White Collar Crime Prof Blog

Skilling Hearing - Sounds Like it Wasn't a Hot Bench

Reading the reports from those who were there, it sounds like the Skilling bench was a quiet one. But then again - a lot of the argument dealt with "honest services" under the mail fraud statute. 

The mail fraud statute is an 1872 statute that was a section in a revision of the Postal Act.  In the 1970's prosecutors extended mail fraud to prosecute cases involving "intangible rights."  In the case of McNally v. United States, the Supreme Court shot this doctrine down finding that "money or property" was required.  Congress came back with a new statute 18 U.S.C. 1346 that allowed prosecutions premised on a right to "honest services."  But the statute has been problematic in both its breadth and in the government's attempt to extend it in new ways.  The courts as seen in the Brown case, have provided limits to what might appear as a limitless statute.  But the bottom line is that this statute has numerous problems, both in its wording and in its application. And because mail fraud is difficult to understand, it is not surprising that a hearing related to this crime might prove dry.

Amit Efrati, U.S. Judges Hint at Little in  Skilling Appeals Session

Loren Steffy - Houston Chronicle Business Blog - Skilling's Appeal Opens With a Bang, Ends With a Whimper

(Houston Chronicle) AP Court Hears Appeal of Enron's Skilling

Nola.com Skilling Hearing Concludes With Smaller Audience Than Expected

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They're Expecting A Crowd for Skilling

The Fifth Circuit Court of Appeals has special instructions on its website about the Skilling oral argument set for today. For example, it states "[n]o one will be allowed to enter any of the courtrooms prior to 1:00 p.m., April 2, 2008, to allow court staff to set up additional chairs in the East Court room, and prepare other courtrooms for overflow spectators."

The case will be heard by three judges: Hon. Jerry E. Smith (Yale law grad, Reagan appointee), Edward C. Prado (Texas law grad, George W. Bush appointee), and Alia Moses Ludlum (Texas law grad, George W. Bush appointee) (see Times Picayune here).   

Some of the key issues before the court are:

• Whether there was a Brady violation in the failure of the prosecution to provide the Fastow Notes and full discovery pre-trial.
• Whether there is any reason not to follow the court's precedent in the Brown case with the prosecution's use of  the "honest services" theory.
• Whether there was error in instructions given to the jury with respect to deliberate ignorance.
• Whether it was improper to refuse instructions on materiality, reliance, and "oral side deals."
• Whether the accused was deprived of a fair trial as a result of the venue of this trial.
• Whether the accused was provided sufficient voir dire.
• Whether errors with respect to the honest services doctrine spillover to other aspects of the case.
• Whether there were sentencing errors.

(esp)

Wednesday Is Jeffrey Skilling Day

This Wednesday is the day that the Fifth Circuit will listen to arguments in the case of United States v. Skilling.  Although the briefs are filled with many arguments, the ones focused upon in the oral argument will likely be fewer in number.  That's typical, as you can't hit everything in a time-tight oral argument. 

As one looks at all of the original legal arguments and the new issues from the release of the Fastow notes, it is clear that the court will have a good bit to consider. And perhaps one item that might be lingering in some minds, is the continuing question as to  why the government didn't object to Fastow's argument for a sentence below the agreed upon terms of the plea agreement. Tom Kirkendall at Houston ClearThinkers (see here) pointed out one segment from the Skilling trial when Fastow was on redirect examination and he answered questions as follows:

Q. And what is the minimum amount of time that that plea agreement calls for?

A. It calls for a 10-year sentence.

Q. So after January 14th, can your cooperation lower that 10 years?

A. My understanding is that I will be sentenced to 10 years. The Judge ultimately has a discretion; but in my plea agreement, I agreed to the 10-year sentence."

Andy Fastow, however, received a sentence of six (6) years. This was despite a provision in the plea agreement that stated:

"The parties agree that Defendant's sentence under the Sentencing Guidelines shall include 120 months in the custody of the Bureau of Prisons.  Defendant agrees that he will not move for a downward departure from the offense level or the guideline range calculated by the Court and that no grounds for a downward departure exist."

And the government did not object.  Why?

The following are links to key posts from this blog that relate to the forthcoming argument, and the briefs that have been filed.

Government Responds to Skilling Supplemental Brief

The Skilling Discovery Problem - Part II of Commentary

The Falling of the Enron Case House of Cards

Skilling and the Fastow Notes

The Skilling Case - Stay Tuned

The Fastow Notes

Commentary on Skillings Reply Brief

Skilling's Reply Brief Arrives, Just in Time for the Holidays

The Government Weighs in on Skilling

Skilling's Fifth Circuit Brief Arrives

Also check out Larry Ribstein's Ideoblog here

(esp)

Government Responds to Skilling Supplemental Brief

Jeffrey Skilling filed a supplemental brief discussing the failure of the government to provide exculpatory material, specifically items now discovered as a result of the release of the Fastow Notes (see here, here, and here).  The government has now responded with an 83-page brief that challenges the defense position. Perhaps the paragraph that sums up the government position best is seen here -

"At trial, the government provided the district court with the rough notes underlying those 302s so that the court could monitor Fastow's testimony and disclose to Skilling any information in the notes that could be used to impeach Fastow.  Now, having obtained those notes while his conviction is on appeal, Skilling argues that they contain undisclosed exculpatory information and show that the government presented false testimony to the jury. As explained in detail below, Skillings' claims rely on isolated snippets culled from  420 pages of handwritten notes and stripped of their context.  Put in its proper context, and divorced from Skilling's hyperbolic rhetoric, each portion of the notes on which Skilling relies contains information that Skilling possessed prior to trial or that would have had minimal value in impeaching Fastow. "

So the government is claiming that the items would have "minimal value."  If that's the case, why didn't they just give them to defense counsel?  Why should we have after-the-fact discussions of whether an item was disclosed and whether it would have made a difference? When an individual is being given a sentence of 24 years, shouldn't the accused be allowed to have everything to properly present a defense to the jury?

Later in the government response they state:

"Finally, if the government had disclosed the information in the February 4, 2004 note, Skilling could not have profitably used it to impeach Fastow.  If Skilling had impeached Fastow with the note, the government would have been entitled to rehabilitate Fastow with the notes showing that on two later occasions he recalled Skilling knew of the quid pro quo."

Should the government be deciding the value of impreachment and rehabilitation evidence?  Isn't that a role we leave to juries?

See WSJ Blog here, Mary Flood's Houston Chronicle Blog here, Kristen Hays - Houston Chronicle here

(esp)

Addendum - Government's Brief -

Download usa_v. Skilling Case# 06-20885 USCA, 5th Circuit 3-25-08 Supplemental Brief by Appellee USA .pdf

(w/ a Stetson hat tip to Whitney Curtis)

In the News - Wecht, Kilpatrick, Paulson Talk, Enron

Philly.Com (AP) - Fifth Day of Deliberations End in Wecht Fraud Trial; Pittsburgh Tribune Review - Wecht Deliberations to Resume Thursday

DetroitNews.com - Mayor Kilpatrick to Get Legal Defense Funding;  Attorneys in Scandal to be Probed

ABA Journal - Ninth Circuit Bounces Judge From Case for Favoring Prosecution

Wall Street Journal - Paulson Joins Advocates of Wider Fed Oversight

AP - Citi Settles Enron Suit for $1.66 Billion

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The Nigerian Barge Case - Will It Sink?

Tom Kirkendall's Houston ClearThinkers has the Motion to Dismiss filed on behalf of a former Merrill Lynch executive who is awaiting retrial (see here). As anticipated, the Fastow Notes - and the alleged failure of the prosecution to provide exculpatory material to the defense - may prove devastating to this prosecution.  The Motion includes numerous references to the Model Rules of Professional Conduct, the ABA Standards for Criminal Justice, and the Restatement (Third) Law Governing Lawyers. Although ethics rules are usually not enforceable at law, they have been used to provide a standard for appropriate conduct in the community.  In this case, the Motion alleges many different violations of ethics rules.

The key issues for the court will likely be: 1) did the prosecution withhold exculpatory material; and 2)  what is the appropriate remedy. Both of these issues offer interesting aspects.  On the first one, a question will be whether the Enron prosecutors will be testifying or is the paper trail sufficient to present each side of the argument.  It is likely that the prosecution will vigorously argue the second issue (that a retrial cures this problem) in an attempt to avoid losing the case on a court dismissal.   But the more important question remains - why are the Fastow notes so late in coming (see here).

(esp)

The Skilling Discovery Problem - Part II of Commentary

The Wall Street Jrl just reported on the release of Skilling's Supplemental Brief and its discussion of the Fastow Notes.  As the White Collar Crime Prof Blog noted here, if prosecutors failed to provide Brady material, Jeff Skilling's conviction could be in jeopardy.  Also discussed here was the importance of full and open discovery by prosecutors.  When a prosecutor provides limited discovery, the prosecutor opens him/herself up to being accused of not giving the defense exculpatory material.

Discovery violations, if they in fact happen, can also violate ethical rules for attorneys.  The applicable rules depend on what has or has not been adopted in the particular jurisdiction.  The ABA Model Rule provides in Rule 3.8 that:

"The prosecutor in a criminal case shall: ...

(d) make timely disclosure to the defense of all evidence or information known to the prosecutor that tends to negate the guilt of the accused or mitigates the offense, and, in connection with sentencing, disclose to the defense and to the tribunal all unprivileged mitigating information known to the prosecutor, except when the prosecutor is relieved of this responsibility by a protective order of the tribunal;"

(esp)

Initial Commentary on the Skilling Supplemental Brief

Obviously, we can expect that the government will take issue with the contents of the Skilling brief (for the brief see here).  The brief even states that when questioned with a discovery issue the

"Task Force merely reverted to its blanket assertion that the 'notes are "not materially inconsistent" with information already in your possession."

But there is an important question that goes beyond the Skilling case, and even beyond the cases such as the Nigerian Barge cases, that are implicated by the Fastow notes.  That question is -- how much discovery should prosecutors give to defense counsel.

Clearly in cases where individuals can be injured, there is a need to make certain that the discovery will not result in the commission of additional crimes.  But what is oftentimes a problem seen in drug cases, is seldom a concern in a white collar case.

So why shouldn't the government give all materials to the defense in a white collar case. This is an important question and my answer would be that the government should provide complete and full discovery in white collar cases, unless they can show to a court that the release of the information will have a detrimental effect on a pending case or will be physically harmful to an individual.   And in situations when there are these possible ramifications, the court needs to find a way to allow defense counsel needed information so that the accused is not deprived of his or her due process rights.

The easiest way for the government to protect the record and case is to provide everything to defense counsel, and in some jurisdictions we find expansive discovery practices for just this reason.  Providing this information not only protects the record and the case, but also serves a judicial economy in that having the information may provide earlier pleas.  After all - if the accused sees that the evidence is there to convict him or her, there is a desire to find a lighter sentence through a plea.  On the other hand, providing selected materials opens the prosecutor to claims that exculpatory material was not disclosed.  Even the best of prosecutors, with the best of motives, may not know the direction of the defense and therefore not be able to ascertain the importance of certain documentation.  Providing everything precludes this later argument of non-disclosure, and precludes the risk of a claim of a Brady violation.   

The Skilling brief highlights the need to provide all notes, even the raw ones, to the defense pre-trial. From the prosecutor's perspective -why risk a retrial, and if you give everything the plea may add an economic benefit.  And more importantly, trials demand fairness.  The stakes are high and sending an innocent person to jail should be avoided at all costs.  The best way to prevent this from happening is to provide full and complete discovery.  The faults of the existing discovery process are not merely claims heard in death cases or ones voiced by the "Innocent Project."  The discovery process also needs to be examined in the context of white collar cases. 

(esp)

Addendum - See Austin Criminal Defense Lawyer here.

The Falling of the Enron Case House of the Cards

The first card in the falling of the government's house of Enron cases occurred yesterday, as Jeffrey Skilling's supplemental brief was unsealed. And one finds within this brief a shocking display of alleged government misconduct. The brief and some commentary can be found over at Tom Kirkendall's Houston ClearThinkers here. For openers, here is but one example of what can be found in the introduction in the brief.  Commentary on this brief will follow in later posts.

Task Force prosecutors called the "Global Galactic"document "three pages of lies" and the "most incriminating document" in Skilling’s entire case. Op.Br.196; R:36538-39. At trial, Fastow testified Skilling knew about Global Galactic because Fastow "confirmed" it with him during a spring 2001 meeting. Skilling denied knowing anything about Global Galactic. Op.Br.32-36. To bolster Fastow’s testimony and impeach Skilling’s, the Task Force introduced a set of handwritten "talking points" that Fastow said he prepared in anticipation of his meeting with Skilling. R:22287-88. At trial, Fastow swore he "went over" the talking points with Skilling, including the crucial point "Confirmation of Global Galactic list." Id. In closing, the Task Force relied heavily on this document to corroborate Fastow’s testimony that he discussed Global Galactic with Skilling. Id.

The raw notes of Fastow's interviews directly impeach Fastow's testimony and the Task Force's closing arguments.  When shown and asked about the talking-points document in his pr-trial interview, Fastow told the Task Force he "doesn't think [he] discussed list w/ JS." AE-27-381. (footnote omitted).

This obviously exculpatory statement was not included in the Task Force's "composite" Fastow 302s given to Skilling.  Nor was it included in the "Fastow Binders" the Task Force assembled for the district court's in camera review of the raw notes.

See also Houston Chronicle here.

(esp)

Addendum - Larry Ribstein's Ideoblog here; the Wall Street Jrl here

Skilling & The Fastow Notes

Kristen Hays of the Houston Chronicle's article, Skilling Seeks to Use Fastow Notes As Part of Appeal and Tom Kirkendall's Houston ClearThinkers (here) discuss the recent happenings in the Skilling appeal. If it is shown that the government failed to disclose exculpatory material to the defense in the Skilling case, it could prove enormously detrimental to the government's ability to have the conviction affirmed on appeal.  Because Andrew Fastow played a crucial role in the government's case, items within the government's possession that they may have failed to provide to defense counsel may send this case in a whole new direction. The question remains as to whether the Fastow Notes will be the card that causes the house of cards (this time the government prosecution of Enron cases) to start falling. (see here and here)

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The Skilling Case - Stay Tuned

Tom Kirkendall, over at Houston ClearThinkers, has landed on some interesting court entries in the Jeff Skilling matter. (see here) And yes, we both are wondering if this development is in some way tied into the Fastow Notes (see here).

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NatWest Three Sentenced to 37 Months and May Be Headed Back to England . . . Eventually

Three former British investment bankers for NatWest Bank who were charged for their role in helping former Enron CFO Andrew Fastow dress up the company's balance sheet were sentenced to thirty-seven month prison terms.  The so-called "NatWest Three" -- David Bermingham, Giles Darby, and Gary Mulgrew -- became a cause célèbre over their extradition from Great Britain under a new treaty between the U.S. and U.K. designed to facilitate the transfer of terrorist suspects.  The appeal went to the House of Lords, which upheld the extradition order, and the three have been living in Houston for the past two years.  Their guilty plea in November 2007 to wire fraud ended one of the few remaining cases arising from the Enron collapse.  A Houston Chronicle story (here) discusses the sentencing.

As foreign nationals, the NatWest Three will be eligible to apply to the Department of Justice's International Prisoner Transfer Program to serve their terms in Great Britain.  The DOJ website on the Program (here) notes that "[w]hen a prisoner is transferred to another country, the completion of the transferred offender's sentence is carried out in accordance with the laws and procedures of the receiving country, including those governing the reduction of the term of confinement by parole, conditional release, or otherwise."  The Chronicle article points out that in England a defendant has to serve one-half the prison term and is then released on a type of probation.  This is much less stringent than the federal sentencing law, which requires a prisoner sentenced to a term such as those given here to serve 85% of the time, i.e. about two and one-half years. 

Among the criteria considered for authorizing a prisoner transfer are acceptance of responsibility, criminal history, seriousness of the offense, and ties to the two nations.  Also considered is whether the prisoner will remain in the home country or return to the United States -- rest assured, the NatWest Three are unlikely to darken our shores again any time soon.  In addition, according to the Bureau of Prisons Policy Statement (here) on transferring foreign prisoners, the transfer cannot be authorized until the prisoner pays any outstanding fine.  In addition to the sentence in this case, U.S. District Court Judge Ewing Werlein ordered the three to repay the $7.3 million they received from the transaction that triggered the charges.  While not a fine but restitution, I suspect there won't be a transfer until that money is repaid.  Even then, the application process will take at least a few months to complete ,once they begin their prison terms, as the bureaucracy processes the requests. (ph)

Fifth Circuit Continues to Rule Against the Government - Honest Services Issue

The Fifth Circuit Court of Appeals, in a unanimous opinion written by Hon. W.  Eugene Davis, refused to accept the government claim that the case of United States v. Brown did not apply to one of the counts dismissed in the case against the former CFO of Enron Broadband. The appellee had initially been convicted of  five counts, but the court dismissed these convictions post-Brown. The district court had vacated the conviction on Count 5 because "there was a reasonable possibility that ....Count Five was indeed tethered to Count One." The government, unhappy with this decision, appealed.

The Brown court ruled that "honest services" did not apply "where an employer intentionally aligns the interests of the employee with a specific corporate goal where the employee perceives his pursuit of that goal as mutually benefiting him and his employer, and where the employer's conduct is consistent with that perception of mutual interest."  Because the jury "could have based its conviction on the tainted conspiracy charge" the district court refused to accept the government's argument that this count should be reinstated.  The Fifth Circuit agreed.

This decision is fascinating on several levels:

• A Pinkerton instruction is a powerful tool for the government as it allows them to proceed against individuals on substantive acts that they may not have been directly involved in -- acts that were foreseeable and in furtherance of the conspiracy. This may be a unique instance showing how the government can get trapped by its own stretching of statutes.  By using Pinkerton, when the conspiracy fell - it also caused the charged substantive act to fall. An after-the-fact claim of -  I really didn't mean it to apply here, does not carry much weight.  The lesson of this case is that prosecutors need to think of the ramifications of having a Pinkerton instruction if they truly believe it isn't necessary.   
• Should prosecutor's have a second chance when they stretch a statute and get caught?  How much of the taxpayer's money should they be allowed to spend?  In other words - should they be allowed to retry this count? (See Tom Kirkendall's comment on Houston ClearThinkers)
• The Fifth Circuit is very clearly saying that the Brown decision is here to stay.
• This decision may be particularly helpful to Jeff Skilling as it not only fortifies Brown, a case focused on in Skilling's appeal, but it also takes a strong position that counts within the "spill-over" of tainted counts, will not stand.

U.S. v. Howard - Download HowardAppealOpinion.wpd.pdf

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Post Stoneridge

Check out the Enron Related Cases Here-

WSJ - Jess Bravin & Mark H. Anderson, Justices Rebuff Enron Holders

Chicago Tribune (AP) - Supreme Court Refuses to Review Enron Investors' Lawsuit

But Stoneridge did have influence in another case, unrelated to Enron, as the Court in Avis Budget Group, Inc., et. al. v. Ca. State Teachers' Retirement granted a petition for a writ of certiorari vacating the judgment and remanding the case to the U.S. Court of Appeals for the 9th Circuit "for further consideration in light of" Stoneridge. (see here)

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The Fastow Notes

As noted by Tom Kirkendall here, the Fifth Circuit has ordered that the Enron Task Force notes regarding Andrew Fastow need to be turned over to defense counsel. This order was initially made in the Jeff Skilling case and now has also been included in the Nigerian Barge case (see here).  The bottom line is that the Fifth Circuit, as it should, is going to allow defense counsel the opportunity to see these notes. Some observations here:

• This could be the straw that breaks the back of the Enron Task Force. If the notes include exclupatory material that was not turned over to the defense counsel in these cases, it could prove important in Jeff Skilling's appeal. Even with a harmless error standard, Fastow was a key witness in this trial and exculpatory material regarding him should have been disclosed.  On the other hand, if there is no smoking gun here, the credibility of the Task Force may be heightened.
• Skilling's reply brief alleges the destruction of exculpatory material (Reply, p. 133).   It certainly seems ironic that prosecutors who proceeded against Arthur Andersen for alleged destruction of evidence, might possibly have destroyed anything considering the high stakes involved in this case.  Obviously, the merit of this argument needs resolution.
• Fastow's plea agreement for 10 years, but eventual sentence to 6 years raises some eyebrows.(see here)  Will the notes present evidence of a sidedeal?
• Why were the prosecutors objecting so strenously to this disclosure of the notes?  If there is nothing here, then it shouldn't be a problem for defense counsel to see these items.  Or is that not the case? 

(esp)

Addendum - The Orders are:

Download 11107_order.pdf

Download 112807_order.pdf

Download 122007_order.pdf

Commentary on Skilling's Reply Brief

The Skilling Reply Brief is lengthy as noted here, although not as long as defense counsel would have liked. Their opening line in the Statement of Facts is that "[s]pace limitations preclude a full recitation of the Task Force's distortion of the trial record." (emphasis added)  The irony in the opening portion that details some of the alleged discrepancies including a chart showing some of the "task force's descriptions" along-side a listing of "actual evidence," is that it is followed by the first argument - an argument pertaining to "honest services" fraud. This entry into their first argument is a masterpiece in the art of skillful brief writing.  Some other thoughts:

• The defense does not present a lay back approach to differences in the record.  They call the government on the carpet with forceful words that emphasize their view of inaccuracies in the government recitation of the facts.  As the appellate court decides the law, and the trial court the facts, this may not be as strong an argument as it reads. But it could become important in light of the legal issues being presented.
• This case highlights the problems with the "honest services" doctrine. The dissent in Rybicki noted the different views held by jurisdictions on a host of points related to section 1346 of the fraud statutes. And with the Brown decision within the court's reach, the government needed to present clear arguments on why Skilling's case was different. Here again we see an interesting tone in the rhetoric by the defense.  For example, they state in the Reply Brief - "[t]his, to be sure, is nothing more than a call for a 'Jeff Skilling' exception to be grafted onto the wire fraud statute." 
• Whichever way the court goes on the honest services issue, it will be an issue that is likely to repeat itself until the Supreme Court provides additional clarification.  The question will be whether this case will serve as the next McNally, a case that reigned in the mail fraud statute when the government used an intangible rights doctrine approach.  Or will it be more like what happened in Carpenter, where the Supreme Court expanded property to include intangible property.  Or will the Court sit back, since after all 1346 was enacted post- McNally by the legislature.   
• The reply brief hits hard on the government response to the giving of the ostrich instruction.
• The materiality and venue arguments get buried in the middle of the brief.  The reality here being that although they were key factors in the conviction, they may be the hardest to demonstrate as legal errors.
• The chart on page 109 of the brief is very telling.  It provides a chart of some high profile cases and the length of the jury selection.  (e.g. Bernie Ebbers - 2 days, I "Scooter" Libby - 4 days, Martha Stewart - 6 days). Uniformity only seems to matter to the Sentencing Commission.
• The "document dump" argument could be a sleeper, although the strong rhetoric at the end of this section is just that - strong rhetoric.
• The brief ends with a request for bail pending appeal.  And although strong arguments are presented here, it doesn't seem likely that Skilling will be home for holidays.

See also co-blogger Peter Henning's points from this article by Mary Flood in the Houston Chronicle here and Professor Doug Berman of Sentencing Law & Policy Blog here.

(esp)

Addendum - Check out Tom Kirkendall's Houston ClearThinker's here.

Second Addendum - The comment above on the materiality and venue issues should not be interpreted to seem like these aren't important issues.  They are extremely important ones that the appellate court will need to examine carefully.

Skilling's Reply Brief Arrives, Just In Time for the Holidays

In case you need a nice 161-page brief to get you through those colds nights this holiday season, below is Jeffrey Skilling's reply brief challenging his convictions in the Enron prosecution.  This is the shortest brief filed to this point, less than the 200-page tomes filed by both sides in their initial submissions -- but that's not saying much, is it.  As is often the case when one side gets the final word, this brief takes the gloves off and aggressively attacks the prosecutors on a range of issues.  As I've said before, the key issue in Skilling's appeal is how far the honest services issue will spread from the conspiracy count to other counts, based on the Fifth Circuit's decision in United States v. Brown limiting the use of that theory in business fraud cases.  Needless to say, there is a lot of detail in those 161 pages, including challenges to the ostrich instruction, the government's evidence on various counts, and the venue issue. 

Under the Fifth Circuit's rules, the usual amount of time alloted to each side for oral argument is twenty minutes per side, which hardly allows for a discussion of two issues, much less the myriad of points raised by Skilling.  After the oral argument, an early tip-off about whether the Fifth Circuit is leaning toward reversing the convictions will be whether it grants Skilling bail pending the final disposition of the case.  In the Brown case, shortly after oral argument the court granted bail to the defendants and then issued its opinion reversing the convictions.  Skilling's brief alludes to its pending request for bail, and his lead appellate lawyer, Walter Dellinger, is sure to renew it after the oral argument. (ph)

Download us_v_skilling_defendant_reply_brief_dec_21_2007.pdf

NatWest Hearing Today

Tom Kirkendall of Houston Clearthinkers reminds us here that there will be a hearing today for the NatWest 3. And the predictions are appearing that something may happen today - The Guardian Unlimited titles their piece "Three May Plea Bargain Over Enron Charges." The Houston Chronicle (see here) also calls it a "rearraignment" or as some may say - an opportunity to change one's plea to guilty.  the charges may be different from the original wire fraud charges, but that remains to be seen - as does whether these three will plead to any charges. The three British bankers were a source of controversy during their extradition to the United States. (see here).

(esp)

Addendum - As anticipated, there was a plea.  See Houston Chronicle here.

Forfeiture Case Against Lay's Assets Moves Forward

The government's civil asset forfeiture complaint against assets owned by the late Enron CEO Ken Lay moved a small step forward when U.S. District Judge Ewing Werlein denied a Rule 12(b)(6) motion to dismiss filed by Linda Lay, the administrator of Lay's estate.  The case -- with the wonderful caption used in asset forfeiture cases of U.S. v. 2121 Kirby Drive (available below) -- was filed after Lay's death wiped out his criminal conviction and required the government to pursue civil asset forfeiture rather than the much easier criminal forfeiture route.  The government is seeking to forfeit a bank account with $22,000, $10.1 million from an investment partnership, and a condo in Houston worth $2.5 million.  Under the relatively low threshold for surviving a motion to dismiss for failure to state a claim, Judge Werlein found that the government's 26-page complaint and affidavit outlining the basis for tracing the proceeds from the Enron fraud was sufficient to allow the case to move forward.  Surviving the motion to dismiss may impel the parties to resolve the case through a settlement rather than litigate it further with the expense of discovery looming, but it's entirely possible Mrs. Lay will continue the fight. (ph)

Download us_v_2121_kirby_drive_opinion_nov_13_2007.pdf

The Government Weighs in on Skilling

Federal prosecutors filed their brief in the appeal by former Enron CEO Jeffrey Skilling challenging his convictions on conspiracy, securities fraud, and false statement to the SEC charges.  Skilling is currently serving a 24+ year sentence in the Waseca, Minn., federal correctional institution.  The brief (available below) is a hefty 218 pages, nearly matching Skilling's 230+ page brief filed in early September (see earlier post here).  The Fifth Circuit allowed the extensive briefing in light of the number and complexity of the issues in the case.

The key issue in the case remains the effect of the Fifth Circuit's decision in U.S. v. Brown that limited the "right of honest services" theory when the defendant believes he or she is acting in the corporation's best interest as defined by management.  The government included this theory in its broad conspiracy count, and the Brown decision overturning convictions for the use of honest services fraud in the Enron Nigerian Barge trial came out about three months after the jury returned its verdict convicting Skilling and Ken Lay -- too late for prosecutors to remove it.  The government argues that Brown does not apply because it is limited to lower-level employees and not a CEO who it describes as the leader of the fraud.  The problem with that argument, however, is that Brown does not seem to create a "CEO exception" to its analysis of the applicability of honest services fraud theory in a private setting in which the company is the victim of the fraud. 

The greater problem for the government is not so much the application of Brown to the conspiracy count -- which I suspect they will lose -- but whether the use of a Pinkerton instruction for Skilling's liability means other counts will also fall.  Pinkerton allows a jury to find a defendant guilty of an offense if any other member of the conspiracy committed a crime, and charging the honest services fraud theory as one basis for the conspiracy may taint counts in which the jury could have found Skilling liable based on what other conspirators did.  The Pinkerton instruction can be very powerful for the government, but when there is a flaw in the conspiracy count it could result in reversal of the substantive counts tied in with the conspiracy because the jury only returns a general verdict and does not outline the basis for its decision to convict.  That could put some of Skilling's securities fraud convictions in jeopardy, although I suspect the insider trading and false statement charges are less likely to be affected by any problem from Brown.

The government argues that the Pinkerton theory of liability was unlikely to have affected the verdicts, and the Fifth Circuit could apply a harmless error analysis to find that the jury likely did not base its decision on that theory.  Whether the appellate court goes along with that suggestion remains to be seen, but the Fifth Circuit could cut back on Brown a little bit by refining the standard for when a defendant's intent to benefit the company will preclude a conviction for honest services fraud.

Among the other issues argued in the brief are the jury instructions, including the willful blindness/ostrich instruction, venue, hindering Skilling's access to witnesses, and the reasonableness of the sentence.  I suspect these are weaker arguments for Skilling, particularly the venue and witness access issues, which are very difficult for defendants to prevail on.  The real action is going to be figuring out how Brown will be applied to the case, which raises interesting issues about how far-reaching that decision will be in the Enron prosecutions, and even beyond when the next wave of scandals hits. (ph)

Download us_v_skilling_government_5th_circuit_brief_nov_13_2007.pdf

The Decline in Corporate Fraud Prosecutions

The American Lawyer has a detailed article (here) What's Behind the Drop in Corporate Fraud Indictments describing what it calls the decline in prosecutions of corporations and senior officers for fraud since the heyday of the President's Corporate Fraud Task Force.  The article and a supporting spreadsheet (here) provides a detailed look at corporate prosecutions since 2002, when the Task Force came into existence shortly before Congress passed the Sarbanes-Oxley Act, the symbol of the government's response to the collapse of Enron, WorldCom, and Adelphia Communications amidst allegations of accounting fraud.  The analysis provides the most comprehensive listing of prosecutions of companies and their executives that I have seen, including information about sentencing and appellate dispositions of cases.

One of the core findings is the drop in corporate fraud prosecutions, particularly since 2004:

Perhaps the most curious of our findings -- and one not highlighted by the Department of Justice -- is the precipitous decline in the number of major corporate fraud indictments in the two years since the re-election of President Bush. After issuing detailed reports in 2003 and 2004, the task force stopped reporting on its efforts in 2005, just as corporate fraud indictments slowed to a trickle. Our analysis shows 357 indictments in major corporate fraud cases between 2002 and 2005. But only 14 indictments were identified by the Justice Department as significant corporate fraud cases in 2006. There have been only 12 major corporate fraud cases indicted so far in 2007.

There are any number of reasons for the decline, and I doubt there is one single "cause" for the slowdown in these types of cases.  One explanation offered by the former U.S. Attorney for the Central District of California takes the "when life gives you lemons make lemonade" approach: the Task Force was so successful that there is no more corporate fraud, at least not on the scale seen a few years earlier.  A more plausible explanation is the almost natural ebb-and-flow to cases in a particular area, be it corporate fraud or drug prosecutions.  Companies change in response to the marketplace, be it products or prosecutors, and so are acting differently.  That doesn't mean they will stay out of trouble forever. 

Perhaps more imporant is the decline in the number of federal prosecutors devoted to corporate crime investigations, which place significant demands on the resources of U.S. Attorney's offices.  With budget resources devoted to the war in Iraq and Afghanistan crimping other departments, and the focus on new prosecutorial initiatives, such as child pornography and terrorism, something has to give and corporate crime is an easy place to cut back when there are no spectacular bankruptcies grabbing the media's attention.  Without the manpower, cases can languish, which is especially difficult in this area because corporate fraud cases are not known for their timeliness.  Filing a case about transactions involving technical accounting issues that occurred in a few years earlier just doesn't leap off the page and demand attention. 

When there are fewer resources committed to the area, the pressure to bring cases may actually decrease because it is not as stylish or important to an assessment of an office's effectiveness.  Moreover, the cases remaining from a few years ago are no longer the "low-hanging fruit" and may be just too difficult to prove without a commitment of significant resources.  Recent media reports indicate that a criminal investigation of accounting fraud at bankrupt auto parts maker Delphi ended with no criminal charges, a result that might not have occurred a few years ago when there was much more pressure to bring cases.

While the American Lawyer focuses on the decline in corporate fraud prosecutions, that does not mean there is a decrease in cases in other areas that fall within the "big tent" of white collar crime -- we are a welcoming niche.  Prosecutions under the Foreign Corrupt Practices Act are increasing, not declining, and the globalization trend probably means this will be a growth area.  [NB: For those interested in the FCPA, please be sure to check out the FCPA Blog (here), which provides outstanding coverage in this area.]   Antitrust prosecutions, especially for international price fixing, have not slowed over the past couple years, and the Antitrust Division's corporate amnesty policy -- first company in the door gets immunity -- seems to work in this area.  The FBI has announced that public corruptioin is a top priority, and the number of Congressmen and Senators under investigation, indictment, or imprisoned recently is staggering.  I doubt anyone is predicting a decline in healthcare fraud investigations, as the recent search at WellCare shows, and the Milberg Weiss prosecution may portend further scrutiny of class action law firms.

Finally, CEOs remain the target of government investigations, and I think that will continue in the future, even if prosecutions of corporations declines.  Former Collins & Aikman CEO David Stockman, former ESS Inc. CEO Michael Shanahan, and former Comverse CEO Kobi Alexander are among the corporate chiefs facing charges -- maybe not Alexander if he can avoid extradition from Namibia.  Regardless of priorities, a case involving the CEO of a public company will be a focus for the Department of Justice, and the resources necessary will be committed to these cases, in all likelihood.

Having seen the aftermath of the collapse of the banking industry up close in the early 1990s, and watching the corporate accounting and backdating cases develop over the past few years, I believe we will see another round of corporate scandals and prosecutions in the next few years.  I wish I knew where it would come from, and the continuing collapse of housing prices may give us a hint. (ph)

Skilling's Fifth Circuit Brief Arrives

Former Enron CEO Jeffrey Skilling's counsel delivered the opening brief to the U.S. Court of Appeals for the Fifth Circuit challenging the convictions -- although "brief" may not be entirely accurate as the filing comes in at a hefty 237 pages, roughly 60,000 words according to the Wall Street Journal Law Blog (here).  Former Acting Solicitor General Walter Dellinger, head of the appellate group at O'Melveny & Myers, likely will argue the case on Skilling's behalf.

Skilling's brief makes four main arguments for reversal of the conviction: (1) the "right of honest services" theory in the indictment as one basis for finding the mail/wire fraud conspiracy has since been discredited by the Fifth Circuit, and affects the other counts requiring their reversal; (2) flawed instructions on "materiality" and "deliberate ignorance" (aka the Ostrich Instruction); (3) prejudice from the denial of the change of venue motion; (4) insufficient voir dire to allow Skilling to flesh out prejudice.  Skilling's strongest argument is the first, based on the Fifth Circuit's decision in U.S. v. Brown, 459 F.3d 509 (5th Cir. 2006), issued in August 2006 -- about three months after his conviction -- that overturned the fraud convictions of defendants in the Enron Nigerian Barge Trial.  The court held that an employee who believes his acts were for the benefit of the corporation cannot have the intent to deprive the company of the person's honest services.  That theory was one of three charged in the indictment for the fraud conspiracy count, and because the jury did not identify which theory was the basis for its conviction, the charge will in all likelihood be reversed.  In fact, the federal prosecutors may well concede that the conspiracy count must be reversed under Brown, a position the government took in the district court on review of convictions of one defendant in the Enron Broadband Trial.

Even if the conspiracy count gets reversed, the interesting question is how much effect the flawed honest services theory will have on the other convictions.  The defense brief argues that all the other counts must be reversed because of prejudicial spillover from the evidence admitted on the improper conspiracy count.  The government's likely response will be that at least the false filings with the SEC and insider trading counts should survive because they are unrelated to the conspiracy count.  The insider trading charge does not require proof of a scheme to defraud in the same way that the mail/wire fraud conspiracy count does, being based on trading while in possession of material nonpublic information in breach of a duty of trust and confidence.  The false filing counts do not require any intent to defraud, and so may be sufficiently distinct that the error from the honest services fraud theory does not affect them.  The Fifth Circuit will have to assess the prejudice arising from the improper instruction on honest services, which is very hard to predict.

I think the other arguments are more difficult for Skilling to win.  The jury instruction issues will require the court to analyze whether U.S. District Judge Sim Lake made legal errors, and then an assessment of prejudice if there were any.  In Skilling's favor is the fact that the honest services issue could have its own spillover effect if the Fifth Circuit finds error in the instructions, making it easier to find prejudice and reverse the convictions because of the number of errors in the trial. The venue and voir dire claims are very hard arguments to win because the district court has wide discretion in those areas, and cases with far more prejudicial news coverage than this one have survived venue challenges. 

Skilling's final argument concerns his sentence of more than 24 years in prison, which he has already begun serving.  Assuming the conspiracy conviction is overturned, then even an affirmance on the other counts probably would require a resentencing so that Judge Lake can base the sentence on only those convictions upheld by the Fifth Circuit.  Whether the reasonableness argument gains traction with the Fifth Circuit remains to be seen.  The court did reject a similar sentence in the Jamie Olis case, also handed down by Judge Lake, although the loss calculations were different given the demise of Enron versus the continued viability of Dynegy, Olis' former employer.

The filing is available below, but check to make sure you have enough ink in the printer if you decide to go that route. (ph)

Download us_v_skilling_defendant_5th_circuit_brief_sept_7_2007.pdf

                                                                                                

Blog co-editor Ellen Podgor offers the following views on Skilling's brief:

The definition and inclusion of honest services as a basis for a fraud conviction is controversial in part because of the language used by Congress in trying to restore a theory that would allow the government to prosecute alleged frauds after the United States Supreme Court rejected intangible rights cases in the  McNally decision. 

Can anyone really say what "honest services" means?  And the problem of discerning the meaning of this phrase is especially problematic when someone is acting to benefit their company.  Couple this with a first offender receiving a 24-year sentence for committing an alleged crime that may not be a crime, makes this appeal one that deserves close scrutiny.

Former Enron Finance Officer Settles SEC Securities Fraud Action

Former Enron treasurer Jeffrey McMahon, who later became its CFO and then president, settled an SEC civil enforcement action related to the company's accounting for the Nigerian Barge transaction in 1999 designed to boost its income and other financial disclosure issues.  McMahon succeeded former CFO Andrew Fastow in October 2001, and became Enron's president and chief operating officer after it entered bankruptcy in 2002.  According to the SEC Litigation Release (here):

[T]he Commission's Complaint alleges that McMahon participated in a fraudulent transaction involving the "sale" of an interest in Nigerian power generating barges to Merrill Lynch that allowed Enron to improperly report $12 million in earnings in the fourth quarter of 1999. Enron never should have recorded profits from this purported sale because the risks and rewards of ownership in the barges never passed to Merrill Lynch due to an oral side agreement made by McMahon and others. The Complaint also alleges that while serving as Enron's Treasurer from April 1998 through March 2000, McMahon made false and misleading statements to the national credit rating agencies regarding Enron's financial position and cash flow. The Complaint alleges that the false and misleading statements included statements about Enron's cash flow from operations that failed to disclose that a portion of such cash flow was a result of structured financings and debt-like obligations that had nothing to do with Enron's operations or trading business. In addition, the Complaint alleges that McMahon made additional false and misleading statements to the rating agencies after he became Enron's Chief Financial Officer on October 24, 2001 through Enron's bankruptcy filing in December 2001.

McMahon agreed to disgorge profits of $150,000 and to pay an equal amount as a civil penalty, along with an administrative bar from appearing before the Commission as an accountant with a right to reapply in three years.  McMahon was not charged with any crimes, one of the few senior executives to avoid criminal prosecution.  He was removed as treasurer in 2000 after he complained about conflicts of interest related to Fastow's various investment vehicles that played such a key role in the company's collapse.  A Houston Chronicle story (here) discusses the settlement. (ph)

27 Months for Enron Cooperator

The Wall Street Jrl reports that Kenneth Rice received a sentence of 27 months.  Rice had testified against Jeff Skilling.  Here again, we see a sharp disparity in sentence between those who cooperate and those who risk trial.  (see also Houston Chronicle story)

(esp)

Emshwiller Article on "Benron"

John Emshwiller has a fascinating piece titled, "'Benron' Behind Bars" that looks at Ben Glisan Jr's life of cooperation and prison.  Although not the focus of this piece, it is interesting to note that the risk and cost of trial weigh heavily in the decision to plea. Glisan, like Martha Stewart realized the value of "getting it over with," and "moving on."  But is that the way the justice system is supposed to work? 

(esp)

The Fight Over Ken Lay's Assets

While the Supreme Court denied certiorari challenging the abatement of Ken Lay's convictions (see earlier post here), the fight over his assets continues in the U.S. District Court for the Southern District of Texas.  According to a Houston Chronicle report (here), Lay's widow, Linda, filed papers in the government's civil asset forfeiture case claiming that she is entitled to the assets the government is seeking, including the couple's Houston condominium worth $2.5 million and $10 million held by a partnership.  The article indicates that the parties are negotiating a settlement of the civil proceeding.  The conviction would have supported a criminal forfeiture, which would have allowed the government to pursue any assets owned by Lay to satisfy the amount ordered by the court, including "substitute" assets.  His death and the subsequent abatement of the conviction means that only the civil asset forfeiture avenue is open, which requires the government to trace any assets it claims to the fraud.  That is a more difficult standard to meet, and probably means that it will have to settle for less than it would have gotten in a criminal forfeiture action.  (ph)

Once More Into the Enron Nigerian Barge Trial

The Houston Chronicle reports (here) that the government has decided to retry the three Merrill Lynch defendants accused of helping Enron by arranging a sham transaction to purchase and then resell Nigerian Barges at the year-end in 1999.  The three executives are Daniel Bayly, the firm's former head of investment banking; James Brown, who headed the asset leasing group; and Robert Furst, Merrill's former liaison with Enron.  The convictions of the three were overturned in August 2006 by the Fifth  Circuit, which found that the government's honest services fraud theory was improper and tainted the convictions (U.S. v. Brown here).  Prosecutors have eliminated that basis for the mail/wire fraud counts, so the government will have to prove a scheme to defraud Enron of money or property, which may be a bit more difficult to establish.  The defendants served a portion of their jail terms before being released on bail by the Fifth Circuit after the oral argument in the case, a clear sign that the convictions were in trouble.  While the Chronicle article mentions that there are plea negotiations, a key issue likely is whether the government will demand that any of them serve additional jail time.  The SEC also filed civil securities fraud charges against them, so any resolution will have to include the civil side of the ledger.  The new trial is scheduled for January 2008, a scant eight years after the transaction. (ph)

Time to Pick on Enron's Lawyers

After plowing through the upper levels of Enron's management, the SEC is now targeting two former in-house lawyers for the company by charging them with securities fraud in a civil action.  The Commission filed the complaint (here) against Jordan H. Mintz, former general counsel of Enron's Global Finance group (EGF) and Rex R. Rogers, a former associate general counsel.  The case concerns a transaction involving Enron's Cuiaba, Brazil power plant to one of former CFO Andy Fastow's special purpose entites, LJM, and the reporting of the transaction.  According to the SEC Litigation Release (here):

Mintz, as General Counsel of EGF, was responsible for managing the related party disclosures in Enron's 2000 Proxy Statement (incorporated in its 2000 Form 10-K) and second quarter 2001 Form 10-Q, and closing a fraudulent related party transaction while knowingly or recklessly disregarding that the transaction was in fulfillment of a secret oral side agreement. Rogers, as Enron's top securities lawyer, was responsible for the timing and content of all Enron's SEC filings, including Enron's 2000 Proxy Statement, second quarter 2001 Form 10-Q and relevant 2001 Form 4 filings.

The Commission is seeking the usual remedies of disgorgement, a civil penalty, and director/officer bars against the two defendants, who deny the charges.  The violations took place more than five years ago, and there is a split in the circuits whether an SEC enforcement action is subject to the five-year statute of limitations period for collection of a penalty under 28 U.S.C. Sec. 2462.  Enron's lawyers, both in-house and outside counsel, have largely avoided government enforcement actions, but this case is consistent with the Commission's approach to look at the "gatekeepers" as potentially liable for reporting violations. (ph)

Government Will Not Appeal Brown Case

According to CCN Money, the government has decided not to appeal the decision in U.S. v. Brown.  This Enron-related case involved executives at Merrill Lynch. The Fifth Circuit Court of Appeals reversal of the conspiracy and wire fraud counts against the defendants was based on the use of the "honest services theory." (see here).

Although the government does not maintain a conviction here, it does leave for future use, the honest-services theory of prosecution. Honest services cases have been a source of concern since the adoption of the statute, 18 U.S.C. Sec. 1346.  In the Rybicki case, the dissenters called for Congress to "repair this statute." 

(esp)

Enron Conviction Falls

No, it's not Jeffrey Skilling, that would merit major headlines.  The convictions of Kevin Howard, the former CFO of the Enron Broadband unit, were overturned by U.S. District Court Judge Vanessa Gilmore (opinion available below).  A jury convicted Howard in May, 2005, just a few days after the verdict in the Lay/Skilling trial in the same courthouse in Houston, of conspiracy, wire fraud, and falsifying books and records related to transactions at the Broadband division.  The government conceded in November 2005 that the Fifth Circuit's decision in United States v. Brown, 459 F.3d 509 (5th Cir. 2006), overturning the fraud convictions in the Enron Nigerian Barge trial controlled four of the five counts in Howard's case.  In Brown, the appellate court found that the government's theory of wire fraud based on deprivation of the right of honest services was improper because the defendants believed that their interests were aligned with the company's, and therefore they did not have the intent to defraud even if they breached their fiduciary duty.  The government used the same theory in the Broadband prosecution, and so the fraud and conspiracy convictions had to be reversed because the jury verdict did not provide any indication about whether the improper legal theory played a role in the decision.

The fifth conviction, for falsifying books and records, was different because it did not involve proof of an intent to defraud.  Judge Gilmore reversed the conviction, however, because one basis on which the jury could find Howard guilty was by applying the Pinkerton doctrine that would permit a con