Wednesday, December 6, 2006

Pulling the Plug on Honest Services Fraud for the NatWest Three

Federal prosecutors filed a motion to strike language alleging honest services fraud from the indictment of three former British investment bankers, known as the NatWest Three, who were involved in a transaction with Enron back in 2000.  The indictment contains seven wire fraud count, and each alleges both a money/property fraud and a violation of Sec. 1346, the right of honest services provision.  The prosecution arises out of a transaction in which the three bankers, David Bermingham, Giles Darby, and Gary Mulgrew, convinced their employer, Greenwich NatWest, to sell a special purpose entity created by Enron for $1 million, which was then resold at a much higher price, netting the three over $7 million. 

In August 2006, in United States v. Brown, the Fifth Circuit overturned the fraud convictions of four defendants in the Enron Nigerian Barge trial on the ground that they did not violate the honest services fraud provision because they believed they were acting in the best interests of Enron in engaging in questionable transactions to bolster the company's balance sheet.  The NatWest Three indictment contains the same language at issue in Brown, so prosecutors are moving to cut-off a defense motion to dismiss by seeking to have the honest services language stricken from the indictment.  If granted by the court, the case will be strictly a money/property fraud case, which I suspect will be more difficult for the government.  In a money/property fraud case, the prosecutors will have to prove that the defendants intended to defraud their employer of the funds, which opens up an argument that the transaction did not deprive NatWest of anything that it otherwise would have received in the transaction, so there was no loss.  The advantage of a right of honest services theory is that the loss need not be monetary. 

The government's motion stresses that the change in the indictment will not affect the evidence that can be introduced at trial.

[B]y seeking to remove the honest services language of the indictment, the United States is in no way waiving its right to present evidence relevant to the deprivation of property allegations in the indictment, including, but not limited to, “policies, compliance procedures, ethical standards, and conflict of interest rules restricting employees’ use of confidential corporate information and mandating that employees avoid conflicts between their personal interests and the interests of NatWest or GNW and its clients.” Indictment ¶ 2. Such evidence is probative of defendants’ state of mind as it relates to the allegations of deprivation of money and property contained in the indictment.

The defendants are likely to dispute that argument, saying that the issue now is only whether the intended to defraud NatWest of its ownership interest through a low-ball transaction.  Whether there was a conflict of interest is arguably irrelevant.  (ph)

Download natwest_three_right_of_honest_services_motion.pdf

http://lawprofessors.typepad.com/whitecollarcrime_blog/2006/12/pulling_the_plu.html

Enron, Fraud, Prosecutions | Permalink

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