Thursday, April 19, 2007
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)
Friday, April 6, 2007
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)
Thursday, March 29, 2007
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)
Sunday, February 18, 2007
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."
Thursday, February 1, 2007
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 conviction because of his participation in the conspiracy. This gets tricky, but it works like this: the court instructed the jury that it could find Howard guilty based on his knowledge of the falsified books, or based on his participation in the conspiracy. Under Pinkerton, if a person is a member of a conspiracy, then that person is liable for all the crimes committed by any other member of the conspiracy, even if they did not do anything themselves for that crime. The conspiracy finding, in turn, could be based on an agreement to commit wire fraud based on the improper honest services theory. Because the wire fraud charge was tainted by the bad honest services theory, the conspiracy falls, and because the falsifying records charge could have been based on the bad conspiracy charge, so it too must it be reversed. Kind of like knocking down the first in a row of dominoes -- once one goes, they all go.
The government can retry Howard on all of the counts because the reversal was based on legal error and not insufficient evidence. This would be the third trial for him, however, the first having ended in a hung jury after a presentation that was at best stultifying. With the Enron Task Force dissolved, the decision shifts to the U.S. Attorney's Office for the Southern District of Texas, which still has an indictment of three other Broadband defendants to pursue and a decision to make on whether to retry the Nigerian Barge defendants whose convictions were overturned in Brown. Does that office have the resources and commitment to continue these cases, especially when it also has the NatWest Three on the docket? (ph -- thanks to Tom Kirkendall of the Houston's Clear Thinkers blog for providing the Judge's order)
Thursday, January 4, 2007
Malcolm Gladwell's article titled, Open Secrets, in The New Yorker Magazine is a required reading assignment for all teaching, learning, or writing about white collar crime. It is a truly amazing commentary on what happened at Enron, and what didn't happen by outsiders. The piece provides a whole new perspective to the Skilling sentence and the events at Enron. It offers context.
Some questions one may ask after reading this piece: Did the government really need Andrew Fastow to make their case? Should Skilling get the Nixon pardon? Has this information world gone on overload? Will people now understand what defense attorneys face when the government gives them discovery in the form of a "document dump." Also check out Tom Kirkendall's (Houston Clear Thinkers) blog entry on the Gladwell article. Enjoy.
Wednesday, January 3, 2007
Richard Causey, former chief accounting officer of Enron, was to report to prison yesterday. (See Houston Chronicle) He received a 66 month sentence for his role in the Enron debacle, after pleading guilty to one count of securities fraud. Causey had been scheduled to be tried with Ken Lay and Jeffrey Skilling, but then entered into a plea agreement immediately prior to the start of the trial. His sentence of 5 plus years is in sharp contrast to that given to Jeffrey Skilling, who received a 24 year sentence following the trial.
The Washington Post (Bloomberg) notes that Causey is to serve his time in a federal prison in Bastrop, Texas. The article notes that this facility is within a few hours of his Texas home and within an even shorter distance to one of his children. Some have not been as lucky as Causey. Take, for example, Jamie Olis who was hopsotched across the United States, being placed in detentions centers for long periods of time, and today remains a "true prisoner" of the Bureau of Prisons (BOP) system. Others have been placed in prisons many miles from those who may be assisting them. One wonders in these situations who is really being punished - the one being sentenced, or the caregivers who often are innocent and who often are left to contend with the aftermath. Further, as noted here, the BOP has not always been in accord with federal judges in assigning individuals to prisons.
Tuesday, December 12, 2006
Wednesday, December 6, 2006
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)
Saturday, December 2, 2006
Books and movies were expected with the Enron happenings, but a musical? Andrew Clark of the Guardian Unlimited provides an interesting review of a new musical in Houston that includes an array of songs such as "There's No Business Like Barge Business."
(esp) (w/ a hat tip to Jennifer Simpson-Oliver)
Saturday, November 25, 2006
Perhaps better described as the "Recoup Ken Lay's Money Because He Had the Temerity to Die on Us Act," the text of S. 4055 (here) provides that restitution can be ordered for any case pending on July 1, 2006, in which the defendant died before sentencing and appeal. First proposed by the Department of Justice in August 2006, Senators Feinstein and Sessions introduced the bill during the lame duck session after the November mid-term elections, and at this point the bill is unlikely to pass unless it is attached to a more pressing piece of legislation. A more likely scenario is that it will be reintroduced in the next session beginning in January 2007. The basic thrust of the legislation is:
`(a) General Rule- Notwithstanding any other provision of law, the death of a defendant who has been convicted of a Federal criminal offense shall not be the basis for abating or otherwise invalidating a plea of guilty or nolo contendere accepted, a verdict returned, a sentence announced, or a judgment entered prior to the death of that defendant, or for dismissing or otherwise invalidating the indictment, information, or complaint on which such a plea, verdict, sentence, or judgment is based, except as provided in this section.
We shall see how far the proposal goes in the legislative process. (ph)
Friday, November 17, 2006
The sentencing of the major Enron players who reached plea agreements and testified for the government against former CEOs Ken Lay and Jeffrey Skilling concluded this week. Michael Kopper, an aide to former CFO Andrew Fastow who helped set up the special purpose entities that caused much of the accounting troubles at the company, received a 37-month sentence from U.S. District Judge Ewing Werlein. Mark Koenig, the head of Enron's investor relations department, received an 18-month term. Kopper was the first Enron executive to plead guilty, and his cooperation was instrumental in the case against Fastow, who in turn provided evidence against Lay and Skilling. Koenig was the government's first witness at trial and described the misstatements made to investors by Enron's management, a key part of the government's case. Judge Werlein, who earlier gave Fastow four years less than his plea agreement called for, accepted the government's recommendation to give Kopper and Koenig reduced sentences for their cooperation, again highlighting the significant benefits that can flow from a plea agreement. An AP story (here) discusses the sentencing. (ph)
Thursday, November 16, 2006
The Houston Chronicle reports (here) that U.S. District Judge Sim Lake has ordered former Enron CEO Jeffrey Skilling to report to the federal correctional institution in Waseca, Minnesota (link here), about 75 miles south of the Twin Cities. This is a low-security facility. Judge Lake had recommended that Skilling be placed in the FCI in Butner, North Carolina, but as seen in former Enron CFO Andrew Fastow's assignment to the FCI in Oakdale, Louisiana, rather than the recommended facility outside Austin, the Bureau of Prisons makes its own decisions on prisoner assignments. Skilling has been ordered to surrender by December 12 at 2:00 p.m., although the Fifth Circuit could order release on bail pending his appeal, which is uncommon but certainly not impossible. If Skilling is not permitted by the Court of Appeals to remain free on bond, it would not surprise me if he reported before December 12 to avoid a media circus on that day. (ph -- thanks to Tom K. for noticing an error in the date in an earlier version)
Wednesday, November 15, 2006
Former Enron chief accounting officer Richard Causey received a five and one-half year prison term from U.S. District Judge Sim Lake for his guilty plea to one count of securities fraud. Causey had been scheduled to be tried along with former CEOs Ken Lay and Jeffrey Skilling, but then entered into the plea agreement just a couple weeks before the scheduled start of trial. Neither side called Causey as a witness at the trial that resulted in the convictions of Lay and Skilling, and it remains unclear whether he would have been particularly helpful to either side. Causey's sentence puts him just a bit below the prison term imposed on his direct boss, former CFO Andrew Fastow. Under Bureau of Prisons rules, Causey must serve 85% of his sentence, or a bit less than five years. An AP story (here) discusses the sentencing. (ph)
The government's effort to convict executives from Enron's Broadband Unit on fraud charges suffered another blow when prosecutors conceded error in four of the five counts of conviction of Kevin Howard, the former CFO of the unit. After the first Broadband proceeding against five defendants ended in a mistrial after a mind-numbingly dull presentation, the government broke the prosecution into three parts and succeeded in convicting Howard in May on conspiracy, wire fraud, and false books-and-records charges. The unit's former chief accounting officer was acquitted. Problems arose in August, however, when the Fifth Circuit reversed the fraud convictions of three defendants from the Enron Nigerian Barge trial that were based on a right of honest services theory, which the court found did not apply to corporate officers who believed they were acting in the company's best interests (U.S. v. Brown, 459 F.3d 509 (5th Cir. 2006).
In a brief filed with U.S. District Judge Vanessa Gilmore (available below), prosecutors state that the same problem that infected the convictions in Brown are present in Howard's case, so the court should vacate four convictions. The indictment alleged both money/property and right of honest services fraud, so prosecutors could retry him on the theory that his misstatements deprived Enron of property, although that may be a more difficult case to establish because the government must prove a loss to the victim. Prosecutors also argued that the fifth count should stand because it is not based on the right of honest services theory, which only applies to fraud charges and not false records. A key issue will be whether the court finds that there was prejudicial spillover from the conspiracy and fraud counts that taint the books-and-records conviction, which may result in a new trial on all the charges. If Judge Gilmore denies the motion to vacate the fifth count, it will certainly come up in an appeal to the Fifth Circuit. (ph)
Monday, November 13, 2006
It started as three - Lay, Skilling, and Causey.
Lay is gone, Skilling is embarking on a 24+ sentence that awaits appeal, and Richard Causey, former Chief Accounting Officer at Enron, who dropped off the team middle of the road - that is, after indictment, but before trial --by entering a plea - now will be sentenced tomorrow.
His plea is pretty definitive and calls for 84 months incarceration with a possible reduction to not less than 60 months with a 5K1.1 motion recognizing cooperation. 5K1.1 motions can only be filed by the government, although courts now have some discretion in this post-Booker world. But this plea calls for the court to follow the federal sentencing guidelines, so reductions may only be in the hands of the prosecutor, and only if the government determines that they want a sentence reduction for cooperation.
Just weeks ago, we saw that Andy Fastow's plea called for 10 years and he in fact received 6 years. Causey's plea, however, clearly provides that the agreement is "null and void" if the court fails to follow its terms. But non-compliance with the terms of the agreement are irrelevant if the parties fail to object to the non-compliance.
And in an odd turn of events, it may be possible that Causey will receive a sentence in excess of Fastow's sentence (see Houston Chronicle here) If this happens then the government would be saying that some cooperation is worth more than other cooperation. The government may advocate that the timing of the agreement to cooperate is what counts, or they may base it upon unknown factors that the public will never hear. But one has to continually ask whether the federal government should be the one with the power to hold this cooperation factor over the heads of the accused and what happens when our judiciary merely becomes a rubber stamp to prosecutorial power. (see here)
Saturday, November 11, 2006
Former Enron CFO Andrew Fastow has finally headed off to a prison in the federal correctional system after a delay of almost two months to allow him to give a deposition in the securities fraud class action against the company's banks. Fastow is currently being held in the Federal Detention Center (website here) in Oakdale, Louisiana, which was not his first choice of facilities. U.S. District Judge Hoyt recommended when he sentenced Fastow that the Bureau of Prisons place him at Bastrop, Texas, a minimum security FCI near Austin, but judges have no control over what the BOP decides on assignments. The Oakdale complex includes a minimum security facility (the Oakdale FCI), where former WorldCom CEO Bernie Ebbers is serving his 25-year sentence, although Fastow is currently in the FDC there, which also includes a prison camp. They could end up together in the same facility, proving that it is a small world of white collar criminals.
Before being dispatched on the BOP bus to Oakdale, Fastow testified for eight and a half days in Houston, taking a daily trip with U.S. Marshals to a facility where seventy lawyers listened to him, along with live internet broadcasting. A New York Times story (here) estimates that at $450 per hour, all those lawyers billed about $2.1 million. That figure may be on the low side because it likely does not include the costs of support personnel and associates back in the firm offices and, of course, the all-important daily transcripts and duplication costs. If the securities fraud case goes to trial, then Fastow may well get another trip back to Houston to testify once again. The Enron litigation just keeps going, and going, and going . . . . (ph)
Tuesday, November 7, 2006
Not surprisingly, the Fifth Circuit Court of Appeals reaffirmed the vacating of Ken Lay's conviction, as a result of his death. (see Houston Chronicle here, Wall Street Jrl. Blog here). The Houston Chronicle reports that the court held, as the district court had, that "when a defendant who has been found guilty of a federal crime dies before exhaustion of his appeal, his prosecution must be abated, his conviction vacated and his indictment dismissed."
Wednesday, October 25, 2006
Unlike some defendants who are immediately taken into custody upon conviction, Jeffrey Skilling has a little bit of remaining time in the semi-free world. He was ordered to report to prison once the Bureau of Prisons has assigned him to a facility. He was not given bond pending the appeal.
The Houston Chronicle here has an interesting story on Jeffrey Skilling's choice of prison. And if given this placement, he will be in a place with at least one other mentioned on this blog (Former Rep. Randy "Duke" Cunningham). Wall Street Jrl blog reports here that he is going to the Federal Correctional Center in Butner, N.C. (see here)
Monday, October 23, 2006
What are others in blogsphere saying about Jeff Skilling's sentence:
Doug Berman - Sentencing Law & Policy here
NormPattis - Crime & Federalism here
Larry Ribstein - Ideoblog here
Tom Kirkendall -Houston's Clear Thinkers here
Howard J. Bashman -How Appealing here
Addendum - Carrie Johnson of the Washington Post reports here that the Enron Task Force was "closing its doors."