Bruce Carton has an interesting post on the Securities Litigation Watch blog (here) about the different media views of attorneys in litigation related to WorldCom. Jay Kasner of Skadden Arps was counsel to J.P. Morgan, and has been criticized for his advice to the client in settling the WorldCom securities fraud civil class action case for $630 million more than it could have been settled a year earlier. Reid Weingarten of Steptoe and Johnson, who was lead defense counsel for former WorldCom CEO Bernie Ebbers — who was convicted on all counts — is featured in a Washington Post article that is quite flattering. Paul wonders about the different media perceptions. Of course, Weingarten established his reputation before the Ebbers prosecution by successfully defending former Secretary of Agriculture Mike Espy and former Tyco general counsel Mark Belnick. Still, it is worthwhile to think about the vagaries of media perceptions of the lawyers in high-profile cases. (ph)
Category: WorldCom
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What exactly was Arthur Andersen’s role in the problems of WorldCom? The answer to this question may be forthcoming as civil litigants are proceeding against Andersen for an alleged failure to question issues at WorldCom. According to the Wall Street Journal, "Andersen denies that it failed in its responsibility to audit WorldCom’s books properly from April 1999 through June 2002, and says it was defrauded, along with investors." Looking at this statement in light of the recent conviction of Bernard Ebbers, former CEO of WorldCom, one has to wonder several things: Was the CEO manipulating the accountants? Were the accountants failing to provide information to the CEO of what underlings were doing in the company? Were the accountants failing to provide sufficient transparency to the outside world of what was happening at the company?
The bottom line is that there is a problem somewhere, and someone is going to have to take the blame.
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Eleven former WorldCom board members have reached another settlement with the plaintiffs in the securities fraud class action. The first settlement was virtually identical to this one but U.S. District Judge Denise Cote did not approve it because of objections raised by the investment banks who were also defendants. With the last of those firms (J.P. Morgan here) having reached a settlement, the way is clear for the judge to approve the settlement. The amount of the settlement is small — $55.25 million — compared to the approximately $6 billion paid by the investment bankers. The key though is that while $35 million comes from a D&O insurance policy, the other $20.25 million comes from the pockets of the individual directors. This is one of the few cases in which individual directors who did not gain personally from the alleged fraud (aside from their fees) will contribute to the settlement from their personal assets. This portion of the WorldCom settlements has sent a powerful message to corporate board members about their responsibilities, and the risks of ignoring the operation of the company or passively accepting information provided by management.
The remaining defendants in the case are former WorldCom board chairman Bert Roberts and former company accountant Arthur Andersen. Any finding of liability against Andersen will trigger an interesting process of trying to collect from insurers and perhaps from the worldwide Andersen organization that was separate from the U.S. entity that was convicted of obstruction of justice and ceased to exist in 2003. See the AP store here about the settlement. (ph)
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This morning’s Wall Street Journal has a wonderful article describing the commentary by the jury on the trial and the deliberation. According to the article it did not come down to Sullivan versus Ebbers, but rather the paper in the trial – – that is the documents. This may actually make it a more interesting appeal. If it had been the credibility of the witness, then the favor would go to the winning party – the government. In the case of admission of documents and instructions to the jury, the court will be looking at the legal issues. This is definitely an appeal to watch. See more here on the issues to consider on appeal.
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The last of the bond underwriters, J.P. Morgan, threw in the towel the day before jury selection was to start in the WorldCom securities fraud class action by agreeing to pay $2 billion. That brings the tally to approximately $6 billion paid by a slew of investment banks that brought WorldCom bonds and stock to the market while the company engaged in a massive accounting fraud that led to the conviction on Tuesday of former CEO Bernie Ebbers. The last defendants left standing are former WorldCom auditor Arthur Andersen — which is not exactly standing tall these days but may have insurance policies out there to cover some of the claims — and 12 former directors of the company whose earlier settlement was rejected by U.S. District Judge Denise Cote. The directors will likely take another shot at settling, which likely will include personal payments from each and not just amounts covered by D&O insurance. A New York Times article (here) discusses the settlement. (ph)
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Bernie Ebbers offered the "honest-but-ignorant CEO" defense, and the jury rejected it. Ken Lay, former CEO of Enron, has advanced a similar position, asserting his innocence because he did not know about the complex financial chicanery at the company (check his personal website at www.kenlayinfo.com). An interesting post at TalkLeft (here) notes that while the key witnesses in both cases are former CFOs (Scott Sullivan of Worldcom and Andy Fastow of Enron) who have agreed to cooperate with the government in exchange for lower sentences, Fastow may have more credibility problems. Part of Fastow’s deal included delaying his ten-year sentence until his wife could complete her sentence for a tax violation related to Enron, giving him a powerful incentive to seek the best deal for himself by incriminating others. Of course, a ten-year sentence is substantial, and may bolster the government’s contention that Fastow is truthful because he did not receive a "sweetheart" deal.
Lay’s "honest-but-ignorant CEO" defense may be stronger than Ebbers’ because Lay was less of a hands-on manager, unlike the Ebbers portrayed to the jury as a micromanager who had tap water put into the company’s water coolers to save money. If nothing else, Lay went first-cabin at Enron, and the company did not scrimp on perks. Lay has a more significant problem, however, arising from his stock sales, including a number of transactions during 2001 — as the company was collapsing — in which he sold shares back to Enron to repay a $77 million line of credit from the company. The SEC’s civil complaint (here) summarizes the transactions:
From January 25, 2001 to November 27, 2001, Lay took advances on his line of credit in the total amount of $77,525,000. Thereafter, despite having other assets at his disposal, Lay repaid balances on the line of credit by selling $70,104,762 worth of Enron stock to the company twenty times, at prices he knew did not reflect accurately Enron’s true financial condition. For example, after learning of Enron’s undisclosed plan to hide over $500 million in EES losses in ENA, Lay sold 1,086,571 shares of Enron common stock back to the company, in 11 transactions, for a total of $34,081,558. Following Skilling’s resignation on August 14, 2001, at a point when Lay was learning more about Enron’s deteriorating financial condition, Lay sold 918,104 shares of Enron common stock back to the company, in five transactions, totaling $26,066,474. As Lay learned more negative information following Enron’s third quarter earnings release on October 16, 2001, Lay sold 362,051 shares of Enron stock back to the company, in four transactions, totaling $6,050,232.
While Ebbers never sold his stock, Lay engaged in a number of transactions in Enron shares that were not publicly disclosed until after it filed for bankruptcy. The focus of the government case is likely to be on the period from Aug. 14, 2001, when Jeff Skilling resigned as CEO and Lay assumed that position again, until the company’s collapse in November 2001. Rather than link Lay to the accounting, which is far more complex than the fraud at WorldCom and more susceptible to a claim of ignorance, the government will use Lay’s knowledge of the company’s burgeoning problems during the last few months and his stock transactions to overcome a claim of ignorance. On these issues there is more of a paper trail, including a number of public statements and private meetings which Lay attended. Fastow remains a key witness, but perhaps more for Skilling and Richard Causey, Enron’s former chief accounting officer, than for Lay. (ph)
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One of the first questions asked of Reid Weingarten after he left the courthouse was whether having Bernie Ebbers testify was a mistake. Weingarten responded, in effect, that he thought it was a good decision then and, if given a second chance, would make the same decision. The question about whether a client should testify is always very difficult, and no doubt the second-guessing of Weingarten will focus on that decision because Ebbers’ testimony was, no doubt, crucial to the jury’s decision. Weingarten may have boxed himself in when he described former CFO Scott Sullivan in the opening statement as "the most impeachable witness ever to hit a witness stand" (no hyperbole there). Conceding that the fraud took place and placing the blame squarely on Sullivan turned the case into a credibility battle. Once Sullivan did a decent job testifying, it was almost impossible for Ebbers to avoid testifying. Unlike cases in which the focus is more on the quality (and quantity) of the government’s proof and the inferences that can be drawn from that proof — e.g. the prosecution of Martha Stewart and Peter Bacanovic — here the question was purely one of intent/knowledge based on witness credibility. Whether there are any lessons to be drawn in the next "honest-but-ignorant" CEO case — Ken Lay — remains to be seen. The defense there may want to avoid making the credibility of one witness, such as Andrew Fastow, the key to the trial. (ph)
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After deliberating over eight days, the jury found Bernie Ebbers guilty on all counts this afternoon. Ebbers was charged with conspiracy, securities fraud, and seven counts of false filings with the SEC. Judge Barbara Jones set sentencing for June 13. Because everyone looks ahead to the next step, two things that will be discussed are grounds for an appeal and the potential sentence. One issue that is likely to be raised is the presence of the supplemental counts that the judge did not strike from the indictment after the Booker decision made those factual issues that relate to sentencing irrelevant for jury consideration (see earlier post here). The defense moved for a mistrial when the jury asked the court whether they had to agree unanimously on those and the judge said they need not be considered. That type of information in an indictment will be argued to have been prejudicial, and there’s no question the jury considered the allegations. Another issue mentioned in the press accounts concerned the government’s refusal to grant immunity to witnesses the defense wanted to call, including WorldCom’s former president, who indicated he would assert his Fifth Amendment privilege if he did not receive immunity. Claims of this type are very difficult to win, but the defense will likely argue that, combined with other evidentiary errors, the judge’s rulings were prejudicial.
For sentencing, Booker has thrown a shroud of uncertainty around the sentence. The Guidelines range will likely be quite significant because of the amount of loss caused by the fraud, and adding in possible enhancements for leadership role and obstruction of justice (if the Judge determines Ebbers was untruthful in his testimony) will would make for an even longer term of imprisonment if the Guidelines are applied strictly. Whether (and how closely) the Judge follows the Guidelines, and whether she can be persuaded to give a downward departure if she does, can’t be predicted at this point. In an earlier high profile case involving an extortion of Bill Cosby by his daughter Autumn Jackson (her conviction was ultimately reversed), Judge Jones sentenced Jackson to 26 months while the Guidelines range was 57-71 months. (See article here). An AP story here discusses the jury’s verdict. (ph)
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As the jury in the Bernie Ebbers prosecution spends more time deliberating, the possibility of a deadlock certainly increases. If the jury indicates that it cannot reach a unanimous agreement on one or more charges, the court may give an Allen charge — also known as a dynamite charge — to break the deadlock. A decision by the D.C. Circuit on March 10 (U.S. v. Yarborough) reverses a conviction because the trial judge gave an improper Allen charge (in a gun possession case). This is yet another area fraught with danger on appeal if there were to be a conviction after such a charge. (ph)
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Add three more deep-pocketed underwriters to the list (see earlier post here) who have settled WorldCom bond investor claims that they failed to conduct adequate due diligence about the company. Deutsche Bank will be paying the largest amount in this group — $325 million — while West LB settles for $75 million and Caboto for $37.5. The brings the total settlements to approximately $4 billion (check the Securities Litigation Watch blog here for its scorecard), with one big fish out there waiting for the trial scheduled to begin March 17: J.P. Morgan. As discussed in a Wall Street Journal article (here), Morgan used Bernie Ebbers in a video touting the Morgan-Chase merger in 2001, with Ebbers saying (to the jury, I might note): "J.P. Morgan Chase is really like MCI WorldCom . . ." How’s that for a ringing endorsement of a defendant accused of failing to adequately review financials of a favored client. Morgan turned down an offer last year to settle the case for approximately $1.3 billion, and that number will likely climb higher as the pool of potential defendants with those deep pockets shrinks. I sure feel good about being a Morgan shareholder.
On the Ebbers trial front, the jury watch has now surpassed watching paint dry for the level of boredom induced. If the jury does not reach a verdict today, the sixth day of deliberations, the question of deadlock (and the dreaded Allen charge) arises. (ph)
MattBray.net 