A frequent topic on this blog has been the unjust nature of the government’s questionable tactic of bludgeoning business executives into plea bargains by playing on the executive’s fear of a draconian prison sentence (often an effective life sentence) if the executive has the temerity to assert his or her Constitutional right to a fair trial by jury.

Although prosecutors justify such tactics as a reasonable tool in seeking the truth about criminal acts of others, plea bargainers often undermine that goal by testifying falsely in order to obtain the favorable terms of the deal.

Moreover, the Enron Task Force’s bludgeoning of plea bargains has been particularly egregious because the Task Force is not using the tactic to promote the truth. Rather, as reflected by the strong evidence of witness tampering in all of the Enron-related criminal cases, the Task Force has been intimidating huge numbers of witnesses (114 in the Lay-Skilling-Causey case alone!) who would testify favorably for the defendants in those cases. That tactic has already resulted in the jury in the Nigerian Barge case not hearing the full story in that case, contributing to the imprisonment of four innocent former Merrill Lynch executives.

Although one judge is currently grappling with how to deal with the Enron Task Force’s witness tampering tactics, another judge — U.S. District Judge Lynn Hughes — recently made clear during a hearing in another Enron-related criminal case that he is highly skeptical of the Enron Task Force’s bludgeoning of a plea bargain from a former Enron executive who is likely going to be a key witness in the upcoming trial against former Enron executives Ken Lay, Jeff Skilling and Richard Causey. You may recall from this previous post that Judge Hughes is not reluctant to criticize the government when it abuses its overwhelming power against individual citizens.

The particular Enron-related criminal case in which Judge Hughes weighed in is that of Christopher Calger, a former Enron North America executive, whose plea bargain was the subject of this previous post. As noted in that post, the case against Mr. Calger involved a somewhat convoluted 2000 transaction known as Coyote Springs II in which Enron North America sold some energy assets to a third party and arranged a hedge of the third party’s risk that Enron North America would not complete the sale of all of the assets.

Although it’s not at all clear that there is anything even questionable — much less criminal — with that transaction, Mr. Calger elected to enter into a plea bargain with the Enron Task Force rather than risk the financial drain and long prison sentence that could result from defending his innocence at trial.

At any rate, when the Task Force decided to announce Mr. Calger’s plea bargain — which just happened to be on the same day that the jury in the Enron Broadband case began jury deliberations (are you still doubting that the Enron Task Force plays fair?) — the judge assigned to the criminal case against Mr. Calger was out of town and unavailable to take the plea.

Rather than postpone the hearing and lose the opportunity to taint the Enron Broadband jury with publicity about another admission of guilt in connection with an Enron-related case, the Task Force elected to proceed with the hearing on Mr. Calger’s plea bargain in front of Judge Hughes, who has not been assigned to any Enron-related criminal cases.

Although mainstream media accounts of the hearing on Mr. Calger’s plea bargain reported nothing about what actually occurred during the hearing, the transcript of the hearing (download here) reveals that the Task Force’s decision to proceed with the hearing in front of Judge Hughes nearly backfired.

Beginning on page 9 of the 23 page transcript (p. 11 of the pdf), Judge Hughes begins questioning both Mr. Calger and then the Enron Task Force prosecutor regarding the nature of the alleged offense. Very quickly, it becomes clear from the transcript that the Task Force prosecutor neither understood the underlying transaction involved in the indictment of Mr. Calger nor could articulate precisely what crime Mr. Calger had committed.

At the end of the pointed questioning, Judge Hughes gave Mr. Calger an opportunity to reject the plea bargain, which he declined to do. As a result, Judge Hughes accepted the plea bargain, although it is clear from the transcript that he was not comfortable in doing so.

So, what really is the bigger problem to American society and the rule of law — criminal business executives or out-of-control prosecutors?

A federal jury in Kansas City yesterday found former Westar Energy Inc. Chief Executive Officer David Wittig and chief strategy officer Douglas Lake guilty of looting the electric utility of millions of dollars. Previous posts on the hotly-contested case — which included a previous trial that ended in a hung jury — are here and here.
The prosecution against the two former Westar executives was similar to the prosecution of former Tyco executives Dennis Kozlowski and Mark Swartz in that the prosecution alleged that Messrs. Wittig and Lake engineered extravagant salaries and benefits for themselves at the expense of Westar shareholders while hiding their actions from the company’s board and federal regulators. As in the Tyco trial, Messrs. Wittig and Lake denied the charges and contended that all of their actions were legal, approved by the company’s directors and disclosed in the company’s regulatory filings. The jury found Messrs. Wittig and Lake guilty of conspiracy, wire fraud, circumventing internal controls and money laundering.
Mr. Wittig became CEO of Westar in 1998 and hired Mr. Lake, a former colleague at Salomon Brothers, to become his chief aide. After some initial success, Mr. Wittig’s quick-deal strategy faltered and Westar’s stock price fell from $44 to $9 as the company came under pressure from shareholders and regulators. As in the Tyco case, an outside law firm hired by Westar’s board eventually uncovered many of the actions of Messrs. Wittig and Lake that led to the indictment against the former executives.

Over four years after Enron’s descent into bankruptcy, 2006 is shaping up as the year of the Enron criminal trials.
First, in mid-January, the trial of the Enron Task Force’s legacy Enron case — i.e., the trial that everyone will remember — cranks up against former Enron chairman Ken Lay, former CEO Jeff Skilling, and former chief accountant, Richard Causey.
Then, in May, the first retrial of defendants in this year’s mistrial in the Enron Broadband case will take place against Kevin Howard, former chief financial officer of EBS, and Michael Krautz, former senior accounting director at EBS.
Following that trial, the second retrial of one of the Enron Broadband defendants will proceed in June against Scott Yeager, the former senior vice president of business development. Finally, the final two of the five Broadband defendants — Joe Hirko, former co-CEO of Enron Broadband Services, and Rex Shelby, former senior vice president of engineering and operations at EBS, will be retried in September. Mary Flood’s article on the Enron Broadband retrials is here.
Thus, 2006 is shaping up as quite a season for Enron-related criminal trials. And you thought the NFL season lasted a long time?

Peter Henning over at the White Collar Criminal Prof Blog is skeptical that U.S. District Judge Sim Lake’s letter-writing campaign is going to induce any of the recalcitrant witnesses in the criminal case against former Enron executives Ken Lay, Jeff Skilling and Richard Causey to come forward in the face of the prosecution’s intimidation tactics and confer with the defendants and their counsel. Professor Henning concludes as follows:

It’s a little bit like the old Woody Hayes view of passing: only three things can happen if you meet with the defense lawyers, and two of them can be bad, so why take the risk? I will be surprised if many of the 38 letter recipients agree to meet with the defense team.

Many folks down here in Texas believe that former Texas coach Darrell Royal popularized that pithy quote about passing in football, but I believe that Professor Henning is correct that Coach Royal picked it up from Coach Hayes.

My sense is that the New York Times editors need a little psychiatric help in letting their “Enron-thing” go.
In this article, the Times reports on a working paper by a couple of East Coast economists who propose the rather unsurprising hypothesis that accounting scandals are one of many factors that tend to have a negative effect on job growth. Thus, the Times translates that working paper into the headline: “The Crime: Slow Job Growth. A Suspect: Enron.”
Of course, the Times didn’t bother to call the longstanding the expert on Houston’s employment market to find out the effect that Enron’s demise has had on Houston’s employment market (it’s not had much long-term effect). Nor does the Times bother to note that governmental regulation through criminalization of business — particularly the Arthur Andersen case — has likely had a far larger negative effect on jobs than the accounting scandal at Enron or other companies.
By the way, this is not the first time that the Times editors have used a questionable headline relating to Enron. Is there a medical term for an unhealthy preoccupation with Enron? Enronpsychosis?

Well, Bernie Ebbers is being allowed to remain free from his effective life sentence during the appeal of his conviction of defrauding WorldCom investors. The basis of the decision to allow Mr. Ebbers to remain free is that there are serious appellate issues in the case, including a jury instruction that the trial judge conceded ventured into “a thorny area of the law.”
Does anyone really believe that Mr. Ebbers’ appeal is stronger than the appeals of these defendants, each of whom’s motion to remain free pending appeal was denied?
Ellen Podgor has more here.

Picking up on the subject addressed previously here, this NY Times article notes that corporate targets of criminal investigations can no longer effectively rely on the attorney-client privilege protecting communications between corporate representatives and the company’s attorneys.

Frankly, the destruction of the corporate attorney-client privilege is changing the landscape of American business.

For example, my standard advice for a prospective chief executive of a publicly-owned company is to negotiate as a part of his employment agreement that the company pay for the executive’s personal attorney to advise the executive in regard to his handling of corporate affairs.

Similarly, I caution business people considering taking on a board seat with a publicly-owned company not to do so unless the company provides separate counsel for the board. Absent such arrangements, the government’s evisceration of the corporate attorney-client privilege has the ironic effect of making business executives and directors less likely to consult corporate counsel before making critical business decisions because they know that counsel will rat them out in the event of a governmental investigation of the company.

Interestingly, the article notes that some people could care less about the demise of the attorney-client privilege, such as those who conclude first that a crime has occurred and then attempt to manipulate facts to support their conclusion.

One of those is John R. Kroger, the Lewis & Clark Law School professor and former Enron Task Force prosecutor, whose law review article — Enron, Fraud and Securities Reform: An Enron Prosecutor’s Perspective — is an appalling example of a non-expert in structured finance concluding that legitimate structured finance transactions of Enron were criminal and then attempting to manipulate the facts to support his thesis.

Taking the same approach to the attorney-client privilege, the article quotes Mr. Kroger:

“It’s really in the public’s interest to get out on the table whether there’s any possibility executives engaged in wrongdoing were really following legal advice or not.”

Or, stated another way, the state’s interest in criminalizing corporate conduct outweighs the individual’s right to consult with an attorney candidly.

That such people as Mr. Kroger are teaching this nonsense to future prosecutors at U.S. law schools is an ominous sign for American business interests.

Showing admirable disdain for the currently popular approach of bowing to governmental demagouges, money manager J. & W. Seligman & Co. fired off a civil lawsuit against New York Attorney General Eliot Spitzer seeking to enjoin his office from pursuing an investigation into whether the advisory fees that the firm charges investors in its mutual funds are excessive. A long line of posts chronicling the Aspiring Governor’s manipulation of business interests to further his political career is here.

Continue reading →

Allan Sloan in his Washington Post column has an interesting take on the Justice Department’s decision not to indict KPMG over the firm’s involvement in the creation and promotion of allegedly illegal tax shelters:

The government didn’t dare file criminal charges against KPMG because an indictment alone would have driven it out of business, leaving us with too few big accounting firms to go around. KPMG was in this strong bargaining position because of the collapse of Enron’s accounting firm, Arthur Andersen, which the government foolishly indicted on criminal charges three years ago.

Continue reading →

That was one of the comments of Richard A. Epstein, the James Parker Hall Distinguished Service Professor of Law at the University of Chicago and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, during this heated exchange with Merck slayer Mark Lanier on Larry Kudlow’s show over the merits of the Ernst v. Merck verdict. The debate comes on the heels of Mr. Epstein’s impassioned criticism of the Merck/Vioxx fiasco in this Opinion Journal op-ed, in which he accused Mr. Lanier of intentionally misleading the jury during the trial. Here are the previous posts on the Merck/Vioxx case.

Continue reading →