Monthly Archives: March 2008

The Economist Gets It

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The Economist produces the best mainstream media article that I’ve seen to date placing the prosecutorial misconduct of the Enron Task Force toward former Enron executives Jeff Skilling and Ken Lay in the context of the most recent demise of a trust-based business, Bear Stearns:

For many people, the mere fact of Enron’s collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between his conviction and sentencing, presided over a fraudulent house of cards.

Yet Mr Skilling has always argued that Enron’s collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run.

Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy.

Yet recent events in the financial markets add some weight to Mr Skilling’s story—though nobody is (yet) alleging the sort of fraudulent behaviour on Wall Street that apparently took place at Enron.

The hastily arranged purchase of Bear Stearns by JP Morgan Chase is the result of exactly such a bank run on the bank, as Bear’s counterparties lost faith in it.

This has seen the destruction of most of its roughly $20-billion market capitalisation since January 2007. By comparison, $65 billion was wiped out at Enron, and $190 billion at Citigroup since May 2007, as the credit crunch turned into a crisis in capitalism.

The article goes on to compare the similarity of certain of Ken Lay’s public comments regarding Enron’s liquidity in the turbulent post 9/11 markets (for which he was eventually prosecuted) with those of Bear Stearns and Lehman Brothers executives during the current turmoil in the financial markets.

The source of the information upon which Lay based his positive statements is the same fellow (former Enron CFO Andrew Fastow) whose exculpatory statements regarding Skilling and Lay the Enron Task Force improperly withheld in connection with their criminal trial. And the revelations of this latest round of prosecutorial misconduct with regard to Fastow comes on top of the Task Force’s blatant misrepresentation (see also here) of Fastow’s plea deal to the Lay-Skilling jury during the trial.

As usual, Larry Ribstein places all of this in context:

I’m constructing a “narrative” for the prosecutorial misconduct case: Prosecutors desperate for a conviction, their careers turning on the outcome, have a key witness, Andy Fastow. The problem is, the guy has, in [Enron Task Force prosecutor John] Hueston’s words, a “heartstopping history of self-dealing.”

Obviously the government couldn’t afford any additional shadow on Fastow’s credibility. Yet in the government interviews it seems his story got more negative on the defendants over time.

Could be a big problem for Fastow on the witness stand, as the defense sought on cross to show he was changing his story to suit his jailers. Could the prosecutors afford to give these notes to the defense? Why not just turn over a summary?

By the time the truth came out (if it ever did) they could do a dance about how the differences were inconsequential.The government is saying the differences are inconsequential. So why, then, didn’t they produce the notes as repeatedly requested, rather than summarizing them?  I think those prosecutors have some explaining to do.

Update: Warren Meyer also notes the similarities between Bear Stearns’ demise and that of Enron.

The Nacchio debacle

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claude rains in casablanca145 I’m shocked, absolutely shocked, that a former Enron Task Force member would have ever been involved in improperly suppressing exculpatory testimony at trial that would ultimately lead to the Tenth Circuit’s reversal of the conviction of former Qwest CEO, Joseph Nacchio.

Larry Ribstein and Ellen Podgor break down and comment on the Tenth Circuit decision. As an aside, the expert witness who was improperly excluded in the Nacchio trial — Daniel Fischel — was the author of the book that exposed the true nature of, and motive behind, Rudolph Giuliani’s prosecution of Michael Milken.

"America’s booming opportunity city"

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AEI FeaturedImage Each time local politicians in Houston engage in bad policy initiatives such as the ones noted here, my wish is that they would be required to read this fine Joel Kotkin/The American op-ed entitled Lone Star Rising — How a combination of ambition, entrepreneurship, trade, and tolerance made Houston America’s booming opportunity city. Kotkin has been studying Houston over the past several years and he provides a perceptive outsider’s view on why Houston grew into such a vibrant place:

First appearances—then and even now—often didn’t help. Early visitors were struck by the settlement’s largely shack-like housing. And in those days, long before air conditioning, there was the Houston weather, which often combined scalding temperatures with soupy humidity.  .  .  . Yet the Allen brothers had not really chosen so badly. Houston possessed powerful assets. It sat on an enormous fresh-water aquifer, which today guarantees a water supply in a way that other growing cities, such as Phoenix and Las Vegas, can only dream about. The area also abounded in natural resources such as timber and rich soil that was ideal for growing cotton. And when oil drillers hit a gusher in Spindletop, about 90 miles from Houston in East Texas, in 1901, Houston suddenly found itself positioned as the nearest city to some of North America’s richest oil and gas reserves.

None of this, however, adequately explains Houston’s ascendancy. Other cities enjoy better locations for shipping, richer agricultural resources, or similar proximity to oil fields. The answer, I have come to understand as I have worked in Houston as a reporter and consultant, echoes something that the late Soichiro Honda once told me: “More important than gold and diamonds are people.” This critical resource, more than anything, accounts for Houston’s headlong drive toward becoming not only the leading city of Texas and the South, but also a player on the global scene: it is emerging as one of the world’s great cities.

Read the entire op-ed and learn a lot about what makes Houston such a special place to live.

That Pesky Trust-Based Business Model

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Over the weekend, we learned that the Fed had bailed out New York-based investment bank Bear Stearns during this unsettled time in the financial markets.

Almost seven years ago, a much larger company that shared many characteristics with Bear Stearns — Houston-based Enron — did not even generate serious consideration for a Fed bailout before it went under in the turbulent post-9/11 financial markets.

In between those two events, one of the world’s wealthiest insurers and another company that is similar in many respects to Bear Stearns and Enron — American Insurance Group — barely escaped a similar fate by cutting a deal with the now-disgraced former Governor and Attorney General of New York to cut loose the executive primarily responsible for creating AIG’s vast wealth.

The fact of the matter is that Enron was — and Bear Stearns and AIG are — trust-based businesses that fundamentally depend on the trust of the markets to sustain their value.

Once that trust is lost, such companies lose value quickly and dramatically, a case in point being that JP Morgan Chase’s proposed $236 million purchase price for Bear Stearns comes just hours after Bear’s market cap was $3.5 billion this past Friday and $20 billion as of January, 2007.

Although unfortunate for the owners of such companies, such a dramatic loss of wealth does not necessarily mean that any criminal conduct caused or was even involved in the loss. Rather, such loss is simply one of the risks of investing in a company based on a trust-based business model.

The sooner we all recognize and understand this risk — and avoid the mainstream media’s promotion of myths about them — the quicker we can put a stop to injustices such as this while advancing the discussion of how best to hedge the risk of such potential losses.

The Stench of Prosecutorial Misconduct

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skilling.jpgThe stench of prosecutorial abuse has long hung over the Enron-related criminal cases.

But the extent of that abuse became crystal clear this afternoon when the Fifth Circuit Court of Appeals granted former Enron CEO Jeff Skilling’s motion to unseal his supplemental brief relating to the government’s interview notes of former Enron CFO and chief Skilling accuser, Andrew Fastow.

The brief reveals suppression of exculpatory evidence by the Enron Task Force on a massive scale. The entire brief is devastating to the Task Force’s prosecution of Skilling and the late Enron chairman, Ken Lay. The excellent 11-page introduction of the brief includes the following passage:

The raw notes are shocking. The 420 pages of contemporaneous notes, which we have spent the last many weeks comparing to the thousands of pages of trial record and the Task Force’s pretrial disclosures, confirm our worst fears. On the most crucial issues in Skilling’s case—especially where it was only Fastow’s word against Skilling’s—the Task Force suppressed vital exculpatory evidence from its “composite” FBI Form 302s for Fastow and all other disclosures given to Skilling. The Task Force then proceeded to present critical testimony and argument at trial it knew was contradicted by the evidence withheld from Skilling.

Much of the suppressed evidence directly relates to—and refutes—the Task Force’s pivotal contention that Skilling orally agreed to “secret side deals” to manipulate Enron’s financial statements. This “side deal” theory underlies every count of conviction against Skilling.

By depriving Skilling of key exculpatory evidence that Fastow conveyed in his interviews, the Task Force was able to skew the proof and convince the jury to accept Fastow’s word over Skilling’s. As the Task Force later told Fastow’s sentencing judge and recounted in a law review article, Fastow’s testimony and credibility were the cornerstones to convicting Skilling.  .   .  . Enron Task Force Prosecutor John C. Hueston, Behind the Scenes of the Enron Trial: Creating the Decisive Moments (“Hueston”), 44 AM. CRIM. L. REV. 197, 197-99 (2007). The substantial evidence the Task Force kept from Skilling all shares one chatacteristic—it was harmful to the Task Force’s case against Skilling.  .    .    .

The implications of this brief reach far beyond the Skilling appeal. For example, the already-reeling re-prosecution of the three former Merrill Lynch bankers in the Enron-related Nigerian Barge case would appear to be over. The Enron Task Force in the first trial of that case not only withheld exculpatory evidence, but put on incriminating testimony from former Enron treasurer and Fastow confidant Ben Glisan that directly contradicted the exculpatory evidence that Fastow provided to Task Force prosecutors during his interviews. Other Enron-related criminal cases — as well as plea bargains — could well be affected.

I’ve often noted on this blog that fair-minded people can disagree over whether the government’s prosecutorial power is an appropriate tool to regulate business. However, my fervent hope is that even those who favor using the state’s awesome power to criminalize merely questionable business transactions will be appalled by what the prosecution did in the criminal case against Skilling and Lay, as well as the other Enron-related criminal cases.

In truth, none of us would be able to survive, as Thomas More reminds us, “in the winds that blow” from the unjust exercise of the government’s overwhelming prosecutorial power. I continue to hope that Jeff Skilling’s unjust conviction and sentence are reversed on appeal, not only for his and his family’s benefit, but also for ours.

Update: The Chronicle’s Kristen Hays, who is the only mainstream media reporter who I know of following this story, has an article on the Skilling brief here (the Chronicle story links to the copy of the Skilling supplemental brief).

Probably in response to an off-the-record response from the DOJ, Hays writes that the Skilling supplemental brief contends that “some of [Fastow’s] initial statements to authorities were not as damning as those in his testimony.” That’s a stark understatement of what the Skilling supplemental brief describes.

The initial Fastow statements set out in the Skillling brief may not have been as damning as Fastow’s trial testimony, but they were irreconcilable with that trial testimony and described completely legal activity, even by Fastow.  Consequently, had the Enron Task Force not been able to pry Fastow off his original story, the core of the Task Force’s case against Skilling and Lay would not have been contradicted by Fastow, who was Skilling’s main accuser at trial.

And the fact that the DOJ did not disclose to the Skilling defense team how Fastow’s incriminating testimony evolved over time from his exculpatory initial statements while Fastow and the Task Force were negotiating a dubious plea deal is beyond reprehensible. What is the DOJ going to say now, that they didn’t disclose the exculpatory earlier statements to Skilling’s defense team because Fastow was protecting Skilling in these initial meetings? Yeah, right.

Update 2: The blogosphere is picking up the story quickly, as Larry Ribstein, Ellen Podgor (see also here) and Warren Meyer have already commented.

Curious, isn’t it, that the mainstream media is lagging well behind. Could it be that the story simply does not comport with the media’s pre-conceived notions of the Enron saga?

Update 3: The WSJ’s John Emshwiller, who covered the Lay-Skilling trial for the WSJ despite legitimate questions about his objectivity, reports on the latest developments here.

Update 4: John Hueston, the former Enron Task Force prosecutor who is quite proud of his work in nailing Skilling and Lay on an admittedly weak case, is mentioned often in the Skilling supplemental brief because of the law review article he authored that is cited in the passage above. Hueston’s law firm bio used to link to a copy of the article, but the firm took the link down some time ago. However, Cara Ellison, who has followed the Enron-related criminal cases closely, provides this handy link to Hueston’s article.

Update 5: The DOJ has replied to the Skilling Supplemental Brief. The DOJ argues essentially that, put in what the DOJ considers to be the proper context, each portion of the Fastow interview notes on which Skilling relies to establish Brady violations contains information that Skilling already had prior to trial or is evidence that would have had “minimal” value in impeaching Fastow.

Frankly, the DOJ’s analysis stands Brady on its head. The essence of Brady is that the prosecution does not retain the power to make such determinations regarding exculpatory evidence unilaterally — that information is a part of the mix that the jury and the Court sort out in determining facts and in applying the law. If what the Enron Task Force withheld here is truly harmless error, then the DOJ’s need of 70+ pages to explain why that is the case belies that contention. Ellen Podgor passes along similar thoughts regarding the DOJ’s brief here.

More rumblings in the Skilling appeal

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This post from last week noted some interesting docket entries in former Enron CEO Jeff Skilling’s Fifth Circuit appeal of his conviction on criminal charges in connection with the demise of Enron.

Now, it looks as if the mainstream media is picking up on the issue. The Houston Chronicle’s Kristen Hays, who is one of the only mainstream media reporters continuing to follow-up on the Enron-related criminal cases, reports here on a couple of the pleadings referenced in the docket entries from last week that apparently were not placed under seal when filed.

Although a copy of the pleadings that Hays was able to review are not included in the article, it appears clear that the government is scrambling in an attempt to contain public disclosure of exculpatory evidence that is contained in the interview notes of former Enron CFO and chief Skilling accuser, Andrew Fastow:

[Skilling attorney Daniel] Petrocelli and his team have since examined the notes. They want to file an additional brief arguing that the notes contain much information that is favorable to Skilling, and prosecutors and Lake wrongly denied him access to the notes before the trial.He said the notes reveal evidence that is “a sledgehammer that destroys Fastow’s testimony” against Skilling, “infecting virtually every facet” of the government’s case.Petrocelli also asked the 5th Circuit to accept his new brief as a public document, which he said quotes liberally from the Fastow notes.

The controversy regarding what Fastow told prosecutors and FBI agents who were investigating Enron became a big issue in the Lay-Skilling prosecution when the prosecution took the unusual step of providing the Lay-Skilling defense team a “composite summary” of the Form 302 (“302’s”) interview reports that federal agents prepared in connection with their interviews of Fastow. Those composites claimed that the Fastow interviews provided no exculpatory information for the Lay-Skilling defense, even though Fastow’s later testimony at trial indicated all sorts of inconsistencies.

However, I have spoken with several former federal prosecutors about this issue and all believe that the government has a big problem in the Skilling case on the way in which the information from the Fastow interviews was provided to the Lay-Skilling defense team. None of these former prosecutors ever prepared a composite 302 in one of their cases or ever used such a composite in one of their cases. The process of taking all the Fastow interview notes or draft 302’s and creating a composite is offensive in that it allowed the prosecution to mask inconsistencies and changing stories that Fastow told investigators as he negotiated a better plea deal from the prosecutors.

Similarly, the Enron Task Force’s apparent destruction of all drafts of the individual 302s of the Fastow interviews in connection with preparing the final composite is equally troubling. Traditionally, federal agents maintain their rough notes and destroy draft 302s. However, in regard to the Fastow interviews, my sense is that the draft 302s were not drafts in the traditional sense. They were probably finished 302’s that were deemed “drafts” when the Enron Task Force decided to prepare a composite summary of the 302’s.

Update: Larry Ribstein comments on the implications that criminalizing the actions of Skilling and Lay has on their prosecutors in light of their actions.

The Spitzer Lesson

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The mainstream media and the blogosphere have been buzzing over the past 24 hours regarding the fall from grace of New York’s governor and former Lord of Regulation, Eliot Spitzer.

As noted in this previous post, there is an under-appreciated human element in such dubious criminal problems as Spitzer fell into.

So, I have a great deal of compassion for the members of Spitzer’s family, although Spitzer’s many victims would certainly attest that he showed none for them. Larry Ribstein has related and typically insightful thoughts regarding why the revelers in Spitzer’s fate should be concerned about the way in which he was brought down.

But I hope that the most important lesson that Spitzer’s political career teaches us is not lost amidst the glare of a tawdry sex scandal.

As with Rudy Giuliani before him, Spitzer rose to political power through the misuse of the state’s overwhelming prosecutorial power to regulate business interests. In so doing, Spitzer manipulated an all-too-accommodating mainstream media, which never misses an opportunity to take down an easy target such as a wealthy businessperson. Spitzer is now learning that the same media dynamic applies to powerful politicians, as well.

However, as noted earlier here, where was the mainstream media’s scrutiny when Spitzer was destroying wealth, jobs and careers while threatening to go Arthur Andersen on American Insurance Group and other companies?

Where was the healthy skepticism of the unrestrained use of the state’s prosecutorial power to regulate business where business had no available regulatory procedure with which to contest Spitzer’s actions?

As Dealbreaker’s John Carney noted at the time of that earlier post:

Why didn’t [the mainstream media covering Spitzer’s investigation of Grasso] reveal the slimy tactics of the Spitzer squad?

We suspect part of the problem was the fear of being “cut off” of access. Reporters compete for scoops, and often those scoops depend on sources who will leak information to them. In the NYSE case, reporters assigned to the story were largely at the mercy of the investigators, who could cut-off uncooperative reporters, leaving them without copy to bring to their editors while their competitors filed stories with the newest dirt. They probably felt—not unrealistically—that their very jobs were on the line.

This reveals an unfortunate state of affairs. Playing bugle boy while government officials call the tunes from behind a veil of anonymity is not investigative journalism—it’s hardly journalism at all. It’s closer to propaganda. It would have been far better had the journalists turned their backs on the Spitzer squad, or even revealed these tactics to the public. Sure they may have lost some “good” stories but they could have painted a truer picture of what was going on. But that’s probably too much to hope for.

And, as noted here, the same prosecution manipulation of the mainstream media contributed to the utter lack of balance in the media’s reporting on the Enron criminal prosecutions.

Alas, change does not come easily to the mainstream media.

Late last week, this post reported on developments that could well expose an egregious abuse of prosecutorial power in connection with the prosecution for former Enron CEO, Jeff Skilling. Why has no mainstream media outlet intervened in that case and demanded that the information about potentially serious governmental misconduct be made public?

The Spitzer lesson is not easily embraced.

Update: Following on the theme of this post, the W$J’s Kimberly Strassel reviews the mainstream media’s complicity in portraying Spitzer as something that he is not, and Charlie Gasporino — who wrote the book about Spitzer that foreshadowed these issues — comments along the same lines here.

What’s Up in the Skilling appeal?

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First, thank you to all of the many readers who have communicated their concerns and prayers for the family crisis that is precluding me from daily blogging for now. Your kind thoughts and words are comforting and much appreciated.

But now for a quick blog post. While working this week, I was checking the docket of an appeal in which I am involved at the Fifth Circuit Court of Appeals. While there, I ambled over to the docket of the appeal of former Enron CEO Jeff Skilling just to see if there was anything interesting happening. Check out the following recent entries:

3/4/08 Motion filed by Appellant Jeffrey K Skilling to file supplemental briefs. [5976818-1] Supplemental brief included? (Y/N): Y, to unseal A’s suppl. brief brief [5976818-2] Date of COS: 3/3/08 Sufficient [Y/N]: Y [06-20885] (jmw)

3/5/08 Motion filed by Appellant Jeffrey K Skilling [5976825-1] to place supplemental brief under seal. Date of COS: 3/4/08 Sufficient [Y/N]: Y [06-20885] (jmw) 3/5/08 Response/opposition filed by Appellee USA to motion to file supplemental briefs [5976818-1] by Appellant Jeffrey K Skilling. Reply to Resp/Opp due on 3/14/08. Date of COS: 3/4/08 Sufficient [Y/N]: y [5976831-1] [06-20885] (jmw)

3/7/08 Reply filed by Appellant Jeffrey K Skilling to response/opposition [5976831-1], motion to file supplemental briefs [5976818-1] Reply to Resp/Opp due ddl satisfied., motion to unseal brief [5976818-2] Sufficient [Y/N]: Y [5978302-1] [06-20885] (jmw)



Translated, the foregoing means that Skilling’s appellate team filed a motion on Tuesday requesting that the Fifth Circuit grant permission to the parties to file supplemental briefs and, because of confidentiality concerns, requested that the supplemental brief be filed under seal (in other words, not for public consumption).


The government must have been expecting the Skilling motion because they filed a response in opposition to it the following day (Wednesday). Not to be outdone in terms of alacrity, the Skilling team filed their response today to the government’s opposition and, for good measure, requested that the Fifth Circuit unseal the Skilling supplemental brief and make if available for public review.


Anyone want to bet that these developments might have something to do with this (see also earlier posts here and here)?


Looks to me like a good opportunity for a mainstream media outlet to intervene and demand that the Fifth Circuit order the supplemental briefs be made available for public review, don’t you think?

					

		
		
	


				
					
	

		

						
A change in blogging seasons

			
						

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blogosphere network map-1 When I started this little blog a bit over four years ago, the blogosphere was a different place. The pioneers of blogs were well-established and had created a viable vehicle to enhance communication of information and ideas, but the blogosphere was a much smaller place. My initial goal was simply to communicate more effectively with an eclectic email group that I had maintained for about five years that was comprised of about 100 friends and family members, mostly businesspeople, clients and former clients, academicians, lawyers, and doctors.


I initially informed no one about the blog other than the members of that email list and figured that, at best, most of them would take a look at it every week or two. Much to my surprise, hundreds and then thousands more began reading it almost immediately. As one sage regular reader apprised me, "Kirk, the success of your blog is conclusive proof that a large number of people don’t have enough to do."


As anyone reading this blog knows, the blogsophere has exploded over the past four years into a key information source and communication device that even few of the blog pioneers predicted. Specialized blogs in such diverse areas as law, business, economics, medicine, education and politics (among others) have fundamentally enhanced the distribution of information and the communication of ideas. As I mentioned in a presentation that I gave on blogs last year at the State Bar of Texas Bankruptcy Seminar, if a lawyer today is not at least periodically reading the specialized blawgs that are addressing the key issues, developments and ideas that are related to the matters on which he or she is providing service to clients, then that lawyer almost certainly is not providing the best quality of service to the clients that is currently available in the marketplace of legal services.


As with many things in life, my blogging over time fell into a rhythm of about 15-17 posts per week, usually three a day on weekdays and a single post on the weekend days. Inasmuch as I also maintain an active family life and a busy law practice, that output was sometimes challenging to maintain, but the benefits of doing so far outweighed the cost in time expended — I have made dozens of new friends through blogging and gained a far richer understanding of many issues and ideas through the blogospheric discussion of them.


Now, however, the time has come for my blogging season to change. Over the past couple of days, my family and I have had to confront a most difficult crisis in our lives. Please don’t be alarmed — the crisis does not involve my health, which continues to be blessedly excellent. Moreover, I am blessed with a wonderful wife, great children and a loving, supportive family who make dealing with these inevitable occurrences in life much easier and more manageable. My family and I will come through this chapter of our lives just fine. 


But in the end, my time is finite and the two most important customers for that time are my family and my clients. My family needs more of that time now, and my clients don’t deserve any less, so I am gladly cutting down the time I previously used for blogging to accommodate my family. That’s not a tough call.


I won’t be leaving the blogosphere completely, though. I will continue to post on the topics that I have addressed over the past four years when I have the time and note an issue or idea that particularly stimulates my interest. My posts just won’t be as frequent as they have been. Thank you for making this blog such a fulfilling experience for me and please continue to check in on my little corner of the blogosphere sandbox when you have a moment. Hopefully, there will always be room in your life for a little clear thinking.

					

		
		
	


				
					
	

		

						
Landry’s is worth more because of what?

			
						

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Landry's logo 012908Did I read right what Steve Scheinthal, general counsel of Houston-based Landry’s Restaurants, Inc., said in this Chronicle article?:




Landry’s is .   .  . facing a handful of shareholder suits seeking class-action status in the wake of CEO Tilman Fertitta’s bid to take the company private.


Fertitta made an offer on Jan. 27 to buy out the company at $23.50 for each unowned share. The $1.3 billion deal, including debt, is being reviewed by a special committee of the Landry’s board. [.  .  .]


Scheinthal dismissed the shareholder suits as standard in a going-private transaction.


"Absent Mr. Fertitta’s offer, the likelihood is that the company’s stock would be trading well below the current market price," he said.


Landry’s stock closed Friday at $17.73 a share, down 38 cents.




Fertitta’s offer for Landry’s was made without a financing commitment in a tough credit market. Yet, the company’s general counsel is claiming publicly that such a speculative offer is all that is propping up the company’s stock price? 


I wonder what the boys over at Long or Short Capital will think about that?