T
he Enron-related Nigerian Barge case has been a frequent topic on this blog as a prime example of the Justice Department’s dubious criminalization of common business practices in the post-Enron era.
As a result of that questionable policy, four former Merrill Lynch executives — Daniel Bayly, William Fuhs, James A. Brown, and Robert Furst — are unjustly facing prison sentences of between 2.5 and almost four years.
Although the former Merrill executives are appealing their convictions, both the U.S. District Court and the Fifth Circuit Court of Appeals have rejected their motions to remain free on bond pending disposition of their appeals.
Inasmuch as those motions had substantial merit, and the Nigerian Barge trial was only the second Enron-related case (the Arthur Andersen case was the first) to be tried in the anti-business environment of Houston in the post-Enron era, the denial of those motions without so much as an explanation is highly troubling.
Nevertheless, the Fifth Circuit did at least put the former Merrill executives’ appeal of their convictions on an accelerated track for a ruling on the merits. Consequently, the Merrill executives filed their initial briefs in the appeal late last week. To say that they make interesting reading is an understatement.
Inasmuch as the mainstream media has rendered Enron to social pariah status and condemned most anyone who did business with the former seventh-largest company in the United States, the conventional wisdom has blithely concluded that the Merrill Lynch executives must have been guilty of some crime in connection with the Nigerian Barge deal.
However, the briefs of the Merrill Lynch executives in the Nigerian Barge appeal reveal a stunningly different picture. Rather than even a questionable transaction, the briefs compellingly portray a typical structured finance transaction that the Enron Task Force decided to criminalize through a brazen web of distortion, inadmissible hearsay, suppression of key testimony, opposition to a defense jury instruction on the key issue in the case, and prosecutorial misconduct.
After reading the briefs, one is left with the unmistakable impression that the Justice Department’s prosecution of the Merrill Lynch defendants had nothing to do with truth or justice, and everything to do with demonizing four decent men for their misfortune of having been involved in a rather ordinary structured finance transaction with Enron.
The Nigerian Barge case arose out of a now familiar deal in which Enron sold to Merrill Lynch a financial interest in power-generating barges moored off the coast of Nigeria. The sale took place in late in December 1999 so that Enron could book in 1999 the relatively small amount of $12 million of income generated by the sale.
According to the government’s theory of prosecution, Enron should not have recognized income because the sale of the barge interest was not a “true” sale because Enron — through it’s former CFO Andrew Fastow — had orally guaranteed to the Merrill executives that, if Enron could not find a third party to “take Merrill Lynch out” of its investment, Enron would itself buy back Merrill Lynch’s interest in the barges within six months. Due to this alleged guaranteed Enron “buyback,” the prosecutors contended that Enron did not truly part with any interest in the barges and, thus, should not have recognized any income on the sale. Inasmuch as the former Merrill Lynch executives enabled Enron to book the income on the sale, the prosecution’s theory is that the former Merrill Lynch executives were guilty of conspiracy and wire fraud.
In response to these draconian allegations, the Merrill Lynch executives had a simple reply — they freely acknowledged that Merrill Lynch had not wanted to be a long-term holder of an interest in the barges, and admitted that Enron had therefore assured Merrill Lynch that it would be “taken out” of its investment. But the Merrill Lynch executives insisted that Enron had simply assured them that the “takeout” was to be through a sale to a third party and not through any guaranteed Enron buyback. Even the government acknowledged during the trial that Enron was entitled to recognize a sale — and no crime was committed — if Enron had simply assurred Merrill Lynch that it would arrange a third party to purchase Merrill Lynch’s interest in the barges.
Thus, the entire case turned on the nature of the oral representations that Mr. Fastow made during a late December 1999 conference telephone call that had about a half dozen other participants from Enron and Merrill, including Messrs. Bayly and Furst. In a transparent effort to hide the weakness of its case, the government chose obfuscation over clarity in presenting its evidence on that key call. Incredibly — and despite the fact that Mr. Fastow is a cooperating witness for the government — the Enron Task Force prosecuted its entire case against the Merrill defendants without calling a witness who had any first-hand knowledge of what Mr. Fastow said during that key telephone conference. Rather, the prosecution relied on hearsay testimony and hearsay within hearsay regarding the call, and on witness accounts who testified as to their “understanding” of what Mr. Fastow had said, but who could not remember where that understanding had come from. In so doing, the government intentionally confused the critical distinction between a lawful promise to find a third-party purchaser, on one hand, and an unlawful promise of a buyback, on the other. As Mr. Bayly’s brief notes on page 30 regarding the testimony of key prosecution witness Michael Kopper:
So which was it, according to Kopper, an Enron buyback or a third-party purchaser? Not even Kopper could keep the two accounts straight, at one point offering both versions in the same breath. Enron, he stated, had to “follow through” on its “promises” — the promise to repay, to get them repaid[.]” But those are two very different “promises.” A “promise to repay” suggests an Enron buyback. But a promise to “get them repaid” suggests a third-party purchase. It should give this Court pause, we respectfully submit, that a theory of prosecution might hang on a nuance in second-hand information so delicate that the witness himself cannot keep the “promises” straight.
To make matters worse, while presenting this “shoddy merchandise,” as Mr. Furst’s appellate counsel calls it, the prosecutors suppressed Mr. Fastow’s pre-trial statements to the government in which he admitted that he indeed had not promised an Enron buyback, but had instead told the Merrill executives that they could have a high level of confidence that Enron could arrange a third party to buy the barges from Merrill. When the Merrill defendants attempted to introduce Mr. Fastow’s inconsistent and exculpatory statements under Fed. R. Evid. 806 during the trial, the prosecution again vigorously opposed introduction of that evidence, and the trial court sustained the government’s objection. Finally, when the Merrill defendants requested a theory-of-the-defense jury instruction stating that a promise to find a third-party purchaser would not be illegal, the government also opposed the proposed instruction on this crucial issue in the case, and the trial court again sustained that dubious objection.
Thus, despite the almost 400 pages of briefs, the former Merrill Lynch executives’ argument is simple. The convictions were based almost entirely on inadmissible hearsay, and even that hearsay evidence was hopelessly confused.
Similarly, the District Court’s decision to sustain the prosecution’s objections to the exculpatory Fastow out-of-court statement and the theory-of-defense jury instruction on the key issue in the case denied the jury from considering important information that was favorable to the Merrill defendants.
Finally, the Task Force distorted — similar to the Task Force’s distortion of the obstruction of justice statute in the Arthur Andersen case — the honest services, money or property, and books and records charges in criminalizing an ordinary structured finance business transaction. In regard to that latter point, Mr. Bayly’s brief refers to Judge Easterbrook‘s classic passage on criminalization of ordinary behavior from his opinion in United States v. Walters, 997 F.2d 1219 (7th Cir. 1993):
According to the United States, neither an actual nor a potential transfer of property from the victim to the defendant is essential. It is enough that the victim lose; what (if anything) the schemer hopes to gain plays no role in the definition of the offense. We asked the prosecutor at oral argument whether on this rationale practical jokes violate 1341. A mails B an invitation to a surprise party for their mutual friend C. B drives his car to the place named in the invitation. But there is no party; the address is a vacant lot; B is the butt of a joke. The invitation came by post; the cost of gasoline means that B is out of pocket. The prosecutor said that this indeed violates 1341, but that his office pledges to use prosecutorial discretion wisely. Many people will find this position unnerving * * * . * * * [T]he idea that practical jokes are federal felonies would make a joke of the Supreme Court’s assurance that 1341 does not cover the waterfront of deceit.
As the Enron Task Force’s growing legacy of misconduct continues, it has become abundantly clear that its purpose is something other than to uncover the truth regarding Enron.
This was brought home again this past Friday afternoon in a seemingly innocuous exchange during a status conference in the Task Force’s legacy case against former Enron chaiman Ken Lay, former Enron CEO Jeff Skilling and former chief accountant, Richard Causey. U.S. District Judge Sim Lake asked the lawyers on each side of the case whether they would prefer to sit during the upcoming trial at the table in the courtroom that is closer to the jury box.
Mike Ramsey, Mr. Lay’s counsel, piped up and stated that the defendants preferred the table closer to the jury box because — due to the way in which the tables in the courtroom are situated — the other table would not require witnesses to look at the defendants (and vice versa) while they were testifying.
Although giving no reason for wanting to deny the defendants this basic part of their right to confront witnesses against them at trial, the Task Force prosecutors opposed the defense’s request for the table closer to the jury. Judge Lake has not yet decided which side will get the table, but the Task Force’s knee-jerk response reflects that their true purpose is something other than to assure that the defendants receive a fair trial.
Accordingly, after fumbling the Arthur Andersen appeal, the Fifth Circuit now has two high profile opportunities — the Nigerian Barge appeal and the Jamie Olis appeal — to redeem itself and send the Justice Department a clear message that the federal judiciary will not countenance distortion of criminal statutes and evidence even when the defendant is an unpopular business executive.
For as Thomas More reminds us, if the courts do not stand up for justice and the rule of law in such cases, “do you really think you could stand upright in the winds [of abusive state power] that would blow then?”
In the Nigerian Barge case and the Enron Broadband case, the Enron Task Force is showing us precisely what happens when such winds blow, and the emotional carnage being experienced by the individuals involved and their families is not something that can easily be overlooked as a trade-off of an imperfect system.
Like this:
Like Loading...
Canadian Imperial Bank of Commerce announced today that it has agreed to pay $2.4 billion to settle the class action securities litigation against the bank arising out of the demise of Enron Corp. in late 2001. The CIBC settlement is the largest settlement to date in connection with the Enron securities class action (previous settlements are here, here, here, here and here), and pushes the aggregate amount of such settlements a billion over the $6 billion benchmark established earlier this year in connection with the settlements in the WorldCom class action litigation. Here is the Chronicle article on the settlement.