Daily Archives: June 24, 2005

While Theodore Sihpol goes home, William Fuhs goes to jail

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Relentlessly avoiding addressing the real issue, this NY Times article speculates that the problem with Eliot Spitzer’s recent unsuccessful prosecution of Theodore C. Sihpol, III was not that he charged Mr. Sihpol in the first place, but that he should have charged all of Mr. Sihpol’s superiors, too.

In so speculating, the Times confirms that it still does not understand that the governmental policy of regulating business through criminalization of merely questionable business transactions is a slippery slope toward injustice that ultimately undermines the rule of law.

Take the case of William Fuhs. He is the former mid-level Merrill Lynch executive who was recently convicted and sentenced to over three years in prison as a result of his participation in the Enron-related Nigerian Barge case.

As has already been noted in regard to the conviction of Daniel Bayly — the former head of global investment banking at Merrill Lynch and one of Mr. Fuhs’ bosses — the government’s prosecution of the Merrill Lynch executives in regard to the Nigerian Barge transaction was dubious, at best. The resulting convictions are a plain miscarriage of justice.

As with its prosecution of Mr. Bayly, the government’s case against Mr. Fuhs strains credulity.

Of the four Merrill Lynch defendants in the Nigerian Barge case, Mr. Fuhs was the only one who was not a managing director of Merrill Lynch. Mr. Fuhs did not participate in the one telephone conference with former Enron CFO Andrew Fastow in which Mr. Fastow allegedly assured Mr. Bayly and other Merrill Lynch executives that Enron would find a buyer within six months of the interest that Merrill was buying in the barges.

In fact, Mr. Fuhs’ only role in regard to the transaction was the ministerial processing of the transaction after Merrill Lynch had agreed to buy the interest in the barges from Enron.

Incredibly, during the government’s case-in-chief in the Nigerian Barge trial, none of the government’s fact witnesses knew or interacted with Mr. Fuhs — indeed, the only government witness who had ever worked at Merrill had neither met, spoken to, nor even heard of Mr. Fuhs!

Mr. Fuhs never conferred with anyone at Arthur Andersen (Enron’s auditors) regarding the transaction and the deal was the only Enron transaction that Mr. Fuhs ever worked on.

In short, the government presented no witnesses or evidence during its case-in-chief that Mr. Fuhs — who is not an accountant — had any idea that Enron’s booking of a $12 million gain on the Nigerian Barge transaction was arguably improper, much less that he intended to promote Enron’s accounting of the transaction.

Nevertheless, while Mr. Sihpol walks away from the New York courthouse a free man, Mr. Fuhs — a young man with a wife and two young children — faces a shattered professional and family life and 37 months in federal prison.

As Professor Bainbridge noted in this TCS op-ed and Professor Ribstein has repeatedly observed, the contrasting results in the cases of Mr. Sihpol and Mr. Fuhs — not to speak of the sad case of Jamie Olis — confirms that the pursuit of justice in such cases has become a sort of lottery.

If the prosecution pursues a bit player such as Mr. Fuhs but can come up with something particularly distasteful to the jury — such as Merrill Lynch’s involvement with the corporate pariah, Enron — then it wins.

On the other hand, if the government slams a little guy such as Mr. Sihpol while not pursuing his dastardly superiors, then the government loses.

This is a radical abuse of our criminal justice system, and the carnage to the families of Martha Stewart, Mr. Bayly, Mr. Fuhs, Mr. Olis and others who are caught in this troubling spiral simply cannot be responsibly dismissed as a “trade-off” of an imperfect system.

But as great as my compassion is for members of those families, my even greater concern is for the principles of justice and respect for the rule of law upon which the success of our society is largely based.

If we lose those, then, as Sir Thomas More asked Will Roper in A Man for All Seasons, “do you really think you could stand upright in the winds [of abusive state power] that would blow then?”

Governmental economic development run amok?

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eminent domain.jpgIn a controversial 5-4 decision, the U.S. Supreme Court ruled in Kelo v. New London on Thursday that a local government may seize private property in facilitating profit-making private re-development as a legitimate form of “public use” under the Constitution. You can review and download the syllabus, majority opinion, the concurrence, and the dissents here.
My first impression of the decision is that it increases markedly the number of bad business deals that local governmental units will be able to consider. From the perspective of a Houstonian, the thought of a Redevelopment Department at the Metropolitan Transit Authority is truly frightening.
At any rate, the most troubling aspect of the majority decision by Justice Stevens is that, even though a local government could not take homeowners’ property “simply to confer a private benefit on a particular private party,” the project involved in this particular case is “a carefully considered development plan.” Therefore, the majority reasoned, the plan is a legitimate form of public use — despite the fact that the the resulting project would not be open for public use — because there is no literal Constitutional requirement of such an outcome. As the Court put it:

“For more than a century, our public use jurisprudence has wisely eschewed rigid formulas and intrusive scrutiny in favor of affording legislatures broad latitude in determining what public needs justify the use of the takigs power.”

“Those who govern the city [of New London] were not confronted with the need to remove blight . . ., but their determination that the area was sufficiently distressed to justify a program of economic rejuvenation is entitled to our deference. . . . Clearly, there is no basis for exempting economic development from our traditionally broad understanding of public purpose.”

Joining Justice Stevens in the majority were Justices Breyer, Ginsburg, Kennedy, and Souter, although Justice Kennedy filed a concurring opinion (see analysis below). Justice O’Connor’s dissenting opinion was joined by Chief Justice Rehnquist and Justices Scalia and Thomas, although Justice Thomas also wrote a dissenting opinion.

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