Saturday, January 6, 2007
The convictions of former Westar executives David Wittig and Douglas Lake were overturned by the Tenth Circuit in what can only be described as a stinging rebuke to the government's theory that they committed fraud. The opinion in United States v. Lake (here) states that the alleged "far-reaching scheme to milk the company for all they could through a pattern of fraud and deceit . . . hung by a thin legal thread." The Tenth Circuit summarized the weakness of the government's central wire fraud counts that were based on the transmission of false information to the SEC:
Despite the scope of the alleged fraudulent scheme, all the counts of the indictment depended on proving the efforts of the defendants to conceal from the United States Securities and Exchange Commission (SEC) their personal use of corporate aircraft. The attempt to prove concealment was flawed, however, because the government produced no evidence that the defendants failed to comply with SEC regulations governing the reporting of such personal use and the jury was never instructed regarding the SEC’s reporting requirements.
The government alleged that the reports were deceptive because they failed to disclose the great value to the defendants (about $1 million each) of their personal use of corporate aircraft. But SEC regulations require reporting only the additional cost to the corporation incurred as a result of the corporate officer’s personal travel, and then only if the total additional cost exceeds a certain threshold per year for the officer. The government offered no evidence that the additional cost to Westar of either defendant’s personal travel ever exceeded this threshold; indeed, it offered no evidence of the additional cost to Westar for any of the personal trips. Therefore, the jury could not possibly determine that the reports, which disclosed no personal travel by the defendants, were false.
The Tenth Circuit reversed money laundering charges based on the wire fraud, and also reversed convictions for conspiracy and circumventing the SEC's internal control provisions because of a faulty jury instruction. Most importantly for Wittig and Lake, the court's conclusion that the government did not introduce sufficient evidence to prove the wire fraud counts means that those charges cannot be retried under the Double Jeopardy Clause because the reversal, if it stands, means that the defendants should have been found not guilty by the jury, a decision that bars any future proceedings. The conspiracy and circumvention charges, however, can be retried if the government so chooses, although the loss of the wire fraud counts might make it more difficult to win a retrial because prosecutors may not be able to allege the circumvention was part of a broader fraudulent scheme. The appellate court did reject the defendants' request to reassign the case to another district court judge if there is a retrial because of alleged bias.
Although overshadowed by the Enron and WorldCom prosecutions that took place around the same time, the trials of Wittig and Lake -- the first proceeding ended in a mistrial -- had all the hallmarks of the use of criminal rather than civil charges against corporate executives for their alleged excesses and abuse of office. In many ways, the Westar prosecution was similar to the New York state prosecution of former Tyco CEO Dennis Kozlowski and CFO Mark Swartz, charged with taking stealing company funds for not properly disclosing their inflated pay. Wittig and Lake received eighteen- and fifteen-year sentences, respectively, and Wittig had begun serving his sentence, but presumably will be released while the government decides what to do next in the case.
Needless to say, the Tenth Circuit's decision is likely to be featured prominently in the appellate brief of former Enron CEO Jeffrey Skilling, who is gearing up for his appeal. As the reversals pile up in high-profile corporate cases (Andersen, Quattrone, Enron Nigerian Barge), will the government reassess its approach to pursuing CEOs and other high ranking executives by using criminal charges only in the clearest cases of fraud? (ph)