Investigation ordered into the David Boies Copy Club

David Boies3.jpgDavid Boies — who champions himself as an advocate of honest corporate governance and disclosure — was the Tyco board’s outside counsel in connection with investigating corporate fraud. Consequently, during the trial of former Tyco executives Dennis Kozlowski and Mark Swartz last year, Boies was one of the prosecution’s main witnesses in contending that the Tyco executives had failed to disclose their compensation adequately to the Tyco board.
Meanwhile, however, Boies resigned last year as special chapter 11 counsel at the request of his client, Adelphia Communications, for failing to disclose to the Adelphia Bankruptcy Court and creditors that members of the Boies family indirectly own a substantial interest in a document management services company that did between $5 and $10 million of business with Adelphia. Apparently, other clients of Mr. Boies’ firm also have paid substantial sums to the document management company without knowing of the company’s affiliation with the Boies law firm.
Now, after a hearing earlier this week, this Wall Street Journal ($) article reports that the Bankruptcy Judge in the Adelphia case has ordered an ethics investigation into whether Boies and his firm should have disclosed the firm’s partners’ ties to the company that Adelphia used for document management.
In the meantime, final Bankruptcy Court approval of the Boies firm’s almost $30 million fee (most of which has already been paid) for doing legal work for Adelphia hangs in the balance. If any significant portion of that fee is disallowed, then that could prove to be one expensive non-disclosure for the champion of good corporate governance and disclosure.

The second Lay-Skilling prosecution witness

ken rice9.jpgThe NY Times Alexei Barrionuevo, who is writing some of the best background pieces in connection with the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, profiles former Enron Broadband CEO Ken Rice today, who is expected to be the prosecution’s second witness in the trial if the parties ever get done with the first witness, former Enron investor relations chief, Mark Koenig.
In addition to noting Rice’s disastrous testimony in the Enron Broadband trial last year, Barrionuevo’s piece points out the little-reported fact (mentioned earlier here) that Rice copped his plea deal after prosecutors discovered circumstantial evidence that strongly indicated that Rice engaged in insider trading shortly before Skilling’s resignation in August, 2001:

More than $9 million of [Rice’s $40.3 million in profits from Enron stock trades] came from three trades on July 13, 2001, about a month before Mr. Skilling officially resigned from Enron, according to records from the Securities and Exchange Commission, and around the same time that Mr. Skilling privately told Mr. Lay of his intention to resign, according to earlier testimony by Mark E. Koenig, Enron’s former investor relations chief.

Meanwhile, the prosecution’s decision to spend an inordinate amount of time on direct examination with Koenig appears to be backfiring. The prosecution spent almost two and a half days on direct examination of Koenig, who has now admitted on cross-examination that he really does not have much knowledge of the underlying evaluation process upon which Lay and Skilling based their public statements regarding Enron’s finances. Thus, Koenig is a quintessential witness whose knowledge is a mile wide and an inch deep, and the defense is now hammering his basis for asserting on direct that Lay and Skilling intentionally misled investors. To make matters worse for the Enron Task Force, the prosecution took so much time with Koenig on direct that it is really not in a position to object to the length of time that the defense is spending with Koenig on cross-examination.
Moreover, my old friend, Joel Androphy, blogging the Lay-Skilling trial over at KTRK-TV, observes the following about another prosecution mistake in dealing with Koenig:

The government allowed Koenig to keep $5 million to fight the civil cases and provide for his family, not the families of the victims. The plea bargain could have required Koenig to pay the maximum fine, and full restitution to the victims even if he provided influential testimony. That would have supported his credibility. Although the judge has the final say on restitution and fines, the government could have required mandatory surrender of funds. Now it looks like he could get reduced jail time and a large pension unlike most former employees. Koenig’s attorney did a commendable job.

It now appears that Rice’s testimony will not begin until Thursday of this week at the earliest, and may not even begin this week at all. Therefore, unless the prosecution pares down its case-in-chief dramatically on the fly, the prosecution’s pre-trial prediction of completing its case-in-chief in nine weeks is looking more and more like a pipe dream.

Directors and the business judgment rule

bainbridge.jpgribstein4.jpgStephen Bainbridge and Larry Ribstein are two of the blawgosphere’s most insightful thinkers on corporate governance issues, and their their blawgs have contributed more to the understanding and appreciation of those and many related business law issues over the past couple of years than virtually any other resources on the Web of which I am aware. These two academics continued their generous contributions over the past week with a couple of timely pieces in regard to director liability and the business judgment rule that should be required reading for any director of a public company or any advisor of a director.
First, Professor Bainbridge used the oral argument in the Delaware Supreme Court in the Disney-Ovitz case to provide this timely refresher (blog post here) on the business judgment rule and its importance to good corporate governance. He plainly states the rule as it relates to directors:

Continue reading