This Chronicle article reports on the pre-trial conference yeseterday in the Enron-related criminal case commonly known as the “Nigerian Barge case,” which appears to be the first Enron-related criminal case that will actually go to trial.
As noted in previous posts here and here, the Justice Department in general, and the Enron Task Force in particular, have adopted a sledgehammer policy in white collar criminal cases against business executives — that is, Justice alleges a myriad of counts against the business executive so that the executive is confronted with a draconian choice: either what amounts to a life prison sentence if the executive dares to defend the charges at trial or a plea bargain calling for a shorter prison sentence of between one (Lea Fastow) and ten (Andrew Fastow) years.
For the government’s standpoint, the strategy has worked well in regard to the Enron criminal investigation. In the two and a half years since Enron crumbled into bankruptcy, the Task Force has obtained plea bargains from over a dozen former Enron executives and has not had to conduct a trial against any former Enron executive to date. In fact, the only Enron-related criminal trial that has taken place was the case against Enron’s auditor, Arthur Andersen, in early 2002. That trial resulted in a controversial conviction of Andersen, which is currently the subject of an appeal before the Fifth Circuit Court of Appeals in New Orleans.
However, the Nigerian Barge case is a different animal, and it does not look like this case is likely to be resolved through a plea bargain. The case is particularly interesting because it involves the government’s attempt to convict former Enron and Merrill Lynch executives for participating in a commercial transaction of the type that is common throughout the business world.
In essence, the Task Force’s indictment against the Merrill executives contends that the entire Nigerian Barge deal was a sham because Merrill Lynch would not have bought from Enron an interest in the barges docked off the coast of Nigeria but for former Enron CFO Fastow’s oral assurance that Enron would broker a sale of the barges at a tidy profit for Merrill Lynch the following year. Fastow did indeed broker a sale of Merrill’s interest in the barges the following year to one of his infamous “off-balance sheet partnerships” that ultimately hid a total of roughly $40 billion of Enron debt.
According to the government’s theory of the case, if Fastow’s oral assurance to Merrill Lynch was binding on Enron, then the sale of the barges was not a true arm’s length sale and, thus, Enron’s accounting for the transaction as a true sale was fraudulent. Accordingly, the government reasons that it is irrelevant that the subsequent written agreements between Enron and Merrill Lynch contained a provision that made Fastow’s oral assurance unenforceable. The contract was false and a part of the sham because Merrill Lynch would not have done the deal but for Fastow’s oral assurance.
Other than Mr. Fastow’s probable testimony of dubious credibility (he is cooperating with the government under his plea bargain), the government’s primary evidence of the alleged sham nature of the deal appears to be the “nervousness” that Merrill executives openly expressed about the deal in emails both before and after Merrill consummated the transaction. The government interprets that nervousness as evidence that the Merrill executives knew that the deal was a sham and that they could be caught participating in a fraud with Enron.
However, there is a more reasonable interpretation of Merrill’s nervousness regarding the deal — that is, they really were nervous about the business risk of the deal, not because they thought it was a sham and a fraud, but because they knew that they could not rely on Fastow’s unenforceable oral assurance that Enron would broker a sale of the barges the following year. Accordingly, their nervousness was that they might be making a bad investment that would result in having to hold the barges for a long term rather than short term they preferred. Stated another way, the Merrill executives were nervous because they knew that this was a real deal in which the deal documents controlled the rights of the parties, and that Fastow’s oral assurances to get them out of the investment could not be enforced if Enron failed to live up to them.
But for the current highly adverse environment for any Enron-related defendant, my sense is that the prospects for a successful government prosecution in this particular case would be low. Even with the current anti-Enron bias in the community, this is going to be a tough case for the government. For example, during the pre-trial hearing yesterday, U.S. District Judge Ewing Werlein — a former civil trial attorney and a scrupulously fair judge — was clearly troubled by the government’s failure to turn over to the defense potentially exculpatory evidence that the government has in its possession. At another point in the hearing, Judge Werlein was openly skeptical of the government’s theory that it should be allowed — without providing pre-trial expert reports to the defense — to elicit expert opinions at trial from three proposed former Arthur Andersen auditors who the government has named as fact witnesses in the case.
Moreover, inasmuch as there are six defendants in this case, the defense team is formidable. Dan Cogdell and Tom Hagemann — two members of Houston’s excellent criminal defense bar that was the subject of a previous post here — were outstanding yesterday during the pre-trial hearing, as were New York’s Daniel Horwitz and Lawrence Zweifach. The prosecution team that assistant U.S. attorney Matthew W. Friedrich is leading will have its hands full at trial with this group of defense attorneys.
Jury selection in the Nigerian Barge case begins on June 7, and the trial will probably last about 4-6 weeks. Stayed tuned to developments in this one. A successful defense in this case could go a long ways toward leveling the one-sided playing field in favor of the Enron Task Force that has existed to date in regard to the handling of the Enron-related criminal prosecutions.