The two remaining unsentenced former Merrill Lynch executives and the only Enron executive convicted of fraud and conspiracy in the Enron-related criminal trial known as the Nigerian Barge case are being sentenced today by U.S. District Judge Ewing Werlein in Houston.
This morning, one of the two Merrill defendants — Robert Furst — received a similar sentence to those received last month by co-defendants and former Merrill executives, Daniel Bayly and James Brown. As in the previous sentencings, Judge Werlein basically ignored the government’s proposed 15 year sentence for Mr. Furst, and sentenced him to three years, one month in prison and to pay $665,000 in restitution.
The other Merrill defendant — William Fuhs — and the lone Enron defendant — Dan Boyle — are scheduled to be sentenced this afternoon. Mr. Fuhs’ sentence will likely be a bit less than Mr. Furst’s, while Mr. Boyle — a mid-level former Enron executive who the government inexplicably wants to put away for life over this — will probably receive a bit longer sentence than Mr. Furst’s.
Update: This afternoon, Judge Werlein first sentenced Mr. Boyle to three years and 10 months in prison and a $320,000 fine. Late this afternoon, the Judge completed the sentencing in the Nigerian Barge case by sentencing Mr. Fuhs to the same sentence as that of Mr. Furst — 37 months.
Meanwhile, Mr. Bayly’s legal team recently filed this brief with the Fifth Circuit Court of Appeals in support of Mr. Bayly’s request to be allowed to remain out of prison pending disposition of his appeal. The brief previews Mr. Bayly’s arguments on appeal, which are focused on the paucity of direct evidence linking Mr. Bayly to the transaction, the hearsay nature of the evidence that did, and the refusal of Judge Werlein to instruct the jury on a key defense theory. That key defense theory is that an Enron promise to Merrill Lynch to arrange a sale of the barges within six months to a third party — as opposed to an Enron promise to repurchase the barges within that time frame — did not undermine Enron’s accounting of the transaction and did not constitute the basis of a crime. Inasmuch as Enron ultimately arranged for such a sale to a third party as opposed to buying back the barges from Merrill itself, the lack of a jury instruction on that issue appears to be a solid basis for Mr. Bayly’s appeal.

After last week’s fireworks in the ongoing Enron Broadband criminal trial noted here and here, the Chronicle’s Mary Flood reports that the attorneys in the trial have reverted to the dubious tactic of chloroforming the jury with mind-numbing techno-jargon:

On the stand Tuesday was jargon-dependent computer specialist John Bloomer. It was his third day of testimony, and for most of morning he was questioned by Enron Task Force prosecutor Ben Campbell.
Campbell took Bloomer through statement after statement made at a critical January 2000 Enron conference for stock analysts to ask about the truth of what was said.
It was no more exciting in the afternoon when defense attorney Per Ramfjord took over. Ramfjord is so well-versed in technology that the courtroom can become Silicon Valley when he gets going with a geeky witness. Bloomer sometimes answered enthusiastically with something like: “We were late. Whether it be MPLS over ATM, whether it be precedent bit over IP.” Don’t ask.

So the jurors and alternates, if they’ve stayed fully awake, know what a hop and a POP are in the tech world, may know the difference between quality of service and quality of stream delivery, and likely know what media cast and media transport are.

Meanwhile, Ms. Flood also reports that some of Mr. Bloomer’s testimony yesterday on behalf of the prosecution in the Broadband trial was helpful to the defense of former Enron CEO, Jeff Skilling, whose criminal trial with former Enron chairman Ken Lay and former Enron chief accountant Richard Causey on securities fraud and related charges is scheduled for January 2006.

Berkshire Hathaway used the tried-and-true tactic of a late Friday afternoon news release in an attempt to generate the least amount of notice possible for its most recent quarterly earnings report.
However, in doing so, Berkshire raised eyebrows by disclosing that a current VP at its General Reinsurance Corp unit had received a “Wells” notice from the Securities and Exchange Commission, which means that the SEC is planning on filing civil charges alleging violations of federal securities laws. The Wall Street Journal ($) disclosed later in the weekend that the General Re VP is Rick Napier, and that the SEC is considering filing a complaint against Mr. Napier for assisting American International Group Inc. in allegedly accounting for a highly-publicized reinsurance transaction improperly. Moreover, inasmuch as Wells notices are usually sent out to all potential defendants to an SEC civil action, more General Re and AIG executives who were involved in the reinsurance transaction will probably receive such a notice soon.
Berkshire also disclosed that General Re and its former CEO, Ronald Ferguson, were sued along with AIG and several AIG executives in a recent class-action civil lawsuit filed in federal court in New York City. Mr. Ferguson was the CEO of General Re when Berkshire purchased the company in 1998. After several years of poor results, Mr. Ferguson stepped down as chief executive in 2001 and has been a consultant to Berkshire’s reinsurance businesses ever since. AIG’s former CEO Maurice “Hank” Greenberg allegedly contacted Mr. Ferguson in 2000 to arrange the reinsurance transaction that is now the subject of the multiple investigations.

One of the remarkable cultural developments since the collapse of Enron Corporation has been the branding of the “Enron” name to become synonomous with all forms of corporate corruption. Earlier this week, the prosecution’s use of the Enron brand in the corporate-fraud trial of former HealthSouth CEO Richard M. Scrushy got the prosecution in some very hot water with the judge in that case.
The fireworks came after the witness — HealthSouth’s security chief and a key defense witness — had mentioned Enron during cross-examination. The prosecutor then then asked the witness if he was referring to “the same company that defrauded investors and laid off many employees, resulting in prison sentences for some people.” That prompted U.S. District Judge Karon O. Bowdre (pictured above) — who previously had warned lawyers in the trial to refrain from references to Enron or any other corporate frauds — to pound her gavel and yell the prosecutor’s name.
After slamming her gavel, Judge Bowdre instructed the jury that the prosecutor had asked a “series of inappropriate questions.” The judge then advised the jury that she was terminating the cross-examination “as a sanction” to the prosecution. No word yet on whether the prosecutor faces further sanctions for what is a serious and intentional breach of the judge’s previous order.
Professor Ribstein has a typically adept observation about this latest incident of prosecutorial misconduct:

“If the government actually has to try the facts of each individual corporate fraud case, it could get sticky.”

Frustrated with the Lord of Regulation getting all the headlines recently, the Federal Bureau of Investigation announced yesterday a wide-ranging inquiry into the insurance industry that could extend into banking and other financial sectors.
FBI investigators and insurance regulators from multiple states are meeting in New York City today during which the regulators are apparently going to school the FBI agents on the structured finance transactions that insurers commonly use to manage earnings or — as described in the current climate of regulatory demagoguery — to manipulate financial statements. The FBI has assigned between 50 and 75 agents from its Financial Crimes Section to the probe and confirmed that its investigation is the result of the various criminal and regulatory probes that are already underway in regard to AIG and Berkshire Hathaway’s reinsurance unit, General Re.
One would hope that the FBI actually hires an expert or two in structured finance to explain the legitimacy of many such transactions before going on the Sunday talk shows and alleging widespread criminal activity within the industry. The misguided nature of the government and the bankruptcy examiner’s similar investigations into many of Enron’s structured finance transactions has already been well-chronicled, particularly by University of Chicago business professor and structured finance expert, Christopher Culp, in his recent books, Corporate Aftershock (Cato 2003) and Risk Transfer (Wiley 2004).
Meanwhile, checking in on the AIG saga, the Wall Street Journal ($) and others published a copy of a letter from former AIG CEO Maurice “Hank” Greenberg to the AIG board yesterday in which Mr. Greenberg laments AIG’s restatement of net worth earlier this week and points out that the restatement lacked critical input from Mr. Greenberg and former AIG CFO, Howard I. Smith. How the company could have reached its conclusions without Mr. Smith’s input “is beyond my comprehension,” observed Mr. Greenberg in the letter.
Of course, the Lord of Regulation made certain that the AIG board did not have such input by effectively forcing Messrs. Greenberg and Smith to invoke their Fifth Amendment privilege against self-incrimination by publicly alleging that they had committed crimes before even hearing from either man. So it goes in the post-Enron business world of being guilty until proven innocent if one engages in structured finance transactions.

Following this development from Monday, the Enron Task Force prosecution is now clearly in serious damage control mode in the ongoing criminal trial against five former Enron Broadband Services executives in Houston federal court.

As this Mary Flood Houston Chronicle story reports, the prosecution hurriedly changed course after the prosecution’s key witness — former EBS CEO Ken Rice — was forced on Monday to admit during cross-examination that he had falsely testified on direct examination that defendant Rex Shelby had made certain statements to an analysts’ conference in 2000.

After Mr. Rice was finally excused on Tuesday after eight days of increasingly grueling testimony, the prosecution departed from its pre-trial witness list and called Beth Stier, who works for a company that previously provided independent contractor video services for Enron. That company continues to maintain a large library of Enron-related videos, and the company is currently providing consultant services for the criminal defense team of former Enron CEO Jeff Skilling.

The source of confusion in Mr. Rice’s testimony was a videotape of the analysts’ conference that the prosecutors used in examining Mr. Rice. That particular video contained a segment of Mr. Shelby’s comments that Mr. Rice contended had been shown at the analysts’ conference.

However, the defense revealed this past Friday that the prosecution had used the wrong video and that the raw footage video of the analysts’ conference clearly showed that the segment containing Mr. Shelby’s comments had not been played for the conference.

On Monday, the defense was allowed to show the jury the raw footage video that proved that the segment containing Mr. Shelby’s comments had not been played for the conference.

Ms. Stier testified on Tuesday that she had originally taped the segment with Mr. Shelby for the conference, but that the segment was not used during the conference and that she had later inserted the segment into an edited version of the videotape at the request of Enron’s investor relations department.

Ms. Stier also admitted that she had given the prosecution a copy of both the edited videotape that the prosecution ended up using in examining Mr. Rice and also the raw footage videotape that the defense team used on cross-examination to impeach the credibility of Mr. Rice’s testimony.

During her testimony, Ms. Stier then revealed that the Enron Task Force prosecutors had hauled her down to the Federal Courthouse over this past weekend to question her over the videotapes after they first became aware of video mixup during cross-examination of Mr. Rice last Friday.

During the weekend questioning, Ms. Stier apparently hedged her answers to prosecutors’ questions regarding the work she has done for the Skilling defense team. Accordingly, when the prosecution asked her today on the witness stand whether she had lied to the prosecution in answering those questions over the weekend, Ms. Stier admitted that she had been very careful about her answers and then added:

“You guys scare me to death. I do not want to lie to you.”

As noted in this earlier post, the damage from the prosecution’s use of the wrong video on Mr. Rice’s direct examination could have been limited by the prosecution’s forthright admission of its mistake.

However, from the report of today’s proceedings, the prosecution not only failed to adopt that approach, but inexplicably compounded the damage from its previous error by attempting to shift the blame to a frightened woman on the witness stand before a predominantly male jury. Such a major tactical blunder is a clear sign of a panicked prosecution.

Consequently, a trial that formerly looked like a sure-fire winner for the Enron prosecution has now turned into a real horse race. Stay tuned, for this trial is has just become very interesting.

An interesting development occurred last Friday during the ongoing Enron Broadband trial, and the development is turning into the first genuine problem for the Enron Task Force prosecution based on Mary Flood’s report of today’s testimony.

Here’s what happened on Friday. Tony Canales, a former United States Attorney in Houston from 1977-80 who is a defense attorney for one of the Broadband defendants, was cross-examining the key prosecution witness and former Enron Broadband CEO, Ken Rice (pictured above).

Mr. Canales attempted to offer into evidence the raw footage video of an analysts’ conference that Mr. Rice testified about on direct examination from another video that the prosecution used. U.S. District Judge Vanessa Gilmore would not allow Mr. Canales to show the raw footage video to the jury on Friday afternoon because the prosecution had not yet had an opportunity to review it on Friday, which was a rather odd ruling given that the prosecution had given the video to the defense in the first place.

At any rate, the defense’s raw footage video came into evidence this morning, and the defense showed the raw footage video side-by-side to the prosecution’s video from which Mr. Rice had previously testified during direct examination.

It turns out that the prosecution video of the analysts’ conference is different in material respects from the raw footage video and that the prosecution’s video — contrary to Mr. Rice’s testimony on direct — contained footage of defendant Rex Shelby making statements that was not shown to the analysts at the conference.

Well, as you might expect, Mr. Rice is in full retreat today as Mr. Canales and other defense attorneys hammer him on why he previously testified that Mr. Shelby had made statements at the analysts’ conference that he actually did not make. According to Mary Flood’s Chronicle article, Mr. Rice appeared to be rather confused:

Rice said he’d seen the government’s video before testifying and when prosecutor Ben Campbell showed it to him in court Tuesday, Rice testified that he was surprised that Shelby was talking about the network operating system as up and running when it wasn’t.

“The government represented that the tape that included Shelby came from Enron and was played at the analysts conference,” Rice said.

In questioning from defense attorney Tony Canales, Rice said he knew Shelby had taped the segment in question and knew it was slated to be shown to the analysts.

Under questioning today, Rice said he thought about this a lot of over the weekend and even talked to his lawyer about whether he’d been shown the wrong tape and convinced himself he did see the Shelby segment at the analyst conference.

“He wasn’t any help to you then?” Canales asked Rice.

“All that money, no,” Rice said smiling back.

It was one of several light moments in the day when Rice acknowledged being somewhat overwhelmed by the circumstances.

Of note, Mr. Rice is testifying under a cooperation agreement in which he has pleaded guilty to one count of securities fraud in return for the prospect of a reduced sentence. However, the government’s support for that reduced sentence is conditioned upon Mr. Rice testifying truthfully during the Broadband trial. He is in his seventh day of questioning.

Even inside the courtroom — much less outside it — it’s notoriously difficult to evaluate how much any of this affects the jury. If the prosecution handles it correctly on re-direct, then the Enron Task Force prosecutors will take the blame for using the wrong video, apologize to the jury for their mistake, and simply have Mr. Rice re-confirm his opinion that certain of the statements made on both the raw footage video and the prosecution’s video were false. So long as the prosecutors take such an approach in a forthright manner, the jurors may view the prosecution’s use of the wrong video as an honest mistake and not think much about the erroneous part of Mr. Rice’s testimony.

On the other hand, if not handled well on re-direct, this is the type of mistake that could blow up in the prosecution’s face. Mr. Rice will almost certainly be called a liar by future witnesses for the defense during this trial, so his credibility will be a key issue for the jury.

The prosecution’s mistake in using the wrong video — and Mr. Rice’s failure to catch it — opens him up to the age-old defense tactic of arguing to the jury that “telling the truth is easy, but lying without making mistakes is hard.” In short, Mr. Rice was lying and the best evidence of it is that he was willing to lie about what statements were made at the analysts’ conference in return for the promise of government support of a shorter prison sentence.

So, watch this part of the trial closely. Three of the defendants in the Broadband trial have to overcome a huge elephant in the courtroom — i.e., the multi-millions that they made on selling Enron stock during an 18 month period. However, discrediting the government’s key witness is a nice start to deflating the prosecution’s case. Let’s see whether the prosecution can minimize the damage to their witness in the jurors’ eyes and move on to refocusing their case against the defendants on that elephant.