The jury in the Enron-related criminal trial known as the Nigerian Barge case concluded the market loss hearing by determining today that the sham barge sale that was at the center of the trial cost Enron shareholders $13.7 million.
In a case that was largely dubious from the beginning, the jury’s conclusion on the market effect of the transaction was just as questionable as many other aspects of the case. In reality, there was no market loss resulting from the sham barge transaction. The fact that Enron did not account for the Nigerian Barge transaction properly actually made Enron’s earnings look better than they really were. Thus, that accounting helped to increase Enron’s share value for the benefit of investors who were buying and selling the stock at the time. Moreover, there is no evidence that the decline in Enron’s share value during its demise into bankruptcy in 2001 had anything to do with revelations regarding the barge transaction. Indeed, the alleged faulty accounting on the barge deal was not even discovered until well over a year after Enron went into bankruptcy and its equity value had become essentially worthless.
Nevertheless, the prosecution trotted an expert on to the stand who testified — apparently with a straight face — that the market loss from the sham barge transaction was $43 million. The defense countered with its own expert who testifed that, at most, the market loss attributable to the barge transaction was $120,000. In all likelihood, the jury was hopelessly confused by the entire matter and, as juries commonly do in such situations, split the baby and arrived at the utterly baseless number of $13.7 million. At least that number bears some resemblance to the $12 million profit that Merrill made on the deal, which of course has no bearing on the market loss. Oh well.
U.S. District Judge Ewing Werlein also asked the 6-women, 6-man jury in the Enron barge case to make findings on seven aggravating factors involved in the alleged offense that the Judge can use under current federal sentencing rules to increase or decrease the range of prison time an individual might receive. Two of the defendants — ex-Enron finance executive Dan Boyle and former Merrill Lynch banker William Fuhs — waived any right to have the jury advise the judge on their sentencing and were excused from the proceedings late last week. So, the jury’s findings only apply to the three other Merrill bankers who the jury found guily earlier, Daniel Bayly, James A. Brown and Robert Furst. Based on the jury’s findings, those three Merrill defendants could be facing considerable jail time depending on how Judge Werlein interprets the sentencing guidelines. All of the defendants are scheduled to be sentenced by Judge Werlein in March 2005.

After winning the only acquittal for any of the defendants in the Enron-related Nigerian Barge trial, Houston-based defense attorney Dan Cogdell is profiled in this Houston Chronicle article. Cogdell did a magnificent job in the trial and clearly was the one lawyer in the crowded courtroom who won over the jury. As noted in this earlier post, Cogdell is one of a group of local criminal defense attorneys that gives Houston as formidable a Criminal Defense Bar as any city in the United States.

After convicting four former Merrill Lynch executives and a former Enron executive of wire fraud and conspiracy charges yesterday, the jurors in the Enron-related trial known as the Nigerian Barge case heard from opposing expert witnesses today regarding the market effect that the Nigerian Barge transaction had on Enron.

Today’s hearing was held to allow the jury to consider the evidence of market loss that is used in determining sentences under the federal sentencing guidelines. As noted earlier in these posts, the U.S. Supreme Court’s recent decision in Blakely v. Washington has called the Constitutionality of the federal sentencing guidelines into question, particularly if the jury is not allowed to consider the issue of market loss.

Anthony Saunders, chairman of the finance department at New York University testified on behalf of the prosecution and estimated — with a straight face — that Enron’s sham sale of three power-generating barges to Merrill Lynch led to damages suffered by Enron shareholders of about $43.8 million.

Professor Saunders came up with this damage assessment despite the fact that Merrill Lynch booked only a $12 million profit on the deal, Enron lost no money on the transaction, and the alleged sham nature of the transaction was not even discovered until a year and a half after Enron’s equity value had become worthless upon the company filing bankruptcy.

At any rate, Professor Saunders speculated that the 1 cent per share that the barge deal contributed to Enron’s 1999 earnings translated to about 47 cents per share of the company’s stock price of $53.50 at the time the company’s financial result were announced in January 2000. Take that 47 cent figure times the number of outstanding Enron shares at the time and wallah — you get a $43.8 million figure.

Of course, whether that number bears any reasonable resemblance to the value that the barge deal contributed to Enron’s stock price is another issue entirely.

The prosecution’s market effect reasoning here is so flawed that it borders on the preposterous. In reality, the fact that Enron did not account for the Nigerian Barge transaction properly made Enron’s earnings look better than they really were. Thus, that accounting increased Enron’s share value for the benefit of investors who were buying and selling the stock.

Moreover, the prosecution has presented no evidence — because there is none — that he decline in Enron’s share value during its demise into bankruptcy in 2001 had anything to do with revelations regarding the accounting on the barge transaction. This is because the alleged improper accounting for the barge deal was not even discovered until well over a year after Enron went into bankruptcy and its equity value had become essentially worthless.

At any rate, Dan Fischel, a law professor at the University of Chicago who testified for the defense, countered with a more realistic market loss evaluation and concluded that the loss was closer to $120,000. He also noted that Professor Saunders’ methods were “inconsistent with the real world,” and that Professor Saunders’ methodology relied too heavily on academic models that are not generally used in evaluating a company’s value in the business community. That is a charitable understatement, to say the least.

The market loss hearing will conclude on Friday, and the jury is expected to present its findings to U.S. District Judge Ewing Werlein shortly thereafter. If the jury buys Professor Saunders’ absurd market loss calculation, the defendants could be facing the equivalent of life sentences under the applicable federal sentencing guidelines.

If that occurs, then this prosecution will officially cross the line from being a “mere” injustice to becoming a modern day witch hunt.

R. Preston McAfee is the J. Stanley Johnson Professor at the California Institute of Technology and formerly held the Murray S. Johnson Chair at the University of Texas at Austin. In this concise and insightful article for The Economists? Voice entitled The Real Lesson of Enron?s Implosion: Market Makers Are In the Trust Business, Professor McAfee explains in plain terms that, in the end, Enron’s demise was caused by a loss of trust:

How did Enron, a firm worth $60 billion, collapse over the discovery of a billion or so in hidden debt and fraudulent accounting? It didn?t. Or, at least, not directly. Market makers like Enron and Ebay are in the ?trust? business, just as banks and insurance companies are. Once trust was lost, the rest of Enron?s value quickly disappeared. The maintenance of customer trust is an important, and frequently mismanaged, aspect of business strategy.

Professor McAfee begins by pointing out that the disclosures of financial problems at Enron were insufficient along to bring Enron down:

At the time of its collapse, Enron?s market capitalization exceeded $60
billion, after growing at over 50% per year for a decade. The company collapsed after the revelation of $1.2 billion in hidden debt. This represented the visible portion of something over $8 billion in total hidden debts, a fraction of the value of the enterprise.
Moreover, the Enron business model provided real value to its customers, permitting them to contract over longer time horizons and to improve risk
management. So why did a company that was making a profit and providing real value to customers vanish so abruptly? Why aren?t the profitable lines of
business operated by Enron thriving today?

After pointing out that Enron was hardly along among major corporations in engaging in questionable accounting practices, Professor McAfee addresses why Enron’s irregularities caused a meltdown when others did not:

So why did Enron collapse, when other firms with questionable accounting survive? The answer is that Enron?s business-model was hostage to the trust that customers placed in Enron?s financial integrity. Once confidence in Enron waned, as I will explain, participants in Enron?s innovative markets were unwilling to engage in the purchasing or selling of a long-term contract that might not be fulfilled. Bid-ask spreads diverged, and Enron?s markets unraveled.

Read the entire piece. Inasmuch as the mainstream media struggles to keep something as seemingly broad as Enron’s demise in perspective, analysis such as this is quite helpful to a proper understanding of Enron’s failure.

Confirming a deal noted here earlier, Lehman Brothers announced on Friday that it has agreed to pay $222.5 million to settle the the Enron class-action litigation against it in which the plaintiffs claimed that Lehman and other financial institutions helped Enron mislead investors.
The Lehman settlement is the third and the largest since the case was filed in late 2001 just before Enron went into chapter 11 during the first week of December 2001 amid public disclosure of hidden debt, inflated profits and accounting improprieties. As noted in this earlier post, Bank of America agreed to pay $69 million to settle similar allegations of liability for loss of value to securities it underwrote for Enron. The Enron class action plaintiffs also reached a $40 million settlement in July 2002 with Andersen Worldwide, the former parent company of the accounting firm Arthur Andersen.
Despite these settlements, the Enron class action plaintiffs continue to make overall settlement demands in the $30-40 billion range, so it appears that — based on the total sum of the three settlements to date — the plaintiffs’ lawyers have some work left to do with the remaining financial institution defendants in the case. Bank of America and Lehman were underwriters in just a handful of Enron-related deals, so attorneys involved in the case believe their roles (and thus their settlement payments) are small in comparison to firms like Citigroup Inc. and J.P. Morgan Chase & Co. who did more Enron-related deals. Citigroup and J.P. Morgan are among the firms that have reserved billions of dollars to cover Enron-related exposure.

Final arguments ended today in the Enron-related criminal trial of four former Merrill Lynch executives and two former mid-level Enron executives in what has become known as the Nigerian Barge trial. Earlier posts on the trial may be reviewed here, here, here, and here.
As noted in the earlier posts, this has been a mess of a trial, which likely would have never been pursued at all had not the pariah known as Enron been involved. Remarkably, all of the main prosecution witnesses had copped pleas bargains with the government, were not primary players in the transaction that was at the heart of the trial, and could not personally implicate any of the defendants in the alleged wrongdoing. In a normal case, this ledger would be a prescription for acquittal of all the defendants.
However, the extraordinary public bias against anything having to do with Enron — a bias that the Enron Task Force repeatedly appeals to in its public statements — makes this a much tougher case to call. Add to that mix that three (former Merrill execs Bayly, Furst and Brown) out of the six defendants chose not to testify and there is a decent probability that the prosecution will obtain at least a few convictions out of the trial.
My bet is that Sheila Kahanek, the mid-level Enron accountant who testified, and William Fuhs, the lowest-level Merrill executive of the defendants and the only one to testify, will be acquitted. Daniel Boyle, the other former Enron executive on trial, has a decent shot at acquittal, but frankly did not do as good a job as either Kahanek or Fuhs on the witness stand. The other three Merrill execs — Messrs. Furst, Bayly, and Brown — did not testify and I believe have a higher risk of facing convictions. As Martha Stewart learned, juries in white collar criminal cases want to hear from the defendant.

The first Enron-related criminal trial — the mess known as the Nigerian Barge trial (previous trial posts here, here, and here) — will conclude its evidentiary phase today and U.S. District Judge Ewing Werlein will complete the charge to the jury. Final arguments are scheduled to begin on Tuesday, and likely will extend into Wednesday. Stay tuned for updates.

This Washington Post article does a decent job of reviewing the work over the past two years of the Justice Department’s Corporate Task Force that was created as a result of the meltdown of Enron Corp.

A British judge ruled Friday that three British bankers indicted in the U.S. on Enron-related fraud charges could be extradited to stand trial in Texas. Here is a prior post that reports on the background of this case leading up to the recent extradition hearing.
District Judge Nicholas Evans found that there was a “good and proper basis” for prosecuting David Bermingham, Giles Darby and Gary Mulgrew in the United States and ruled the case should be sent to Home Secretary David Blunkett for a decision on whether to extradite them. Under British law, Home Secretary Blunkett can only halt the extradition if the men might face the death penalty or are likely to face further charges once in the U.S.
Despite the Justice Department’s dubious handling of the Enron-related criminal investigation and prosecutions to date, the Justice Department is likely “only” to seek a prison sentence against each of the bankers that is tantamount to a life sentence, but not the death sentence. ;^)
The three former employees of National Westminster Bank (“Natwest”) were charged in the U.S. in 2002 with bilking the bank of $7.3 million in a Andrew Fastow-designed scheme. Prosecutors allege that Messrs. Mulgrew, Darby and Bermingham conspired with Mr. Fastow and Michael Kopper in 2000 to defraud Natwest of millions of dollars. They allegedly advised the bank to sell its interest in a subsidiary of LJM (one of Fastow’s off balance sheet partnerships) to another Fastow-created entity for $1 million when it was really worth much more. However, based on the way Fastow manipulated Enron and his partnerships, I do not know how the prosecution could know what the interest was really worth.
At any rate, the government says that Fastow arranged for Enron to pay $30 million to unwind the energy company’s transactions with the LJM subsidiary and that Natwest received only $1 million of that amount, while Fastow, Kopper, and the bankers divvied up $19 million between themselves. Of that, the bankers allegedly pocketed $7.3 million and, as a result, each of the bankers has been charged with seven counts of wire fraud.
The bankers’ case has been one of the first tests of the new fast-track British extradition procedures introduced in 2003 to deal primarily with terrorist cases. The Extradition Act lessens the burden of proof in some cases, allowing certain countries such as the U.S. to provide mere information rather than evidence that a crime has been committed.
Inasmuch as Kopper pleaded guilty to two counts of conspiracy in August 2002 and Fastow pleaded guilty to two counts of conspiracy in January of this year — and Kopper just finished being one of the prosecution’s main witnesses in the ongoing Nigerian Barge trial — the bankers can expect that both Kopper and Fastow will be witnesses against them in any U.S. trial.