Monthly Archives: March 2006

Comparing Martin Frankel and Jamie Olis

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Outside the media glare of the trial of the Lay-Skilling trial, decade, a true corporate crook — financier Martin Frankel — was re-sentenced yesterday in a post-Booker hearing to 17 years in prison for pulling off one of the biggest insurance frauds in American history.

Frankel was a small-time New York money manager in the early 1990’s who arranged for the acquisition of a group of financially-troubled insurance companies throughout the 1990’s, which he then used to pull off a several hundred million dollar scam.

With investigators closing in on him in May,1999, Frankel bought millions of dollars worth of diamonds, wired money to accounts all over the world, torched any remaining paper trail and fled the country for Germany under a blaze of publicity.

He was apprehended in Germany several months later, spent a year and a half in a German prison, and then was extradicted to the US to face criminal charges here.

The Wall Street Journal’s Ellen Joan Pollock was a lead writer on the reporting team that covered the FBI’s four-month international manhunt for Frankel, and she eventually wrote a good book about the affair called The Pretender (Free Press 2002).

Meanwhile, as Frankel returns to prison to serve the remainder of his 17-year sentence, Jamie Olis — an honest, hard-working, American success story who did what his bosses told him to do in regard to a merely questionable business transaction — continues to await resentencing after his previous 24-year sentence was overturned on appeal.

Comparing the sentences of Frankel and Olis provides a stark example of the injustice involved in the government criminalizing corporate agency costs to assuage public animus after a business meltdown such as Enron.

If the government cannot tell the difference between Martin Frankel and Jamie Olis, then it is highly unlikely that it can tell the difference between Martin Frankel and you or me.

Five questions about the Stros

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stros logo8.jpgAs Spring Training winds down, freelance writer and longtime Stros follower Bob Hulsey addresses five questions about the Stros upcoming season. Check it out.
By the way, word from Florida is that Jeff Bagwell will either begin the season on the disabled list or retire because of his inability at this point to throw a ball adequately to play slow pitch softball, much less Major League Baseball. From the looks of it this spring, Bags’ damaged right shoulder has also sapped him of any remaining power that he once had as one of the most feared sluggers of the past decade and a half. Thus, my bet is that Bags hangs ’em up rather than linger on the Stros’ bench for the season as the highest-paid singles hitter in the game.
With his retirement, Bags will immediately become the greatest former player in Stros history and will likely become the first Stros player to be named to Baseball’s Hall of Fame. This post explains why.

Lay-Skilling, Week Eight

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Week Eight of the corporate criminal case of the decade drew to a close on Thursday with former Enron treasurer and Andy Fastow acolyte Ben Glisan on the stand and with the Enron Task Force announcing that presentation of its case-in-chief was drawing to a close.

That’s entirely appropriate because, in many ways, Glisan’s testimony has been a microcosm of the Task Force’s case against former key Enron executives Ken Lay and Jeff Skilling.

During a heavily-scripted direct examination that took a little over a day, the Task Force had Glisan provide a 30,000 foot flyover of the various alleged misrepresentations that, somewhat surprisingly, mostly Lay and, to a lesser extent, Skilling made to the market and Enron employees about the company’s finances.

Then, during yesterday’s cross-examination, defense attorneys began to chip away systematically at Glisan’s allegations, focusing much more on the specific circumstances relating to Glisan’s allegations of wrongdoing than the prosecution did on direct. Much of the testimony on both direct and cross-examination pertained to dizzying analysis of the financial details of the Raptor financial structures that involved certain of Enron’s special purpose entities, a subject that clearly has become a snoozer for the jury and even the ever-patient Judge Lake, who continually encourages both sides to move things along.

Nevertheless, Glisan provided some of the most fascinating testimony to date in regard to the sledghammering manner that the Task Force has handled the biggest corporate criminal investigation in the United States since Rudy Guiliani’s prosecution of Drexel Burnham and Michael Milken almost 20 years ago.

First, as noted in this earlier post, Glisan disclosed that he had been successfully negotiating with Task Force prosecutors about a better prison deal almost from the beginning of his prison term in September 2003.

That important fact was not revealed to the court and the jury during Glisan’s key testimony in the earlier Enron-related Nigerian Barge trial in 2004 that resulted in four Merrill Lynch executives being sent to prison for the dubious “crime” of not sufficiently appreciating that Enron may not have accounted properly for an asset sale.

The Task Force had presented Glisan in the barge trial as a witness whose testimony was particularly credible because he had not cut any deal with the government in regard to his testimony and was being compelled to testify under a grant of immunity. That presentation of Glisan in the barge trial was disingenuous, at best.

Then, during cross-examination yesterday, Glisan revealed even more sordid details of his negotiations with the government.

Soon after Enron went into bankruptcy in early December, 2001, Glisan and his attorney went to prosecutors and the SEC and attempted to minimize his role at Enron while, at the same time, apparently hoping that prosecutors wouldn’t discover Glisan’s involvement in effectively embezzling about $1 million from Enron in connection with Fastow’s Southhampton deal.

When that approach didn’t work and Glisan was indicted in April, 2003, Glisan changed his story and began singing like a canary about alleged wrongdoing at Enron, but entered into a plea deal with the Task Force that did not include a cooperation agreement so that he could begin serving his five-year prison term immediately at a minimum security prison camp, the best alternative in the bad choices that a prisoner confronts in the federal prison system.

Despite Glisan’s turnabout, the Task Force apparently was still interested in extracting a better level of “cooperation” from Glisan. So, rather than sending him to the prison camp that the judge in Glisan’s case recommended and for which Glisan qualified, the Task Force apparently arranged with the Bureau of Prisons to send him to a harsher minimum-security prison facility, where Glisan was shockingly thrown into solitary confinement for most of his first two weeks in prison and then forced to share an 8 by 12 ft. prison cell with two other prisoners over most of the following month.

That had the intended effect on Glisan, who immediately began bartering his testimony in other Enron-related cases for the Task Force’s assistance in moving to the more-desirable prison camp and in lessening the length of his sentence. That led to arguably the most shocking revelation of all.

In February, 2004, the Task Force arranged to have Glisan brought to Houston so that he would be here during the time that Skilling was indicted. On the day after Skilling’s indictment, when the Task Force put Skilling through his “perp walk” before his initial court appearance, the Task Force had Glisan — in prison jump suit, leg shackles and handcuffs — meet Skilling and ride with him in the same federal courthouse elevator.

In one of the most dramatic exchanges of the trial, Skilling lawyer Daniel Petrocelli asked Glisan the following question about that incident:

“Did you believe for one second, sir, that [meeting Skilling in the elevator] was a coincidence?” asked Petrocelli.

“No, I didn’t believe that,” replied Glisan.

Although the Task Force’s transparent purpose in exposing the defeated Glisan to Skilling in this heavy-handed manner was to shock Skilling into seeking his own plea deal, the Task Force badly miscalculated the strength of Skilling’s backbone.

Glisan went on to testify on how he parlayed his testimony in the barge and Lay-Skilling trials into a Task Force-sponsored transfer to the more desirable mininum-security prison camp in Beaumont, liberal furloughs at home while working with the Task Force, and the Task Force’s facilitation of a reduction of his prison sentence by over year through his participation in an alcohol-rehab program.

As a result, Glisan — who entered prison in September 2003 to serve a five-year sentence — is scheduled to be released to home confinement in September of this year and will be released from custody entirely in January, 2007.

Not bad for a “non-cooperating” witness, eh?

What effect all of this is having on the Lay-Skilling jury remains decidedly unclear. I was in the courtroom for most of the direct examination of Glisan and it is clear that most the jurors now check out when the testimony turns toward the boring details of Enron’s complex financial transactions.

On the other hand, reports from courtroom observers from yesterday indicate that most jurors were listening intently during Glisan’s testimony about his solitary confinement and his arranged courthouse elevator meeting with Skilling.

My sense is that the Task Force has done a competent job of presenting a generally weak case that has some gaping holes, and that the jury is anxious to begin hearing Lay and Skilling’s side of the story.

So, at this point, it appears that Lay and Skilling will begin presenting their side of the case on Monday, April 3rd and that the defense’s case-in-chief will take about a month to six weeks to put on.

My bet is that it will be a vigorous and highly entertaining defense, so stay tuned as the corporate criminal case of the decade — and arguably the purest attempt to criminalize corporate agency costs in recent memory — turns toward home.

The Rawls Course at Texas Tech

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rawls course at TT.jpgThe notoriously flat and dusty West Texas terrain is not normally associated with outstanding golf courses, but golf course architectural expert Jay Flemma gives a hearty thumbs-up to the Tom Doak-designed Rawls Course at Texas Tech University in Lubbock:

He may not be a cowboy in the real or allegorical sense of the word, but the wild wind that is Tom Doakís design team blew into west Texas on top of the already legendary fierce howls that blow errant golf shots to New Mexico.
It was 2002. Doak and company had just conquered the world for the first time, fresh off the smash hit at Pacific Dunes. He was a bit of a cowboy in terms of golf course design. Unapologetic about his industry raking book The Confidential Guide to Golf Courses, Doak talked the talk, then walked the walk, proving that the success of a golf course lies not in the money or the marketing, but the golf course itself.
Doak wrote on his website, ìAfter Pacific Dunes, it was inevitable that the next site we had to work with would be a letdown, so we went back all the way to square one ñ a flat cotton field on the north end of Texas Techís Lubbock campus, bounded by major streets, power lines and apartment houses.î

Flemma concludes:

There is no way to overstate Doakís accomplishment here. The land use went from the outhouse to the penthouse.
It was a roar of dust and diesel. Now itís a shining Lone Star.
And in case you forgot, itís Doak . . . [for the eminently reasonable price of] $35-$42 a round.

By the way, check out Flemma’s idea of a tournament bracket during NCAA Basketball Tournament season.

The Glisan Deal

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When former Enron treasurer and Andy Fastow henchman Ben Glisan cut his plea deal with the Enron Task Force in September, 2003, he did not — unlike most other Enron plea bargainers — enter into a cooperation agreement that required him to cooperate with the Task Force in other Enron-related prosecutions.

Interestingly, in connection with Glisan’s plea deal, U.S. District Judge Ken Hoyt recommended that Glisan be assigned to a more-favored minimum-security camp.

However, the Bureau of Prisons assigned Glisan to the Bastrop, Texas prison facility, which was contrary to Judge Hoyt’s recommendation that Glisan be assigned to the less-restrictive camp. Glisan reportedly was miffed with the BOP’s assignment.

Nevertheless, during the previous Enron-related Nigerian Barge case in Sept.-Nov., 2004, Glisan was the key prosecution witness. Because he has no cooperation agreement, Glisan testified in that trial — as he is currently doing in the Lay-Skilling trial — under a grant of use immunity so that his testimony cannot be used against him in another prosecution.

Accordingly, the Task Force presented Glisan during the Nigerian Barge trial as a witness who was being “forced” to testify under the immunity grant and who had no deal with the Task Force to get a lighter sentence in return for his testimony. Indeed, the prosecutors touted Glisan during the barge trial as a witness who was more credible than the typical prosecution witness who had cut a deal for a reduced sentence under a cooperation agreement with the prosecution.

Well, in a startling revelation during Glisan’s direct examination in the Lay-Skilling trial yesterday, it appears that the Task Force’s presentation of Glisan as a non-cooperating witness during the Nigerian Barge trial was a sham.

A letter introduced into evidence yesterday sets forth the terms of the cooperation agreement between Glisan and the Task Force. In return for Glisan’s cooperation in other Enron-related cases, the Task Force arranged Glisan’s transfer to his favored Beaumont, Texas minimum-security camp (from the his disfavored Bastrop, Tx. prison facility) and helped Glisan shave a year off of his five-year prison sentence by facilitating his involvement in a prison alcohol-rehab program.

As a result of the deal, Glisan is now scheduled to complete his five-year prison sentence in January, 2007 and will be released to home confinement in September.

Moreover, although the letter between the Task Force and Glisan’s suggests that Glisan’s lawyer had proposed “the deal” in early 2005 after the completion of the Nigerian Barge case in November, 2004, it’s clear that Glisan and the Task Force were negotiating the deal well before the trial of the Nigerian Barge case.

The final paragraph of a June 1, 2004 from the Task Force to the defense counsel in the Nigerian Barge case contains the following statement about Glisan’s negotiations with the Task Force:

In May, 2004, Glisan, through his counsel, requested that the government support his request to be transferred to a minimum security camp in Beaumont, Texas. The government responded to Glisan’s attorney as follows: the government will not weigh in on BOP’s decision to designate Glisan to a particular facility; that is a matter for BOP. However, if BOP inquired, the government would advise BOP of the government’s assessment of Glisan’s truthfulness in [the Nigerian Barge case].

Contrary to the foregoing statement, it now appears clear that the prosecution did weigh in on Glisan’s transfer to the Beaumont facility, in addition to helping Glisan shave a year off of his sentence.

Moreover, contrary to the suggestion in the June 1 letter that the BOP is independent of the Task Force, the September 30 Task Force letter exposes that the BOP is, in fact, a cooperating agency with the Task Force (the BOP’s Houston office is on the same floor of the federal courthouse as the Task Force’s offices).

Does anyone really believe that Glisan’s original assignment to the more restrictive Bastrop prison facility was the result of “administrative necessity?”

Or that the assignments of Nigerian Barge defendants Dan Bayly and William Fuhs to more-restrictive facilities far away from their families was not the product of Task Force intervention with the BOP?

Remember, Task Force prosecutors were clearly upset with U.S. District Judge Ewing Werlein’s refusal to accept their draconian recommendation regarding the length of the prison sentences for the four Merrill Lynch defendants convicted in the barge case.

Glisan’s testimony helped place four Merrill Lynch executives in prison for doing their jobs in connection with the firm’s purchase of a dividend stream for which Enron, not Merrill, may have improperly accounted, although even that issue was never proven during the barge trial.

Now it appears that the true motivation for Glisan’s testimony during that trial was not disclosed to either the defense or the jury.

Chalk it up as yet another example of the lengths that prosecutors must go to justify the criminalization of the unpopular businesspersons of the moment in the post-Enron era.

Farewell, Ten Cups

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ten cups logo.gifFor a number of years, my favorite driving range facility in Texas has been San Antonio’s Ten Cups facility just down the road from the La Cantera Resort. Owner Dave Fineg hails Ten Cups as “maybe the finest third rate goat pasture in Bexar County” and has used the facility for years to promote his theory that golf should be an enjoyable form of recreation rather than a frustrating obsession.
Urban driving ranges such as Ten Cups are usually interim land uses, and urban encroachment is the reason for Ten Cups’ demise. So, Fineg is taking his “Golf is Fun” seminars on the corporate roadshow circuit and — if this absolutely hilarious spoof on golf club infomercials is any indication — his new endeavor should be a big success.
Hat tip to Bogey McDuff for the links.

On federal deficits and debt ceilings

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federal deficit.jpgClear Thinkers favorite James Hamilton points out in this post the seemingly non-partisan point that it is hypocritical for politicians in Washington to vote, on one hand, for spending and tax measures that generate the federal deficit while voting, on the other hand, against an increase in the debt ceiling necessary to service the deficit.
Then, commentators to Professor Hamilton’s post promptly take his non-partisan point and turn it into a partisan issue.
Hilarity ensues.

The Murray Plan

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Murray.gifIn this intriguing WSJ Opinion Journal op-ed, American Enterprise Institute scholar Charles Murray — author of the new book, In Our Hands (AEI Press 2006) — takes dead aim at the American welfare state:

This much is certain: The welfare state as we know it cannot survive. No serious student of entitlements thinks that we can let federal spending on Social Security, Medicare and Medicaid rise from its current 9% of GDP to the 28% of GDP that it will consume in 2050 if past growth rates continue. The problems facing transfer programs for the poor are less dramatic but, in the long term, no less daunting; the falling value of a strong back and the rising value of brains will eventually create a class society making a mockery of America’s ideals unless we come up with something more creative than anything that the current welfare system has to offer.
So major change is inevitable — and Congress seems utterly unwilling to face up to it. Witness the Social Security debate of last year, a case study in political timidity. Like it or not, we have several years to think before Congress can no longer postpone action. Let’s use it to start thinking outside the narrow proposals for benefit cuts and tax increases that will be Congress’s path of least resistance.

Murray goes on to lay out his proposal, which he dubs as “the plan”:

[The federal government] makes a $10,000 annual grant to all American citizens who are not incarcerated, beginning at age 21, of which $3,000 a year must be used for health care. Everyone gets a monthly check, deposited electronically to a bank account. If we implemented the Plan tomorrow, it would cost about $355 billion more than the current system. The projected costs of the Plan cross the projected costs of the current system in 2011. By 2020, the Plan would cost about half a trillion dollars less per year than conservative projections of the cost of the current system. By 2028, that difference would be a trillion dollars per year.

Murray concedes that there are many technical issues that need to be sorted out before implementing such a system, but addressing those is not the purpose of his piece. Rather, he addresses why such an alternative to the current system of federal entitlements is preferable from a policy standpoint:

[D]o we want a system in which the government divests itself of responsibility for the human needs that gave rise to the welfare state in the first place? I think the reasons for answering “yes” go far beyond the Plan’s effects on poverty, retirement and health care. Those issues affect comparatively small minorities of the population. The more profound problem facing the world’s most advanced societies is how their peoples are to live meaningful lives in an age of plenty and security. . .
If you believe . . . that the purpose of life is to while away the time as pleasantly as possible, . . . then it is reasonable to think that the purpose of government should be to enable people to do so with as little effort as possible. But if you agree with me that to live a human life can have transcendental meaning, then we need to think about how human existence acquires weight and consequence.
. . . Aristotle was right. Virtue is a habit. Virtue does not flourish in the next generation because we tell our children to be honest, compassionate and generous in the abstract. It flourishes because our children practice honesty, compassion and generosity in the same way that they practice a musical instrument or a sport. That happens best when children grow up in a society in which human needs are not consigned to bureaucracies downtown but are part of life around us, met by people around us.

Read the entire piece. Regardless of whether you agree with Murray’s plan, his ideas on the underlying individual and societal qualities that American governmental policies should promote is the type of clear thinking that we need in addressing the inevitable reorganization of the American welfare state.

The costs of Quattrone

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frank quattrone.jpgEllen Podgor and Peter Henning do a great job of breaking down the issues and details of the Second Circuit’s decision in overturning the conviction of Frank Quattrone yesterday, so I’m attempting to step back and assess the big picture.

In so doing, one thing is becoming clear — Quattrone is the new poster boy for the enormous costs involved in the dubious governmental policy of attempting to regulate business fraud through criminalization of corporate agency costs.

As with the government’s case against Martha Stewart, the government did not prosecute Quattrone for alleged crimes related to his supposed mishandling of allocation of stock offerings during the technology boom. Rather, the government prosecuted him for allegedly attempting to cover up those purported crimes.

As a result, the prosecution’s case was built upon mostly email messages between Quattrone and his CSFB employer’s in-house counsel, all of which were innocuous in nature. Even the key email in the prosecution (as with Arthur Andersen, one relating to CSFB’s document retention policy) was one that Quattrone forwarded with the comment that he agreed with the email as he was hurriedly getting ready to leave his office for the day.

No one acted on Quattrone’s email and, within days of it, CSFB’s in-house counsel was advising him that it was “a big problem” because of the various ongoing investigations involving CSFB.

Of course, once CSFB settled and waived its corporate attorney-client privilege, that email became evidence in the prosecution against Quattrone. Thus, the jury was allowed to see evidence that a lawyer who appeared to be working in concert with Quattrone thought that his seemingly innocuous email was “a big problem.”

Talk about being put on the defensive from the start.

Meanwhile, the prosecution figured that its case against Quattrone was not sexy enough without more, so it presented evidence that Quattrone was allegedly involved in illegal activity that was not a part of the indictment (the Second Circuit ruled that it was error for the District Court to allow that into evidence) and that his motive for allegedly obstructing the investigations was so that could greedily preserve his huge CSFB compensation package (which the Second Circuit said was OK).

So, where does this leave us?

Well, it’s clear that the costs of the government’s criminalization of corporate agency costs are extraordinary. Based on Quattrone’s experience, no executive can rely any longer on the executive’s communications with company counsel remaining confidential or privileged. Thus, it would be far more prudent for an executive to say nothing to corporate counsel and to retain personal counsel immediately.

Better yet, the executive should forsee such problems and require as a part of the executive’s employment agreement that personal counsel be provided to the executive on the company’s dime. Good for the legal business, but not a prescription for reducing a company’s administrative costs or for facilitating open discourse regarding business or legal problems.

But should the executive even continue working for the employer after such investigations are commenced? Inasmuch as many of Quattrone’s actions that were used to prosecute him were performed in the normal course of interacting with others within CSFB regarding the status of the investigations, a powerful argument can be made that virtually anything that Quattrone did at that point — including simply sitting in his office and saying nothing — would have been used against him in the subsequent cover-up prosecution.

Indeed, even an immediate resignation would probably have been used by the prosecution as evidence of Quattrone’s culpability. Are we prepared to endure the cost attributable to companies losing key personnel simply because someone in government has elected to commence an investigation of those companies?

Thus, the lottery of regulating business fraud through criminalization of corporate agency costs is having huge and largely unevaluated costs. If the government pursues bit players such as William Fuhs or Daniel Bayly in the Enron-related Nigerian Barge case and can come up with something particularly distasteful to the jury — such as Merrill’s involvement with the corporate pariah Enron — then it wins and productive careers are destroyed.

On the other hand, even if the government oversteps with regard to a big fish such as Frank Quattrone, then the government may lose the battle, but it still wins the war because Quattrone is out of business.

This is not a rational deployment of our justice system, and the economic costs — not to mention the emotional carnage to the families of the executives who are caught in this troubling spiral — simply cannot be responsibly dismissed as a “trade-off” of an imperfect system.

Update: Don’t miss Christine Hurt’s clever analysis of Quattrone’s impact on the means for notification of a company’s document retention policy.

Did Fastow forge Causey’s initials on Global Galactic?

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As noted on several occasions previously, the Lay-Skilling trial has settled into a rhythm during the Enron Task Force’s case-in-chief in which long stretches of boring testimony regarding rather dry topics is interrupted intermittently with a tidbit that really appears to capture the jury’s attention.

The same routine took place yesterday and surprisingly, only the Chronicle’s John Roper among the major news media reporters covering the trial appears to have picked up on the most riveting testimony for the jury.

For most of Monday, the jury and spectators endured testimony from a couple of former Arthur Andersen partners who worked on the Enron account and testified how they thought Enron violated various accounting rules.

Most of it was pretty dry, but prosecutor Sean Berkowitz had the following exchange with Tom Bauer, one of the former Andersen accountants who worked closely with former Lay-Skilling defendant and former Enron chief accountant, Richard Causey, regarding the Global Galactic agreement between Causey and former Enron CFO, Andy Fastow:

Q: Do you recognize anybody’s initials on this document, Mr. Bauer?

A: I recognize what appears to Mr. Causey’s initials.

Q: And are you familiar with Mr. Causey’s initials from having worked with — having worked with him?

A: I’d seen Mr. Causey’s initials on a number of documents that I have reviewed during the course of my work.

Q: And do the initials on each of these three pages appear, to the best as you can tell, to be Mr. Causey’s initials, based on your — your knowledge and recollection of his initials?

A: They appear to be.

During Fastow’s testimony, the Lay-Skilling defense raised substantial questions regarding the validity and authenticity of the Global Galactic agreement, and those questions have become even more compelling by the revelation that the Task Force has chosen not to have Causey corroborate Fastow’s testimony on Global Galactic, at least during the presentation of the prosecution’s case-in-chief.

During cross-examination yesterday, Skilling lawyer Randy Oppenheimer displayed for Bauer and the jury a handy graphic that contained several examples of Causey and Fastow’s initials, including Causey’s alleged initials on Global Galactic.

As the jury looked on with keen interest, Oppenheimer led Bauer through a review of the various initials, getting Bauer to admit that the alleged Causey initials on Global Galactic indeed looked different from Causey’s initials from other documents and that certain characteristics of Fastow’s writing appear similar to the alleged Causey initials on Global Galactic.

Appearing somewhat dumbfounded, Bauer’s final statement to the jury during his testimony yesterday was the following regarding Global Galactic:

“Sir, I can’t say who authored this document. When I saw the initials on them, they appeared to me to be the initials of Mr. Causey, but I’m not a handwriting expert. I can’t testify with regard to who authored this document.”

Where is Waldo? er, I mean Causey? Indeed.