As noted on this blog before, Holman Jenkins is one of America’s most insightful commentators on business issues. In his Wall Street Journal ($) column today, Mr. Jenkins addresses the injustice that occurred recently in the 24 year sentence given to former mid-level Dynegy executive, Jamie Olis, whose sad case was previously discussed here and here. Mr. Jenkins decries the sledgehammer approach that the Justice Department now takes in white collar criminal prosecutions:

Mr. Olis did wrong, but it’s hard not to see his sentence as punishment for insisting on his right to a jury trial. He didn’t loot the company for his own enrichment. The deal at the heart of the conspiracy may have involved deceptive accounting but it apparently yielded a real gain to the company in the form of $79 million in tax benefits. More to the point, whether or not the sentence was just, the metric that produced it was downright fishy.
A year ago Mr. Olis would have done five-to-six, but in a post-Enron mood, Congress insisted on double-digit penalties in cases associated with large stock-market losses. Rolled forth during the trial, therefore, was a government expert witness who — in exactly the kind of calculation that provokes eye-rolling when put forward by Wall Street analysts to “explain” stock prices — determined that Mr. Olis had caused between $500 million and $1.4 billion in damage to Dynegy’s 200,000 shareholders.

Mr. Jenkins’ column contains a graph that shows how Mr. Olis’ conduct had nothing to do with Dynegy’s stock price, followed by an “unspeakable” observation:

The deal for which Mr. Olis was prosecuted had nothing to do with the run-up in Dynegy’s stock price. Project Alpha wasn’t born until March 2001, and was exposed only in April 2002, by which time investors had already given up the fantasy of riskless profits from trading energy on the Internet.
Indeed, it’s a fine judgment whether such frauds were actually occasioned by pressure to protect unrealistic valuations awarded in the bubble market. What’s more, an unspeakable but unavoidable thought is that, somewhere, thousands of investors who picked the right moment to sell have no beef now with any of this scofflaw behavior — they benefited from it, to the tune of millions of dollars in some cases.

Then, Mr. Jenkins concludes by pointing out the injustice of forcing businessmen to choose between defending themselves and a life sentence:

Certainly in a system so addicted to plea-bargaining, some sort of safeguard is needed against extorted guilty pleas. Forget about white-collar convicts: One of these days, when reformers are done springing death row inmates with DNA evidence, they’ll start scouring the jails for people who pleaded guilty to crimes they didn’t commit because they feared the death penalty.

At this point, the only protection from the government’s sledgehammer approach to white collar criminal prosecutions is the judiciary. Unless the trial judges balance the playing field by forcing the government to drop duplicative charges and resist putting on far-fetched damage calculations, injustices such as the Olis case will continue.

The Super Bowl streaker is relying on it.

Professor David Bernstein has published this law review article on how to keep it out. Thanks to The Volokh Conspiracy for the link.

Following up on this earlier post on the sad case of Jamie Olis, the sentence is in — 24 years. Here is the NY Times article on the sentencing.

In the wake of recent corporate scandals, several directors-and-officers (“D&O”) insurance carriers have sought to rescind policies that were allegedly purchased on the basis of misrepresentations. This WSJ article ($) reports on a recent decision out the Eastern District of Pennsylvania holding that Aegis Bermuda Insurance Co. must pay the defense costs for several directors and officers involved in litigation over the collapse of Adelphia Communications. Although Adelphia’s bankruptcy temporarily prevents Aegis Bermuda from taking legal action to rescind the policy, the court nevertheless held that the insurer was required to continue paying legal fees until a judgment permitting recission was obtained:

“‘Insurance carriers do not function as courts of law,’ U.S. District Judge Michael M. Baylson wrote. ‘If a carrier wants the unilateral right to refuse a payment called for in the policy, the policy should clearly state that right. This policy does not do so.'”

Thanks to the 10b-5 Daily for the link to the WSJ article.

This Logos post entitled “The chosen people of the IRS?” points to this New York Times article that reports on a California case that has uncovered a rather remarkable preference that the Internal Revenue Service has granted to the Church of Scientology.
Apparently, Scientology parents are allowed to deduct the cost of religious education as a charitable donation under an officially secret 1993 IRS agreement despite a 1989 Supreme Court decision prohibiting such a deduction. In the original case, the Ninth Circuit ruled against the plaintiff’s request for a deduction for the cost of Jewish religious education, but when it did so, one of the judges suggested an alternative approach:

“Why is Scientology training different from all other religious training?” Judge Barry D. Silverman wrote in his opinion, adding that the question would not be answered just then because the court was not faced with the question of whether “members of the Church of Scientology have become the I.R.S.’s chosen people.” Judge Silverman then recommended litigation to address whether the government is improperly favoring one religion.
“If the I.R.S. does in fact give preferential treatment to members of the Church of Scientology – allowing them a special right to claim deductions that are contrary to law and disallowed to everybody else – then the proper course of action is a lawsuit to put a stop to that policy,” Judge Silverman wrote.

So, the plaintiffs filed another lawsuit, and during the course of discovery in that case, a subpoena was issued for a copy of the “secret agreement”, but both the IRS and the Church of Scientology resisted producing it. Stay tuned.
As an aside, actor and director Steve Martin hilariously spoofed the Church of Scientology and its heavily Southern California clientele in his underrated comedy from several years ago, “Bowfinger.”

Professor Jack Balkin, Knight Professor of Constitutional Law and the First Amendment at Yale University, posts this interesting overview and analysis on the issues involved in the U.S. Supreme Court case — Elk Grove Unified School District v. Newdow — in which Dr. Newdow, an atheist, argues that government officials’ use of the phrase “under God” in the Pledge of Allegiance violates the Establishment Clause of the United States Constitution. Professor Balkin predicts that the Supreme Court will figure out a way to leave the words in the Pledge for primarily political reasons. Although Professor Balkin is much more knowledgeable on these issues than me, I still am not sure about that. With Justice Scalia’s recusal, I think there is a real chance of a 4-4 deadlock on the Court, which would leave in place the Ninth Circuit opinion that government officials’ use of the phrase in the Pledge violates the Establishment Clause.
On a related note, this transcript is now available of a very interesting and informative disucssion that the Pew Forum hosted last week on the Newdow case, featuring Doug Laycock and Jay Sekulow.

The Health Care Blog reminds that oral argument occurred yesterday in the U.S. Supreme Court in an appeal of this Fifth Circuit decision, which involves tort claims against HMO’s under the Texas health care liability statute and the HMOs’ contention that claims under the state statute are preempted by the federal ERISA statute. The Fifth Circuit previously rejected the HMOs’ attempt to use ERISA preemption to remove the tort cases to federal court and upheld the plaintiffs’ right to litigate their claims in Texas state courts, which are rarely as corporate-defendant friendly as federal courts. The Supreme Court’s decision in this case will address a festering issue in ERISA law — that is, whether an HMO’s medical-necessity determinations are really benefits determinations that are completely preempted by ERISA.
As you might expect, the battered health care finance industry is closely eyeing the outcome of this case. The applicable ERISA provision provides a narrow basis for recovery against plans that withhold a requested level of care and a conservative measure of damages for successful plaintiffs. On the other hand, as is Texas’ tradition, Texas tort law provides injured plaintiffs with a more liberal basis for recovery and thus, exposes health plans to far greater economic risk.
So long as HMOs and other managed care units are forced to make mixed coverage and treatment decisions against a backdrop of potential tort liability, opponents of managed care believe that the managed care units would be far less willing to risk limiting or denying care that physicians and patients request. On the other hand, HMO’s and managed-care plans view an adverse result in the case as a threat to the financial security of employee benefit plans that extend health coverage to millions of workers and retirees.
Tom Mayo, the health care lawyer who is the author of the Health Care Blog, seems to think that the Supreme Court is leaning in favor of the managed care plans and federal preemption. However, the Supremes are notoriously difficult to read in cases such as this, so follow this one closely.

This NY Times article reports on the sad case of a former midlevel executive of Houston-based Dynegy, the energy company that attempted to merge with Enron and then called off the deal shortly before Enron filed bankruptcy in December, 2001. Dynegy subsequently went into its own tailspin that cost its former CEO his job, but has to date avoided bankruptcy.
On Thursday, Jamie Olis faces a federal probation department recommendation that he serve 24 to 30 years in prison for organizing a scheme to falsify Dynegy’s books. Mr. Olis and two former associates at Dynegy were found guilty last year of devising a secret project to disguise a $300 million loan as cash flow. Mr. Olis, a 38-year-old with an infant daughter, declined to strike a plea bargain, choosing instead to take his chances at trial, where he elected not to testify. As noted in earlier posts here regarding the Martha Stewart trial, the strategy of a white collar defendant choosing not to testify during trial is a risky move. In this case, Mr. Olis’ lawyers were unsuccessful in their defense of portraying Mr. Olis as a corporate soldier doing as he was told and blaming his Dynegy superiors for the scheme.
If U.S. District Judge Sim Lake agrees with the probation department’s sentencing recommendation on Mr. Olis, it would be the most severe prison term for a business crime in recent memory. The two other Dynegy officials convicted of taking part in the scheme struck plea deals before trial giving them maximum sentences of five years. Mr. Olis’s lawyers are seeking a sentence of 5 to 10 years, arguing both that he is not responsible for all of Dynegy’s losses and also that he has no previous criminal record.
Mr. Olis never rose above a position of vice president for finance at Dynegy after serving as the senior director of tax planning. Unlike defendants in other higher-profile corporate fraud cases, he never amassed a fortune from his time at Dynegy. The most money he made at Dynegy in any year was a salary of $162,000 and a bonus of $110,000, in addition to selling Dynegy stock worth about $200,000.
You can bet that more than a few criminal defense attorneys for former Enron executives will be watching the result of Mr. Olis’ sentencing closely.

This NY Times article has six law professors discussing Justice Scalia’s decision not to recuse himself in the Sierra Club case. As one would expect from a half dozen academics, there is a substantial amount of disagreement.