Inasmuch as I had to appear at an hearing in federal court early this morning, I stuck around after my hearing to attend the sentencing hearing of former Merrill Lynch executive Daniel Bayly in connection with the Enron Nigerian Barge case, which has been a regular subject on this blog over the past year.

To say the least, I’m glad I stuck around.

In one of the most impressive judicial performances that I have witnessed in my 26 year legal career, U.S. District Judge Ewing Werlein, Jr. — in the face of widespread public and political expectation that anyone who had anything to do with Enron should be punished severely — rejected the Enron Task Force prosecutors’ pleas to punish Mr. Bayly with up to 15 years of prison and sentenced the former Merrill Lynch executive to 30 months in prison, six months of probation, a $295,000 restitution award, and a $250,000 fine.

Later in the afternoon, Judge Werlein sentenced former Merrill executive James Brown — who, unlike Mr. Bayly, also faced conviction on perjury and obstruction of justice charges over the barge deal — to 46 months of prison and similar financial penalties as the ones assessed to Mr. Bayly.

Inasmuch as Mr. Bayly is the first defendant to be sentenced after being convicted at trial of an Enron-related crime, the far shorter sentence than the punishment that the prosecutors recommended was a bitter blow to the Task Force prosecutors, who did not attempt to hide their displeasure with Judge Werlein’s ruling after the hearing.

Clearly in full command of the legal issues and evidence before him, Judge Werlein carefully stated his findings and conclusions, which included the following:

He categorically rejected the prosecution’s controversial $44 million “market loss” theory as being contrary to the U.S. Supreme Court’s recent decision in Dura Pharmaceuticals v. Broudo, in which the Court rejected the price inflation theory of causation that the Task Force prosecutors used in calculating the $44 million in market loss.

He declined to adopt the jury’s $13.7 market loss theory, essentially on the same grounds as he rejected the government’s theory.

He ended up calculating market loss at $1.4 million, which was the total profit that Merrill and the Enron-related partnership ultimately made on the Nigerian Barge deal.

He rejected the prosecutors’ pleas for an upward adjustment of the sentence under the advisory sentencing guidelines “to make an example out of Mr. Bayly for Wall Street.”

He granted a downward adjustment of the sentence under the sentencing guidelines because of Mr. Bayly’s exemplary professional and personal record. “I may have never had a defendant before me who had a more glowing and extraordinary record of being a good citizen,” noted Judge Werlein.

Although he noted the jury conviction of fraud, Judge Werlein observed that — in the constellation of of Enron fraudulent conduct that former Enron CFO Andrew Fastow orchestrated — Mr. Bayly’s involvement in the barge transaction was relatively benign and not central to Enron’s transactions.

He noted that the Enron Task Force had obtained plea bargain sentences for two Enron executives who were central to Enron’s more wide-ranging fraudulent conduct — 10 years for Mr. Fastow and five years for former Enron treasurer Ben Glisan — and that those sentences were less than the one that the prosecution was recommending for Mr. Bayly, who was a bit player in Enron’s questionable conduct.

Then, as if to punctuate his rulings, Judge Werlein firmly rejected the prosecution’s over-the-top call at the end of the hearing for Mr. Bayly to be taken into custody immediately, and allowed Mr. Bayly to report to prison voluntarily in accordance with a date to be scheduled in the near future by the Bureau of Prisons.

Judge Werlein delivered his rulings in his customary conscientious and professional manner that exuded the careful consideration that this man of extraordinary depth gave to the issues before him.

After the hearing, I happened to get on the same elevator as Mr. Bayly and several members of his family. After having lived through a nightmarish prosecution and clearly expecting the worst when they came to court today, Mr. Bayly and each of his family members — several of whom had tears in their eyes — were clearly touched by Judge Werlein’s courage, grace and fairness in sentencing Mr. Bayly.

Later, as I drove back to my office after the hearing, I reflected on Ewing Werlein, Jr. and the remarkable judicial performance that I had just witnessed.

When I moved to Houston as a young college student over 30 years ago, one of the first Houston families that my family and I met was that of Mr. and Mrs. Ewing Werlein, Jr., who hired a couple of my younger sisters to babysit their daughter and son. I recall my late father observing to me at the time: “Tom, if you want to become a gentleman, Mr. Werlein would be a fine model for you to follow.”

Several years later, after finishing law school and becoming a young attorney in Houston, I learned quickly that Ewing Werlein, Jr. — then a partner at Vinson & Elkins — was one of the most respected lawyers in the Houston bar and a model for young lawyers.

Over a decade later, Judge Werlein’s son, Ken, became an associate pastor at my family’s church here in The Woodlands before going on to start his own church in northwest Houston. O

One of Ken’s finest sermons during his time at my family’s church was one that he gave on Father’s Day in which he lovingly described his father’s tender mentoring of his son and daughter.

Finally today, in the face of virtually unprecedented public animus toward anyone or anything having to do with Enron, Judge Werlein has shown judges everywhere the model of what a judge should aspire to be.

That’s quite a fine legacy in my book.

Even the Justice Department does not have a license to take contradictory positions in important cases, even if one of those cases is Enron-related.

Leading up to the the sentencing hearing tomorrow in U.S. District Judge Ewing Werlein‘s court in regard to two defendants in the Enron-related Nigerian Barge case, developments in another case this past week shine a clearer light on the dubious nature of the government’s position that Judge Werlein should toss the barge defendants in prison and throw away the key.

The Enron Task Force is taking the position that former Merrill Lynch executive Daniel Bayly should receive a more severe sentence based on a bogus theory of “shareholder loss” that has been long rejected in civil securities fraud cases.

By way of background, Mr. Bayly was a well-regarded and longtime Merrill Lynch executive who was involved in a transaction in late 1999 in which Merrill bought from Enron an interest in three Nigerian energy-generation barges as a favor for Enron.

An Enron partnership bought the barges six months later and then sold them to a third company for a profit.

The Enron prosecutors argued that the deal allowed Enron to book illegal profits at the end of 1999 because Enron had orally agreed to buy the barges back from Merrill, and a jury convicted Mr. Bayly and four others of conspiracy and fraud (Enron’s in-house accountant – Sheila Kahanek – was acquitted).

The prosecutors are now arguing that Judge Werlein should increase Mr. Bayly’s sentence by up to 15 years because the alleged fraud caused a near $44 billion shareholder loss.

The prosecution has no legal basis for this alleged loss figure. Under civil securities fraud law, investors sue for a decline in the value of a security only if they can show that the decline was actually caused by the fraud.

Thus, if a company puts out news of a transaction that causes a share price to rise, and then discloses that the transaction is a sham that, in turn, causes the share price to decline, investors can recover any loss that resulted directly from the disclosure of the misrepresentation.

Which is precisely the rub in the Enron Nigerian Barge case — no such loss resulted from the alleged sham deal.

Enron sold the barges to Merrill and Merrill sold them to an Enron-related partnership well before Enron collapsed at the end of 2001. Accordingly, any reduction in the price of Enron stock happened well in advance of disclosure of details of the barge transaction, which disclosure did not occur until well after Enron had filed bankruptcy and Enron’s share value had already dropped to zero.

Consequently, the government simply cannot show that Enron shareholders lost a dime from the disclosure of this particular transaction.

To get around this rather substantial legal problem, the Enron Task Force prosecutors are taking the position that, because some shareholders bought Enron stock at an inflated price due to losses that were covered up by the barge transaction, those purchases equate to a loss. The prosecutors even got an “expert” to opine during the market loss hearing after the completion of the Nigerian Barge trial that the relatively small barge deal pumped up Enron’s price and, presto, the government has its $44 billion market loss figure.

Interestingly, even the Justice Department does not support the Enron prosecutors’ dubious views regarding market loss. Earlier this week, the Supreme Court unanimously ruled in Dura Pharmaceuticals v. Broudo that plaintiffs who claim securities fraud must prove a connection between a misrepresentation and an investment’s subsequent decline in price.

In direct contradiction of the Enron Task Force’s position in the Enron Nigerian Barge case, the Justice Department and the Securities and Exchange Commission filed this joint brief in Dura in support of the proof-of-causation position and against the price inflation theory of causation that the Justice Department prosecutors used in asserting “market loss” in the Nigerian Barge trial.

Does simply the fact that a case is related to Enron justify the Justice Department in taking such blatantly contradictory positions?

The Justice Department continues seeking maximum sentences against easy targets, such as relatively wealthy business executives who had the misfortune of doing business with the pariah Enron. Apparently, it’s going to take wise judges to step in and check the government’s zeal. Judge Werlein is capable of doing so, and I hope he does so tomorrow.