U.S. District Judge David Hittner today took the unusual step of issuing a ten page order admonishing prominent Houston criminal defense attorney, Dick Degeurin, for sending a background report about DeGeurin’s client, Lea Fastow, to the Bureau of Prisons.
Mrs. Fastow, wife of ex-Enron Chief Financial Officer Andrew Fastow, was ordered this week to serve her term for a tax misdemeanor in the cell block-like downtown Houston Federal Detention facility starting in July. DeGeurin had been trying to arrange for her to serve the year in a more comfortable federal minimum security unit in Bryan. DeGeurin’s letter to the Bureau indicated he was sending the report so that the Bureau had all the possible information on Mrs. Fastow before assigning her to a facility to serve her one-year sentence.
Presentencing background reports are routinely sent to the Bureau and both the prosecution and the defense requested that one be sent in this case. However, Judge Hittner refused to send the report in this case, reasoning that the report was based on the felony charges that the government dropped when Mrs. Fastow pled to a misdemeanor tax evasion charge. Judge Hittner contended that the lawyers waived a new report, but DeGeurin and the prosecution apparently did so only because a report already existed and they thought it was fine to send to the Bureau.
Judge Hittner took the unusual step of distributing his order regarding DeGeurin to all the district judges in the Southern District of Texas saying DeGeurin “circumvent(ed) the rulings of the court, as well as the procedures of the United States Probation Office and Federal Bureau of Prisons.”
Judge Hittner previously refused to accept a 5-month prison plea bargain for Mrs. Fastow. Although this is speculation, I suspect that Judge Hittner has not been pleased with the way in which the Enron Task Force handled the case against Mrs. Fastow — i.e., prosecuting her until her husband cut a plea bargain and then agreeing to a minimum level plea with Mrs. Fastow that indicated that they really were not serious about the prosecution in the first place. However, I have no idea why the judge has gone off on DeGeurin, who appears to have done nothing other than vigorously represent his client.
One thing looks certain — I suspect that all parties in any future Enron criminal prosecutions that land in Judge Hittner’s court will file joint motions to recuse him from the case. It was somewhat surprising that Judge Hittner handled the case against Mrs. Fastow because he was a former Enron Corp. shareholder. Neither the prosecution nor the defense in Mrs. Fastow’s case raised that fact as grounds for the judge’s recusal.

Following on the earlier post from today, U.S. District Judge Ewing Werlein has postponed the trial of the Enron Nigerian Barge case. The trial will now begin on August 16.

The first Enron-related criminal prosecution to go to trial since the 2002 case against Arthur Andersen begins today in U.S. District Judge Ewing Werlein‘s court in Houston. This Houston Chronicle story reports on the difficulty of finding unbiased jurors in regard to any trial relating to the demonized Enron. Earlier posts on this particular case may be reviewed here, here, and here.
One of the first issues that Judge Werlein will deal with today is various defense motions to dismiss the case based on the Enron Task Force‘s inexplicably late revelation last Thursday that it possessed potentially exculpatory evidence for the defense in statements that former Enron CFO Andrew Fastow made to the Task Force.
In court pleadings, the Task Force has rationalized the late disclosure on the grounds that Fastow’s statements are not really exculpatory. However, that position is highly dubious in that the Task Force admits that Fastow stated that he never used the word “guarantee” in a key phone conversation in which the defendants participated. In that phone call, the Task Force claims a secret side deal was arranged in which Fastow committed Enron to buy back or broker a deal within six months for an interest in the Nigerian Barges that Enron was selling to Merrill Lynch. Such an agreement would have rendered the sale of the interest in the barges not a “true sale” and, thus, made Enron’s financial reporting of such sale fraudulent.
The Task Force is also attempting to minimize its delay in notifying the defense of Fastow’s potentially exculpatory statements by taking the position that it is not going to call him as a witness in its case in chief, but that Fastow is available to testify if the defense chooses to call him. Inasmuch as the Task Force’s case is based largely on Fastow’s alleged agreement to buy the barge interest back from Merrill, even the most credulous of the Task Force’s allegations will have to strain to accept the Task Force’s reasoning here. Stay tuned to learn how Judge Werlein deals with this issue.

This NY Times article reports on a potentially important development in the Enron-related criminal case against two former Enron executives and four Merrill Lynch executives dubbed the “Nigerian Barge case.” The Houston Chronicle story on these latest developments is here.
A day after the Enron Task Force had elected not to list former Enron CFO Andrew Fastow as a witness in the case, the Task Force advised the defendants that the government has in its possession potential exculpatory evidence for the defense relating to Mr. Fastow. Defendants immediately asked U.S. District Judge Ewing Werlein Thursday to conduct an evidentiary hearing to find out why prosecutors have withheld until the last minute evidence from Fastow that could help the defense.
According to the defense motion, in one FBI interview, Fastow said he did not even recall one of the defendants — former Enron finance executive Dan Boyle — being involved in Enron’s 1999 sale to Merrill Lynch of an interest in electricity-generating barges in Nigeria.
As noted in this earlier post, the government’s theory of the case is that Enron’s sale of an interest in the barges to Merrill was a sham and not a “true sale” for accounting purposes because Fastow orally promised Merrill in a secret side deal that Enron would either buy back the barges or broker a deal for them the following year. However, none of the deal documents contained that promise, and the the parties contirmed in the written documents that they were relying only on the representations and agreements contained in the written agreements between the parties. Fastow’s statements to the FBI and Justice that no such oral agreement existed could be strong evidence for the defense that the alleged side deal did not exist.
In a pre-trial conference last Thursday, Judge Werlein was openly skeptical about several of the prosecutors’ statements regarding why they had not turned over potentially exculpatory evidence in their possession to the defense. It will be interesting to see how this eminently fair Judge reacts to these latest developments.

As noted in this earlier post, the Enron Task Force‘s first trial in a case stemming from its over two year investigation into the collapse of Enron Corp. will begin next Monday in U.S. District Judge Ewing Werlein‘s court in Houston.
The case has been dubbed the “Nigerian Barge case” because it involves the actions of two former Enron executives and four Merrill Lynch executives in arranging Merrill’s purchase of an interest in a barge off the coast of Nigeria at the end of 1999. The Task Force alleges that the deal was a sham that was done merely to improve Enron’s financial condition artificially at the end of its fiscal year. The Task Force’s proof of the alleged sham is that former Enron CFO Andrew Fastow allegedly promised that Enron would broker a sale of the interest in the barges for Merrill the following year and that Merrill would not have done the deal but for Fastow’s promise. Thus, argues the government, the sale was not a “true sale” of the interest, and Enron’s accounting of the deal as a true sale was false.
An apparent weakness in the government’s theory is that, even if the government could prove that Fastow made the promise and that Merrill would not have done the deal but for that promise, Fastow’s promise was made before the parties entered into the final deal documents, which contain the typical provision that essentially provide that the parties are relying only on the written representations in the documents and that any oral promise made prior to the written agreements between the parties is not being relied upon. Thus, even if Fastow had made the promise to broker a deal for the interest in the barges to induce Merrill to buy it, that promise was not contained in the written agreements and, by signing them, Merrill confirmed that it was not relying on them. Stated simply, Merrill would not have been able to enforce Fastow’s oral promise to broker a deal for the barges.
In view of the foregoing and Fastow’s plea bargain with the government, it would seem that Fastow’s testimony that the deal was a sham would be of great importance to the government. However, this Chronicle article reports that the Task Force has decided not to call Fastow as a witness in presenting its case in chief during the trial.
Given the importance of Fastow’s allegedly fraudulent deal-making to the government’s case, this is good news for the defense. Moreover, in light of the written agreements between Enron and Merrill, is there really any way that the Task Force can sustain its burden that an oral side deal to broker a deal for the barges was an enforceable part of the deal? Stay tuned.

This Chronicle article reports on the pre-trial conference yeseterday in the Enron-related criminal case commonly known as the “Nigerian Barge case,” which appears to be the first Enron-related criminal case that will actually go to trial.
As noted in previous posts here and here, the Justice Department in general, and the Enron Task Force in particular, have adopted a sledgehammer policy in white collar criminal cases against business executives — that is, Justice alleges a myriad of counts against the business executive so that the executive is confronted with a draconian choice: either what amounts to a life prison sentence if the executive dares to defend the charges at trial or a plea bargain calling for a shorter prison sentence of between one (Lea Fastow) and ten (Andrew Fastow) years.
For the government’s standpoint, the strategy has worked well in regard to the Enron criminal investigation. In the two and a half years since Enron crumbled into bankruptcy, the Task Force has obtained plea bargains from over a dozen former Enron executives and has not had to conduct a trial against any former Enron executive to date. In fact, the only Enron-related criminal trial that has taken place was the case against Enron’s auditor, Arthur Andersen, in early 2002. That trial resulted in a controversial conviction of Andersen, which is currently the subject of an appeal before the Fifth Circuit Court of Appeals in New Orleans.
However, the Nigerian Barge case is a different animal, and it does not look like this case is likely to be resolved through a plea bargain. The case is particularly interesting because it involves the government’s attempt to convict former Enron and Merrill Lynch executives for participating in a commercial transaction of the type that is common throughout the business world.
In essence, the Task Force’s indictment against the Merrill executives contends that the entire Nigerian Barge deal was a sham because Merrill Lynch would not have bought from Enron an interest in the barges docked off the coast of Nigeria but for former Enron CFO Fastow’s oral assurance that Enron would broker a sale of the barges at a tidy profit for Merrill Lynch the following year. Fastow did indeed broker a sale of Merrill’s interest in the barges the following year to one of his infamous “off-balance sheet partnerships” that ultimately hid a total of roughly $40 billion of Enron debt.
According to the government’s theory of the case, if Fastow’s oral assurance to Merrill Lynch was binding on Enron, then the sale of the barges was not a true arm’s length sale and, thus, Enron’s accounting for the transaction as a true sale was fraudulent. Accordingly, the government reasons that it is irrelevant that the subsequent written agreements between Enron and Merrill Lynch contained a provision that made Fastow’s oral assurance unenforceable. The contract was false and a part of the sham because Merrill Lynch would not have done the deal but for Fastow’s oral assurance.
Other than Mr. Fastow’s probable testimony of dubious credibility (he is cooperating with the government under his plea bargain), the government’s primary evidence of the alleged sham nature of the deal appears to be the “nervousness” that Merrill executives openly expressed about the deal in emails both before and after Merrill consummated the transaction. The government interprets that nervousness as evidence that the Merrill executives knew that the deal was a sham and that they could be caught participating in a fraud with Enron.
However, there is a more reasonable interpretation of Merrill’s nervousness regarding the deal — that is, they really were nervous about the business risk of the deal, not because they thought it was a sham and a fraud, but because they knew that they could not rely on Fastow’s unenforceable oral assurance that Enron would broker a sale of the barges the following year. Accordingly, their nervousness was that they might be making a bad investment that would result in having to hold the barges for a long term rather than short term they preferred. Stated another way, the Merrill executives were nervous because they knew that this was a real deal in which the deal documents controlled the rights of the parties, and that Fastow’s oral assurances to get them out of the investment could not be enforced if Enron failed to live up to them.
But for the current highly adverse environment for any Enron-related defendant, my sense is that the prospects for a successful government prosecution in this particular case would be low. Even with the current anti-Enron bias in the community, this is going to be a tough case for the government. For example, during the pre-trial hearing yesterday, U.S. District Judge Ewing Werlein — a former civil trial attorney and a scrupulously fair judge — was clearly troubled by the government’s failure to turn over to the defense potentially exculpatory evidence that the government has in its possession. At another point in the hearing, Judge Werlein was openly skeptical of the government’s theory that it should be allowed — without providing pre-trial expert reports to the defense — to elicit expert opinions at trial from three proposed former Arthur Andersen auditors who the government has named as fact witnesses in the case.
Moreover, inasmuch as there are six defendants in this case, the defense team is formidable. Dan Cogdell and Tom Hagemann — two members of Houston’s excellent criminal defense bar that was the subject of a previous post here — were outstanding yesterday during the pre-trial hearing, as were New York’s Daniel Horwitz and Lawrence Zweifach. The prosecution team that assistant U.S. attorney Matthew W. Friedrich is leading will have its hands full at trial with this group of defense attorneys.
Jury selection in the Nigerian Barge case begins on June 7, and the trial will probably last about 4-6 weeks. Stayed tuned to developments in this one. A successful defense in this case could go a long ways toward leveling the one-sided playing field in favor of the Enron Task Force that has existed to date in regard to the handling of the Enron-related criminal prosecutions.

This Chronicle story reports on today’s plea bargain and settlement involving Paula Rieker, the former Enron managing director of investor relations. Under the deal, Ms. Rieker will turn over to the SEC nearly half a million dollars she made off the sale of stock the summer before Enron filed bankruptcy in early December, 2001, and she will plead guilty to a criminal insider trading charge under a cooperation agreement to testify for the Enron Task Force. Here is an earlier post that anticipated the deal.
Rieker is charged with knowing about significant losses at Enron’s defunct broadband business and selling her Enron stock before the company’s myriad problems were fully revealed to the public. Rieker was the managing director of investor relations for Enron in mid-2001 when the stock sale occurred. Later in 2001, she became the secretary to the board of directors and continued in that position until recently.
Under the SEC settlement, Ms. Rieker agreed never to serve again as an officer or director of a public company and, upon court approval of the settlement, will pay the SEC roughly $500,000, which is her profit from the sale of the stock. As is standard in these deals with the SEC, Mrs. Rieker did not admit or deny the SEC’s charges against her.
In the criminal case, Ms. Rieker has been cooperating with the government and she could be a valuable witness for the government as she prepared earnings releases and internal scripts for conference calls with analysts. The Task Force’s allegations against ex-CEO Jeff Skilling focus largely on alleged misrepresentations made about Enron’s earnings, and it is likely that any prosecution of ex-Enron Chairman Ken Lay would also also focus on such alleged misrepresentations. Lay has not yet been charged with any crime
Over two dozen individuals have been criminally charged in the Enron Task Force’s investigation, but none of those individuals have taken a case to trial. Several have pleaded guilty to various charges and are cooperating with the continuing investigations. Among those cooperating is former Enron Chief Financial Officer Andrew Fastow, whose cooperation facilitated the indictments earlier this year of Mr. Skilling and former Enron chief accountant, Richard Causey.
The first Enron-related criminal trial — the one known as the “Nigerian Barge case” involving several mid-level former Enron executives and former Merrill Lynch executives — is currently scheduled to begin in on June 7 in Houston before U.S. District Judge Ewing Werlein.

This NY Times article reports on the $85 million partial settlement that has been in the works for quite some time in the Tittle class action lawsuit involving claims of former Enron employees who lost their shares in their 401K plans when Enron collapsed in late 2001 was filed today in U.S. District Court in Houston. Here is a copy of the plaintiff’s memorandum in support of the proposed settlement.
Enron employees lost hundreds of millions of dollars when the Enron stock in their 401(k) plan went up in smoke as the company slid into bankruptcy in late 2001. Under the settlement, the former employees may receive up to 10 cents on the dollar. Associated Electric & Gas Insurance Services Ltd., also known as Aegis, and Federal Insurance Co. will fund most of the settlement payment. Enron had $85 million in fiduciary liability insurance to cover company employees who were acting as fiduciaries.
The partial settlement resolves claims against Enron’s directors and human-resource staff, but does not settle claims against former Enron executives, Kenneth Lay and Jeffrey Skilling. The settlement also does not resolve claims against Northern Trust Co., who the former employees contend should have protected them in its capacity as trustee and a fiduciary of the plans, or Arthur Andersen, which was the auditor of the plans and Enron. Similarly, the settlement also does not release claims against Enron’s fidelity bonds, which cover losses to the plans caused by theft or dishonesty. Finally, the settement does not release the plans’ separate securities claims against Enron underwriters and investment banks.
The settlement will be presented for preliminary approval to U.S. District Judge Melinda Harmon Houston on May 20 in Houston. Plaintiffs still have some substantial hurdles to jump over in connection with Enron’s bankruptcy case in New York, where Enron’s creditors are contending (with considerable merit) that the former employees and retirees’ claims are subordinate to the claims of most other Enron creditors.

Lea Fastow’s plea bargain with the Enron Task Force was approved today, and U.S. District Judge David Hittner sentenced her to a year in the slammer. Mrs. Fastow plea guilty to a misdemeanor charge of income tax evasion.
The Task Force prosecutors, who have become quite chummy with the Fastows since former Enron CFO Andrew Fastow, cut a deal to testify against other former executives at Enron, recommended that Mrs. Fastow’s sentence be five months. Judge Hittner, who I believe has never been pleased that the Task Force brought a marginal criminal case against a wife to put pressure on her husband, overruled prosecutors’ recommendation
Judge Hittner criticized prosecutors for vascillating between an original indictment of six felonies and a final charge of just one misdemeanor, suggesting that justice may not have been served in either instance. “Such maneuvering as is present in this case might be seen as a blatant manipulation of the justice system,” Judge Hittner said on the record.
The first Enron-related criminal case actually to go to trial since the Arthur Andersen prosecution in early 2002 is coming up in early June. That is the case that is known as the Nigerian Barge case, which is discussed in more detail here.