Dru Stevenson over at the South Texas Law Professor does a good job in this post of analyzing the current status of the Andrea Yates case. Professor Stevenson’s thoughts are insightful, particularly his point about the trend in big cases of prosecutors abandoning the principle of prosecutorial discretion in favor of career advancement.
I’m glad the feds got this guy. Think what might have happened when the Eagles get beat in the NFL playoffs?
The U.S. Supreme Court granted certiorari on Friday on Arthur Andersen’s appeal of its conviction of felony criminal charges in connection with allegedly destroying and altering Enron Corp.-related documents.
The Supreme Court will review this Fifth Circuit Court of Appeals ruling that upheld the former Big Five accounting firm’s June 2002 conviction by a jury in a Houston federal court. The key issue in the case will be whether the jury instructions that U.S. District Judge Melinda Harmon approved during the trial were too vague and broad for jurors to determine whether Andersen’s actions constituted obstruction of justice. The specific issue to be addressed is this: “Must Arthur Andersen’s conviction for witness tampering under 18 U.S.C. 1512(b) be reversed because the jury instructions misinterpreted the ‘corrupt persuasion’ and ‘official proceeding’ elements of the offense?”
The Justice Departent charged Andersen with obstruction of justice for its mass destruction of Enron-related documents in late 2001 as the Securities and Exchange Commission and Congressional Committees began investigating Enron’s complicated financial structure. As we all know, Enron catapulted into bankruptcy in early December 2001 amid revelations of accounting schemes to mask debt and inflate profits.
As Enron’s auditor, Andersen contended that it was only implementing its document-retention policy that called for destroying unneeded documentation to streamline files. Andersen argued during trial that employees who shredded thousands of documents simply followed the policy and had no intent to undermine any investigation of Enron.
Although an Andersen victory at the Supreme Court would be a Pyrrhic victory for the now defunct firm, this is a positive development for the Enron case in general. The Justice Department’s heavy-handed prosecution of Andersen reflected an egregious lack of prosecutorial discretion — the prosecution of Andersen ultimately caused the loss of thousands of jobs, most of which never had anything to do with Enron. Moreover, as noted here awhile back, the accounting industry has still not recovered from the Andersen fallout, and big business is finding it difficult to find enough auditors to fulfill the new Enron-era regulatory obligations.
Thus, a Supreme Court reversal will not help Andersen much, but it just might send the right message to a Justice Department that increasingly appears oblivious to the negative economic impact that results from criminalizing merely questionable business practices.
Washington, D.C. based Howrey Simon Arnold & White LLP announced yesterday that seven partners from the Houston-based litigation boutique of Clements, O’Neill, Pierce, Wilson & Fulkerson LLP — including Swift Boat veteran John O’Neill — have joined Howrey Simon’s Houston office.
The move was Howrey Simon’s second major move in Houston over the past several years. In 2000, Howrey Simon merged with Houston-based Arnold White & Durkee, which was Houston’s most prominent IP firm at the time. Howrey Simon Arnold & White is now a big international firm with about 550 attorneys in its 10 offices in the U.S. and Europe.
In addition to Mr. O’Neill, the other partners from Clements, O’Neill that will join Howrey are managing partner Jack O’Neill (no relation to John), Jesse R. Pierce, Sashe D. Dimitroff, Kelly J. Kirkland, Reagan D. Pratt and Mark A. White. Eight associates and 10 other attorneys will also make the move to Howrey Simon.
10 of the 12 former outside directors of WorldCom Inc. have agreed in principle to pay $18 million out of their own pockets as a part of a $54 million settlement of the class-action lawsuit that WorldCom bondholders and shareholders brought against them in connection with the telecommunications company’s massive accounting scandal and resulting chapter 11 bankruptcy case. Paul Curnin of Simpson Thacher & Bartlett LLP in New York represents the ten former directors.
The directors’ liability insurers will pay the remaining $36 million of the tentative settlement. The $18 million that the former directors will pony up under the settlement represents about 20% of their combined personal net worth, excluding exempt property such as primary residences and retirement accounts.
WorldCom emerged from Chapter 11 bankruptcy protection last year and has changed its name to MCI. The reorganized company has an entirely different board of directors.
The tentative settlement is being watched closely be the business and legal community because it is precedent for expansion of the potential liability of outside directors whose companies commit accounting fraud. By way of comparison, the outside directors of Enron are currently attempting to settle similar litigation by using the remainder of approximately $200 million of the Enron officers and directors’ liability insurance while paying only 10% of their net Enron stock sales during the class period out of their own pockets.
As a general proposition, outside corporate directors have been among the most difficult defendants to tag in securities and accounting fraud litigation because of their lack of involvement in a company’s management and accounting processes. Although outside directors can face liability in such cases for oversight failures if their dereliction of duty is proven to both severe and demonstrable, the cases that have successfully proven such conduct are extremely rare. As a result, most cases against outside directors are settled by the directors’ liability insurer without the outside directors paying any portion of the settlement amount themselves.
The planned settlement comes about several months after Citigroup Inc.’s $2.65 billion settlement in the same lawsuit. Citibank — one of WorldCom’s leading bond underwriters — was one of 18 underwriters in the case, which also includes J.P. Morgan Chase & Co., Deutsche Bank AG and Bank of America Corp.
Update: Professor Ribstein provides his typically insightful analysis of the settlement here, and offers the following astute observation:
Well, the audit committee was independent, and at least one member did have the requisite expertise, but according to the complaint that didn?t prevent them from completely falling down on the job. Moreover, the complaint details disturbing governance failings at all levels ? executives, underwriters, accountants.
I believe an important lesson from all this is that our current model of corporate governance just isn?t working, and that we delude ourselves if we think that Sarbanes-Oxley is going to fix it.
So what?s the answer? First, we need high-powered market-based incentives that would be provided by the return of an active market for corporate control. Second, as I?ve been saying (e.g., here) we need to encourage alternative business structures that take near-absolute power over corporate earnings away from corporate executives and give it to the firm?s owners.
In other words, cases like WorldCom tell us that the answer to the corporate governance problems lies in getting rid of the corporation as the exclusive structure for business enterprise.
Houston-based Halliburton Co. announced on Monday that it had consummated an innovative $5.1 billion settlement with asbestos claimants.
Halliburton became exposed to about 400,000 asbestos claims through its acquisition of Dresser Industries Inc. in 1998, which was a deal that former Halliburton CEO and current U.S. Vice President Dick Cheney promoted. The claims were asserted against a former Dresser subsidiary, Harbison-Walker Refractories.
The settlement allows two large units of Halliburton to emerge from chapter 11 cases and opens the door for Halliburton to sell its Kellogg Brown & Root (“KBR”) construction and government-contracting unit. The KBR has been the subject of considerable scrutiny this past year over the unit’s handling of a $10 billion contract to provide support services for the military in Iraq.
As with many companies, the liabilty represented by the asbestos claims has been a huge monkey on Halliburton’s back — Halliburton has booked more than $3 billion in asbestos-related charges since 2002. The settlement allows Halliburton to take advantage of the current favorable market for the oil field services industry that is based on strong demand for such services from exploration and production companies. In anticipation of the settlement, Halliburton’s share price has surged by about 25% over the past quarter, closing yesterday at $38.02.
Under its innovative chapter 11 strategy, Halliburton effectively used its profitable oil field service business to support the company’s operations while it promoted a settlement plan that liquidated the amount that Halliburton would have to pay current and future asbestos claimants. Although other companies have used chapter 11 as part of an overall litigation strategy against asbestos claimants, Halliburton’s strategy to dedicate 59.5 million company shares and $2.8 billion in cash to create a $5.1 billion trust fund to pay current and future asbestos claimants faciliated the settlement while most other companies remain locked in settlement negotiations with lawyers for asbestos claimants.
The case has been closely watched as most other companies have elected to try and resolve their unliquidated liability for asbestos claims through the unwieldly and inconsistent civil justice system. More than 70 companies — including large companies such as ABB Ltd., W.R. Grace & Co., Federal-Mogul Corp. and Owens Corning — have filed chapter 11 cases for themselves or a business unit because of huge asbestos claims, but many of those companies continue to fight with the asbestos claimants and have failed to liquidate the amount that the companies will ultimately have to pay current and future claimants. Many of those companies are actively lobbying for federal tort-reform legislation that would limit mass tort lawsuits and create a universal fund to pay asbestos claims.
After announcing late last week that Yuganskneftegaz (“Yugansk”) — OAO Yukos‘ former primary production unit — would not be transferred to state-controlled OAO Gazprom as anticipated, the Russian government announced over the weekend that Yugansk is now operating as a subsidiary of OAO Rosneft, the Russian government’s oil company that is currently merging with Gazprom.
This latest news confirmed that nobody in the West really has a clue of what the Kremlin has planned for Yugansk.
In the meantime, the China National Petroleum Corp. told the Wall Street Journal ($) that they were not aware of the Kremlin’s offer of a stake in Yugansk reported in this previous post. The Journal article speculates that the Kremlin-China talks regarding Yugansk are taking place at the highest levels of the two governments and that the details simply have not been delegated to the operators of the state-controlled oil companies yet.
The Russian government previously forced the sale of Yugansk last month to defray the government’s alleged back-tax claims against Yukos that total $28 billion. After a Houston Bankruptcy Court issued a TRO in Yukos’ chapter 11 case enjoining any Western financial institutions from participating in the auction, a shell bidder emerged at the auction to buy Yugansk for $9.4 billion. Rosneft subsequently agreed to buy the shell bidder for an undisclosed amount. A hearing is scheduled in the Houston Bankruptcy Court this Thursday on Gazprom’s motion to dismiss the Yukos’ chapter 11 case. Here are the previous posts on the Yukos’ chapter 11 case and related matters.
Finally, as if the Russian government’s handling of Yukos was not enough of a deterrent to Western investment in Russian business interests, this Wall Street Journal ($) article notes that the measures taken by prosecutors and the Russian courts have exacerbated the vulnerability of defense lawyers who represent interests competing with those of the Russian government in the notoriously political Russian judicial system. As the Journal article observes:
In recent months, the arrests and interrogations of Yukos lawyers have fueled fears that those who defend politically unpopular clients could themselves become targets. Two senior Yukos legal officers fled Russia this fall to escape criminal prosecution, while a lower-ranking colleague who stayed, Svetlana Bakhmina, was arrested last month. Another Yukos legal consultant, Elena Agranovskaya, was detained a day later. Prosecutors also have launched sweeping searches and interrogations of other Yukos lawyers and middle managers.
Along these same lines, note this Boston Globe article on the fear and self-censorship that is occurring under the Putin regime in Russia. One of the emerging business issues of 2005 is the degree to which the above-described Russian government actions will chill badly needed Western investment in Russian business interests?
Following on the matters addressed in this earlier post, U.S. District Judge Vanessa Gilmore ruled on Thursday that she will instruct the jury regarding the government’s failure to comply with her prior order to disclose the basis of its decision to seek the death penalty against one of the defendants in the criminal case in Houston against against the two remaining defendants accused in the deaths of 19 illegal immigrants who were being smuggled into this country in the back of a blistering hot trailer.
Houston defense attorney Craig Washington accused the government of singling out one of the defendants for the death penalty because he is black. During a prior hearing in the case, Washington presented evidence that this case was the only one in which the government had sought the death penalty out of almost 70 illegal smuggling cases. Prosecutors denied that race was a factor, pointing out that they did not seek the death penalty for the other black defendant in the case and that the basis of the government’s decision to seek the death penalty is subject to executive privilege.
I have not researched either the merits of Judge Gilmore’s ruling or the government’s claim of executive privilege in this matter. Nevertheless, Judge Gilmore’s order appears to be nothing more than a mechanism to ensure a full and fair trial of all issues in a death penalty case. Her refusal to acquiesce quietly to the Justice Department’s refusal to comply with her order is refreshing. Judges in the Enron-related criminal cases — please take note.
Get ready for another round of jokes on the late night talk shows as the U.S. Court of Appeals for the Ninth Circuit overturned an $88 million bankruptcy court judgment in favor of former stripper, zaftig model, reality show star and current Trimspa spokeswoman Anna Nicole Smith against the estate of her late husband, Houston oilman J. Howard Marshall, II. Here is the Ninth Circuit opinion and the Chronicle story on the case is here.
E. Pierce Marshall of Dallas, the son of J. Howard Marshall, is the main beneficiary of the late Mr. Marshall’s estate. Forbes estimates E. Pierce Marshall’s net worth at $1.6 billion. Most of the late Mr. Marshall’s fortune was generated through his stake in privately held Koch Industries.
In a surprise move, the Russian government announced Thursday that Yuganskneftegaz (“Yugansk”) — the main oil production unit of bankrupt Russian oil giant OAO Yukos — will not be conveyed to to Russian gas giant OAO Gazprom as widely anticipated. Rather, the Russian government announced that Yugansk will be used to create a new government-owned oil company and that a minority stake of up to 20% in that company will be offered to China’s state energy company.
Here are the earlier posts on the Yukos chapter 11 case and related matters.
The new plan for Yugansk will be a major shot in the arm for China’s efforts to obtain access to new fuel reserves for its burgeoning economy. China’s economy has been the largest factor in the surging world oil demand of recent years, but the Russian government has heretofore always declined Chinese efforts to invest in the Russian oil and gas industry. The plan also confirm that the Russian government’s campaign against Yukos will result in the re-nationalization (is that a word?) of a large part of what had been Russia’s largest oil unit and one of the relatively few Russian companies that was able to attract foreign investors.
Gazprom is controlled by the Russian government but also has private shareholders. After a Houston Bankruptycy Court enjoined Gazprom and Western Banks two weeks ago from participating in the Russian government’s controversial auction of Yugansk to pay for Yukos’ alleged $28 billion tax debt, Gazprom appeared to have found a way around the TRO by using the Russian oil company OAO Rosneft to acquire Yugansk. Gazprom and Rosneft are in the process of merging.