’ resentencing. Inasmuch as Judge Lake is about ready to commence the trial of former key Enron executives Ken Lay and Jeff Skilling, it now appears that Olis resentencing will be postponed for at least four months.

Meanwhile, justice, respect for the rule of law, the principle of prosecutorial discretion, common sense and human decency continue to be the casualties of the sad case of Jamie Olis and other dubious prosecutions of corporate agency costs in the post-Enron era.

Update: Doug Berman continues to place the over/under on the Olis resentencing at 5-7 years. I’ve been taking the under on that bet, but the latest news reflects that my bet is based more on a generally optimistic nature than savvy betting skills in such matters.

A couple of NY Sunday Times articles reports on the success of a number of former Enron executives. However, in doing so, the Times misses a major point that is sadly lacking in most mainstream media accounts of Enron’s demise.
This interesting Alexei Barrionuevo piece examines the rebounding energy trading business, a productive and profitable sector of the economy that was virtually shut down in the aftermath of market-maker Enron’s bankruptcy case. The article does repeat a few of the common myths about the energy trading business, such as “traders manipulate markets,” “trading increases energy costs,” and “traders caused California’s power crisis.” Overall, though, the article does a good job of presenting how bright, young traders — many of whom formerly worked for Enron — invested their own money when the energy trading industry almost ground to a halt in early 2002 and now are profiting as the comeback of this valuable sector of the economy provides companies flexibility in providing for — or hedging the risk of — their energy needs.
Meanwhile, this Times article notes that Rich Kinder of Kinder Morgan Inc. was recently named chief executive of the year by Morningstar, Inc. Kinder is a former long-time Enron executive who left the company in 1996 to set up Kinder Morgan after six years as president when former Enron chairman and CEO Ken Lay passed him over for the chief operating officer position in favor of Jeff Skilling.
The Times blurb on Kinder implies that Enron’s monkey-business began after Kinder left the company, and that is certainly true with regard to former Enron CFO Andy Fastow’s shenanigans with certain special purpose entities. However, the Times fails to note that the vast majority of business activities that made Enron such an extraordinarily successful company during the 1990’s — both in its primary business activities and in the ways in which it raised money — were taking place while Kinder was Enron’s president just as they were five years later when the company collapsed into bankruptcy. Unfortunately, an enormous and unnecessary loss of wealth occurred as many of the markets for Enron’s beneficial and innovative financial transactions — such as the energy trading industry and structured finance use of derivative pre-pay forward contracts, to use just two examples — shriveled in the wake of the societal demonization of Enron during 2001 and thereafter.
Consequently, Kinder’s success after leaving Enron actually emphasizes a point that the Times and much of the mainstream media completely misses — i.e., that it is critically important in determining the truth of what happened at Enron to distinguish between Enron’s role as a legitimate, innovative company and the limited fraud that took place. As noted in this prior post, the Enron Task Force is currently struggling with that realization in its prosecution of Lay and Skilling. A more truthful analysis of Enron’s demise would likely result if much of the mainstream media would catch on and take notice, too.

This Wall Street Journal ($) article on Friday (USA Today article here) reports that government authorities led by New York Attorney General Eliot Spitzer are finalizing a settlement with American International Group under which the company would settle civil business fraud charges for between $1 and $1.5 billion. The anticipated deal does not settle similar civil claims against AIG’s co-defendants in the case, former chairman and CEO, Maurice “Hank” Greenberg and former CFO Howard Smith.
Spitzer has probably maximized his political benefit from persecuting AIG and particularly Greenberg, and AIG — by offering up to Spitzer a number of sacrificial lambs, including Greenberg — has already avoided an Enronesque experience. So, the proposed settlement is really not surprising. However, it still is important to step back and assess what happened here, particularly in view of — as Larry Ribstein notes — the appearance of regulatory extortion.
Spitzer publicly demonized a pattern of structured finance transactions at AIG that had been in place for years. Rather than undertaking a measured regulatory review of the complex transactions — which, by the way, were not even clearly material to AIG’s $80 billion plus equity value — Spitzer threatened AIG with a criminal indictment, which would probably have put AIG out of business (remember Arthur Andersen?). Then Spitzer went on television to pronounce that the AIG transactions were “wrong,” “illegal,” and fraudulent even though it was not yet clear what the charges were, much less whether they were true. AIG’s board quickly cratered and unceremoniously showed the door to Mr. Greenberg, who was primarily responsible for creating huge amounts of shareholder wealth over the past generation. Mr. Greenberg was not even able to present his side of the story before AIG’s board bowed to the Lord of Regulation and characterized the transactions as “improper.”
In short, Spitzer used public allegations of business fraud to charge, try and convict easy and popular targets — i.e., a big company and its allegedly greedy leader — even before he announced that he wasn’t going to pursue criminal charges against Greenberg. Much of the mainstream media has embraced this public relations abuse while portraying Spitzer as the defender of noble egalitarianism fighting against the forces of corrupt capitalism.
As noted recently here in regard to Enron case, many legitimate business transactions — most notably structured finance transactions that most prosecutors and journalists neither understand nor do the homework necessary to understand — are unfairly and incorrectly portrayed as complex business frauds in the wake of such seemingly simple morality plays. Completely ignored in the process is the fact that such transactions build wealth in companies for the benefit of shareholders, and that such transactions are usually reviewed and approved by multiple professionals who are experts in such transactions. Rather than protecting shareholders or any meaningful public purpose, Spitzer’s investigation of those transactions in regard to AIG — as noted here and here — simply damaged AIG and its shareholders.
Meanwhile, with the inviting prospect of greater political rewards resulting from the favorable publicity of knocking a wealthy businessman off his perch, Spitzer has dispensed with any notion of prosecutorial discretion in regard to his investigations of business. Although Spitzer’s political campaign and his media friends portray him as a hero to shareholders and the common man, my sense is that the AIG case offers powerful evidence of precisely the opposite.

Inasmuch as I am critical of the SEC in this earlier post today, it’s only fair to compliment the agency for one of its regulatory initiatives that could have a beneficial impact.
This NY Times article reviews the SEC’s new proposed rules on disclosure of executive compensation, which — even though the new rules address a problem that probably would not break the top 20 in current corporate governance problems — could work to keep the SEC busy from pursuing more damaging regulatory actions. Larry Ribstein has the most insightful comments on the proposed new rules (here, here and here) and points out the possible mischief-saving nature of the SEC initiative:

By focusing on executive compensation disclosure, [SEC chairman] Cox manages to get a big pile of political capital from the pro-regulatory populists, while at the same time causing relatively little harm compared to many other things he could be doing. . . . .[D]isclosing executive compensation is probably . . . not going to be hugely costly. If it deters abuses, that’s not so bad. Meanwhile, maybe Cox can use the political capital he gains from this move to meaningfully shrink regulation.

Last week, former Enron chief accountant Richard Causey pled guilty to a single count of securities fraud and agreed to a seven-year prison term after vigorously defending himself from multiple charges of business crimes for over two years. Had he elected to defend himself at trial against the charges and lost, he would have faced an effective life sentence.

A friend of Causey’s commented that, despite the plea, Causey does not think he committed crimes at Enron and that he pled guilty to spare his family the emotional trauma of the trial and a possibly longer prison sentence.

Earlier this year, former Enron Broadband CEO Ken Rice testified falsely in the Enron Broadband trial after cutting a plea bargain with prosecutors in the face of an almost certain conviction on insider-trading charges (Rice had sold Enron stock in August, 2001 immediately after a meeting with Jeff Skilling in which Skilling informed Rice that he was resigning as Enron’s CEO).

The Enron Broadband trial ended in a mess of acquittals and a mistrial, and all five defendants in that case face re-trials later this year. Rice remains free on bond and has not yet been sentenced.

Meanwhile, throughout the over four-year criminal investigation relating to the demise of Enron, the Enron Task Force has engaged in widespread intimidation of potential witnesses in Enron criminal cases by threatening those witnesses with indictment if they provide exculpatory testimony on behalf of any defendant in an Enron-related criminal trial.

Lawrence Ciscon and Beth Stier testified dramatically about those prosecution threats during the Enron Broadband trial, and dozens of key witnesses with exculpatory testimony declined to testify on behalf of four Merrill Lynch executives in the Nigerian Barge trial after the prosecution had fingered the witnesses as unindicted co-conspirators. The Merrill Lynch executives were all convicted in that trial and are now serving jail sentences.

Amidst that backdrop, U.S. District Judge Sim Lake yesterday sentenced the plea-bargaining defendants in the sad case of Jamie Olis (Chronicle article here) — former Dynegy executive and Olis boss Gene Foster, and Dynegy employee Helen Sharkey — to 15-month and one-month sentences respectively for their involvement in the Project Alpha transaction that ensnared Olis (Doug Berman comments on the sentences here as does Peter Henning here).

The government previously obtained a gruesome 24 year sentence against Olis for having the temerity of asserting his innocence in regard to the Project Alpha-related charges at trial. The Fifth Circuit later overturned that sentence and Olis is awaiting re-sentencing.

Yale Law Professor John Langbien, who has written extensively on prosecutorial abuse in the American criminal justice system, observes as follows:

Plea bargaining concentrates effective control of criminal procedure in the hands of a single officer. Our formal law of trial envisages a division of responsibility. We expect the prosecutor to make the charging decision, the judge and especially the jury to adjudicate, and the judge to set the sentence. Plea bargaining merges these accusatory, determinative, and sanctional phases of procedure in the hands of the prosecutor.

Students of the history of the law of torture are reminded that the great psychological fallacy of the European inquisitorial procedure of that time was that it concentrated in the investigating magistrate the powers of accusation, investigation, torture and condemnation. The single inquisitor who wielded those powers needed to have what one recent historian has called ‘superhuman capabilities [in order to] . . . keep himself in his decisional function free from the predisposing influences of his own instigating and investigating activity.'”

I cannot emphasize too strongly how dangerous this concentration of prosecutorial power can be. The modern prosecutor commands the vast resources of the state for gathering and generating accusing evidence. We allowed him this power in large part because the criminal trial interpose the safeguard of adjudication against the danger that he might bring those resources to bear against an innocent citizen — whether on account of honest error, arbitrariness, or worse.

So, what really is the bigger problem for American society and the rule of law? Criminal business executives or out-of-control prosecutors who bludgeon defendants into plea bargains and use the threat of indictment to prevent juries from hearing exculpatory testimony about defendants charged with crimes?

The disparity in sentences between Olis, on one hand, and Foster and Sharkey, on the other, is a stark reminder of the high price that a business executive must pay these days for asserting innocence in the American criminal justice system. Similarly, the difference between Causey’s seven year sentence and whatever Rice eventually gets is largely attributable to Causey’s assertion of his innocence until the eve of his trial. Ellen Podgor previously commented on the troubling implications of this trend in connection with the sentences emanating from the WorldCom prosecutions.

In a scene set just after World War II from the movie The Aviator (hat tip to Larry Ribstein), Howard Hughes asks Senator Brewster if he really wants to go to war with him. Brewster responds:

“It’s not me, Howard. It’s the United States government. We just beat Germany and Japan. Who the hell are you?”

What the government is doing in punishing Jamie Olis for asserting his innocence is wrong. Likewise, regardless of what one thinks about the propriety of the government’s Lay-Skilling and Nigerian Barge prosecutions, the government is wrong in preventing the defendants in those cases from presenting to their juries exculpatory testimony from dozens of relevent witnesses.

It’s easy to delude ourselves that the cost of doing nothing in response to such wrongs is “merely” the lives of a few unpopular businessmen. But in reality, erosion of justice and respect for the rule of law is the far higher price that we pay for turning our collective cheeks in the face of such abusive tactics. For, as Sir Thomas More reminds us, if that abusive state power is not controlled and is then turned on us, “do you really think you could stand upright in the winds [of abusive state power] that would blow then?”

As KPMG’s settlement of the class action lawsuit against the firm over its promotion of tax shelters lurches toward final approval, this NY Times article reports that the number of class members opting-out of the proposed settlement is unusually high (almost 30% of all class members) and speculates that KPMG may elect to exercise its right under the settlement agreement to opt-out of the settlement itself if too many class members opt-out.
Although it was nice of the Times to deliver that message by KPMG to class members, there is little chance that the firm will terminate the settlement. Even if 30% of the class members opt out, that means that KPMG has still liquidated its liability to over 190 former tax shelter clients at an aggregate amount of the $180 million or so that KPMG will contribute to the $225 million settlement. That’s under a million per individual claim, which is the equivalent of a payout on a “slip and fall ” case for KPMG these days. No way KPMG rolls the dice that it can do better than that by defending the class action and even more opt-out individual claims at trial.

The long-awaited resentencing hearing in the sad case of Jamie Olis that was scheduled to take place today has been postponed indefinitely to give U.S. District Judge Sim Lake time to review recently-filed materials in the case relating to the key issue of market loss causation and to conduct another hearing on the market loss issue. You can download a copy of Olis’ lengthy memorandum on the market loss and related sentencing issues — which includes copies of letters from Olis and his wife to Judge Lake — here.
Although the delay in the resentencing is unfortunate, it is understandable. There is no harder working judge in the country right now than Judge Lake, who is literally snowed under with both the prodigious materials relating to the Olis resentencing and dozens of pre-trial motions in the run-up to the complex trial of former key Enron executives Ken Lay and Jeff Skilling that is scheduled to begin on January 30 in Houston. Given Judge Lake’s nature, I suspect that he will attempt to schedule the market loss hearing in the Olis case before the commencement of the Lay-Skilling trial.
Meanwhile, Doug Berman — who has provided the flat-out best analysis in the blogosphere of the Olis case from a sentencing perspective — added this informative post earlier in the week and this post today on the key issues to be addressed in the Olis resentencing hearing. As this earlier post notes, the prosecution misled Judge Lake in the previous sentencing hearing on the key market-loss issue, and I’m optimistic that Judge Lake will come to understand this time around the folly of attributing any meaningful market loss to Olis’ participation in the ill-fated Project Alpha, a point that is amply buttressed in Olis’ memorandum on resentencing by the expert reports of Rice University business professor Bala Dharan, former SEC economist Craig McCann, and well-known Houston energy securities analyst John Olson. In contrast, the Justice Department’s strikingly superficial response to the Olis memorandum and expert reports comes across as mean-spirited and baseless. If Judge Lake properly concludes that the reasons for market loss are simply too diffuse to attribute to Olis’ actions, then my sense is that he will reduce Olis’ sentence to considerably less than the 5-7 years that Professor Berman is predicting.
Update: Professor Berman comments on the postponement, as well as the resentencing hearing of Olis’ co-defendants (both copped pleas), which will proceed as scheduled today.

On my way out the door to attend the Houston Bowl today, I noticed this LA Times article on the latest development in the now five-year criminal investigation of certain of the attorneys involved in the former Milberg Weiss Bershan Hynes & Lerach, LLP law firm for allegedly engaging in a kickback scheme involving a common plaintiff in a number of the firm’s class action lawsuits. Prior posts on the Milberg Weiss case are here.
Last week, federal prosecutors attached a potentially troublesome internal law firm memo to a seemingly innocuous objection to Palm Springs lawyer Seymour Lazar’s request to end his house arrest. Lazar and his personal attorney, Paul Selzer, were indicted earlier this year for allegedly taking $2.4 million in kickbacks from a “New York law firm,” presumably Milberg Weiss. Inasmuch as prosecutors have already given immunity to at least two other former clients who say they received kickbacks from Milberg Weiss, the conventional view is that the Lazar and Selzer indictments are part of an effort to prompt the two defendants to testify against Milberg Weiss and its partners.

Continue reading →

The Washington Post’s Carrie Johnson — who has written more balanced articles on the Enron scandal than her better-publicized colleagues in the mainstream media — weighs in with this interesting piece today on the process of selling Enron’s remaining assets under the liquidation plan that the Bankruptcy Court confirmed in the company’s chapter 11 case. Turns out that mopping up on Enron has become very lucrative work:

[T]he lawyers, accountants and turnaround experts who guided the company through bankruptcy have collected or are seeking substantial amounts. Stephen F. Cooper, the corporate executive who served as Enron’s interim chairman, wants a $25 million success fee — besides his $1.3 million salary and extra consulting fees the company paid several of his associates at Kroll Zolfo Cooper LLC.
The law firm of R. Neal Batson, who prepared several reports as the company’s court-appointed bankruptcy examiner over an 18-month period, took home $90 million.

Continue reading →

Regular readers of this blog are well-acquainted with my position that New York attorney general Eliot Spitzer’s tactics toward unpopular businesspeople are a grave abuse of justice and the rule of law, and this Wall Street Journal ($) op-ed is pretty darn good evidence that my view of Mr. Spitzer is right on target.

John C. Whitehead, former chairman of Goldman Sachs and current chairman of the Lower Manhattan Development Corp., wrote the op-ed about a Spitzer-initiated telephone conversation between the two men earlier this year. The telephone call was prompted by a previous WSJ op-ed that Whitehead had written in April entitled “Mr. Spitzer Has Gone Too Far” in which Whitehead expressed the following observation about Spitzer’s defamatory public comments about former AIG chairman, Maurice “Hank” Greenberg:

Something has gone seriously awry when a state attorney general can go on television and charge one of America’s best CEOs and most generous philanthropists with fraud before any charges have been brought, before the possible defendant has even had a chance to know what he personally is alleged to have done, and while the investigation is still under way.

According to Whitehead, the day the foregoing op-ed was published, Spitzer called him, and Whitehead describes the conversation as follows:

After asking me one or two questions about where I got my facts, he came right to the point. I was so shocked that I wrote it all down right away so I would be sure to remember it exactly as he said it. This is what he said:

“Mr. Whitehead, it’s now a war between us and you’ve fired the first shot. I will be coming after you. You will pay the price. This is only the beginning and you will pay dearly for what you have done. You will wish you had never written that letter.”

I tried to interrupt to say he was doing to me exactly what he’d been doing to others, but he wouldn’t be interrupted. He went on in the same vein for several more sentences and then abruptly hung up. I was astounded. No one had ever talked to me like that before. It was a little scary.

Although understandable, it’s too bad that Mr. Whitehead was so taken aback by Spitzer’s bullying that he could not respond to Spitzer in a similar manner to the way that Sir Thomas More responded to King Henry VIII’s henchman Thomas Cromwell when Cromwell attempted to use similar tactics on him during a scene in the wonderful movie, A Man for All Seasons. After Cromwell made his threat, Sir Thomas initiated the following exchange between the two men:

Sir Thomas: You threaten like a dockside bully.

Cromwell: How should I threaten?

Sir Thomas: Like a minister of state. With justice.

Cromwell: Oh, justice is what you’re threatened with!

Sir Thomas: Then I am not threatened.

The WSJ has a couple of other interesting items today on Spitzer, including this editorial ($) that disassembles Spitzer’s latest dubious allegations against Greenberg. The piece concludes with this pointed observation:

[T]he question the rest of us should ask is whether Mr. Spitzer’s habit of publicly smearing individuals while bringing no charges in court is appropriate behavior by any prosecutor, much less one running to be New York’s Governor.

But the best of all is this delicious letter to the W$J editor that plays on a point that Ted Frank made earlier this week regarding Spitzer’s inaction in the face of the New York transit workers strike:

Strikes by public employees are prohibited under New York State’s Taylor Law. And New York State has as its chief law enforcement officer Attorney General Elliot Spitzer, a prosecutor of relentless zeal, unlimited resources and possessed of an almost extrasensory ability to detect wrongdoing.

I thought Mr. Spitzer would’ve have thrown Roger Toussaint and the rest of the TWU Local 100 leadership in jail by now.

Maybe he just couldn’t make it in to work this week.

Michael Garrett
Montclair, N.J.