Citigroup is heading into Everett Dirksen territory with its settlements in securities fraud actions. It paid $2.58 billion to settle with WorldCom investors, and now it has agreed to pay $2 billion to Enron investors to settle claims related to the company’s work on behalf of the now-bankrupt energy giant. Among the investment banks that remain in the lawsuit is J.P. Morgan Chase, which resisted settling the WorldCom class action and ended up paying $600 million more than had been offered earlier by the plaintiffs class to settle. With the $2 billion paid in the WorldCom case coming on top of the recent $1.45 billion awarded to Ron Perlman related to J.P. Morgan’s work on behalf of Sunbeam, this may be an expensive year for its investment banking unit. Thank goodness I still own shares in the company (by way of one of the many mergers that brought it to its current state). An AP story here discusses the Enron settlement (here). (ph)
Category: Enron
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Lea Fastow, wife of former Enron finance exec Andrew Fastow, was released from prison early this a.m. and moved to a halfway house for the remaining one month of her sentence. For details see AP story here.
According to the AP story she was released at 4:00 A.M. and had to report at 4:15 A.M. to a halfway house several blocks away in Houston. One has to wonder whether this timing was at the request of her counsel to avoid publicity, or was standard procedure. If it was standard procedure then it needs to be examined, especially for women who might not have family or friends to meet them upon release. Check out Myrna Raeder’s wonderful article in the Spring 2005 issue of Criminal Justice Magazine titled, "A Primer on Gender Related Issues of Women Offenders" for a discussion on some of the issues faced by women offenders.
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The British Home Secretary, Charles Clarke, approved the extradition of David Bermingham, Gary Mulgrew and Giles Darby to the United States to face wire fraud charges in Houston related to transactions with an Enron-related SPE organized by Andy Fastow and Michael Kopper. The three were officers of Greenwich NatWest, a division of NatWest Bank, which is now owned by Royal Bank of Scotland (RBS). According to the indictment (here), when it became clear that NatWest would be acquired by RBS, which would put their jobs at risk, the three defendants hatched a scheme with Fastow and Kopper to take for themselves Greenwich NatWest’s investment in a Cayman Islands company (LJM) that was used by Enron for off-books transactions. The three defendants are charged with seven counts of wire fraud in relation to the scheme, and it is alleged they received a total of approximately $7.3 million from the transaction. The defendants had sought to be tried in Britain because their actions took place there and the victim of the alleged fraud is a British company. They can appeal Home Secretary Clarke’s decision, which would likely slow the extradition process further. The Times story (here) discusses the extradition decision, and check Tom Kirkendall’s Houston’s Clear Thinker blog (here) for information about the prosecution (including pictures of the three defendants). (ph)
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While the field of white collar crime is (sometimes) considered interesting, and perhaps even "sexy," the trials themselves can be quite laborious, as some of the recent well-known prosecutions have shown that the proceedings can drag on over months. Tom Kirkendall has a terrific post (here) on his Houston’s Clear Thinkers blog about the Enron Broadband Services trial in which the government now estimates that its case-in-chief will take an additional 7-10 days, much to the chagrin of the jurors already laboring through a tedious proceeding. The trials in the HealthSouth (Scrushy) and Tyco (Kozlowski and Schwartz) cases both began in late January and are only now heading for the jury. For the Tyco case being prosecuted by the Manhattan DA, this is a significant improvement over the first trial, in which the prosecution case lasted for 18 weeks while this time it only took 13 weeks. Last year, the prosecution of former senior executives of Cendant lasted for five months, and the jury deliberations went on for over a month. The jury could not reach a verdict on one defendant in that case, former chairman Walter Forbes, and his retrial is scheduled to begin in September. White collar cases are rarely simple affairs, and usually involve a number of documents and a stream of transactions that need to be placed in a larger context. Yet, prosecutors sometimes become enamored with the details of a case, especially when they know the evidence so well that everything seems important, and interesting. Will these drawn out trials have a negative effect on the jury’s view of the government’s case? (ph)
UPDATE (5/18): Larry Ribstein has an interesting take on the travails of the Enron Broadband Services jury here.
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The three remaining defendants in the Enron Nigerian Barge prosecution were sentenced today by U.S. District Judge Ewing Werlein. Former Merrill Lynch bankers Robert Furst and William Fuhs each received 37 month terms of imprisonment, which is in the range of sentences given the first two Merrill defendants sentenced, Daniel Bayly and James Brown, who received 30 and 46 months respectively. The sentencing recommendation in the Presentence Report prepared by the U.S. Probation Office was 15 years for Furst, based on the jury’s loss calculation. The judge also said he would ask the Bureau of Prisons to postpone the beginning of Furst’s sentence until after his 20th wedding anniversary on June 29. Former Enron executive Dan Boyle received a 46 month term, the same sentence as Brown. The judge denied requests by all the defendants to remain free pending appeal. A story in the Houston Chronicle (here) discusses the sentencings.
Tom Kirkendall has an interesting post (here) on his Houston’s Clear Thinkers blog about Bayly’s appeal of the bail denial that foreshadows the arguments he (and the other defendants no doubt) will make in the full appeal of the conviction. The post contains a link to the brief. Tom writes:
The brief previews Mr. Bayly’s arguments on appeal, which are focused on the paucity of direct evidence linking Mr. Bayly to the transaction, the hearsay nature of the evidence that did, and the refusal of Judge Werlein to instruct the jury on a key defense theory. That key defense theory is that an Enron promise to Merrill Lynch to arrange a sale of the barges within six months to a third party — as opposed to an Enron promise to repurchase the barges within that time frame — did not undermine Enron’s accounting of the transaction and did not constitute the basis of a crime. Inasmuch as Enron ultimately arranged for such a sale to a third party as opposed to buying back the barges from Merrill itself, the lack of a jury instruction on that issue appears to be a solid basis for Mr. Bayly’s appeal.
It will be interesting to see if the Fifth Circuit is receptive to these arguments, and possibly previews the strength of them by granting bail pending the appeal. Recall that the court rejected the arguments of Arthur Andersen in the first of the Enron-related prosecutions, a position that does not appear to be favored by the Supreme Court. With the passage of time and a transaction that is overshadowed by the much larger pending conspiracy prosecution of former Enron CEOs Ken Law and Jeff Skilling, the circuit court may be a bit less favorable to the government in its review of this phase of the Enron prosecutions. (ph)
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Lest we forget about the various Enron proceedings that are taking place, here’s a short update:
Enron Broadband Services Trial: A funny article in the Houston Chronicle (here) expresses the frustration of the reporter, and probably the jurors, as the trial descends into tech-speak — but then, the case is about whether the various statements by the five defendants were misleading about the state of Enron’s broadband services. The current witness is a tech specialist, with both the direct and cross-examinations getting into the knotty details of the software. Imagine having someone from a tech helpdesk testifying. It has gotten so bad that one lawyer compared the case to a "civil trial," truly damning words. The bad news for participants is that the case is likely to last at least another four weeks.
Merrill Continues to Pay Attorney’s Fees for Convicted Employees: The Enron Nigerian Barge trial resulted in the conviction of four Merrill Lynch employees, and the two remaining Merrill defendants are scheduled to be sentenced tomorrow by U.S. District Judge Ewing Werlein. A Wall Street Journal article (here) states that the firm (still affectionately known as "Mother Merrill" to some) will continue to pay the attorney’s fees of the employees through their appeals. To this point, Merrill has paid over $17 million to the lawyers, and the government apparently is now complaining in a letter to the district court about the continued payment of the fees and the firm’s failure to seek repayment. The duty to pay attorney’s fees on behalf of an employee for conduct in the course of employment is governed by whatever contract they might have, and corporate law authorizes such agreements. Merrill is a Delaware corporation, and Delaware General Corporation Law Section 145 (here) permits such payments in a criminal prosecution so long as the officer or director "had no reasonable cause to believe the person’s conduct was unlawful." Whether the officer’s can have their attorney’s fees paid (Delaware law authorizes advancement of expenses) is up to the board of directors, which must decide whether the employees were acting in good faith. Although the Department of Justice views the payment of attorney’s fees as somehow suspicious (see the Criminal Division’s Principles of Federal Prosecution of Business Organizations (here) on this issue), I don’t think the government has any basis to question a business judgment made by a corporation about its obligation to pay the attorney’s fees of its officers and directors. Shareholders can certainly object to how their company uses its funds, but that is a matter of internal corporate governance and not an issue in a criminal prosecution.
Sentencing Dates for Cooperating Former Enron Execs Postponed: Not surprisingly, the sentencing dates of four former Enron executives who reached plea agreements with the government have been pushed back. Among the four are former CFO Andrew Fastow and his top aide Michael Kopper, who will be key witnesses in the 2006 conspiracy trial of former CEOs Ken Lay and Jeff Skilling (along with former chief accounting officer Richard Causey). Their sentencing has been set for June 2006, which will probably be after the trial if finished — at least I hope it’s done within five months. A Houston Chronicle article (here) discusses the sentencing postponements. (ph)
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As detailed in Tom Kirkendall’s Houston’s Clear Thinkers Blog (which is always an interesting read, especially on Enron developments), the Enron Broadband Services trial (see earlier post here) took a decidedly odd, and potentially devastating, turn when the prosecution’s key witness started to backtrack about what was said at an analysts presentation in 2000. An important piece of the government’s case involves a videotape of the presentation, in which the allegedly false statements were made by some of the defendants. The government witness is Ken Rice, former co-CEO of Enron Broadband Services who entered a guilty plea and it testifying for the government. Tom writes(here):
At any rate, the defense’s raw footage video came into evidence this morning, and the defense showed the raw footage video side-by-side to the prosecution’s video from which Mr. Rice had previously testified during direct examination. It turns out that the prosecution video of the analysts’ conference is different in material respects from the raw footage video and that the prosecution’s video — contrary to Mr. Rice’s testimony on direct — contained footage of Mr. Shelby making statements that was not shown to the analysts at the conference.
Well, as you might expect, Mr. Rice is in full retreat today as Mr. Canales and other defense attorneys hammer him on why he previously testified that Mr. Shelby had made statements at the analysts’ conference that he actually did not make.
Given that the government provided the raw video footage to the defense, it’s hard to figure out quite how it got caught so flat footed. (ph)
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Flying largely under the radar, the Enron Broadband Services trial has been going on since mid-April, and the government’s key witness, former Broadband Services co-CEO Ken Rice, is now being cross-examined. Rice and former Broadband Services Chief Operating Officer Kevin Hannon entered guilty pleas to one count of securities fraud and are cooperating in the prosecution of five former Broadband Services officers — including Rice’s former co-CEO Joe Hirko — for securities fraud, wire fraud, conspiracy, and money laundering. The allegations center around statements about the technology behind the Broadband Services division and its ability to create a market buying and selling broadband access, which was Enron’s attempt to take advantage of the internet bubble that burst shortly before the company itself collapsed.
Similar to the other trials of corporate executives for accounting and securities fraud, the government’s case relies on the testimony of former executives who have agreed to cooperate in exchange for lighter sentences. Among the cooperating executives have been former WorldCom CFO Scott Sullivan and the Five Guilty CFOs from HealthSouth, and next year’s Enron conspiracy trial of former CEOs Ken Lay and Jeff Skilling will feature former CFO Andrew Fastow, who is sure to be portrayed as the architect of Enron’s downfall. Skilling even made a brief appearance in the courtroom the day Rice, an old friend, began his testimony. Skilling was asked to leave because he is on one of the defendants’ witness list, although I suspect he would assert his Fifth Amendment privilege if called to testify — why give the prosecutors even a brief free preview of his testimony.
Rice testified against his fellow executives for four days, and has been cross-examined for two more, with more to come this week. On Friday, when asked if he would lie to the jury to help get a shorter sentence, Rice responded, "I wouldn’t lie in this proceeding because it could result in going to prison for life if I did." Rice also conceded that many statements made by the Broadband Services division were truthful, supporting the defense that no material misstatements were made. The Houston Chronicle has continuing coverage of the trial here, including links to all the Enron indictments, plea agreements, plea agreement scorecards, etc. (here) (ph)
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U.S. District Judge Sim Lake rejected the government’s request to begin the trial of Ken Lay on the severed bank fraud charges within the next two months. Judge Lake accepted the defense argument that an earlier trial — and conviction — would have a prejudicial effect on the jury pool because of the intense publicity it would engender. The two sides also agreed that the charges will be decided by the judge and not a jury, so the court will begin the bank fraud case as soon as the jury retires in the larger conspiracy case that also includes former Enron CEO Jeff Skilling and former Chief Accounting Officer Richard Causey. This is an interesting arrangement that essentially piggybacks the evidence (to the extent it may be relevant) from the conspiracy trial on to the bank fraud/false statement to a financial institution case, which involves Lay’s uses of funds from loans to purchase additional Enron stock. For Lay, the timing of the separate trial means that he will have greater freedom to decide whether to testify in the conspiracy prosecution without the specter of a prior conviction hanging over his head if the earlier trial had gone against him. A Houston Chronicle story (here) discusses the judge’s ruling. (ph)
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Two Merrill Lynch executives, Daniel Bayly and James Brown, were sentenced for their roles in the Enron Nigerian barge trial in which Enron agreed to sell the barges to Merrill and then repurchase them later, essentially a financing deal rather than a true sale, in order to inflate Enron’s earnings for at the end of the year. This was the first of the Enron-related trials, and the jury determined the loss caused by the transaction was $13.7 million — a procedure adopted by some federal courts before the Supreme Court’s decision in Booker made such jury fact-finding unnecessary.
U.S. District Judge Ewing Werlein sentenced Bayly to 30 months imprisonment, below the Sentencing Guidelines range even after the judge determined the loss caused by the fraud was $1.4 million, based on Merrill’s gain on the transaction. The Pre-Sentence Report recommended a 14 year prison term, based on the larger jury-based loss and other sentencing enhancements. Brown received a 46-month prison term. In addition to the conspiracy/wire fraud charges, Brown was also convicted of perjury and obstruction, and the jury determined he played a leadership role in the offense. (See Bloomberg story here)
In sentencing Bayly, Judge Werlein stated how impressed he was by the defendant’s reputation: "I may have never had a defendant before me who had a more glowing and extraordinary record of being a good citizen . . . The ignominy of a conviction and sentence by one who commits a crime of this type is quite different than one that could be tolerated by people who committed (other types of offenses)."
Sentencing Law & Policy has an interesting post (here) continuing an earlier discussion about whether Booker will result in lighter sentences in white collar crime cases. In an earlier post (here), I discussed whether judges will favor white collar defendants who are more like themselves, with long-term charitable and family ties in the community. Two items in Judge Werlein’s sentence are of interest, based on the Houston Chronicle story (here) discussing the sentence: the judge noted Bayly’s "boy scout" reputation and opined that white collar defendants cannot tolerate long prison terms and are sufficiently deterred by shorter sentences.
"Boy scout" reputations are certainly not unknown among white collar offenders, and are more likely to be the norm. The collateral consequences of a prison term, including loss of livelihood, reputation in the community, licenses, etc. are exacerbated when the person has so much more to lose than the typical defendant in a street crime case, even the ones that come up in federal court involving drugs and weapons. Are these sufficient to justify lower sentences, so that a "reasonable" sentence in a white collar crime case will be less than that for a person who is a felon in possession or is a lower-level drug dealer in a large narcotics organization? Unfortunately, the message from a sentencing like Bayly’s to Congress may be that judges will gradually move toward consistently lower sentences for white collar defendants who have the ability (and means) to present themselves in the best possible light to a judge who is naturally sympathetic to someone similar to himself or herself. The congressional overreaction is H.R. 1528, which would prohibit as least some of the grounds cited by Judge Werlein as the basis for a downward departure from the Guidelines (leaving aside the loss calculation).
That said, 30 months is not a short sentence, and Bayly could be barred from the securities industry by the SEC for his role in the barge transaction. This is a substantial punishment. (ph)
UPDATE (4/21): A USA Today story (here) gives some additional details about the sentencing of James Brown that were not available when I posted earlier. The PSR recommended a 33 year prison term, and even with the judge’s lower fraud loss calculation the sentence certainly looks like a downward departure. An additional basis identified by Judge Werlein for giving Bayly and Brown lower sentences was his comparison with the sentence Andrew Fastow is expected to get for his cooperation, which is capped at ten years. Whether that is a fair basis for comparison is a different matter. Fastow cooperated while Bayly and Brown (among others) did not, although I have not always found that to be entirely persuasive.
One statement by Brown did catch my eye. He said at the sentencing: "Since I was indicted, I have been branded a liar and a criminal; I could no longer make a living in my chosen profession." Regarding the first part, being convicted of perjury, obstruction of justice and wire fraud tends to have that effect on a person. That he can no longer pursue his chosen profession is true of most people convicted of crimes, particularly professionals. I have a hard time seeing how either of those circumstances should affect a sentence, and I doubt that they did. (ph)
UPDATE (4/22): For an interesting discussion of Bayly’s sentencing hearing by Tom Kirkendall, an attorney who was present, check his blog Houston’s Clear Thinkers here.
MattBray.net 