Flying under the radar screen of the more well-publicized criminal trials of unpopular businesspersons, jury selection began yesterday in the retrial of the corporate fraud criminal case against former Westar Energy Inc. executives David Wittig and Douglas Lake in Kansas City federal court. Here is a previous post on the mistrial that occurred in the first trial of the case.
The retrial of the case is particularly interesting because of a battle over whether Westar is responsible to pay the defense costs of the defendants. In an order this past Friday, the 10th Circuit Court of Appeals denied the two former executives’ motion that sought a postponement of the trial while they appealed an a trial court order that bars Westar from advancing their legal fees. Although the appellate court turned down their stay motion, the 10th Circuit did agree to dispose of the appeal of the legal fee issue on an expedited basis.
To date, Westar has advanced about $8 million for the attorney’s fees and expenses the men have incurred in the ongoing criminal case. Westar’s by-laws provide for payment of such fees in litigation arising from its executives’ employment. After the first trial ended in a mistrial, however, prosecutors contended that the money was the product of the defendants’ illegal activities and was subject to forfeiture. Last month, U.S. District Judge Julie Robinson — who battled with defense attorneys throughout the first trial — sided with prosecutors and reversed her earlier order that authorized Westar to advance the fees.
While the 10th Circuit considers the executives’ appeal on the legal fee issue, Westar will place funds equal to their defense costs in escrow. If the 10th Circuit reverses Judge Robinson’s ruling, then the money will be made available to pay the executives’ defense costs. If it upholds her ruling, then the money will be released to pay the fees if the executives are acquitted or, possibly, if the case ends in a mistrial again.
If the first trial was any indication, this retrial is one worth watching.

This Wall Street Journal ($) article reports that Manhattan District Attorney Robert Morgenthau has launched an investigation in New York of Bank of America, Dallas-based investor Sam Wyly and his brother, and several other institutions in regard to lucrative tax shelters that the Wylys set up in the English tax haven, the Isle of Man. Here is a previous post on the colorful Mr. Wyly, who was also one of President Bush’s biggest campaign contributors in both the 2000 and 2004 election campaigns.
Although legally a possession of the United Kingdom, the Isle of Man operates as an independent country with its own financial laws, the most important of which is that a foreign government cannot enforce in the Isle of Man courts a claim for unpaid taxes against an Isle of Man entity. Thus, tax-shelter promoters often tout the Isle as a convenient tax haven just an hour’s flight from London.
Mr. Morgenthau’s office, and now the Internal Revenue Service and the Securities and Exchange Commission, are investigating a popular stock option that B of A helped the Wylys establish to lock in gains on stock options during the bull market of the 1990’s. The IRS has already determined that the transaction was widely used as a tax shelter, so this new investigation is a part of a larger IRS drive to to identify and punish firms that promoted improper tax shelters.
Under the particular shelter under scrutiny here, wealthy businessmen and U.S. corporations donated options to trusts that they alleged were not under their control. The IRS contends that they retained control of the trusts and that over 40 U.S. corporations and dozens of executives used the arrangement to shelter income and avoid paying more than $700 million in taxes. The Wylys contend that they neither owned nor controlled the trusts, and that they were legitimate vehicles established for the benefit of family members and charities.

Former billionaire Russian oil magnate Mikhail Khodorkovsky was sentenced to nine years in prison yesterday by a Russian court in a case that businesspersons from around the world have followed carefully as a sign of the Russian government’s willingness to treat business interests fairly.

Russian governmental officials have presented the case against Mr. Khodorkovsky as a repudiation of the corrupt capitalism in the early days of Russia’s market economy of the 1990s that allowed Mr. Khodorkovsky to win control over Yukos, which was then Russia’s largest oil company.

Thus, the Russian government’s actions against allegedly corrupt business leaders is quite popular among most Russians, who resent Mr. Khodorkovsky and the other Russian tycoons who made fortunes during the 1990’s while most Russians struggled under the new market economy.

Nevetheless, the price that the Russian government will pay for prosecuting Mr. Khodorkovsky may be costly.

Western governments and investors have begun to question the Russian government’s commitment to the rule of law in regard to its treatment of business interests that compete with the government’s business interests.

Moreover, the government’s dismantling of Yukos has made given foreign investors yet another reason to avoid investment in Russian capital markets precisely at a time when Russia’s undercapitalized economy desperately needs that investment.

But lest we in the U.S. get too self-righteous about the Russian government’s handling of Mr. Khodorkovsky’s case, remember that the sentence pursued by U.S. prosecutors and handed down by a U.S. federal court in the sad case of Jamie Olis makes the Russian government’s handling of Mr. Khodorkovsky’s case look downright reasonable.

And if you do not believe that a prosecution of a U.S. business figure could be based on similar political aspirations as those involved in Mr. Khodorkovsky’s case, just watch the upcoming case against Maurice “Hank” Greenberg develop.

What parallel universe are we living in when the U.S. government’s criminalization of business interests appears as bad, if not worse, than that of the Russian government’s?

On the heels of this lawsuit, this New York Times article profiles the defense team of former AIG chairman and CEO, Maurice R. “Hank” Greenberg — David Boies, Robert G. Morvillo, and longtime Greenberg confidant, Kenneth J. Bialkin of Skadden, Arps.
In typical NY Times style, the article treats Mr. Boies as a rock star, while essentially avoiding too much mention of the two less flashy members of the defense team. Overall, the team strikes me as somewhat odd. Mr. Boies is a longtime supporter of Democratic Party interests, which is the opposite of Mr. Greenberg’s political interests. Moreover, Mr. Morvillo — the criminal law expert — is coming off the rather disappointing trial defense of Martha Stewart last year. I would not be surprised to see additional members added to this team when the inevitable criminal indictments against Mr. Greenberg are filed, probably later this summer.