Longtime Houston attorney Tom Kirkendall's observations on developments in law, business, medicine, culture, sports, and other matters of general interest to the Houston business, professional, and academic communities.
Could it be that folks are finally realizing that old-fashioned greediness really should not be a crime?
Of course, the rationalization for the lack of villains now as compared to earlier crises has never been particularly compelling.
Business prosecutions over merely questionable business judgment obscure the true nature of risk and fuel the myth that investment loss results primarily from criminal misconduct. Taking business risk is what leads to valuable innovation and wealth creation. Throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison does nothing to educate investors about the true nature of risk and the importance of diversification.
Ignorance about business risk has led in part to the criminalization of business lottery. Such a lottery breeds cynicism and disrespect for the rule of law.
Isn’t it about time that dubious policy be put to permanent rest?
During my unexpected absence from the blogosphere last week, the Seventh Circuit Court of Appeals released Conrad Black from prison pending his re-trial on various business fraud charges.
That got me to thinking about what was going on in Jeff Skilling’s case on the same issue, so I checked in at the Fifth Circuit and found that Skilling has also requested his release from prison. That motion — as well as Skilling’s memorandum of law on why all remaining counts against him should be reversed and the entire case remanded for retrial — are below.
These two documents arguably provide the best description yet of the unjust nature of the criminal case against Skilling. In short, the government knew that it had a flimsy case against Skilling on conventional securities fraud (he simply believed in and touted his company like any other CEO) and wire fraud charges (he didn’t steal a dime from Enron).
So, the government relied on the defective honest services wire-fraud theory to convict Skilling of crimes based on amorphous, non-criminal acts such as not acting in the best interests of the company or promoting an unhealthy culture at Enron. Having relied heavily on the now-discredited honest services wire-fraud theory in obtaining convictions against Skilling on the more conventional charges, the government simply cannot prove beyond a reasonable doubt (it’s burden on remand under such circumstances) that the jury did not rely on the acts relating to the honest services wire-fraud charges in convicting Skilling on the other charges.
It looks to me as if this case should be going back to the District Court for re-trial on all charges. Skilling and the government have agreed to an expedited briefing schedule on the issues and Skilling has requested that the Fifth Circuit review the matter on an expedited basis. Thus, look for a decision sometime next month.
Yesterday’s post touches on the enormous direct costs attributable to the federal government’s questionable policy of regulating business through criminalization of bad or simply incorrect business judgments.
However, as enormous as those direct costs are, the indirect costs of criminalizing bad business judgments dwarfs the direct ones.
Whether management makes such judgments correctly is a fundamental risk of business ownership. Criminalizing that risk — through the prism of hindsight bias — will simply make executives in the future less likely to take the risks necessary to build wealth and create jobs while not deterring in the slightest the Bernie Madoffs of the world from embezzling money.
Business owners deserve protection from theft, but not from risk taking, and it’s not clear that government prosecutors know — or even care about — the difference.
Those indirect costs came to mind again as I read this Wall Street Journal article (H/T Russ Roberts) on the unintended consequences arising from the government?s new regulations concerning rating agencies:
Ford Motor Co.’s financing arm pulled plans to issue new debt, the first casualty of a bond market thrown into turmoil by the financial overhaul signed into law Wednesday.
Market participants said the auto maker pulled a recent deal, backed by packages of auto loans, because it was unable to use credit ratings in its offering documents, a legal requirement for such sales. The company declined to comment.
The nation’s dominant ratings firms have in recent days refused to allow their ratings to be used in bond registration statements. The firms, including Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, fear they will be exposed to new liability created by the Dodd-Frank law.
The law says that the ratings firms can be held legally liable for the quality of their ratings. In response, the firms yanked their consent to use the ratings, hoping for a reprieve from the Securities and Exchange Commission or Congress. The trouble is that asset-backed bonds are required by law to include ratings in official documents.
The result has been a shutdown of the market for asset-backed securities, a $1.4 trillion market that only recently clawed its way back to health after being nearly shuttered by the financial crisis.
Professor Roberts sums it up in his post by quoting Hayek:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
A common topic on this blog has been the power of anti-business myths within American society.
Take Enron, for example. The anti-business myth contended that that Enron — at one time one of the largest publicly-owned companies in the U.S. — was really just an elaborate financial house of cards that a massive conspiracy hid from innocent and unsuspecting investors and employees.
The Enron Myth is so widely accepted that otherwise intelligent people reject any notion of ambiguity or fair-minded analysis in addressing facts and issues that call the morality play into question. The primary dynamics by which the myth is perpetuated are scapegoating and resentment, which are common themes of almost every mainstream media report on Enron.
The mainstream media — always quick to embrace a simple morality play with innocent victims and dastardly villains — was not about to complicate the story by pointing out that the investors in Enron could have hedged their risk of loss by buying insurance quite similar to that which Enron developed in creating their wealth in the first place.
Instead of attempting to examine and tell the nuanced story about what really happened at Enron, much of the mainstream media simply became a part of the mob that ultimately contributed to the death of Ken Lay and hailed the barbaric 24 year sentence of Jeff Skilling. Ambitious prosecutors, given wide latitude to obtain convictions of key Enron executives regardless of the evidence, gladly took advantage of the firestorm of anti-Enron public opinion to lead the mob.
As noted in many subsequent posts here over the years, it is far more likely that the truth about Enron is that no massive conspiracy existed, that Skilling and Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation.
Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst choppy post-bubble, post-9/11 market conditions when the markets were spooked by revelations of the embezzlement of millions of dollars by Enron CFO Andy Fastow and a relative few of his minions.
In the wake of such destruction of careers and lives, the public is even less willing to confront the vacuity of the myth and the destructive dynamics by which it is perpetrated. indeed, even though what happened to Enron has now happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses over the past two years, much of the public and the mainstream media still cling to the Enron Myth.
Created, funded and filmed by Beth Stier — who was the subject of prosecutorial misconduct as a non-party witness in the trial of the Enron Broadband case — Ungagged.net is a “webumentary.” That is, a website comprised of short modules of documentary-style content, organized into two main categories: “What It Was Like to Be on The Other Side of the Enron Story,” and “Behind the Scenes of The Other Side of the Enron Story.”
Ungagged.net currently features over a dozen relatives of defendants, attorneys, former Enron executives and employees telling their stories about what they experienced personally in dealing with the overwhelming governmental power and societal forces at work in the Enron saga. Moreover, six experts in economics, political science, finance, UK law and civil liberties — including Clear Thinkers favorites William Anderson and Harvey Silverglate — provide their views on the ominous implications that the government’s handling of the Enron case have on us all.
Ms. Stier continues to add new information to the site, the latest of which are dozens of snippets from fascinating interviews of David Bermingham and Gary Mulgrew, two of the NatWest Three bankers from England who were caught up in an international firestorm in connection with the Enron Task Force’s effort to turn Fastow and his right-hand man, Michael Kopper, into witnesses for the Task Force against Skilling and Lay. This series of interview modules paints an absolutely fascinating tale of three regular fellows from the U.K. having their lives, families and careers turned utterly upside down by governmental forces that viewed them as mere pawns in a much larger game.
Apart from the its egregious human toll and the serious abuse of state power that its promoters ignore, the Enron Myth’s devastating impact is that it obscures the true nature of investment risk and fuels the notion that investment loss results primarily from someone else’s misconduct. As Larry Ribstein has been asking for years, do we really want to be sending a message to investors that risk is bad when it often leads to valuable innovation and wealth creation?
For example, self-settled derivative prepay transactions are not particularly intuitive (no product actually changes hands) and are not well-understood outside the trading business. Nevertheless, such transactions provide the valuable benefit of hedging risk for companies, who pass along that benefit to consumers in the form of lower prices for their products and services.
Do we really want to allow prosecutors and regulators to paint such beneficial transactions as frauds and then manipulate the public’s ignorance to demonize innovative risk-takers who are attempting to create wealth? How does throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison do anything to educate investors about the true nature of risk and the importance of diversification and hedging?
Ungagged.net is currently a lonely voice in the wilderness advocating against such governmental overreach. Here’s hoping that voice grows louder as those of us who are concerned by the pernicious growth of abusive governmental power listen to the stories and observations contained in this valuable resource.
As noted in April when the Securities and Exchange Commission brought its lawsuit against Goldman Sachs, the case was destined to settle with Goldman paying a hefty settlement, which the SEC announced last week. But Larry Ribstein expands on that thought in this timely post on what the proposed settlement means to the folly of the current reform movement regarding governmental regulation of financial firms:
The SEC is heralding the $550 million settlement in its suit against Goldman as ìthe largest penalty ever assessed against a financial services firm in the history of the SEC,î and ìa stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.î Surely the agency had a strong incentive to try to use the Goldman settlement to obscure the memory of Madoff, Stanford and the Bank of America settlement. Meanwhile,todayís NYT concludes its Goldman story with a quote suggesting Goldman got off lightly.
The truth is far more disturbing: the SEC got a big payday in what would have been seen as a strike suit had it been a private securities class action lawyer. [. . .]
What clues on all this can be gleaned from a settlement that involves a huge amount of money but only an admission of a ìmistakeî?
The bottom line is that this suit has proved to be no more than a common ìstrikeî suit, no better than the sort of private securities class actions that triggered Congressional reform 15 years ago. Instead of attorneysí fees, the SECís objective appears to have been purely political. In the end it extracted a ransom payment from Goldman so the firm could reclaim its reputation and get back to business.
The court must now review the settlement. It should take a cue from the dissenting Commissioners and reject it because of the puzzling and troubling inconsistency between the amount of the settlement and Goldmanís meaningless admissions. The SEC should have to prove exactly what Goldman did wrong. This will force Goldman to either litigate or make a meaningful settlement. Goldman is hardly an object of pity at this point. In any event, the issues here go far beyond Goldman to, among other things, the proper role and function of the SEC.
It is sad that the SEC not only cannot be trusted to find fraud, but that it can no longer be trusted to litigate and settle cases involving the supposed frauds that it finds. But this is where we find ourselves in the days following ìfinancial reform.î
Expecting the SEC to regulate a firm as sophisticated as Goldman Sachs effectively is about as rational as investing oneís entire nest egg with Bernie Madoff or Allen Stanford.
After Le Affaire Rosenthal and the ensuing change at the top levels of the Harris County District Attorneys Office over the past couple of years, it’s easy to forget that the local D.A’s office was a model of stability and excellence during the previous generation.
Johnny B. Holmes, who ran the D.A.’s office for 21 years before retiring in 2001, is still relatively well-known to many Houstonians. But less well-known is that Holmes inherited a well-organized D.A.’s office from Carol Vance, who was D.A. from 1966-1979 and literally transformed the local office from a small-town outpost into one that other major cities copied.
I pass this along because I just finished reading Vance’s autobiography,Boomtown D.A. (White Caps Media 2010) (it’s not available through Amazon at this time, so I bought my copy through the publisher’s site). For any long-time resident of Houston, it is a thoroughly enjoyable read. And for any attorney practicing in Houston, it is an essential read.
Vance was involved in his share of juicy cases, so the chapters on those cases are the meat of the book. Vance’s big cases include the John Hill case of Blood and Money fame, the cases arising from the TSU race riot of 1967, the prosecution of two corrupt judges (District Judge Garth Bates and Supreme Court Justice Don Yarbrough), the amazing transformation of former UH professor Gerry Phelps, and the prosecutions of Elmer Wayne Henley and David Brooks, who were the sidekicks to the worst serial killer in Houston history.
Moreover, just as interesting to me as the big cases is Vance’s explanation of how the D.A.’s office grew from a relatively small office that was easily overwhelmed by a big case into one that could take on virtually anything that was thrown at it. Vance had many people helping him with this task and he is effusive in his praise of those folks, many of whom went on to become successful judges and attorneys in Houston after leaving the D.A.’s office. And Vance has a field day describing his interactions with Houston’s formidable criminal defense bar, including such legends as Percy Foreman and Richard “Racehorse” Haynes.
But most impressive is Vance’s description of his efforts after leaving the D.A.’s office in becoming one of the leaders of prison care and reform in Texas. The Carol Vance Prison Unit in Sugar Land is named for him and has one of the lowest recidivism rates of any prison in the U.S., a result of that unit’s robust Christian ministries that Vance nurtured and promoted.
Carol Vance is a remarkable man who became Harris County District Attorney at a key time in Houston’s history. We are all the better for that. Check out his book and learn why. You won’t be disappointed.
Update: The book’s editor, Kit Sublett, passes along that Carol Vance will have a book signing at Brazos Bookstore on July 22nd, and that the book signing scheduled for July 31st at Murder by the Book has been postponed. Mr. Sublett also advises that the book is available at all Houston-area Barnes and Noble stores and the Barnes and Noble website.
Does the end of convicting a business executive of a crime justify the means by which government prosecutors accomplish it?
James Brown, the former Merrill Lynch executive and one of the defendants in the Enron-related criminal case known as the Nigerian Barge case, has to be asking himself that question as he continues to endure what is now his seventh year of prosecutorial hell.
The Nigerian Barge prosecution was baseless from the start and, as later developments revealed, trumped-up to boot.
But as Brown’s Supplemental Memorandum below filed this past Friday explains, “trumped-up” is too kind a term to describe what the prosecutors did to Brown and his fellow Merrill co-defendants.
A quick history of the case is helpful. After prosecuting Arthur Andersen out of business in the intensely anti-business post-Enron climate of Houston in 2004, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which the firm did by offering up Brown and fellow Merrill executives Dan Bayly, Robert Furst, and William Fuhs.
Through a deferred prosecution agreement with Merrill, the Task Force hamstrung the Merrill defendants’ defense by limiting access to other Merrill Lynch executives who were involved in the barge transaction and who would have testified favorably for the defendants. To make matters worse, the Task Force then intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the Merrill defendants’ defense.
Thus, after bludgeoning a couple of plea deals from former Enron executives Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the Merrill defendants, which was good enough to obtain convictions in Houston’s deeply-hostile environment in 2005 toward anyone having anything to do with Enron.
Of course, most of the convictions were vacated on appeal (and in Fuhs’ case, thrown out completely). However, each of the Merrill defendants served over a year in prison during their appeal while their families endured the substantial human cost of this and other misguided Enron-related prosecution.
Even after the convictions of the Merrill defendants were vacated, the Department of Justice initially threatened to pursue a retrial of the three remaining Merrill executives. But then the DOJ recently dismissed all charges against Bayly, while Furst cut a favorable plea deal that will lead to a dismissal of the remaining charges against him.
So, logic dictates that the DOJ would dismiss its charges against Brown, the only remaining defendant. Right?
Well, not so fast.
The DOJ has inexplicably teed up another trial of Brown, who was the only one of the Merrill defendants who was convicted on additional charges of perjury and obstruction of justice for having the temerity of protesting his innocence to the grand jury that originally investigated the Nigerian Barge deal. Brown’s new trial is currently scheduled to begin on September 20.
But in the meantime, Brown’s legal team has been leafing through enormous amounts of exculpatory evidence that the Enron Task Force withheld from the Merrill defendants in connection with the first trial back in 2005, but which the DOJ has recently been forced to disclose.
The result of the Brown team’s effort is set forth below in the Supplemental Memorandum in support of a motion for a new trial for Brown on the perjury and obstruction charges (the downloaded version of the memo is bookmarked in Adobe Acrobat to facilitate ease of review). The memorandum details the appalling length that the Enron Task Force went during the first trial in suppressing exculpatory evidence in favor of Brown and his co-defendants and generally disregarding the rule of law in order to obtain convictions. As the memorandum concludes:
The conclusion is now inescapable that the ETF engaged in a calculated, multi-step process to deprive Brown of his constitutional right to Due Process. (1) They repeatedly denied the existence of Brady material, told this court they had met their Brady obligations and fought vehemently against producing anything [exhibit reference and footnote omitted]. They highlighted only selected material in a veritable garden of Brady evidence — much of their selections being vague, tangential or marginal — while working around clear, declarative, relevant exculpatory material even in the same page, paragraph or document. (3) When ordered by the Court to produce summaries to the defense, they further redacted even the Brady material they had themselves highlighted and withheld the crucial facts that they had highlighted as Brady. (4) They egregiously capitalized on their misconduct at trial by making assertions that were directly belied by the exculpatory evidence they withheld. . . .
The memorandum goes on to set out dozens of Brady violations, including charts that compare the exculpatory statements that the Enron Task Force withheld prior to the first trial with the incriminating statements that the Enron Task Force extracted from witnesses during that trial.
Folks, this is really bad stuff. But as bad as it is, I have not seen any mention of it in the mainstream media.
When is the mainstream media going to realize that the scandalous behavior of government prosecutors in prosecuting business executives in connection with the Enron case dwarfs the true crimes that were committed at Enron?
Or is the media’s stubborn refusal to challenge the Enron narrative an even bigger scandal than the prosecution’s misconduct?
If you tire of the seemingly endless demagogic blather that governmental officials and pundits often pass off as discussion of key societal issues, then be sure to read this insightful Will Wilkinson post on the politics of ignorance:
The problem [of ideologues elevating doctrine over wisdom] is heightened by the fact that the reading public generally enjoys ideologues more than three-handed scholars, and so the more ideological among ideologues find themselves with larger audiences and more numerous and remunerative opportunities to publicly opine.
What results is not so much an exercise in public reason as a smash-em-up reputation derby, where elites vie to increase their pull with the public and policymakers by disparaging ideological competitors. Moves in the reputation game take many forms, from sniffs of imperious condescension, to bald ìstupidest man aliveî name-calling, to self-congratulatory above-the-fray comments like this one. There is no reason to trust that this is a process through which truth unfolds.
In the absence of institutions that limit the scope of democratic authority over intractably complex policy questions, the best we can hope for is perhaps a tad more self-awareness among opinion elites about their tendencies toward dogmatism and for the rise of norms that do more to reward the honestly judicious and penalize highly-regarded doctrinaire assholes.
As noted earlier here and here, the instinct of most politicians and much of the mainstream media is to embrace simple ìvillain and victimî morality plays when attempting to explain a particular trouble.
Take, for example, investment loss. The more nuanced story about the financial decisions that underlie a failed investment strategy doesn’t garner sufficient votes or sell enough newspapers to generate much interest from the demagogues or muckrakers. That’s why we periodically endure witch hunts, such as the recent one demonizing speculators. Thatís also why it’s important that our leaders who are ignorant about the function of speculation in markets take a moment to understand its beneficial purpose.
Morality plays are comforting because they make it easy to identify and demonize the villains who are supposedly responsible for trouble. The truth is usually far more nuanced and complicated, but ultimately more rewarding to embrace.
Regular readers of this blog are familiar with the technique that federal prosecutors used in the post-Enron era to score easy convictions against businesspeople.
Threaten to go Arthur Andersen on a company, offer to let the company off the hook under a deferred prosecution agreement in return for offering up an executive or two as sacrificial lambs to be prosecuted, and then bludgeon the individualís career, life and family into bits under the sledgehammer of the DOJís prosecutorial power.
Jamie Olis was arguably the first of those sacrificial lambs, andtherewere plenty in connection with the Enron-related prosecutions. Heck, the DOJ is even getting ready to tee up a re-trial of one such case this September.
But check out this example of DOJ brazenness that Ellen Podgor passes along. The DOJ enters into a deferred prosecution agreement with American Express and, as a part of the deal, has AE enter into a side-letter agreement that, absent the DOJís prior consent, prohibited AE executive Sergio Masvidal from obtaining employment with an AE unit or any company that bought the AE unit.
Given the DOJís heavy-handed approach in such matters, that part of the deferred prosecution agreement is not all that unusual. But one aspect of this particular deal was.
The DOJ didnít bother to disclose the side-letter to either Masvidal or the District Court that approved the deferred prosecution agreement.
Masvidal eventually found out about it when he was denied employment by the company that bought the AE unit. So, he sued the DOJ, which eventually led to the DOJís issuance of the letter below, which admits that the DOJ did not disclose the side-letter to the District Court on purpose and that the DOJís investigation ìdid not reveal any evidence that Mr. Masvidal had committed any criminal offenses or violated any banking regulations.î
Could it be that folks are finally realizing that old-fashioned greediness really should not be a crime?
