Although such matters are notoriously unpredictable, the SCOTUS blog — the premier U.S. Supreme Court blog — reports that observors of the oral argument earlier today on Arthur Andersen’s appeal to the Supreme Court of its witness tampering conviction unanimously reported that the Justices appeared to favor Andersen’s side of the argument strongly. In particular, Justice Scalia expressed incredulity at the government’s position:

“You want criminal liability to attach to that?” Justice Scalia asked, referring to Andersen in-house lawyer Nancy Temple’s email. “You want somebody to go to jail?”

Here is the Washington Post report on the argument.

As noted earlier here and here, there are several characteristics of the structure of American International Group Inc. that are similar to the structure of Enron Corp. In particular, both companies’ business is largely dependent on its customers’ trust and, as Enron showed us in dramatic fashion, once that trust is lost, a company structured in such a manner can literally collapse in a very short period of time.
On face value, this report from yesterday regarding the Lord of Regulation‘s investigation into whether AIG wrongly pocketed tens of millions of dollars in insurance premiums that should have gone to the New York state workers’ compensation fund is probably not any more damaging to the public’s trust in AIG’s finances than any of the dozens of other revelations that have occurred in regard to AIG and Berkshire Hathaway in connection with that investigation over the past couple of months.
However, in what can only be described as an astounding revelation in this morning’s Wall Street Journal ($) article, AIG’s general counsel in 1992, E. Michael Joye, informed AIG’s senior management — including former CEO Maurice “Hank” Greenberg — that the company’s accounting treatment with regard to the insurance premiums was illegal. Even more interestingly, Mr. Joye resigned from AIG (or was forced out) later that same year over problems relating to accounting issues.
To top it all off, according to the WSJ article, Mr. Joye provided to the Lord of Regulation a copy of his memo to AIG management about the insurance accounting issue, and then AIG waived its attorney-client privilege regarding Mr. Joye’s memo and the accounting issue to allow Mr. Spitzer’s office to proceed with its investigation into the issue. AIG’s board is allowing this highly unusual level of cooperation with the Lord of Regulation because of its realization that the Lord has the board over a barrel: if the AIG board were to assert such basic rights as the attorney-client privilege, then the Lord of Regulation would almost surely issue an indictment that would have a potentially cataclysmic effect on AIG’s various insurance licenses.
On the other hand, if AIG’s senior management forced Mr. Joye out because of his calling out of questionable or illegal accounting practices, then that would reflect a serious defect in AIG’s internal controls in that an advocate of adhering to legal requirements was canned rather than rewarded. Inasmuch as a similar defect in internal controls allowed Enron’s Andrew Fastow to profit wildly from Enron’s apecial purpose entities while serving as Enron’s CFO, this latest revelation about AIG sure is starting to sound familiar, isn’t it?
By the way, the WSJ’s ($) article on AIG’s ultra-exclusive New York area golf club — Morefar — makes it sound as if getting an invitation to play Augusta National is easy in comparison to getting one to play Morefar.

The last defendant standing in the WorldCom securities fraud litigation stood down on Monday as Arthur Andersen announced that it had settled with the WorldCom class for $65 million. The settlement occurred at the beginning of the fifth week of what amounted to an auditing malpractice case against Andersen.
The settlement was apparently reached after Andersen disclosed its limited financial resources to the WorldCom plaintiffs, which should not have been any surprise to the plaintiffs. After having been convicted of witness tampering in a dubious government prosecution in connection with the Enron scandal, Andersen collapsed as a going concern and is now merely a liquidating trust for its former partners. Andersen is still contending with similar civil litigation in connection with its audits of Qwest Communications International Inc., Global Crossing Ltd., and the Big Kahuna, Enron.
As noted in these previous posts over the past year, Andersen was the last of more than two dozen defendants who agreed to pay a total of $6 billion to settle securities fraud claims in connection with WorldCom’s collapse into bankruptcy in 2002. That total amount is a record recovery in a securities class action in the United States, but that record is probably short-lived. The aggregate settlements in the similar class action in the Enron case projects to lap the WorldCom record by several billion.

On Wednesday of next week, the U.S. Supreme Court will hear arguments over the meaning of the law under which now defunct accounting giant Arthur Andersen was prosecuted and convicted. Previous posts are here, here, here, here, and here about this case, which corporate legal departments and corporate lawyers are following closely.
The main reason that the Andersen appeal is being followed closely is that it began with an e-mail that any in-house counsel could have written — that is, a reminder to colleagues about the company’s document retention policy. “It will be helpful to make sure that we have complied with the policy,” wrote Nancy Temple, the in-house lawyer for Andersen in the October 2001 as Enron was spiraling toward bankruptcy. Andersen’s policy called for destroying documents when they were “no longer useful” for an audit. The timing of the email eventually led to the criminal prosecution and conviction of Andersen for destroying thousands of Enron-related documents. The prosecution and conviction doomed Andersen as a going concern and a once-proud company that employed almost 30,000 employees in the U.S. Andersen has withered into what is now essentially a self-liquidating litigation defense fund with fewer than 200 employees.
As a result of what happened to Andersen, numerous professional organizations such as the National Association of Criminal Defense Lawyers and the American Institute of Certified Public Accountants have filed amicus curie briefs that urge the Supreme Court to interpret the law under which Andersen was prosecuted narrowly so as not to criminalize routine legal and professional advice. In particular, the NACDL brief asserts that the Andersen lower court decisions place “lawyers at risk of investigation, prosecution, and imprisonment for doing their jobs,” and contends that those decisions improperly chill attorneys from lawfully advising their clients not to volunteer information to a grand jury or not to include unnecessary information in responding to the Securities and Exchange Commission.
For its part, the government claims in its brief that Andersen was well aware that an SEC investigation was likely at least a month before Ms. Temple sent her e-mail, noting that the accounting firm had assembled an Enron crisis-response team in September, 2001 as public revelations mounted regarding Enron’s questionable accounting.
Nevertheless, the government’s prosecution of Andersen was required to place a square peg in a round hole in that its indictment asserted only a form of witness tampering that occurs when one “corruptly persuades” others to destroy documents in order to make them unavailable for an official proceeding. What is often overlooked in the aftermath of the demise of both Enron and Andersen is that no Andersen official has ever been charged criminally or even cited by the SEC for violating securities laws in connection with Andersen’s work for Enron.
The narrow issue that is before the Supreme Court is whether U.S. District Judge Melinda Harmon properly instructed the jury in the Andersen trial on the meaning of “corruptly persuades.” The dispute is essentially over whether “corruptly” should be given a transitive or intransitive meaning. The Andersen side of the argument embraces the the transitive — i.e., in order to to prove the crime, the government would have to show that the persuading was done by corrupt or improper means. Under such an interpretation, Ms. Temple’s e-mail would not constitute a crime.
On the other hand, during the trial, Judge Harmon adopted the government’s jury instruction based on the intransitive meaning — i.e., that the government merely had to establish that Andersen had some improper intent of impeding an official proceeding regardless of whether Andersen believed its actions were lawful. Judge Harmon ruled that, so long as Andersen’s intentions were improper, the government did not have to prove that an official proceeding was under way or even likely in order to prove that Andersen had committed a crime.
Thus, the importance of the Andersen case to in-house counsel and corporate counsel is clear — if the Supreme Court upholds the 5th Circuit decision, virtually any corporate document retention policy that includes throwing things out would be at risk because making such documents unavailable is at least part of such a policy’s purpose. Somewhat surprisingly, the document warehousing industry has not filed an amicus brief with the Supreme Court in support of the government’s position. ;^)
However, in a larger sense, the Andersen appeal gives the Supreme Court an opportunity to knock down one of the government’s most visible symbols of its dubious policy of regulating business generally — and auditors in particular — through criminalization of heretofore normal business practices. One brave U.S. District Judge already this week firmly rejected the government’s over-zealous attempt to obtain what would have amounted to a life sentence for former Merrill Lynch head of international investment banking, Daniel Bayly, who was bit player in a relatively small Enron-related deal. Inasmuch as the government’s disembowelment of Andersen as a source of productive employment for approximately 30,000 U.S. citizens is equally indefensible, here’s hoping that the Supreme Court sends the government a clear message in the Anderson case that misapplying criminal law to regulate business will not be tolerated.

Inasmuch as I had to appear at an hearing in federal court early this morning, I stuck around after my hearing to attend the sentencing hearing of former Merrill Lynch executive Daniel Bayly in connection with the Enron Nigerian Barge case, which has been a regular subject on this blog over the past year.

To say the least, I’m glad I stuck around.

In one of the most impressive judicial performances that I have witnessed in my 26 year legal career, U.S. District Judge Ewing Werlein, Jr. — in the face of widespread public and political expectation that anyone who had anything to do with Enron should be punished severely — rejected the Enron Task Force prosecutors’ pleas to punish Mr. Bayly with up to 15 years of prison and sentenced the former Merrill Lynch executive to 30 months in prison, six months of probation, a $295,000 restitution award, and a $250,000 fine.

Later in the afternoon, Judge Werlein sentenced former Merrill executive James Brown — who, unlike Mr. Bayly, also faced conviction on perjury and obstruction of justice charges over the barge deal — to 46 months of prison and similar financial penalties as the ones assessed to Mr. Bayly.

Inasmuch as Mr. Bayly is the first defendant to be sentenced after being convicted at trial of an Enron-related crime, the far shorter sentence than the punishment that the prosecutors recommended was a bitter blow to the Task Force prosecutors, who did not attempt to hide their displeasure with Judge Werlein’s ruling after the hearing.

Clearly in full command of the legal issues and evidence before him, Judge Werlein carefully stated his findings and conclusions, which included the following:

He categorically rejected the prosecution’s controversial $44 million “market loss” theory as being contrary to the U.S. Supreme Court’s recent decision in Dura Pharmaceuticals v. Broudo, in which the Court rejected the price inflation theory of causation that the Task Force prosecutors used in calculating the $44 million in market loss.

He declined to adopt the jury’s $13.7 market loss theory, essentially on the same grounds as he rejected the government’s theory.

He ended up calculating market loss at $1.4 million, which was the total profit that Merrill and the Enron-related partnership ultimately made on the Nigerian Barge deal.

He rejected the prosecutors’ pleas for an upward adjustment of the sentence under the advisory sentencing guidelines “to make an example out of Mr. Bayly for Wall Street.”

He granted a downward adjustment of the sentence under the sentencing guidelines because of Mr. Bayly’s exemplary professional and personal record. “I may have never had a defendant before me who had a more glowing and extraordinary record of being a good citizen,” noted Judge Werlein.

Although he noted the jury conviction of fraud, Judge Werlein observed that — in the constellation of of Enron fraudulent conduct that former Enron CFO Andrew Fastow orchestrated — Mr. Bayly’s involvement in the barge transaction was relatively benign and not central to Enron’s transactions.

He noted that the Enron Task Force had obtained plea bargain sentences for two Enron executives who were central to Enron’s more wide-ranging fraudulent conduct — 10 years for Mr. Fastow and five years for former Enron treasurer Ben Glisan — and that those sentences were less than the one that the prosecution was recommending for Mr. Bayly, who was a bit player in Enron’s questionable conduct.

Then, as if to punctuate his rulings, Judge Werlein firmly rejected the prosecution’s over-the-top call at the end of the hearing for Mr. Bayly to be taken into custody immediately, and allowed Mr. Bayly to report to prison voluntarily in accordance with a date to be scheduled in the near future by the Bureau of Prisons.

Judge Werlein delivered his rulings in his customary conscientious and professional manner that exuded the careful consideration that this man of extraordinary depth gave to the issues before him.

After the hearing, I happened to get on the same elevator as Mr. Bayly and several members of his family. After having lived through a nightmarish prosecution and clearly expecting the worst when they came to court today, Mr. Bayly and each of his family members — several of whom had tears in their eyes — were clearly touched by Judge Werlein’s courage, grace and fairness in sentencing Mr. Bayly.

Later, as I drove back to my office after the hearing, I reflected on Ewing Werlein, Jr. and the remarkable judicial performance that I had just witnessed.

When I moved to Houston as a young college student over 30 years ago, one of the first Houston families that my family and I met was that of Mr. and Mrs. Ewing Werlein, Jr., who hired a couple of my younger sisters to babysit their daughter and son. I recall my late father observing to me at the time: “Tom, if you want to become a gentleman, Mr. Werlein would be a fine model for you to follow.”

Several years later, after finishing law school and becoming a young attorney in Houston, I learned quickly that Ewing Werlein, Jr. — then a partner at Vinson & Elkins — was one of the most respected lawyers in the Houston bar and a model for young lawyers.

Over a decade later, Judge Werlein’s son, Ken, became an associate pastor at my family’s church here in The Woodlands before going on to start his own church in northwest Houston. O

One of Ken’s finest sermons during his time at my family’s church was one that he gave on Father’s Day in which he lovingly described his father’s tender mentoring of his son and daughter.

Finally today, in the face of virtually unprecedented public animus toward anyone or anything having to do with Enron, Judge Werlein has shown judges everywhere the model of what a judge should aspire to be.

That’s quite a fine legacy in my book.

Even the Justice Department does not have a license to take contradictory positions in important cases, even if one of those cases is Enron-related.

Leading up to the the sentencing hearing tomorrow in U.S. District Judge Ewing Werlein‘s court in regard to two defendants in the Enron-related Nigerian Barge case, developments in another case this past week shine a clearer light on the dubious nature of the government’s position that Judge Werlein should toss the barge defendants in prison and throw away the key.

The Enron Task Force is taking the position that former Merrill Lynch executive Daniel Bayly should receive a more severe sentence based on a bogus theory of “shareholder loss” that has been long rejected in civil securities fraud cases.

By way of background, Mr. Bayly was a well-regarded and longtime Merrill Lynch executive who was involved in a transaction in late 1999 in which Merrill bought from Enron an interest in three Nigerian energy-generation barges as a favor for Enron.

An Enron partnership bought the barges six months later and then sold them to a third company for a profit.

The Enron prosecutors argued that the deal allowed Enron to book illegal profits at the end of 1999 because Enron had orally agreed to buy the barges back from Merrill, and a jury convicted Mr. Bayly and four others of conspiracy and fraud (Enron’s in-house accountant – Sheila Kahanek – was acquitted).

The prosecutors are now arguing that Judge Werlein should increase Mr. Bayly’s sentence by up to 15 years because the alleged fraud caused a near $44 billion shareholder loss.

The prosecution has no legal basis for this alleged loss figure. Under civil securities fraud law, investors sue for a decline in the value of a security only if they can show that the decline was actually caused by the fraud.

Thus, if a company puts out news of a transaction that causes a share price to rise, and then discloses that the transaction is a sham that, in turn, causes the share price to decline, investors can recover any loss that resulted directly from the disclosure of the misrepresentation.

Which is precisely the rub in the Enron Nigerian Barge case — no such loss resulted from the alleged sham deal.

Enron sold the barges to Merrill and Merrill sold them to an Enron-related partnership well before Enron collapsed at the end of 2001. Accordingly, any reduction in the price of Enron stock happened well in advance of disclosure of details of the barge transaction, which disclosure did not occur until well after Enron had filed bankruptcy and Enron’s share value had already dropped to zero.

Consequently, the government simply cannot show that Enron shareholders lost a dime from the disclosure of this particular transaction.

To get around this rather substantial legal problem, the Enron Task Force prosecutors are taking the position that, because some shareholders bought Enron stock at an inflated price due to losses that were covered up by the barge transaction, those purchases equate to a loss. The prosecutors even got an “expert” to opine during the market loss hearing after the completion of the Nigerian Barge trial that the relatively small barge deal pumped up Enron’s price and, presto, the government has its $44 billion market loss figure.

Interestingly, even the Justice Department does not support the Enron prosecutors’ dubious views regarding market loss. Earlier this week, the Supreme Court unanimously ruled in Dura Pharmaceuticals v. Broudo that plaintiffs who claim securities fraud must prove a connection between a misrepresentation and an investment’s subsequent decline in price.

In direct contradiction of the Enron Task Force’s position in the Enron Nigerian Barge case, the Justice Department and the Securities and Exchange Commission filed this joint brief in Dura in support of the proof-of-causation position and against the price inflation theory of causation that the Justice Department prosecutors used in asserting “market loss” in the Nigerian Barge trial.

Does simply the fact that a case is related to Enron justify the Justice Department in taking such blatantly contradictory positions?

The Justice Department continues seeking maximum sentences against easy targets, such as relatively wealthy business executives who had the misfortune of doing business with the pariah Enron. Apparently, it’s going to take wise judges to step in and check the government’s zeal. Judge Werlein is capable of doing so, and I hope he does so tomorrow.