If you saw Enron:  The Smartest Guys in the Room, then you may well remember the discussion of Lou Pai, head of Enron Energy Services, left Enron at the top of the market and sold his stock as part of a divorce settlement in spring of 2001 to the tune of almost $300 million.  As you may remember, the Fall of 2001 was not good for Enron (or Enron shareholders).  The same stock of course would have been worth less than a $1 per share in December 2001 (and worth twice as much as he sold it for had he sold in 2000).  The documentary makes Pai seem like the "smartest guy in the room," as he headed out of Houston to buy a mountain in Colorado. 

Pai was never indicted in any of the criminal proceedings, and he was dismissed as a defendant in the ultimately unsuccessful Enron shareholder suit.  However, he was the target of a civil SEC investigation for insider trading, which he settled this week for $31.5 million.  If the SEC really had evidence that he broke insider trading laws by selling stock worth $280-plus million, then $31.5 million seems like a small price to pay (seems less than sales tax in Chicago these days).  However, as much of the Enron criminal prosecutions are proving to have only symbolic long-term value, perhaps the Pai settlement is symbolic as well.

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We've discussed the NatWest three often on the blog, and it looks like they've reached the end of the road, with prison in Pennsylvania awaiting, and, they hope, a quick extradition to the UK.  The three made the mistake of sweetheart dealing with Andy Fastow - and the Times suggests that their indictment prompted his guilty plea.  Perhaps.  But the prosecution's "honest services" theory always looked shaky, though the bankers' conduct may have been a bit more self-interested than NatWest interested, as Christine noted here before.  I haven't followed the case too closely, but to me, it looked like an example of a meme: the prosecutions that follow disasters can reach broadly, sometimes unpredictably, and not always evenly.  Not everyone who dealt with Fastow on favorable terms is going to jail.  And there's a question as to whether the United States or NatWest should have been the entity sanctioning these bankers.

So why the plea, and now the sentencing?  I'm wondering if the White Collar Crime Profs think that the UK will treat the 18 months the defendants spent in Houston as time served.  It sounds like they think the defendants will be out of jail much more quickly if they are extradited home.

Update: Here's Tom Kirkendall's excellent blow-by-blow of the case - he concludes that the group settled because of the trial penalty.  Tom's post and other sentencing stories that I've seen note that regardless of the time served question, the UK parole process should cut the jail part of the sentences in half.

Update 2: And check the comments for Peter Henning's view - no on the movement restrictions while out on bail (probably, unless the UK is strange), 18 months total behind bars.

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I'm running off to class, but I just noticed this WSJ article reporting that the U.S. Supreme Court has refused to hear the appeal of class certification in the Enron shareholder lawsuit.  At first glance, however, the article seemed to overstate the importance of not granting certiorari:

The denial is an indication the high court doesn't believe the Enron suit met the standards set in the Stoneridge ruling for securities class-action lawsuits to proceed. Taken with separate action the court took in a class-action appeal over an accounting scandal at Homestore.com, the court also sent a message that accounting and banking firms are clearly covered by the Stoneridge ruling.

Although one can infer that the Supreme Court is not rushing to make clear that Stoneridge doesn't apply to financial and legal third-parties, I don't think that one can infer that the Supreme Court believes the Enron case and the Stoneridge case to be the same based solely on a cert denial. There are a lot of wacky things about the Enron appeal that make it a poor candidate for a grant -- its procedural posture as an appeal of a denial of class certification for one. I predict that the Court will affirm in the next few years that Stoneridge applies to other third parties besides vendors, but I think the Court wants to do so in a different case. More later.

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Tom Kirkendall has all the details of the real story behind the NatWest Three case and resulting plea bargain.  Here.

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I've blogged before about the bizarre case pending in the Southern District of Texas against the "NatWest Three" -- three UK bankers who were extradicted to Houston to face charges of "theft of honest services" from their employer, Greenwich National Westminster, in connection with transactions with Enron Corp.  Although this theory has been criticized by the Fifth Circuit in reviewing other Enron-related appeals, this prosecution has caused the three non-U.S. citizens to be held here for 16 months on bail under conditions that each must stay in Houston and that they may not live with or see each other.

Both the Houston Chronicle and the Guardian are reporting that the three bankers are expected to plead guilty today at a re-arraignment hearing, which suggests that each may plead guilty to a count or counts other than ones in the original indictment.  The original counts of wire fraud, etc. carried up to nine years in prison.  Although experts are predicting that the three will face some amount of jail time, we'll have to see what happens.

Tom Kirkendall also ponders whether the bankers are hedging against the U.S. "trial  penalty."  I'm hoping that instead, the prosecutors are hedging against their Fifth Circuit reversal risk!

N

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Here's some light weekend reading for you -- the 239-page appellate brief filed on behalf of Jeff Skilling.  I have not read it yet, but the Houston Chronicle sums up the arguments in these bulletpoints:

• Prosecutors used a flawed theory to prove the overarching count of conspiracy — a theory that has been knocked down by the 5th Circuit in another Enron-related case.

• Lake gave flawed jury instructions, most notably allowing jurors to find Skilling guilty of deliberately ignoring fraud when his defense was that no fraud existed and he wasn't knowingly ignorant of anything.

• Lake refused to move the trial from Houston, where the defense contends anger and desire for vengeance for those hurt by Enron's collapse poisoned the jury pool beyond its ability to be fair.

• Prosecutors, the appeal alleges, threatened potential witnesses and their lawyers, including ex-Enron executives who pleaded guilty to crimes, with possible reprisals if they spoke to Skilling or testified in his behalf.

• Skilling's 24-year, four-month prison term is excessive.

I did skim through the brief to see what day it was filed.  It says it was filed on September 14, 2007.  I know I've been distracted lately, but surely I haven't lost a week somewhere!

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Barbara Black linked to this WSJ article over the weekend that chronicles Ben Glisan's journey through the federal prison system.  I think many of us downplay in our minds how horrible federal prisons, especially minimum security "camps" are, possibly to insulate ourselves from the lengthy sentences that are meted out every day.  However, after seeing my husband's clients (thankfully few of them) spend time in even the best camps, I certainly do not wish the experience on anyone.  At every turn, an inmate is reminded that he (or she) is not human, is not an individual, and has no rights at all.  The entire process, from beginning to end, is purposefully dehumanizing.

Glisan's account is a textbook account.  Although he seemed to be a perfect candidate for a minimum-security camp, prison officials chose to put him in a higher security prison across the highway from the camp he had requested.  Glisan only learned that his request was denied when officials turned into the prison instead of the camp.  Then he went to solitary confinement because his paperwork had not yet arrived.  No one's paperwork ever arrives when they do, and this trip through solitary is routine and meant to break down all who enter.  When he finally did get a transfer almost two years later to a camp in Beaumont, he was transferred via a prison bus that went from Bastrop, TX to Oklahoma before taking him to Beaumont.  (For those unfamiliar with Texas geography, this would be similar to traveling from Paris to Madrid via Berlin.)

Glisan's roomies were not accountants and tax cheats; they were drug lords and mobsters.  Before testifying against Enron, he had to secure the blessing of the head of the white prison gang there or fear retaliation for being a snitch.  I know there are many readers who think that all criminals, particularly white-collar criminals, deserve what they get, but I can't believe that living in fear for one's physical safety on a daily basis for three years is getting off easy.

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Just to catch folks up:  the Enron Task Force has won eight convictions at trial.  One of those, Ken Lay's, was vacated at his death.  Four others were overturned in whole or in part by the Fifth Circuit as part of the Merrill Lynch/Nigerian Barge case, and one conviction in the Broadband cases was vacated by the trial judge after that Nigerian Barge reversal.  And of course, Jeff Skilling's conviction is on appeal.

Prosecutors have vowed to retry Kevin Howard of the Broadband case, and the Houston Chronicle reports today that prosecutors have presented an amended indictment to retry the Merrill Lynch bankers under theories other than the "theft of honest services" theory.  Remember that these defendants have already served a year of their reversed two- and three-year sentences.  Prosecutors say that they are working on a settlement with the defendants.  It must be nice to be a prosecutor -- if at first you don't succeed, threaten, threaten again.

The WSJ Law Blog picks up on this story and asks this insightful question that might be familiar to Conglomerate readers: 

The Fifth Circuit ruled last month that a securities-fraud class-action against Merrill Lynch and others over their role as advisers to Enron cannot proceed. (The opinion specifically cited the Nigerian Barge case as an example of Merrill’s allegedly fraudulent conduct.) Let’s try to get this straight. So the conduct of Merrill’s bankers in their Enron dealings is sufficient to impose criminal liability, but insufficient to support civil liability? Are there other instances where the law permits this result?

Wow. That is ironic. I wish someone would write a paper on that.

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For awhile I have been wondering what happens to all of the defendants in the Enron trials who plead guilty after being indicted on theories later questioned by appellate courts, leading to the acquittals of the defendants they testified against?  Well, the answer may be that for those who have yet to be sentenced, defendants may be able to withdraw their pleas.

Yesterday, U.S. District Court Judge Lee Rosenthal allowed Christopher Calger to withdraw his 2005 guilty plea.  Calger pled to one count of wire fraud in connection with a transaction that prosecutors argued violated the "theft of honest services" statute, a theory that has been called into question by the Fifth Circuit, leading to the reversal or vacation of sentences in both the Merrill Lynch case and the Enron Broadband case.  In Houston, Tom Kirkendall anticipated Calger's good news in this post on Sunday.

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I guess I'm a little slow this morning because Larry Ribstein and the Law Blog are all over this story about the SEC filing civil charges against two former in-house attorneys at Enron, Rex Rogers and Jordan Mintz for activities in 2000 and 2001.  Sigh.  The SEC is woefully underfunded an in a hiring freeze, but I'm glad the agency has its priorities straight here.

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Yesterday the Fifth Circuit reversed the class certification in the Enron shareholder suit pending in Judge Melinda Harmon's court in the Southern District of Houston.  The trial was scheduled to begin in April.  Similar to the 2nd Circuit's reversal of class certification in the IPO Cases, the panel seems to get into the merits of the cases.  Here, according to the Houston Chronicle, the Fifth Circuit reversed because the defendants remaining, the banks, were not primary violators but mere aiders and abettors.  (Readers will recall that for strategic purposes, the plaintiffs dropped many of the individual Enron defendants who would have been primary violators under the theory of the case.)

So, not to make everything about ME, but If this were going to happen, it could have happened before I sent out my paper, The Undercivilization of Corporate Law, which compares criminal prosecutions to civil lawsuits under the same set of facts suggesting corporate misconduct.  So, here we have a set of facts that spawned the Enron Task Force, which gathered numerous guilty pleas and even criminal convictions, some of which have been reversed by appellate courts.  However, under the same set of facts, shareholders are not able to overcome procedural obstacles (or inherent collective action problems) to succeed in a civil lawsuit.  (The Enron plaintiffs were able to secure record-setting settlements from other banks, who may feel silly today, but I'm not sure if those settlements have been approved yet.  That's an item for additional research today.)

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From the "How Did I Miss This?" File:

In the Fifth Circuit's December 12, 2006 order denying Jeffrey Skilling bail:  "Our review has disclosed serious frailties in Skilling's conviction of conspiracy, securities fraud, and insider trading, difficulties brought by a decision of this court handed down after the jury's verdict, as well as less formidable questions regarding the giving of a jury instruction on deliberate ignorance." 

This assertion by the Fifth Circuit that some counts of Skilling's conviction would almost certainly be reversed did not seem familiar to me, and I try to stay informed.  I looked around to see if this sentence had been reported in the media.  Um, not really.  A WSJ article (no link) did quote the sentence, on page A12, in an article oddly titled, Court Faults Skilling Conviction But Orders Him to Report to Prison.  The Law Blog that day reported on the order in a post entitled "Well, That Was Fast" with the beginning paragraph that focuses on the fact that the court ordered Skilling to report to prison one day after Skilling filed the appeal.  No one seems to think it's interesting that the Fifth Circuit, in one day and without the trial record, goes out on a limb to say that there are "serious frailties" in the conviction.  The media reports focus on the fact that he was denied bail.

So, why was he denied bail?  Well, even if the Fifth Circuit thinks that the counts of conspiracy, securities fraud and insider trading are vulnerable on appeal, there are still five counts of false statements to auditors.  The time to be served on convictions standing after an appeal would have to be less than the duration of time between December 12, 2006 and the appeal.  So, the Fifth Circuit might be saying that much of the conviction may be reversed, but there could still be six months to a year to serve at the end of the day.  Well, that's a lot different than 24 years.  Remember that when the Fifth Circuit sua sponte released the Merrill Lynch bankers William Fuhs, Daniel Bayly and Robert Furst from prison pending appeal the bankers had already served one year and had been sentenced to 37- and 30-month sentences.

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As Larry Ribstein notes today, Professor Joe Grundfest celebrates the decline in class-action securities lawsuit filing in the WSJ.  Professor Grundfest participates in the Stanford Law School Securities Class Action Clearinghouse, which tracks filings, dismissals and settlements of these types of suits, and the Year in Review Report for 2006 can be found at that site.  In the Press Release for that report, and in the WSJ article, Professor Grundfest claims that part of the decrease is due to the successful criminal prosecutions of corporate actors.  As Larry notes, is that really a victory?

I have been blogging lightly because I'm trying to get my article on The Undercivilization of Corporate Law out the door, an article that asks that same question.  One example in point that may or may not be resolved by the time the article is:  For all the criminal pleas and convictions in the Enron case, the civil case may go nowhere.  We've seen convictions that were overturned (Type I errors) and then convictions that may stand and also plea bargains that may be regretted, but the private litigation may not even get started (Type II error).  As I've blogged before, the situation complained of in Enron would not survive a Dura analysis for pleading loss causation; however, that motion to dismiss was decided before Dura.  However, on Monday, the bank defendants argued in front of the Fifth Circuit to reverse the class certification determination.  If that should happen, then the case would be effectively over.  (The banks also seem to be arguing (again) that they can't be primary actors under the PSLRA amendments, but that may not be addressed again by the Fifth Circuit.) 

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Yesterday U.S. District Judge Vanessa Gilmore vacated the last Enron Broadband conviction standing.  Tom K. was all over it.  The Houston Chronicle article is here.  Peter Henning, who is quoted in the article is here.

Of course, the big question is what does this do to Skilling's appeal?  Remember, according to prosecutor John Hueston, Skilling's guilt came down to the fact that he knew about the Broadband criminal activities.  However, if those are not considered criminal activities now, then what exactly was Skilling guilty of?

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While on my research leave this semester (gloat, gloat), I have run into some really interesting papers.  One is Conspiracy Theory by Neal Kumar Katyal, 112 Yale Law Journal 1307 (2003).  In this provocative paper that thoroughly dissects the whys, hows, and what thens of the charge of conspiracy, Professor Katyal gives a history of practice of conspirators testifying against each other.  This history includes a practice known as approvement:

Medieval law as early as 1130 recognized the practice of approvement, whereby an indicted person could plead guilty but offer to cooperate with the prosecution. The accuser had to implicate accomplices before the jury deliberation began, and the accuser was not simply to reveal "the whole truth" of the particular crime, but also all felonies to which the person had knowledge. If the accomplices were convicted, he would be pardoned, but if his accomplices were not, then the accuser was sentenced to death.

Wow. Two thoughts come to mind. First, this "downside" may encourage truth-telling, and not just testifying as an escape from punishment or out of spite or revenge. However, the results may not always correspond to the truthfulness of the testimony. The jury may not believe truthful testimony or may believe the testimony but acquit anyway. If I testify that my partner in thievery had talked about going back and killing a potential witness, the jury might believe my testimony but believe that the witness' violent, abusive spouse was the culprit. Second, what does this say about all the Enron defendants who pled guilty to charges and testified in the broadband trial or the Nigerian barge trial? Some of those questioned received letters of no prosecution, but some received reduced jail time. I did feel sorry for them because they are going to jail when their so-called co-conspirators are now acquitted, but at least they won't face the death penalty!

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In the Enron shareholders' civil lawsuit against Enron executives, banks and law firms, we know how the two Enron defendants emerged.  Kirkland & Ellis was dismissed early on by their own motion, and Vinson & Elkins will probably be voluntarily dismissed by a motion from plaintiffs, who have decided on a post-PSLRA "deep pockets" strategy.  But there were Houston law firms involved in other litigation -- the bankruptcy litigation.

Enron's bankruptcy estate has been pursuing those claims that the company otherwise would have had.  Well, if you see all your nice transactions being shot down by the DOJ, and you knew those transactions were blessed by outside counsel, then that smells like malpractice.  Vinson & Elkins, who may escape liability to Enron shareholders in one federal court, has already paid in $30 million to settle malpractice claims against them.  Today, Andrews & Kurth (who was never formally sued) has settled similar malpractice claims after court-ordered mediation for $18.5 million.  Regardless of whether law firms escape primary liability under securities laws (as was the hope and promise of the PSLRA), the Enron tale is still a cautionary one for outside counsel.

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By the time the shareholders get to trial, no defendants will be left.  Plaintiffs are asking today not only that Ken Lay (his estate) be dropped but also that Kenneth Rice, Joe Hirko, Kevin Hannon and Greg Whalley be dropped.  Rice, Hirko and Hannon were involved in Enron Broadband Services and were defendants in that case.  Whalley was involved in Enron trading operations.  Rice and Hannon pled guilty in 2004 to one count of securities fraud and conspiracy to commit securities fraud, respectively.    You may remember that Hannon testified against Lay and Skilling during their trial this year and asserted that the two were knowledgeable and complicit in misleading investors as to the potential of the EBS unit.  After one such release about EBS' potential, the stock price rose from $54 to $72.  Whether EBS had that potential or not is of course speculative.  Greg Whalley, who temporarily assumed the presidency of Enron and in due course fired Andy Fastow, has cooperated with prosecutors and never been charged.

Hirko took his chances at the Broadband trial that ended in acquittal on some charges and a hung jury on others.  Four other defendants in that trial had the same fate; two defendants, Kevin Howard and Michael Krautz, were retried this year.  Krautz was acquitted, but Howard was convicted on five counts.  Prosecutors have now moved to vacate four of those counts after the Fifth Circuit ruled that the basis for those counts, theft of honest services, did not fly in the Nigerian Barge Cases.

So, now these defendants will be dismissed from the lawsuit.  This prompts a few questions:

1. Isn't it strange that two men who pled guilty to securities fraud and face up to 10 years in prison (5 for Hannon) would be dismissed from a civil suit for the same actions? How could it be possible that in a civil trial they would not be found liable? Is this an issue of proving the elements of the fraud? Or, are these plaintiffs somehow not worth the time due to low net worth? Although they made tens of millions at Enron, that money may have dissipated. Rice forfeited $13.7M to the DOJ and $1M to the SEC. How closely are Enron prosecutors working with the plaintiffs? We know that Fastow was given leniency at sentencing because of promising to give testimony in the civil suit. Could Rice and Hannon be receiving leniency in the civil suit because of cooperating in the criminal suit?

2. What does it say about Skilling's sentence, which was largely based (according to prosecutor John Hueston's statements here) on a belief that he perpetuated the EBS fraud that now the people that controlled EBS are being acquitted, having sentences vacated, and being dropped from civil suit. Was there no there there?

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In this week's New Yorker Malcolm Gladwell writes on Enron, intelligence, and the perils of too much information.  Gladwell makes the argument that the problem wasn't that Enron was a puzzle (where you need more clues to solve it).  Rather, Enron was a mystery - where the observer is overwhelmed by information.  Solving the mystery depends on judgment and skill in analysis.  Gladwell explains:

A puzzle grows simpler with the addition of each new piece of information: if I tell you that Osama bin Laden is hiding in Peshawar, I make the problem of finding him an order of magnitude easier, and if I add that he’s hiding in a neighborhood in the northwest corner of the city, the problem becomes simpler still. But here the rules seem different. According to the Powers report, many on Enron’s board of directors failed to understand “the economic rationale, the consequences, and the risks” of their company’s S.P.E. deals—and the directors sat in meetings where those deals were discussed in detail. In “Conspiracy of Fools,” Eichenwald convincingly argues that Andrew Fastow, Enron’s chief financial officer, didn’t understand the full economic implications of the deals, either, and he was the one who put them together.

I agree with Gladwell that Enron was more a mystery than a puzzle, and that Wall Street didn't process the information as well as it should have. 

Still, I'm not sure I'd go so far as to say, as Gladwell suggests, that the disclosure paradigm is broken.  If Enron had made all its SPE deal documentation available, hardly an analyst would have cared.  Enron was a faith stock.  But maybe an enterprising hedge fund manager would have dug in, and Enron's market price might have corrected sooner, say in 2000 instead of 2001.  Moreover, as Mike Guttentag has reminded me, disclosure tends to deter fraud not just by transmitting information to an outsider, but by changing the group dynamics inside the firm.  In any event, as always, Gladwell is provocative, interesting, and quite possibly right. 

I'm quoted towards the end of the piece, where I argue that Enron's failure to pay income taxes was a red flag.  I note, however, that while the fact of the book-tax gap was easily observable, the cause of the gap was not easily observable.  I then offer the profound comment, "The tax code requires special training." (My soundbyte skills still need work.)

I expanded on this idea in Enron's Dirty Little Secret.

What do we think of Gladwell's argument?  Is the disclosure paradigm broken?  Was Enron a puzzle or a mystery?

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Less than a week after moving for defendant Vinson & Elkins to be dismissed from the Enron class-action lawsuit, plaintiffs (through Lead Plaintiff CALPers) are now asking for defendant Lou Pai also to be dropped.

If you saw Enron:  The Smartest Guys in the Room, then you may recall that Pai left Enron before the trouble hit the proverbial fan, cashing in $270 million in stock/stock options to retire to Colorado.  Pai liquidated his holdings as part of a divorce settlement, a silver lining that allowed him to cash out and go home.  Pai is back in Houston now and interested in trading again -- this time in pollution credits.

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In a surprising turn of events, investor plaintiffs in the civil action against Enron asked on Friday that Vinson & Elkins be dismissed from the suit.  Although as recently as last summer the plaintiffs insisted that V&E were in cahoots with Enron executives and should not be dismissed, the plaintiffs have changed strategy.  Houston Chronicle article, with commentary by Nancy Rapoport, is here.

If V&E is dismissed here, every corporate attorney in Houston and the rest of the country will breathe a collective sigh of relief.  Stay tuned.

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Not to be "all Enron, all the time," but I wanted to point out that Richard Causey was sentenced to 5 1/2 years prison time yesterday.  As you may remember, Causey was scheduled to be tried with Ken Lay and Jeff Skilling, but arrived at a plea bargain with prosecutors fairly close to the eve of trial.  Although commentators speculated that Causey would surely testify against Lay and Skilling in return for a reduced sentence, Causey never took the stand.  Earlier this week, commentators speculated whether Causey's sentence would be longer than Andrew Fastow's sentence, given that Causey's "cooperation" did not seem to be as important as Fastow's.  If Causey went to prison for longer than Fastow, this might seem to be an injustice due to Fastow's greater involvement and self-enrichment.

But, that was not to be and Causey was sentenced to a little less than Fastow was.

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I have a deadline this week, so I promised myself I wouldn't blog today.  However, I then saw Peter Henning's post linking to a brief filed by Enron prosecutors in the Enron Broadband trial.  (For background on the trial and current conviction of Kevin Howard, read Tom Kirkendall's October post.)  In response to a brief filed by Howard's attorney's to vacate his conviction on five counts relating to various types of fraud, prosecutors have conceded that four of the counts should be vacated, but not the fifth.  The theory behind the turnaround is that these counts were based on the "theft of honest services" theory that was debunked and limited by the Fifth Circuit recently in the Enron Nigerian Barge case.  The prosecutors concede that under the Fifth Circuit's interpretation, the honest services theory of fraud would not apply to Howard's actions.  The question remains whether Judge Vanessa Gilmore will vacate the entire conviction or just four of the five counts.

Of course a bigger question remains.  One of the threads underlying these Enron trials is that executives should not be able to artificially inflate the stock price through creative accounting methods designed to achieve just that result.  Now we want these executives, who benefitted from the inflated stock price, which harmed investors, to be punished.  Sarbanes-Oxley even requires executives who restate financials to regurgitate any compensation or bonuses received that were based on the higher financials.  What about artificially obtaining plea bargains and even convictions through creative prosecution methods designed to achieve just that result?  Now that courts are pushing back on the techniques of the Enron Task Force, do we get to clawback the benefits the members of that Task Force have received?  Do we go get the ones who "got out early" and are enjoying their huge salaries at fancy New York firms, who hired them based on their inflated win record?

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In the months and years following the demise of Enron that began in November of 2001, many of our friends and former colleagues who had worked (however briefly) at Enron spoke of the "Enron stigma."  Some coined it the "scarlet E," for the large "E" that became Enron's symbol and logo.  Of course, most of our friends were attorneys and accountants.  However, the former Enron traders have found that the employment market for financial services may be more forgiving and possibly more efficient than the employment market for legal services.  In this WSJ article, former traders at Enron tell of the enormous demand for their talents, which are seen as both substantial, due to their recruitment by Enron, and tempered, due to their experiences at Enron.  In fact, some of the former traders have started their own trading operations.

The most interesting part of the article details the current project of Lou Pai, an executive who sold his Enron stock for hundreds of millions of dollars and retired before any of the problems surfaced.  Pai attempted to buy at auction Enron's pollution credits from the bankruptcy estate.  Because of his obvious insider status, the credits were sold to a third-party, who then sold them to Pai.  Pai is now involved in a Houston-based trading firm that creates markets in pollution-emission credits.

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Andy Fastow, who seems to have arrived at a second-best result in his Prisoner's Dilemma, gave 7 1/2 days of deposition testimony last week in connection with the shareholder's suit against Enron and the banks that loved Enron.  (Note that Vinson & Elkins is also still a defendant.)  From this NYT story, it seems that Fastow's testimony revealed little new information, but seemed to corroborate and substantiate facts already known.  Although the banks didn't seem to blink, Arthur Andersen decided to fold and settle on November 1 for $72.5 million.  (I have to add, as I've said before, that I'm not sure that causation can be proved in Enron after Dura, which I think may speak more negatively to Dura than to Enron.)

Readers will remember that Fastow agreed to provide this testimony on behalf of the shareholder plaintiffs (led by Bill Lerach), with Lerach paying Fastow's attorney Craig Smyser (Smyser, Kaplan & Veselka LLP).   The agreement to appear in the civil case was part of his plea agreement in the criminal case, and part of his cooperative efforts that encouraged Judge Kenneth Hoyt to trim his 10-year agreed sentence to six years.

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Obviously there was some back and forth in the blogosphere yesterday about Jeff Skilling's sentence:  Dave Hoffman (see my comments there); Larry Ribstein (responding to Dave); Ellen Podgor and Peter Henning; and Geoff Manne (with the best title).  Nancy Rapoport has an article on Jurist also impressively titled, "A Fish Called Jeffrey."  In blogging about Enron and in presenting my paper The Undercivilization of Corporate Law, I've found that when one speaks out in support of Skilling, Lay or other Enron defendants, one gets some "pushback" to say the least.  I've tried to sort out some of the arguments that get thrown out at the defenders of our modern-day indefensibles.

1.  The "How Can You Defend Fraud" Argument

In speaking out against Skilling's sentence, one might be disputing one or more very different findings by the court:

a.  What subordinates of Skilling are accused of doing is in fact a crime.  For example, that Andy Fastow's use of special purpose entities to line his own pockets was a crime.

b.  Skilling knew or turned a blind eye to subordinates, who were committing crimes that were explicitly or implicitly endorsed by him. 

c.  What Skilling himself is accused of doing is in fact a crime.  For example, that changing financials by one penny a share under fairly flexible rules is accounting fraud.

d.  That a jury can find that Skilling committed crimes or knew/should have known about the crimes of others based on the testimony of witnesses who benefitted greatly from so testifying.

e.  Willful blindness is a valid theory of criminal guilt.

f.  That the various prosecutorial tactics utilized in the Enron trial were just.

g.  That even if the practices is not just, they are warranted because the individuals eventually brought to justice are guilty.

h.  The sentencing guidelines justly calculate a sentence using important variables, including whether a defendant cooperates or shows remorse and whether the defendant utilized a sophisticated means for the crime.

i.  The harm done by Skilling's actions (or the actions of his subordinates) was $80 million.  Using recognized theories of causation and financial modelling, we know that the accounting fraud decreased shareholder wealth by $80 million.

j.  A 24-year sentence is proportionate to the crimes committed and will effectively deter would-be corporate fraudsters in the future.

I don't dispute all of those building blocks to the sentence, but I definitely don't agree with them all.  To applaud the sentence, I think I would have to agree with all of them.

2.  What About Drug Dealers? or Why Don't You Complain When Young Drug Users Get Sent Up the River?

I think this is a red herring.  First of all, I don't agree with the sentencing guidelines as applied to federal drug offenses, either.  The reason I don't write articles or blog posts about the injustices of the drug laws is because that is not my field.  I don't teach Criminal Law and don't have the time to get up to speed in every area of the law that seems inconsistent or unfair to me.  That may seem cold, but that's how life goes.  I'm outraged by a lot of U.S. laws and policies in various areas, but I leave the hard-core academic dissection of those laws and policies to others.

Second, I don't see a zero-sum game here.  If I defend Skilling's sentence, how am I ratifying the sentences of drug dealers?  Shouldn't those who hate the drug sentences jump on the "overcriminalization" bandwagon instead of sneering at us corporate geeks who came late to the protest party?  I think the strawman corporate law professor who is content to see young people put in federal prison for the rest of their lives for using or selling drugs does not exist.

Third, I do think that the current corporate misconduct cases highlight prosecutorial discretion abuses and disproportionate sentencing in a way that the less-publicized drug cases do not.  When a non-criminal law person hears about a lengthy sentence for what seems to be a smallish drug crime, then that person may rationalize the outcome in several ways.  Perhaps we might assume that there are facts not reported that support the sentence.  More likely, a person might assume that the reason for the extreme outcome is that the defendant was poor and without resources to successfully defend the case.  Even with the best public defender in the country, resources are still necessary for experts, scientific evidence, etc.  In addition, a person might also assume that the disproportionate outcome was the product of jury bias if the defendant is non-white.  Therefore, injustices in the prosecution of federal drug crimes might be categorized as socioeconomic and discrimination problems.  Because these problems are well-known and advocates highlighting these problems seem to have reformed the system as much as they ever are going to under current conditions, then outside observers may just shake their heads.  These stories may not prompt anyone to question basic prosecutorial practices and the sentencing guidelines.   However, when we see white, wealthy, educated, male business people receiving extreme sentences in cases in which we know all the business facts, corporate law professors may be inclined to say, "Wait, there must be something wrong here that is not just a product of unequal resources but something much bigger."

3.  If you are outraged about (white) white collar criminals receiving disproportionate punishments, then you are a victim of your own race and class biases.

Hold on there.  My friend Miriam Cherry writes at Prawfsblawg:  "Without being too banal, I suppose it boils down to social class, race, and the artificial abstraction of harm associated with white collar crime."  I guess this argument is an extension of the "why don't you speak up when drug dealers go to jail" argument.  If white collar criminals are white and drug defendants are black, then by being sympathetic to white collar criminals, we are showing our own preference for white guys.  Does this go back to Skokie?  If you want the NAACP and the ACLU to have free speech, then the KKK has to have free speech, too.  So, if you're outraged about young black people being sent to prison for smallish drug crimes because of the stupidity of the sentencing guidelines, then you can't be happy that a white guy finally feels the pain, too.  However, you might be able to see the silver lining -- now that white guys are feeling the pain, maybe more people will open their eyes to the injustices that affect everyone.

4.  Maybe if you had lost your retirement because of Jeff Skilling, then. . . .

I also don't buy this argument.  Yes, employees of Enron who had much of their retirement accounts invested in Enron stock saw all of that disappear.  No, they were not required to have their accounts full of Enron stock, but they were encouraged to do so by Ken Lay's statements and by the fact that the stock had risen quite high, making it look like an attractive investment.  Of course, we can say that no one should be that undiversified, particularly when your human capital is undiversified, but that fact was not being stressed to employees.  And, when the stock was plummeting, their accounts were frozen for a short but important time period.  And there were some employees who were historically employees of stable utility companies who were acquired by Enron who did not understand that their retirement plans were no longer in a stable utility company stock.  I think that what the leaders of Enron did was wrong and that the result for many people was horrible.  I can repeat all the finance theory that puts the risk of loss on the risk-takers (Why did so many people who were so close to retirement have so much stock in their accounts?  Many Enron employees also benefitted from the high stock price by selling.  Many Enron employees chose not to sell as the stock was on slow decline because they didn't want to pay taxes on the gains.)  All of that does not take away the pain of the loss.

However, we do have a civil system and a lawsuit that is underway to attempt to get compensation to the injured.  So, if I had lost my retirement because of Jeff Skilling, I would be a plaintiff in the civil lawsuit.  (And remember that anyone who was in the market in 2001 lost a significant portion of their retirement during that time.  My mother's retirement account was full of Texas Instruments stock, and she lost quite a significant portion of her account during that time.)  I have no problem with the financial penalties assessed against Skilling and hope that they eventually do make their way to the victims.  However, putting Skilling in jail does not replenish those retirement accounts.

5.  What Lay and Skilling did was just as bad as what serial killers do.

No it's not.  The penal code has long reflected the various values that we as a society put on certain types of property and liberties that we hold.  At the top of that list is life and bodily integrity.  Therefore, we have differing punishements for theft, theft in someone's home, theft with a weapon, and theft when someone gets killed.  Murder has always been at the top of any list and is the only class of crime for which the death penalty currently can be assessed (and then only a subcategory of murder).  From time to time, anomalous provisions will reflect an idiosyncratic value attachment, such as a Texas statute making it a felony to steal any part of a cow.  Cattle at one time were very valuable and therefore a stiff penalty was needed.  Are we now saying that we value retirement accounts over life or bodily integrity?  (I can see over a cow, but not over life or bodily integrity.)  If we are now saying that our greatest fear isn't death or bodily harm but that we will have to live without our retirement accounts, then maybe there's something really, really wrong about our society.  Maybe greed is not isolated to the executive suite.

"Lawstudent" commented to Dave's post with this:  "Could someone please explain why there should be a magic dividing line between violent and nonviolent offenses? To me, proportionality should be based on harm, not violence. Surely there are non violent harms that are greater than violent ones. I would rather be punched in the face than loose my life savings at mid life or retirement. In fact, I would probably rather be robbed at gunpoint for my pocket money than loose my life savings."

I think Lawstudent is making this argument.  And maybe in our lives where the threat of violent bodily harm or death is fairly abstract that the threat of losing money makes that possibility seem sharper some how.  Yes, I would take a punch in the face rather than having a $200k retirement fund drained.  (For economists, yes I would take $200k to be punched in the face.)  I don't think the second example is the same though.  Yes, I would let myself be robbed at gunpoint to save my $200k retirement fund if I knew that the robber would not shoot me.  However, I'm not sure that I would take $200k in order to put myself in a situation where a robber has me at gunpoint and the outcome is uncertain.  To put another way, if a robber has me at gunpoint, will I give $200k to get out of that uncertain situation?  We know that most people with no armed combat training give whatever they have to offer.

And, to finish the point, according to the Texas Penal Code, the punch is a Class A Misdemeanor and the aggravated robbery is punishable in a range of 5-99 years, not a minimum of 24 years.  No state crimes have that minimum according to the Texas Penal Code.  In fact, some crimes are capped at 20 years (all crimes besides first degree felonies).  So Skilling could not have been put in jail in Houston for over 20 years for manslaughter, murder under the influence of passion, trafficking children under 14 or other humans where death results, or having sex with a child.  He also could be sentenced to jail for as little as 2 years for any of those crimes.  (Obviously, if these crimes were against multiple people, then the penalties could run consecutively.)

O.K., I guess that's enough.  I better put on my Teflon armor. . . .

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This just in:  Jeff Skilling was sentenced to 24 years in prison.  Skilling will not be allowed free on bail awaiting appeal but has some time before he will be told when to report to prison.  The play-by-play of the hearing is on the Houston Chronicle blog.  Judge Lake explained that the sentence was proportionate to the crime because Skilling effectively sentenced "hundreds, if not thousands," to a "life sentence of poverty."  I think I would quibble with that statement, but I guess that's for another post.

Note that Skilling gets the pain of a long sentence without even the solace of "one for the record books."  To be known as the holder of the longest white-collar crime sentence, Skilling would have had to receive a sentence of 25 years and a day.

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The media is describing today as "the end of an era" as Jeff Skilling receives his sentence from Judge Sim Lake at a hearing beginning at 1:00 p.m. CST in Houston.  At the beginning of the hearing, 10-12 employees of Enron will testify as victims before Judge Lake hands down the sentence.  I understand that risking one's human capital (and to some extent one's retirement capital) is more serious than risking one's financial capital due to lack of diversification opportunities, but I do see most Enron employees as risk-seeking.  During the 1990s, I knew many workers who were recruited to Enron:  attorneys, accountants, software engineers, traders, legal assistants, and secretaries.  They all went to Enron because of the lure of big money.  Enron paid more, and Enron rewarded people at all levels with stock.  The work was grueling (at all levels), but the rewards were high.  I'll be interested to see what is said in these 5-minute testimonials.

In the Houston Chronicle this morning, my colleague Margareth Etienne, who submitted a brief in support of Skilling, is quoted as arguing that Skilling should not be punished for exercising his right to a jury trial while others at Enron pled guilty and received a "plea discount."  Professor Jack Coffee is also quoted as agreeing with the idea that defendants are punished for proceeding to trial and thereby taking up a judge's time.  Other Enron defendants who seem as culpable as Skilling or more received reduced sentences for providing testimony, specifically Andy Fastow, who received six years in prison for "cooperating."  The Chronicle does report that both sides reached an agreement on the amount of damages caused by Skilling's conduct, a significant factor in sentencing under the Guidelines.

To whet readers' appetites while waiting until the 1:00 hearing, here are gameday comments by Larry Ribstein and Tom Kirkendall, as well as a round-up of Enron commentary on WhiteCollar Crime Blog (by Ellen Podgor and Peter Henning).

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I missed all the excitement last week surrounding Jamie Olis' sentence reduction to six years and Andy Fastow's subsequent reduction from his bargained-for sentence of ten years to six years.  Fortunately, other bloggers chimed in.  Nancy Rapoport, former Dean of the University of Houston, author of a book on Enron and featured commentator in the Enron movie, was interviewed by Loren Steffy of the Houston Chronicle.  The podcast is linked here.

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As he makes his way to serving out his prison term, Andy Fastow apparently has agreed to help lawyers representing Enron shareholders in their suit against investment bankers.  Last year the district judge overseeing the shareholders’ case against the bankers dismissed several banks from the suit based on the view that shareholders had to prove that banks were directly involved in the manipulation of Enron’s financial statements or otherwise directly involved in misleading investors.  That standard of proof is higher than what shareholders wanted—the ability to show that bankers aided and abetted Enron’s actions.  However, Fastow has agreed to be deposed so that he can provide specific details about the role bankers played in Enron’s demise.  While analysts disagree about whether jurors will credit Fastow’s deposition given his admission of wrongdoing, Fastow is certainly bending over backwards to help out.  Now the cynic in me wants to say that Fastow’s helpfulness stems only from his desire to gain leniency in the sentencing process.  However, Fastow has indicated that he is motivated by the desire not to be a scapegoat as well as his view that banks really were involved in manipulation and hence should face some repercussions for that involvement.  Cynicism notwithstanding, I also think Fastow is motivated by genuine regret and a desire to salvage his (and his family’s) reputation.

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Andy Fastow has been sentenced to six years in prison for his role in the Enron debacle.  Although he was eligible to receive up to 10 years in prison, according to the Washington Post, the sentencing judge indicated that he was deserving of a more lenient prison terms because "his family has suffered enough."  Indeed, Fastow's wife already has served one year in prison for tax crimes associated with helping Fastow hide gains stemming from his fraudulent schemes.

Ironically, Fastow's sentence comes on the same day that Bernie Ebbers is set to go to prison to begin his 25 year sentence.  As the Washington Post indicates, the discrepancies between these two sentences seems jarring.  On the one hand, one can argue that such differences reflect the distinction between those defendants who cooperate with the prosecution as did Fastow, and those who do not.  On the other hand, the discrepancies could be viewed as a reflection of how inexact the sentencing process is, and in turn, how inexact the process as a means of punishing and deterring white collar crime.   

I certainly recognize that one of the things that happens when you use the criminal justice system to regulate these kinds of crimes is that we focus on individuals, and hence every sentence depends on people's individual circumstance.  From that perspective, I think it is too easy to condemn the entire process by comparing the different sentences handed out in these cases--something I believe occurs too often.  Yet I still find myself wondering if the differences between the financial impact of WorldCom and Enron--to the extent that such an impact reflects the measure of the kind of terms we expect to be imposed--merit a near 20 year sentencing difference between those deemed responsible for improper conduct?  I also wonder if there is a 20 year sentence difference in the culpability  and responsibility between Ebbers and Fastow.   Thus, even though I know I probably shouldn't, I find myself drawing comparisons between the two sentences.   Those comparisons raise questions for me that make me uneasy about the process, even if I can agree with the prosecutions themselves.

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Bethany McLean has had a lot to say about Enron, but she was speaking to the State of Wisconsin Investment Board in Madison today, and I took advantage of the opportunity to meet her. Her theme was "self-deception" -- by executives, directors, analysts, journalists, etc. -- and at several points her presentation she emphasized the limits of law (including Sarbanes-Oxley) to overcome this problem. Of course, the problem with Enron was not merely self-deception, but public deception on a grand scale.

Some other tidbits:

• Andy Fastow was not the CFO who brought down a good company, but rather the CFO who propped up a bad company.
• Jeff Skilling is the most compelling character in the story, and a "very strange man."
• No one in the Houston courthouse celebrated the conviction of Lay and Skilling, which was a "human tragedy."
• After Lay's death, she received hundreds of emails from people who were angry that he had "cheated justice," but he lost his wealth, his reputation, and ultimately his life. What more do you want?

During the talk, she expressed her cynicism about the investment analysts who covered Enron, almost all of whom rated it a "buy" just prior to the collapse. Afterward, I asked her whether she had more optimism about investment analysts today, and she suggested that the problem now isn't so much conflicts of interest as lack of competence. The money in investment analysis is much less than it was five years ago, and many of the best and brightest minds are working for hedge funds instead.

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Peter Henning has all the facts about the Enron prosecution's latest attempt to push the envelope -- in this instance, the time-space continuum.  Houston Chronicle article here.  Specifically, prosecutors have asked Judge Sim Lake to delay sentencing for Jeff Skilling, set for October 23, until Congress can consider a proposed bill to change existing federal law that vacates a criminal conviction if the defendant dies before appeals are exhausted.  In other words, the prosecutors do not like the state of the law, which will require Ken Lay's conviction to be vacated on October 23, and have asked Congress to pass a new law that will create a new result.  The new result will enable the conviction to stand and prosecutors to go forward with forfeiture proceedings against Lay's estate.  The new law will be retroactive to July 1, 2006, days before Lay's death.

Prosecutors are arguing that this law change is necessary to protect the crime victims and to provide restitution.  However, we have a system that has one purpose -- victim compensation.  That is the private litigation system, and the case against Lay is still lingering over there on that side of the fence.  If we feel that the civil system is not equipped to compensate the harmed in stock fraud cases, then perhaps we should focus on that side of the fence instead of changing existing federal law in a matter of weeks that will have a wide-ranging effect on criminal defendants in the future.

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While I was traveling yesterday, the Fifth Circuit reversed the convictions of Merrill Lynch defendants accused of fraud in what is known as the Nigerian Barge scandal.  The conviction of one defendant on obstruction and perjury was not appealed, so it still stands.  Fortunately, others jumped on the story:  Ellen Podgor, Larry Ribstein, and Tom Kirkendall.

I do want to note that with all the coverage the Enron case has gotten in the Houston Chronicle, I had to search for this article on the reversal on the website because it was so hard to find.  This article notes that the DOJ could ask for full review by the Fifth Circuit.

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I hate to interrupt the Workshop, but the Houston Chronicle is reporting that Ken Lay has died from a heart attack in Colorado.

UPDATE:  Peter Henning explains how Lay's death extinguishes the criminal case against him under appeal, preserves his estate against the forfeiture action, and may create a collateral estoppel argument that plaintiffs in the civil case cannot use Lay's conviction as any evidence in the civil case against him.  Wow.  Larry Ribstein also weighs in.

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In the Dura opinion, Justice Breyer quoted Blue Chip Stamps to stress the point that to allow plaintiffs merely to plead that a misstatement or omission caused the purchase price to be inflated without more

"would permit a plaintiff with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement, value, rather than a reasonably founded hope that the [discovery] process will reveal relevant evidence."

This worst case scenario sounds a lot like the prosecutorial team in the Enron case, as described by Kurt Eichenwald in a TimesSelect article on June 6, as analyzed by Larry Ribstein here.  What is interesting, and what is the theme of my summer article, is how corporate defendants seem to have more protection in a civil case than a criminal case under the same set of facts.

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In doing research for an article, I've re-read the briefs and opinions in Dura Pharmaceuticals, Inc. v. Broudo, decided last year by the Supreme Court.  The case holds that the plaintiffs in the securities fraud case did not sufficiently plead "loss causation" because although the price at which the plaintiffs bought may have been artificially inflated because of misstatements or omissions, the price drop was not directly caused by an announcement tied to the same misstatements.  So, I'm wondering how this reasoning is going to result in a verdict for the Enron plaintiffs.  The opinion is rather narrow; it does not thoroughly give all scenarios in which loss causation can be proved, but it doesn't seem to hold out hope for fraud on the market cases where the price slowly lets out steam over a number of months instead of falling dramatically after one big announcement. 

With Enron, there was an announcement of restatement of earnings on November 18, 2001, and the pleadings in the securities fraud class action case plead that the 12-month high before that date was $90 and change a share.  Then, the pleadings state that on November 18, the price fell to $8.41 and continued to $4 in the next few weeks.  However, the price the day before was nowhere near $90.  The stock price had been falling steadily since February and had not been over $20 since October.  From October 16 to November 17, the price had fallen 75% to a little over $9.  And in case we've forgotten, many factors were negatively affecting the stock market as a whole in September, October and November 2001.

Enron had been dying a death of a thousand cuts, with the November restatements a big nail in a recently purchased coffin.  So, how can this case square with Dura, either on pleading loss causation or in determining damages?  However, the Enron securities fraud class action case survived a motion to dismiss with a class period from 11/27/95 to 11/27/01.  And, as we know, defendants are settling every day at very large prices.  The spectre of a jury trial must be incredibly frightening.

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These are surely not the last words on Enron, but I wanted to share a few thoughts on the conclusion of Conglomerate Forum: Enron.

First, many of the commentators have discussed the deterrent effect of criminal law on corporate executives. As Nancy Rapoport's post from downtown Houston illustrates, however, this case was not about deterrence for most people. This was about punishment. And, in some cases, a felt need for revenge.

Second, several commenters, including most recently John Kroger, have expressed shock that some of the participants have reservations about the guilty verdicts. Yes, Enron was a colossal fraud. But the pre-trial narratives were mixed about Lay's and Skilling's roles in that fraud. Even though I followed the trial closely, and I thought the prosecutors did an excellent job, I find it hard to shake the notion that the real villain in Enron was Andy Fastow.

Third, this brings us to Lay's and Skilling's defense. Why did they believe that they could convince a jury that nothing untoward was happening at Enron? Why didn't they go with the pre-trial narratives that portrayed Lay  as clueless and Skilling as distracted and emotionally troubled? Would that have made a difference?

Finally, I want to thank all of the participants and commenters in the Forum. I have very much enjoyed reading the posts and comments. I feel like I have learned a lot.

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