In another stunning loss for federal prosecutors in the post-Enron prosecutions of persons involved in the energy trading industry, a federal jury in Houston federal court yesterday acquitted former Duke Energy trader Todd Reid on all counts of conspiracy, fraud and falsifying books, and acquitted co-defendant Timothy Kramer on seven counts of wire fraud, mail fraud, and circumventing Duke Energy internal controls in connection with the award of $9 million in trader bonuses during 2001. Earlier posts on the case are here, here and here.
As of mid-afternoon yesterday, the jury reported to U.S. District Judge Nancy Atlas that they were deadlocked on 15 remaining counts against Kramer. Judge Atlas instructed the jury to continue deliberating and then informed the attorneys involved in the case that she would declare a mistrial if the jury could not agree on a verdict on the remaining counts against Kramer by the end of the day. Later that afternoon, the jurors sent the Judge a note informing her that they had acquitted Kramer on three more counts and that they wanted to return tomorrow to attempt to resolve the remaining 12 counts (a personal matter of one juror prevents the jury from deliberating today). Judge Atlas agreed to allow the jury to do so.

As noted in the previous posts on this case, this was one of the first criminal trials in which executives have been accused of devising schemes to generate profits in a trading book by using “mark-to-market” accounting in calculating bonuses, on one hand, and entering losses in an “accrual book” that had no bearing on bonuses, on the other. Duke Energy, Enron Corp. and many other energy traders previously used mark-to-market accounting to record profit and loss for energy contracts that might not settle for years into the future. However, the mark-to-market accounting method has come under intense scrutiny since the demise of Enron in late 2001 because of the wide latitude that the method allows in recording profitable results in trading operations.
The government essentially accused Kramer and Reid of cheating their employer, which was a subsidiary of Duke Energy. Prosecutors alleged that Kramer and Reid entered profitable trades in one book called the “mark-to-market book,” which allowed the market value of the contract to be recognized as earnings when the contract was originated. On the other hand, the prosecutors contended that unprofitable trades went into what was called “the accrual book,” which contained transactions in which the realization of revenue was delayed until the product involved in the trade was actually delivered. The prosecution argued that the the effect of the dual booking of trades was to make the men appear more successful than they really were because only the mark-to-market book was used in computing bonuses. The defense essentially argued that the dual booking of trades was accepted company policy, that the defendants had no criminal intent and that any errors in the booking of trades were simply honest mistakes.