The Sihpol acquittal from last week has generated much needed criticism of the demagogic ways of New York AG Eliot Spitzer, including this Wall Street Journal ($) editorial the day after the acquittal. While the WSJ editorial rightly criticizes Mr. Spitzer’s questionable tactic of criminalizing merely questionable business practices, the editorial concludes with the following observation:

One lesson here is that juries, forced to make a decision about a defendant’s fate, want to make sure that the alleged behavior is in fact criminal. Prosecution by press release won’t do in court.
The Justice Department has understood this, and has built a record in business fraud cases that has held up in court on Enron, WorldCom and Adelphia. Mr. Spitzer, by contrast, has used New York’s overbroad Martin Act to prosecute financial cases of dubious legal merit. Business fraud deserves to be prosecuted, but the criminalization of widely accepted business practices ex post facto is both unjust and offensive to the rule of law.

Well, that dubious compliment of the Justice Department’s equally egregious conduct toward criminalizing business practices did not sit well with Harvey Silvergate, a Boston civil rights attorney and author who is working on a book on abusive federal prosecutions. In this WSJ letter to the editor, Mr. Silvergate notes the following:

The reason for the Justice Department’s success is that the federal courts have aided and abetted in contorting the law by affirming dubious convictions for dubious crimes. The Supreme Court’s welcome reversal of the Arthur Andersen conviction, one hopes, signals a counter-revolution rather than a mere blip in the continuing degradation of the federal criminal code.

However, in my book, a more insightful criticism of the WSJ’s misguided compliment of the Justice Department comes from Ben Edwards, former American business editor for The Economist magazine, who wrote the following letter to the WSJ editors, which the WSJ has chosen not to publish, at least as of yet:

Sirs,
Your otherwise commendable editorial calling New York Attorney General Eliot Spitzer to account for his abusive disregard of the rule of law falls once again into what has become a most unfortunate and unthinking habit of mind regarding the rights and wrongs of the Justice Department’s wider war on white-collar “crime”.
While damning Mr Spitzer, you lavish praise on those wise folk at Justice for building “a record of business fraud cases that has held up in court”. Two thoughts spring to mind.
First, just as with Mr Spitzer, most of the actions the Justice Department takes against white-collar defendants never end up in front of a jury of peers. Federal prosecutors use the threat of ultra-long jail sentences to bludgeon plea-bargain agreements from their victims instead. Who, in this climate, fancies their chances of acquittal in court, no matter how persuasive their defense?
Second, some of the cases that have reached the courts seem notable for reasons other than fine prosecutorial legal work. So far, we have had willful and abusive misinterpretation of the law (Arthur Andersen), absurd and dangerous criminalization of civil disputes (the Enron broadband trial) and stunning abuse of hearsay and other evidentiary rules to damn defendants with whispers and slurs (the Enron-related “Nigerian Barge” trial). No doubt, as the nation’s temperature cools, more of these convictions will be overturned on appeal.
Of course, federal judges share some of the blame for failing to restrain this appalling government behaviour. But surely the thundering editorialists at the Wall Street Journal can muster the courage to stand up to the howling lynch mob and call this for what it quite nakedly is: a witch hunt.
Ben Edwards
Stamford, CT

Amen!

I speculated facetiously awhile back that some NY Times editors are reading this blog. Now, I’m really starting to wonder.
First, over the weekend, the NY Times ran this less than flattering article on the Lord of Regulation’s recent defeat in the Sihpol case, which dovetails with much of the criticism that this blog has leveled toward Mr. Spitzer over the past year.
Now, Joseph Grundfest pens this Times op-ed in which he addresses an issue that this blog has been hammering on for a long time: that is, the tactic of prosecutors damaging or — in the case of Arthur Andersen — effectively terminating a business entity before the nature or scope of alleged criminal activity is proven:

Andersen’s demise did serve as a stern reminder to corporate America that prosecutors can bring down or cripple many of America’s leading corporations simply by indicting them on sufficiently serious charges. No trial is necessary. …

The current situation of the insurer American International Group is a case in point. Would you buy an insurance policy from a company that might be crippled by a criminal indictment that the New York attorney general, Eliot Spitzer, decides to file tomorrow morning? Neither would I. If the government insists that A.I.G.’s chief executive be fired as part of the price of not indicting the firm, the chief executive is gone. It doesn’t matter that he ranks among the most powerful executives in America. A.I.G. has no realistic choice but to cooperate fully with the government, even if evidence might later demonstrate that the government’s theories were legally infirm or that factual allegations couldn’t withstand cross-examination. Who, after all, wants to be put out of business when indicted, only to be vindicated years later by a jury verdict or appellate ruling? . . .
. . . The prosecutor’s decision to indict is largely immune from judicial review. The prosecutor acts as judge and jury. Traditional due process safeguards, like the right to confront witnesses, can’t protect the potential corporate defendant. The innocent can therefore be punished as though they are guilty, and penalties imposed in settlements need not bear a rational relationship to penalties that would result at a trial that will never happen.

Hat tip to Professor Bainbridge for the link to the Mr. Grundfest’s op-ed.

On the heels of the dramatic testimony that occurred late last week, this Chronicle article reports that Rex Shelby, former senior vice president of engineering and operations for Enron Broadband, yesterday became the first of the five defendants in the ongoing trial to take the stand in his own defense.
All of the five Enron Broadband defendants are expected to testify during the trial, which is a significantly different tactic than the defense team used in the previous Enron-related Nigerian Barge trial, the only other trial that has taken place involving former Enron executives. In that trial, only three of the six defendants testified and one of those — former Enron in house accountant Sheila Kahanek — was acquitted. All of the other five defendants in that case — including the only other Enron defendant (Dan Boyle) — were convicted.
Although not without risk, the defense move of having the defendants testify is sound. Juries in white collar cases almost always expect to hear what the defendants have to say and generally hold it against the defendants if they do not testify (even though they are instructed not to do so). The biggest obstacle that the defendants in the Broadband case have is attempting to explain the elephant in the courtroom — that is, the huge amount of money on Enron stock sales that Mr. Shelby and two of the other defendants made — and attempting to humanize the defendants by having them testify is an essential component of that explanation.

On the heels of Citigroup’s settlement last week, J.P. Morgan Chase & Co. elected to avoid the risk of being placed in the “last to settle” position that it found itself in the WorldCom class action securities fraud litigation and agreed to pay about $2.2 billion to settle claims against the firm in the Enron securities fraud class action.
The Enron securities fraud class action accuses a group of Wall Street banks and securities firms of misleading investors by facilitating Enron transactions that removed billions of dollars of debt that allegedly should have been reported on the firm’s public financial statements. The lawsuit specifically claimed JP Morgan underwrote Enron securities, lent more than $1 billion to the company, and syndicated more than $4 billion of bank loans for Enron while the bank’s analysts were issuing allegedly false positive reports about the company.
Combined with the Citigroup settlement and previous settlements of lesser amounts (here, here and here), the JP Morgan settlement pushes the total amount of settlements in the Enron class action over $5 billion and ever closer to the $6 billion standard that the settlements in the WorldCom class action established.
JP Morgan’s settlement is not surprising given what happened in the WorldCom litigation, in which the firm and its counsel were heavily criticized by analysts and investors for waiting until the courthouse steps to settle. JP Morgan settled that case for $2 billion, but that was reportedly $630 million more than it would have had to pay had the firm settled earlier.
The Citigroup and JP Morgan settlements ups the price of poker on the remaining institutional defendants in the Enron class action, which include Merrill Lynch & Co., Credit Suisse Group’s Credit Suisse First Boston, Barclays PLC, Toronto-Dominion Bank, Royal Bank of Canada, Royal Bank of Scotland Group PLC and Goldman Sachs Group Inc. Plaintiffs counsel in the litigation has publicly stated that they are seeking $40 billion in damages in the case, but the pace and size of settlements indicates that the total amount recovered will be far south of that amount. Nevertheless, the total amount of settlements will certainly be higher than the WorldCom settlement total and, thus, will establish a new record for the highest amount recovered in a U.S. securities fraud class action against financial institutions.

Predicting the lifespan of popularity for a demagogue is a risky business, but recent mainstream media pieces certainly indicate that New York AG (“Attorney General” or “Aspiring Governor,” take your pick) Eliot Spitzer‘s fifteen minutes of fame as the nation’s self-appointed Lord of Regulation may be coming to an end. Here are the posts from over the past year and a half that catalog Mr. Spitzer’s relentless self-promotion campaign at the expense of business interests.
First, this NY Times article from this past weekend reviews Mr. Spitzer’s resounding loss in the Sihpol case, where Mr. Spitzer had sought to put away for 30 years a young broker who simply was following orders in doing his job. It’s never a good sign for a business regulator such as Mr. Spitzer when the NY Times — not exactly on par with the Wall Street Journal’s editorial page as a supporter of business interests — suggests that his tactics are overreaching.
Meanwhile, in this Tech Central Station op-ed, Dominic Basulto points out what is really going on:

It is perhaps all too obvious why Spitzer has preferred to use headline-grabbing tactics, intimidation and the threat of criminal prosecution to achieve his ends rather than depend on the U.S. legal system. After all, Eliot Spitzer is not just campaigning against financial wrongdoing on Wall Street — he is also campaigning to become the future governor of New York in 2006. His Spitzer2006.com Web site may not state it outright, but he is trying to leverage his crusade against the most corrupt of Wall Street practices to win over the hearts and minds of New York voters. Sound familiar? To some extent, it’s the same strategy that Rudy Giuliani used to campaign for New York City Mayor nearly fifteen years ago. A few more setbacks in the courtroom, though, and New York voters may view Spitzer only as an over-reaching political opportunist.

Finally, in this OpinionJournal op-ed, Kimberly Strassel reports that Mr. Spitzer’s well-publicized case against former New York Stock Exchange chairman Richard Grasso and NYSE board member Kenneth Langone (previous posts here) is not looking particularly rosy, either. In fact, it’s looking downright baseless:

The AG charges in his suit that Mr. Grasso’s compensation was not “reasonable”–that directors awarded him money based on “incomplete, inaccurate and misleading” information; and that Mr. Grasso influenced his awards. Mr. Spitzer is also suing former compensation committee head Ken Langone–on grounds that he misled directors about the true size of the compensation package–as well as the Exchange itself.
But [more than 1,000 pages of interviews with more than 60 former and current NYSE directors and staff, as well as third parties that Mr. Spitzer attempted to exclude from the lawsuit] refute much of this. Key directors admit that they knew exactly what they were doing in paying Mr. Grasso as they did, and continue to defend their actions.

In the end, Ms. Strassel asks the $64,000 question about the Grasso lawsuit:

Does it serve the interests of the NYSE? Or does it fuel, instead, the political Odyssey of Mr. Spitzer?

As predicted in this earlier post, this NY Times article reports on the guilty plea of Richard Napier — a senior vice president at General Re in 2000 and 2001 when the questionable transaction with American International Group occurred — to a single criminal conspiracy count in United States District Court in Alexandria, Va. on this past Friday. Here are the previous posts on the investigation into AIG and Berkshire Hathaway, Inc.’s General Re.
Meanwhile, General Re continued its attempt to hedge the risk of loss resulting from the criminal probes by negotiating with the government about settling a continuing criminal investigation that focuses on whether General Re conspired with AIG to distort its finances and mislead investors. The negotiations are complicated by the competing government investigations into AIG and General Re, which a Justice Department probe, an SEC investigation, and the New York attorney general office’s investigation.
A deal between General Re and the government would be based upon the Justice Department’s 2003 Thompson Memo, which contains guidelines that federal prosecutors are supposed use to charge companies in criminal cases. For example, prosecutors can offer lighter charges against companies that “identify culprits” within their organizations, make witnesses available to prosecutors, disclose results of their own internal investigations and waive attorney-client protection.
Berkshire’s Warren Buffet has been pushing General Re’s cooperation with authorities as a basis for leniency. Berkshire’s lawyers have instructed General Re executives to provide emails, notes and other documents to investigators in connection with the various investigations, and Berkshire has publicly stated several times that it is cooperating fully with all government investigations of its reinsurance businesses. AIG’s Board has adopted a similar approach with regard to the investigations.

The slumbering Enron Broadband trial was jolted Friday as Lawrence Ciscon — a former Enron Broadband systems engineer who the Enron Task Force has fingered as a target of its ongoing criminal investigation — dramatically testified that Enron Task Force prosecutors had repeatedly threatened him in attempting to dissuade him from testifying on behalf of the five Enron Broadband defendants.

The sparks began to fly when the prosecution attempted during cross-examination to impeach Mr. Ciscon’s favorable testimony for the defendants that had been elicited during his direct examination. On cross, the prosecution had Mr. Ciscon confirm that prosecutors had advised him that he was a target of the Task Force’s ongoing criminal investigation, thereby implying that Mr. Ciscon was testifying in favor of the Broadband defendants to save his own skin.

On re-direct examination, Mr. Ciscon confirmed that prosecutors had recently made three telephone calls to his attorney to “remind” Mr. Ciscon that he remained a target of the Task Force’s criminal investigation.

Defense counsel then asked Mr. Ciscon whether he considered those calls to his attorney as a “warning” not to testify? Mr. Ciscon replied that he did not consider the calls as merely a warning, but a “threat” by the Task Force prosecutors.

After that explosive testimony, the prosecution on re-cross-examination had Mr. Ciscon confirm that the prosecution’s calls had all been to his attorney and that he had not talked directly with the prosecutors. Then, in a questionable move that simply highlighted the prosecution’s thinly-veiled threat to Mr. Ciscon, the prosecution requested that Judge Gilmore strike Mr. Ciscon’s testimony about the calls as inadmissible hearsay testimony.

Judge Gilmore — who favored the prosecution during the early stages of the trial, but appears to be warming to the defense recently — quickly denied the prosecution’s request and pointed out that the government had waived any objection to Mr. Ciscon’s testimony on the subject. The jurors watched the entire episode with rapt attention.

As noted in this previous post, the Task Force used the same tactic effectively during the trial of the Nigerian Barge case to suppress the testimony of dozens of former Enron employees who would have likely contradicted the testimony of Ben Glisan, the prosecution’s main witness in that trial.

However, due to the fact that none of the “chilled” witnesses in the Nigerian Barge trial came forward to testify as Mr. Ciscon has courageously done in the Broadband trial, the jury in the Nigerian Barge trial never heard about the government’s tactic of fingering witnesses as targets of its criminal investigation to suppress favorable testimony for the Nigerian Barge defendants.

Thus, in a trial that looked like a tap-in for the prosecution at the beginning, a feisty defense team appears to have the Enron Task Force prosecutors on their heels. Earlier in the trial, the prosecution was in a similar position when it allowed its key witness to testify falsely regarding a video shown to the jury and then compounded that mistake by attempting to blame the error on a clearly intimidated woman who previously provided video services for Enron.

Moreover, as this Mary Flood/Chronicle article reports, the prosecution’s case appears to be so weak against two of the Enron Broadband defendants that they and their counsel are practically being ignored at this point in the trial.

Alas, one can only speculate as to the effect that any of this has on the jury. Three of the Enron Broadband defendants still have to overcome the “elephant in the courtroom” — that is, the huge amount of money that they made from Enron stock sales during the period in which they were making their allegedly false public statements. That is no easy task under even the best of circumstances.

But regardless of the outcome of this trial, the Enron Task Force’s ugly tactic of effectively suppressing important testimony of witnesses favorable to Enron defendants has now been fully exposed.

As a result — and particularly in view of the Task Force’s ongoing effort to suppress virtually all testimony favorable for the defendants in its case against former Enron CEO Jeff Skilling and former Enron chairman Ken Lay — it is becoming clearer by the day that our government’s “Justice” Department is not interested in justice at all when it comes to prosecuting unpopular business executives.

Citigroup Inc., the nation’s largest financial institution, announced this morning that it has agreed to pay $2 billion to settle class-action claims over its role in the sale of Enron Corp. stock and bonds prior to the company’s collapse into bankruptcy at the end of 2001. As this earlier post notes, Citigroup had set aside $6.7 billion to cover its litigation exposure relating primarily to claims against the bank in the Worldcom class action and the Enron class action.
As is typical in such deals, in announcing the settlement, Citigroup denied any wrongdoing and said it had agreed to settle solely to hedge the risk of a bigger claim being awarded in the litigation. The settlement must be approved by the Board of Regents of the University of California (the lead plaintiff in the case) and the Board of Directors of Citigroup. It is also subject to the approval of the U.S. District Court for the Southern District of Texas.
Citigroup is the first really large bank settlement in the Enron class action litigation. Other bank defendant include J.P. Morgan Chase & Co., Merrill Lynch & Co.; Credit Suisse First Boston, a unit of Credit Suisse Group; Deutsche Bank AG; Canadian Imperial Bank of Commerce; Barclays PLC (BCS); Toronto-Dominion Bank; and Royal Bank of Scotland PLC. My sense is that we will see a steady stream of settlements for the remainder of this year as the financial institutions strive to clean up the Enron liability on their financial statements before the end of the year and the plaintiffs’ lawyers attempt to exceed the total $6 billion in settlement proceeds from the defendants in the WorldCom class action.