This past week, I've been drafting a blog post in my head (yes, it's been that kind of week) about the role that risk played in the 2008 financial crisis.  I kept seeing smart people making analogies to "the Enron debacle," and I just felt that this analogy was not apt.  I assume that references to the Enron debacle are shorthand references to the accounting scandals that plagued the beginning of this century, which involved Enron, WorldCom, Tyco, HealthSouth, RiteAid, and more.  In each of these stories, the financial picture given to the marketplace didn't seem to match up with reality, making some investors be caught off guard when the picture was revealed.  These stories are fraud stories.  At these firms, certain individuals knew that the picture was off, and criminal prosecutions and civil litigation tried to sort out which individuals knew what and when.  These trials seemed to throw too wide of a net and induced some big fish caught in the net to surrender whether than flounder and risk a greater penalty.  (OK, I went too far with that fish-net analogy.  I apologize.) 

Another way to read those 2001 stories is as stories of risk-taking.  Either risk-seeking companies painted too rosy a picture to try to buy time for actuals to catch up with disclosed financials or individuals had too great an appetite for legal risk -- sidling up too close to the edge of an accounting rule or guideline.  But generally, the risk story is eclipsed by the fraud story.  So, is the 2008 financial crisis going to be a risk story or a fraud story?  I think this is important because it is going to drive the regulation that will inevitably follow.  The 2001 scandals were fraud stories, and SOX is basically an anti-fraud statute that re-allocates responsibility for fraud and tries to prevent fraud.  SOX does not address risk-taking directly, although some make the argument that SOX stifles risk-taking.

I would argue that at least given what we know now, the 2008 financial crisis is a risk story.  Different individuals and firms underassessed the risk of certain financial transactions and products.  Homebuyers underassessed their ability to refinance mortgages and the potential appreciation of their homes; mortgage lenders underassessed the potential appreciation of collateral and credit risk; mortgage asset-backed security buyers underassessed the risk of those products; financial firms entering into credit default swaps to hedge the risk of those products underassessed counterparty risk; and so on.  Although the system was meant to reduce overall risk of mortgage lending, the system could not withstand the shock to its system when housing prices fell.  (Think of it as all the nation's insurers selling hurricane insurance, and then several hurricanes hitting at once.  And, unfortunately, those insurers weren't regulated and required to maintain reserves.)  If this is just a risk story, then regulation just needs to backstop the risk for these "perfect storm" "once in a century" types of shocks.  Some risk stories don't even need regulation -- think of the "take or pay" cases from the 1980s between pipelines and producers of natural gas who never envisioned that demand would be less than supply of natural gas.

But of course, risk stories don't sell.  They don't sell to the media, the regulators, the investors or the voting public.  Surely mispricing of risk couldn't cause this collapse, could it?  If we're going to put $700 billion into fixing the system, then the problem has to be as big as the cure.  In other words, the bailout only sells if there is a fraud story.  Our markets are efficient, and efficient markets price risk well, if not perfectly.  If there was mispricing of risk, that must have been because there was fraud in the system.  So, enter the FBI.  The FBI is now investing not only Fannie Mae and Freddie Mac, but also Lehman Brothers and AIG for "misstatements."  According to one unnamed government official "it was 'logical to assume' that those four companies would come under investigation because of the many questions surrounding their recent collapse."  If there is one thing that we may have learned from the "Enron debacle," it's that federal prosecutors tend to find what they are looking for.  Although, Attorney General Mukasey has said there will be no "2008 Financial Crisis" task force, a la  the 2002 Corporate Fraud Task Force.  Stay tuned.

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White collar crime followers will remember that before we started being concerned about DOJ hiring practices, we had begun to be concerned with the DOJ's prosecutorial practices, including pressuring corporate targets to waive attorney-client privilege and refuse to pay attorney fees for employees who were potential defendants.  These tactics were the result of guidelines outlined in an internal memo, first called the Thompson Memo, then the McNulty Memo, after the Deputy AGs who oversaw the drafting of those memos.  Well, the memo had been revised again, under the direction of Deputy AG Mark Filip.  So, why the Filip Memo?

These guidelines have been revised following congressional interest in regulating the DOJ's tactics.  In an effort to head off congressional action, specifically this proposed bill, the new guidelines "[prevent] prosecutors from asking companies under investigation to disclose attorney-client privileged information" and specify that "whether a company is paying legal fees of employees under investigation, or whether a company has entered into a joint defense agreement with employees" will not be relevant to a determination of whether the company is "cooperating" with prosecutors for purposes of the sentencing guidelines.

So, we'll see whether this attempt at self-regulation will halt proposed legislation and of course, what effects the revisions will have in practice.

UPDATE:  Apropos of pressuring companies not to pay attorney fees for employees, Miriam Baer just tells me that the Second Circuit just affirmed Judge Kaplan's slapdown of KPMG.

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Some research I’ve been doing on consumer fraud had me running across a Federal Trade Commission survey on complaints related to consumer fraud in general and identity theft in particular.  The survey reflected data from self-reported consumer complaints (and hence was not a nationwide survey) for January through December 2007.

For 2007, Colorado was the state with the largest number of consumer fraud complaints per capita—displacing Utah, which held the position in 2006.  Thus, Colorado had 233.8 consumer fraud complaints per 100,000 people in its general population, for a total of 11,364 complaints.  The state with the least number of consumer fraud complaints was Mississippi, which had 90.6 complaints per 100,000 people, for a total of 2,644.  The next two states with the lowest number of consumer fraud complaints were North Dakota and South Dakota.   

Apparently, identity theft is by far the most prevalent form of consumer fraud, and has been so for eight years in a row--explaining why so many governmental agencies and other entities have focused on ways to combat it.  Arizona was the state with the largest number of identity theft complaints per capita.  Hence Arizona had 137.1 identity theft complaints per 100,000 people in its population, for a total of 8,688 total victims. Once again, the two states at the bottom of the list in terms of identity fraud were North Dakota and South Dakota.  It is probably no surprise that in terms of total number of complaints, no state beat California, with 61,409 consumer fraud complaints and 43,892 identity fraud complaints.  Unfortunately, my own state of Maryland ranked 6th in terms of consumer fraud complaints and 10th in terms of identity fraud complaints.  Interestingly, at least in terms of consumer fraud complaints, Maryland ranked behind Alaska, which came in at number 5.

One the one hand, the survey does suggest that there may be places to which one can escape if seeking to avoid consumer fraud—like the Dakotas.  And yet, the survey also underscores the fact that fraudsters do not direct their schemes into particular states.  Rather, the predominant manner in which victims are contacted is through the Internet over email, suggesting that any state could find itself in the unenviable position of consumer fraud or identity fraud capital of the nation.

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Yesterday, two former Bear Stearns managers were arrested and face criminal charges related to the collapse of certain investment funds associated with subprime mortgages.  The managers represent the first executives to face criminal charges stemming from the subprime meltdown and current financial crisis.  The Wall Street Journal has a copy of the indictment, which charges both managers with securities fraud, wire fraud, and conspiracy, and one manager with insider trading, that can be viewed here. Both former managers were arrested outside of their respective homes.  The photos and coverage of their “perp walks” struck me as very similar to the highly publicized arrests of corporate executives involved in the accounting and corporate governance scandals post-Enron. In fact, such arrests and perp walks began occurring almost five years ago, and around the same time—during the summer months. So I was struck by the similarities between those arrests and yesterday’s arrests. Moreover, the similarities raise some interesting questions.

First, do the arrests represent the tip of the iceberg? Certainly such was the case five years ago, as the summer months seemed to reflect the beginning of an almost steady flow of corporate arrests. Moreover, the creation of Operation Malicious Mortgage (DOJ and the FBI’s concerted efforts to curb mortgage fraud) suggests that more corporate executive arrests may follow. Indeed, apparent some four hundred individuals have already been charged with fraud in connection with the operation.

Second, will the indictments lead to convictions? To be sure, many of the high-profile indictments surrounding the collapse of Enron and other entities resulted not only in convictions, but the imposition of lengthy prison terms.  According DOJ's most recent report, its Corporate Fraud Task Force—created in July of 2002 to respond to the corporate governance crisis—has been responsible for over 1300 corporate fraud convictions since its inception. And yet there were some notable “losses”—including high profile acquittals, reversals and mistrials.

Third, if there is an increase in indictments of corporate executives over the coming months, will that increase be sustained over the coming years? One 2007 survey by the American Lawyer found that in recent years the number of major corporate fraud indictments has “slowed to a trickle.”  Thus, the survey found that while there were more than 300 major corporate fraud indictments between 2002 and 2005, DOJ only identified fourteen such indictments in 2006 and twelve as of November of 2007.  To be sure, apparently some 400 people have been indicted since March as a result of Operation Malicious Mortgage. Then too, some may applaud the overall decrease in prosecutions and convictions, particularly those who believe that such actions are ineffective in curbing fraud as well as those concerned that such indictments and their resulting convictions were sometimes obtained through problematic practices that eroded important attorney-client rights.  Moreover, there are many reasons for the decline, including the possibility that both the market and corporations adapted to increased prosecutorial scrutiny.

Fourth, will these indictments make a difference?  Of course this may be the most important and yet most difficult question about which we try to respond. After all, five years after new legislation and a seeming increase in white collar crime prosecution, we seem to be back at the same place. Does that confirm that these high profile indictments, convictions, and lengthy prison sentences are not effective deterrents? Or should it cause us to question how much more fraud we may have seen if not for the increased efforts of five years ago?  Unclear.  At the very least however, the similarities between the corporate perp walks of yesterday and those that occurred five years ago suggest that while the transactions and people may change, fraud—and the corporate perp walk?—will persists.

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In the Ring: The Trials of a Washington Lawyer is the fascinating memoir of well-known Washington, D.C. attorney Robert S. Bennett. Although it was published a few months ago (and was extensively reviewed, including here, here, and here), I only recently had time to read it. In the interest of full disclosure, I had the tremendous good fortune to work for Bob at Skadden, Arps, Slate, Meagher & Flom. I admire him a lot. Consequently, I had been looking forward to reading some of his legal war stories.

I was not disappointed. The book serves up chapter after chapter detailing interesting cases Bob has handled. Some of the cases are well-known: acting as Special Counsel to the Senate Ethics Committee during the Keating Five investigation; representing Caspar Weinberger in an investigation regarding Iran/Contra; representing President Bill Clinton in the Paula Jones case; and representing New York Times reporter Judy Miller in legal proceeding regarding her sources for a story revealing a CIA agent’s identity. Other cases are less well-known, but equally intriguing. Bob is a careful and entertaining storyteller. He provides interesting behind-the-scenes anecdotes without disclosing confidential client information (and without getting bogged down in the more mundane legal issues that are present in even the most interesting legal cases). Those who enjoy stories of law will appreciate this book.

But the book also has something for those who enjoy the ideas of law. For me, the most thought-provoking chapter was entitled “Ring Around the White Collar.” Among other things, this chapter highlights the precarious position of companies accused of corporate wrong-doing. “Even if a company believes it is innocent, it cannot, absent unique circumstance, afford to fight the charges to the bitter end … because the company will be destroyed in the process.” Remember Arthur Andersen. Bob notes that “[w]hile prosecutors claim that they do not pressure companies to do what the government wants, every defense lawyer knows that in the real world companies are under tremendous pressure to do what the government wants so that they will not be charged.” Yet Bob concedes that “Sarbanes-Oxley has been a positive force for good. There is more corporate accountability than in the past and it has forced executives and directors of companies to focus more on their obligations to the public.” The book is not a law review article. It leaves the task of determining how to fairly prevent and punish white-collar crime largely to the reader. I cannot say that I have all the answers, but I feel comfortable saying that attorneys like Bob Bennett play a critical role.

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The American Lawyer has an article posing the provocative question of whether, with criminal fraud indictments down, has the Corporate Fraud Task Force reduced corporate fraud or merely stopped looking for it?  Corporate fraud of course, is not self-revealing, so statistics on prosecutions may either mean an actual drop in frequency or merely a drop in investigations because of shifts in priorities or resources.  The article also attempts to add more data to the selective data revealed annually by the Task Force since its inception in 2002 -- the DOJ releases data on indictments and convictions, but the magazine also tries to quantify acquittals and reversals to show a clearer picture of the "success" of the Corporate Fraud Task Force.  Read it all.

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I've often been intrigued by the question of whether, if an entire industry can be negligent, can an entire industry be criminal?  Many of the so-called corporate scandals seem to involve practices that were engaged in widely throughout a certain sector or industry, and the unlucky few lose the "corporate crime lottery" by becoming targets of prosecutorial discretion.  In a scenario not unlike Shirley Jackson's The Lottery, these unfortunate targets are punished for the purported crimes of many in hopes of deterring the larger population.  The defense that everyone backdated or engaged in wash trades or practiced aggressive earnings management is not even worth advancing.

However, at least in the NBA, widespread rule-breaking seems to have exonerated each individual.  The NBA commissioner David Stern, in reacting to a report that all of the NBA's 56 referees broke the league's anti-gambling rule in some way, criticized the rules instead of the rule-breakers.  Evidence that none of the referees live by the rules, with half gambling in casinos and the group hosting a poker tournament at its annual meeting, seemed only to convince Stern that the rules were "harsh" and "outdated in regards to changing attitudes toward gambling in the United States."  As a consequence, the rules will now be rewritten to include various non-sports gambling in the off season.

According to commentators last week on Pardon the Interruption, Stern (who apparently has claimed in the past to be tied to the letter of the law of other Draconian NBA rules) was put in a difficult situation because he could not practically fire all or even half of the NBA referees.  Being unable to prosecute all offenders has never stopped the DOJ, however.  Apparently Stern is new to the art of prosecutorial discretion.

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Jamie Olis, now represented by Houston plaintiffs' lawyer John O'Quinn, has filed a petition in federal court claiming multiple instances of prosecutorial misconduct in his now-infamous indictment, prosecution and conviction.  As usual, Tom Kirkendall has the good details (and links to the documents).

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So, what do the ongoing criticism of DOJ hiring/firing priorities and the overcriminalization of corporate law have in common?  So far, at least one case:  the bribery convictions of Richard Scrushy, former CEO of HealthSouth and Don Siegelman, former governor of Alabama.  I was interested in this case awhile back because the indictment of Scrushy on bribery charges by federal authorities seemed overtly opportunistic. 

As you may recall, Scrushy was acquitted in June 2005 of federal securities law charges.  This acquittal was seen as a slap in the face to the fancy big city U.S. Attorneys who chose to prosecute Scrushy on his home turf of Alabama.  After considering filing perjury charges against the acquitted Scrushy, prosecutors finally indicted him in October 2005 on bribery charges -- he wrote 2 checks for $250k each in 1999 and 2000 to the Alabama Educational Lottery Foundation, overseen by then Gov. Siegelman.  Later, Siegelman appointed Scrushy to the state hospital board.  Scrushy was convicted in June 2006.  Siegelman was also convicted and sentenced to 88 months in prison.

Now, however, the case has become interesting again as DOJ critics contend that the former governor, a Democrat who was voted out of office by a narrow margin in 2002, was targeted so that he would not defeat the Republican candidate in the next election.  What is interesting to me is that in this go-round, newspaper accounts are focusing on the argument that this type of bribery charge is rarely brought and utterly discretionary and that the actions in question are generally considered business as usual in state politics -- big donors receive nice appointments by the victors.  Also, accounts now point out that Scrushy had held the same position under the previous two administrations, making his appointment by Siegelmen seem more a matter of course than a repayment for a contribution.  No one seemed to be making these arguments to save poor Scrushy! 

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          Last month DOJ’s Corporate Fraud Task Force issued a report revealing that in the five years since the Task Force was established (on the heels of the fall of Enron and WorldCom) there have been 1236 corporate criminal fraud convictions.  This includes high-profile convictions such as Martha Stewart and Bernie Ebbers as well as convictions of corporate officers whose names you may not know, even though you’d recognize the name of the corporation caught up in corporate malfeasance.  The report revealed that many different corporate officials have been the subject of prosecutions and convictions.  Apparently DOJ has convicted more CEOs and presidents than any other group of corporate officers.  This is surprising given than in the past it has been especially difficult to hold such top executives liable for criminal wrongdoing because such executives where less likely to be intimately involved with specific transactions.  Less surprising is that the group with the second largest number of convictions was vice presidents, followed by CFOs, and then corporate counsel and attorneys.  Interestingly, the one group of corporate actors who did not appear to be on the list was outside directors.  Hence, while there appear to have been plenty of inside directors, including board chairs, who have been convicted of various white collar offenses within the last five years, there do not appear to be many, if any, instances in which directors who were not employed by a corporation were convicted of corporate fraud.

            On the one hand, their apparent escape from criminal conviction is surprising.  Indeed, it seems as if a variety of current and former corporate officers were caught in the wave of increased criminal prosecutions, including those many believed did not have the kind of culpability necessary for criminal liability.  So why not outside directors as well?  On the other hand, however, the exclusion of outside directors makes sense.  Indeed, it seems unlikely that outside directors, who have more of an oversight role in the corporation, would have the kind of knowledge or intent necessary to be subjected to criminal liability.  Then too, the most recent study by Bernie Black and his co-authors reveals that out-of-pocket liability for outside directors is a rare phenomenon in the civil context.  It is certainly consistent with their study that the chances of an outside director being subject to criminal liability would be even more remote.  Moreover, their study suggests that the rarity of civil liability for outside directors will continue notwithstanding the fact that outsider directors had to pay out-of-pocket damages in connection with the WorldCom and Enron settlements.  In their view, civil damages will continue to represent the exception to a general rule of non-liability for outside directors.  Taken together, however, the study and the DOJ report reveal that while there may be repercussions for outside directors who are involved in corporations accused of wrongdoing, liability—either criminal or civil—is not likely to be one of them.

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Yesterday prosecutors decided not to bring criminal charges against the law firm of Sidley Austin in connection with Sidley's work regarding allegedly abusive tax shelters.  Prosecutors determined that the indictment could destroy the law firm and have a devastating impact on its clients.  The decision appears to reflect a sign of the times, pursuant to which there has been tremendous criticism and push-back regarding white collar crime enforcement efforts and the tactics employed to prosecute corporations and their officers.  The decision also reflects the impact of Arthur Andersen, which impact includes a better understanding of the devastating collateral consequences that flow from indicting a major firm.  Yet the impact cuts both ways.

To be sure, yesterday's decision suggests that prosecutors may be extremely reluctant to subject any major firm to the fate of Arthur Andersen.

However, the possibility of such an indictment still appears to have a major impact on corporate conduct.  Indeed, the threat of criminal indictment and the potential destruction of their firm (even if that potential is remote) appears to make firms more than willing to cooperate with prosecutors in other areas, such as paying civil fines or helping with the investigation of firm partners and employees.  In Sidley's case, the fact that the prosecution elected not to prosecute the firm does not mean there are no repercussions for Sidley.  Instead, Sidley has agreed to pay $39.4 million to the IRS and to continue to cooperate with the investigation of one of its former partners. 

Thus, while lessons from Arthur Andersen may cause prosecutors to be gun-shy about the prosecution of law firms and other entities, they also appear to make such entities more then willing to accept other penalties in an effort to ensure that such a prosecution does not occur.

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Worth reading.

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Okay, it just caught my eye.

A Chinese businessman, Wang Zhendong, was sentenced to death this week by a Chinese court for his role in a fraudulent investment scheme related to ant breeding. The businessman (the chairman of his company) defrauded more than 10,000 investors out of some $385 million, only $1.28 million of which had been recovered by the start of his trial.

Interestingly, others involved in the scheme escaped Zhendong’s fate. Instead, fifteen managers at the company were fined and received prison terms ranging from 5 to 10 years.

Evidently, one investor committed suicide as a result of his losses. But that does not appear to be the reason—or at least not the only reason—why the businessman was sentenced to death. According to news report, the death penalty is used quite broadly in China. While it is used most often in violent offenses, it is also used for nonviolent crimes that involve large sums of money or otherwise have significant social repercussions. Apparently, Chinese leaders have been concerned about the escalating number of pyramid and investment frauds, fearing that such fraudulent schemes, and the losses that result from them, will contribute to growing social unrest. I gather the hope is that such a sentence will send a message, thereby curbing these kinds of bogus investment schemes. It certainly adds a whole new angle to white collar crime.

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Although I've read this only through one source, it appears that Cosmo Corigliano, the former CFO of Cendant Corp., who testified against Walter Forbes, the former CEO and Kirk Shelton, was sentenced to three years' probation this morning.  Corigliano seems to have been the Fastow of the Cendant scandal, orchestrating, supervising and maintaining an ongoing financial fraud.  Forbes was tried three times for his role in the fraud, being convicted after two hung juries on one count of conspiracy to commit securities fraud and two counts of making false statements to the FBI.  Forbes was sentenced to twelve years, seven months in prison.  Shelton was convicted in his first trial and sentenced to ten years in prison.

My crim law professor, Michael Tigar, used to say of defendants "A Snitch in Time Saves Mine," and he must have been speaking of Mr. Corigliano.  Although SEC press releases report that Corigliano forfeited all of his assets to the tune of $14 million, with some exceptions, news reports have totalled his exempted assets at about $5 million.  Two other testifying witnesses, the comptroller and an accountant, were also sentenced to two years' probation yesterday.  I have not been following these trials closely enough to judge the relative guilty hearts of Forbes, Shelton and Corigliano, but Corigliano seems to have been right in the middle of the fraud, which is why he was so invaluable in the investigation (as noted by the prosecutor and the judge).  If he had been less responsible for the fraud and less guilty, he would probably be in jail now.

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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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Last summer when Conglomerate hosted the Enron Forum, John Kroger, a law professor at Lewis & Clark and former Enron prosecutor, defended the convictions of Lay and Skilling on this blog.  In ramping up productivity on an article that will go out next month on the disconnects between criminal prosecutions and private litigation over corporate misconduct, I ran across Professor Kroger's article Enron, Fraud and Securities Reform:  An Enron Prosecutor's Perspective, 76 U. Colo. L. Rev. 57 (2005).  The article provides a detailed overview of some of the transactions at the heart of the Enron investigation, but also offers suggestion for further reforms.  One suggestion that caught my eye was one to criminalize negligent corporate behavior by corporate executives.

By analogizing to several California state laws that criminalize negligent behavior (mostly relating to environmental activities) and the Clean Water Act, Professor Kroger proposes "that Congress pass a new federal criminal statute making it a misdemeanor, punishable by up to one year in jail, for any person to negligently make any untrue statement of material fact about a publicly traded company's operations, performance, or financial condition, or to negligently omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading."  (p. 129-31)

I find it hard to imagine a world in which negligent statements or nonstatements would send someone to jail even though the same statements, without some other indicia of scienter, would not even subject an individual to private litigation past a motion to dismiss.  Likewise, merely negligent behavior in corporate decisionmaking is protected by the business judgment rule.  I doubt that supporters of this proposition would also support abrogation by statute of the business judgment rule and repeal of the PSLRA. 

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. . . ain't the hazard it used to be, at least not if you want to run Coca-Cola.  Coke just appointed Muhtar Kent as its president and COO, making him the No. 2 behind CEO Neville Isdell, as well as Isdell's likely successor.  Almost ten years have passed since Kent was fired from a senior position with Coca-Cola Amatil--a regional bottler based in Sydney--for shorting 100,000 of his own company's shares just hours before the company issued a serious profit warning that caused a drop of $2.5BB in the company's market cap, almost a 30% loss.  Kent had been managing director of the bottler's European division.  He apparently made about $324,000 from the sale.  After an investigation by the Austrialian Securities Commission, Kent coughed up the profits and another $30,000 to cover the costs of the investigation. 

This past October, Kent denied prior knowledge of the impending profit warning, calling it all a "bad coincidence."  The current official story from Coke is of the "dog ate my homework" variety:

Mr Kent was advised by his financial adviser to diversify his financial portfolio, which at the time consisted solely of KO stock and CCA stock options. . . . He accepted the proposal and left it to the financial adviser to execute. In doing so, he did not fully understand that it would involve a short sale or the elements of a short sale. As a result, he also did not know the specific timing of the transaction.

So he didn't know about the impending profit warning.   And he didn't know about the impending short.  Hmmm . . .  Sorta sounds like Martha Stewart's oral stop loss order.  I'm also not sure how short-selling diversifies his portfolio.  And why was he shorting his own company anyway??  When Kent was made president of Coca-Cola international in January, less than a year after rejoining Coca-Cola, it made Colin Barr's The Five Dumbest Things on Wall Street This Week at TheStreet.com.  Or you can watch the video.

In any event, CEO Isdell (declining to be interviewed) recently issued a written statement:  "Without doubt, Muhtar is a man of the highest integrity and deepest skills."

When Coke sneezes, Emory catches a cold.  So we tend to follow our local benefactor quite closely.

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The Enron saga continues with the prosecutions of the "NatWest Three," the three British bankers from Greenwich National Westminster who were extradicted to the U.S. to stand trial on seven counts of wire fraud connected with

a scheme to defraud NatWest and GNW (Greenwich NatWest, the subsidiary) and deprive them of money and their right to honest services by recommending to GNW that it sell its interest in Swap Sub for only $1 million, when the defendants knew GNW's interest was worth far more, and when the defendants were planning fraudulently to convert the balance of GNW's interest to themselves and others.

The only problem is that the Fifth Circuit has now cut off at the knees the "theft of honest services" theory of fraud in connection with the reversed convictions of four Merrill Lynch employees in the so-called Nigerian Barge cases.   (Peter Henning at White Collar Crime here.)  This development has caused prosecutors to reconsider the conviction of another Enron employee in the Broadband case.  Defense attorneys in the NatWest Three case have asked for the indictment to be dismissed.  In response, prosecutors have amended the indicment, although "[t]he United States continues to believe that the Defendants' arguments regarding the honest services allegations are without merit."

The new indictment reads

a scheme to defraud NatWest and GNW (Greenwich NatWest, the subsidiary) and deprive them of money and their right to honest services by recommending to GNW that it sell its interest in Swap Sub for only $1 million, when the defendants knew GNW's interest was worth far more, and when the defendants were planning fraudulently to convert the balance of GNW's interest to themselves and others.

So, what did the bankers do?  This London Observer article has much of the backstory, and the necessary facts are in the indictment (linked above).  Enron employed GNW to create derivatives to help Enron hedge some of its portfolio risk, including restricted shares in an IPO that could not be sold.  To do this, Enron (through LJM Cayman) created Swap Sub, and GNW purchased an interest in that entity.  (CSFB also had an interest in this entity.)  This entity entered into offsetting derivatives contracts with Enron.  At the time, the bankers complained to others that GNW got no value out of that arrangement.  In fact, GNW recorded the value of its interest in Swap Sub as zero.  Then, when it looked like the bankers would all be seeking other employment because of the Royal Bank of Scotland acquiring NatWest and selling off GNW, the bankers entered into a "final period" with all the problems inherent therewith.

The bankers met with Fastow and Kopper in Houston and proposed letting the three bankers in on spinning straw out of gold.  Swap Sub was not necessary any more, so Enron would disburse money to Fastow to buy back the Enron stock in the subsidiary and liquidate it.  First, however, Enron would purchase GNW's interest for $1 million, creating a profit for GNW where none was before.  Then, Enron would sell the three bankers an interest in the sub (through two partnerships) for $250.  Ten days later, Enron would buy that interest back for $7.3 million, split three ways.  Fastow and Kopper also received $12.3 million from the deal.

So, did the bankers defraud GNW of money?  The prosecutors' theory is that the bankers fraudulently misrepresented the $1 million purchase price of Swap Sub as a good price.  The fraud would be that the bankers know that the entire sub will be liquidated by Enron for $30 million and that they will have the opportunity to buy a 50% interest for $250k that will turn into $7.3 million.  (Yes, I understand that the numbers don't work out quite right!)  I can't tell from the pleadings what GNW's interest in Swap Sub was.  I would assume that CSFB's and GNW's investment was probably the minimum required for Swap Sub to be considered a third-party to Enron, but I don't know.  So, the issues would be (1) what the value of GNW's interest would have been (that GNW considered to be worth $0) and if it would have been over $1 million under the liquidation plan and (2) would the liquidation plan have occurred without buying out GNW first.  In other words, the plan seems to have been spearheaded by the bankers under the assumption that GNW was out of the picture.  Could GNW ever have participated in more profits?

As the title suggests, what this scenario looks like to this business law professor is an usurption of a business opportunity.  The bankers used the relationship between GNW and Enron to invite themselves to participate in a structured finance deal much like the ones that GNW participated in without offering the opportunity to GNW.  GNW apparently had conflict of interest rules in place, and the bankers violated those private rules and the rules surrounding fiduciary duties.  GNW certainly seems to have a cause of action against the bankers for violating those duties.  Whether a foreign government will be able to prosecute this scheme criminally is another question.

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Last week, I posted an attempt to debunk the "if you think Skilling's sentence is excessive, what about drug sentences" argument.  The New York Times has twice in the last two weeks compared the Supreme Court's willingness to place due process limits on excessive punitive damages awards with the Court's unwillingness to strike down "three strikes" laws as violating the Eighth Amendment.  Both editorials (one authored by Adam Cohen, the other unsigned) mention a heartbreaking case of a father who was sentenced to 50 years after his third conviction -- shoplifting videotapes worth $153.53 -- in the context of the Williams case that was heard yesterday.

This argument seems somewhat more compelling mostly because it is directed not at me but at the Supreme Court, which seems to have the obligation and opportunity to opine on both of these areas of the law.  The assumption behind the argument is that those likely to be on the receiving end of excessive punitive awards (and some may be repeat players or at least repeat industries) have the incentives, resources, and power to argue forcefully for damage limits both as a state legislative reform matter and as a judicially-recognized constitutional law matter.  Those who may be sent away for the rest of their lives for the third hot check or shoplifting spree may not.  There also seems to be an accusation in these pieces that the Supreme Court doesn't care about common petty thieves because they are after all criminals, but they have a soft spot in their hearts for tort defendants who aren't of the same guilty mind.

I could argue that proportionality is more important a concept in criminal convictions than in tort damages (and really, a punitive damages ratio limit is reflecting a policy of proportionality) because of the qualitative difference between jail time and monetary damages.  Courts seem to assess punitives with an eye to the defendant's overall ability to pay (how much money will the defendant have left over), but sentences don't seem to reflect a concern about how much of the prisoner's life will be left over.  Criminal defendants have a finite lifespan whereas tort defendants (except in bankruptcy) generally do not have finite lifetime resources.

Although I am generally not in favor of tort damage caps, punitive or otherwise, I understand that a finding of tort liability is generally less blameworthy than the finding of criminality.  However, recklessness and gross negligence may not be as far from some crimes as one would think.  Perhaps the court is more deferential to legislators who pass three strikes laws and judges that sentence criminals than to juries who might be "runaway juries."  We may also be concerned that in a non-class action setting, a large punitive award may be duplicated in another proceeding (and may attract other proceedings).  However, that concern could be deal with in other ways and really isn't a concern that this particular award is excessive.

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A theme raised at Maryland's conference on federalism focused on the increased use of enterprise liability--that is imposing liability on the corporation as an entity both in the civil and criminal context.   The concerns people raised were familiar.  That is, enterprise liability seems to harm shareholders because to the extent the corporation must make some payment, that ultimately means the shareholders must make some payment.  Hence, the liability strategy imposes a kind of double penality on shareholders--one related to whatever misconduct they had to suffer through and the second related to having to pay for that misconduct.  Then too, people talked about the harm such liability, particularly criminal liability resulting in the destruction of the enterprise, imposed on other groups such as creditors, consumers and employees.  In fact, with regard to employees, it strikes me that in the context of enterprise liability, the greatest harm is suffered not by those executives who either engaged in misconduct or had some power to prevent it, but rather by the rank and file who--if they lose their job because an entity suffers the fate of Arthur Andersen--may not be able to recover as quickly.

The discussion got me thinking about rationales for entity liability.  My impression is that such liability, particularly when we are talking about the sort that could destroy the entity, makes the most sense when the corporation has become corrupt in some sense.  That is my short-hand way of saying: (a) the individuals in the corporation engaging in wrongdoing out-number the individuals who are "innocent"; (b) the corporate culture breeds an enviornment that encourages and facilitates misconduct; and/or (c) even if only a few indidivuals engage in misconduct, the harm they inflict is tremendous and they are using the entity to shield themselves from responsibility.  In my mind, these scenarios suggest that there is no way to get at the individual bad actors other than through some form of enterprise liability and/or that there is a significant danger of continued misconduct.

I recall someone saying that the problem with enteprise liability, especially in the criminal context, is that it stems from laws and tactics developed in response to criminal enterprises, where the enterprise's sole or primary purpose was to engage in criminal activity.  Hence, the purpose of the liability was to destroy the enterprise.  If that is not our purpose, it seems to me we need to develop better standards regarding how and under what circumstances to use such liability.

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Over the weekend, the California attorney general Bill Lockyer announced that there was ample evidence to indict individuals both within and without H-P for activities involving "pretexting."  So far, these indictments have not been issued.  Are California prosecutors involved in their own pretexting?  If they announce to the media that there are indictments forthcoming, they have a lot of leverage with the individuals they question to gain access to more information.  Although investigators are not pretending to be other people in order to gain information, they may be pretending that the laws against pretexting are stronger and more specific than they really are.  Although investigators may take the position that pretexting is illegal under broad California laws, some doubt must exist because a law that would have specifically banned pretexting languished in the California legislature all year.  In addition, new bills have been introduced in Congress to ban pretexting, hardly evidence that we are confident of pretexting's current illegality.

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Last Thursday, the WSJ reported on a prosecution of a bank employee in Vietnam.  The tenor of the story is that the pre-trial treatment of the accused and the potential sentences are disproportionately harsh for relatively technical crimes.  However, in reading the article, the facts reminded me of the Enron Nigerian barge trial.  I thought this warning to Vietnam prosecutors was a bit disingenuous given U.S. prosecutors treatment of the NatWest bankers and the BetonSports.com CEO:  "The currency case reflects the distance Vietnam has to go before it can say it is governed strictly by rule of law rather than the whims of the police and the dictates of the ruling Communist Party."  (I am obviously not saying that the U.S. government is Communist; I am saying that prosecutorial whimsy is not in short supply.)

Here are the facts:  Nguyen Thi Quynh Van is a 35-year-old trader at the Industrial & Commercial Bank of Vietnam (Incombank), a state-owned bank.  From April 2003 to February 2006, she traded foreign currencies through intermediaries, specifically ABN Amro.  During this time, she lost $5.4 million on trades.  During a routine audit, bank officials discovered that she was not authorized to make these trades.  (The article never says whether she lacked internal authorization or some sort of external authorization.  Her job is described as trading currencies, so one wonders how it was that she was unauthorized to do her job.)  The article states that she was unauthorized to make any trades, but that her manager approved the trades due to his poor English skills.  (Again, not sure why Ms. Van submitted authorization requests in English.)  Ms. Van was then arrested, and four other traders were fired.

Because the bank is state-owned, the state is both victim of the loss and prosecutor.  This coincidence of interest may explain why the state then began investigating ABN Amro at the same time that the bank is seeking for ABN Amro to return the $5.4 million.  As ABN Amro was an intermediary, their profit from the trades was the commission alone.  However, police discovered "a little-known banking regulation that requires all foreign-currency traders to register with the central bank" and arrested the non-registered ABN Amro employees under that law.  Perhaps the ABN Amro intermediaries will eventually be exonerated, like the Merrill Lynch executives in the Nigerian barge cases.  Maybe they won't be.  However, to say that only in Vietnam can business people "be jailed for as long as 20 years after a seemingly routine transaction" seems a bit myopic.  (Of course, in Vietnam Ms. Van faces the death penalty for "mishandling state assets," a punishment that has not yet been extended to white-collar criminals here.)

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According to Reuters, a federal judge has accepted a "settlement" between prosecutors and Frank Quattrone that provides for twelve months of deferred adjudication.  This is the final footnote in a three-year odyssey for Quattrone, whose first trial in 2003 ended in a mistrail.  His second trial ended in a conviction, which was overturned by the Second Circuit.  The settlement today avoids a third trial.  For those of you new to the Quattrone odyssey or those of you who have understandably forgotten how this case started, Quattrone was a celebrated analyst at Credit Suisse First Boston in the technology sector during the technology boom.  For a short time in 2002-03, investigators were interested in whether fancy firms were spinning shares in hot IPOs.  Now, it's not clear that under NASD rules at the time that spinning was prohibited.  (Spinning for an exorbitant fee or other remuneration was clearly prohibited, but not spinning for "softer" considerations.)  In the course of investigating CSFB and Quattrone, investigators read an email in which Quattrone reminded others of the document retention policy at CSFB.  The obstruction of justice charge was born.  This was the sole charge in question in both of Quattrone's trials.  Did Quattrone remind employees of the document retention policy in violation of the obstruction of justice statute in an effort to cover up evidence of an act that may or may not be a crime?

And so, we'll never know if spinning in the early 2000s was a crime.  (The NASD and SEC have foregone an opportunity to clear that up in new rules issued as a result of the IPO Advisory Committee.)  If we had gotten some finality on Quattrone's case, the benefit would seem to be only that companies would know how to better craft document retention policies.  Oh, and the prosecutors involved in his conviction did get fancy new jobs at Wachtell and others for big bucks.  I guess that's a benefit.  I would like to know what the total cost of prosecuting Frank Quattrone was, so we would know if it was worth it. 

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The prosecutorial response to white collar crime post-Enron has had some setbacks.  In both the Arthur Andersen case and the Enron Nigerian Barge case, appellate courts eventually said that the fact pattern did not constitute the crime in question.  However, as welcomed as these decisions are, they cannot turn back time.  Arthur Andersen was destroyed by the investigation and conviction and, like a corpse after an autopsy, cannot be brought back to life.  The defendants in the Nigerian barge case will never get back the years they spent defending themselves and actually living in prison, not to mention the untold defense costs.  I am writing a paper on the relative burdens on the various parties in criminal and civil corporate misconduct cases, and I find it interesting that we have so many requirements and presumptions to save corporate civil defendants from vexatious litigation and exorbitant discovery costs, but we seem not to care about the corporate criminal defendant who must wait until a jury verdict or an appellate ruling to determine whether the prosecution was without merit.

I was reminded of this paradox when reading this story in the WSJ this morning about the decimation of BetOnSports.  As I blogged before, the DOJ arrested the CEO, who is not a U.S. citizen or resident, as he was changing planes in Dallas on his way from London to Costa Rica.  BetOnSports is not a U.S. company, is not listed on any U.S. exchange, and has no assets in the U.S.  BetOnSports is listed on a UK exchange and is headquarted in Costa Rica.  Mr. Carruthers is still in jail in St. Louis, separated from family and business in a foreign country.  Now, surely to try to appease the DOJ, BetOnSports has announced that it will take no more bets from Americans and will return their deposits.  Analysts say this will in fact mean the end of BetOnSports, who received 3/4 of its revenue from American bettors.  And by the time a U.S. court ever answers the question of whether prosecutors can actually make a case against Carruthers and BetOnSports under existing law, the damage will have been done.

Playboy is banned in many countries.  If the governments there found out that their citizens were able to order the magazine over the Internet or access its website, would the DOJ stand back if Hugh Hefner was arrested while traveling? 

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I think we're all aware of the trials of Martha Stewart over the past few years.  She was convicted of obstruction of justice, making false statements, and conspiracy to do the same and to commit perjury and sentenced to five months in prison and five months of house arrest.  The charges stemmed from an investigation into whether Stewart violated SEC insider trading rules by selling her ImClone stock ahead of an announcement that sent the stock price downward.  The DOJ never charged Stewart with insider trading, and the general consensus was that no prosecutor could prove that she committed insider trading, given the evidence available.  However, the SEC did file civil insider trading charges against Stewart, and as recently as May 2006, Stewart vowed to contest those charges.

Today, Stewart settled with the SEC and will pay $195,000.  Possibly more importantly, she agreed never to be a director or executive officer of a public company, including her own.  Why now?  There doesn't seem to be too much of a downside to the settlement (she had already resigned as CEO and director of Martha Stewart Living Omnimedia), and a trial would have meant that she would have been subject to deposition.  With the criminal trial over, the DOJ could have created a situation where she could not invoke the Fifth Amendment, given no plans to prosecute her on any additional charges.  That might not have been pleasant.  All in all, the settlement may just put an end to the sordid saga and let us all focus on something new.

UPDATE:  The SEC's press release specifies that the director ban and officer limitation is for a period of five years.

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Last week the Second Circuit upheld Bernie Ebbers 25 year sentence, calling it “harsh, but not unreasonable.” In fact the Second Circuit highlighted the difference between his sentence on those for violent crimes, noting “25 years is a long sentence for a white-collar crime, longer than the sentences routinely imposed by many states for violent crimes, including murder, or other serious crimes such as serial child molestation.” The Second Circuit nevertheless upheld the sentence as reasonable apparently because, based on the manner in which the sentencing guidelines are structured, Congress had made a judgment that the loss associated with some economic crimes warranted significant sentences and because Ebbers appeared to have been motivated by personal financial circumstances. The White Collar Crime blog poses some interesting questions about the decision, and about how we should assess the reasonableness of such sentences. http://lawprofessors.typepad.com/whitecollarcrime_blog/2006/07/commentary_on_e.html

It is a hard question. On the one hand, the Second Circuit’s language seems to invite us to assess reasonableness by comparison to violent crimes, with predictable results. Indeed, that assessment—does any economic crime merit greater punishment than the punishment we would impose on a serial child molester?—tempts us to conclude that all economic crimes should receive less punishment than violent crimes. On the other hand, Congress seems to have placed a lot of emphasis on the loss caused by economic crimes. While the emphasis acknowledges that such crimes can have a significant impact on individuals and the market, such an emphasis seems like it could lead to disproportionate results. Indeed, does the person who commits a financial fraud at a Fortune 100 company merit greater punishment than the person who commits the same fraud at a small closely held firm? Viewed in this light, the case and sentence raise an important question not about what's reasonable, but rather about how we determine reasonableness.

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Almost a year after an Alabama jury acquitted HealthSouth founder Richard Scrushy of accounting fraud charges, another Alabama jury convicted him of bribery charges for apparently paying half a million in bribes to get a seat on a state health care board.

The conviction seems to discredit one popular theory regarding Scrushy’s acquittal on the accounting fraud charges. That theory essentially blamed the acquittal on jury nullification—the idea that Scrushy and his defense team played on the sympathies of the Alabama jury by cultivating support within African American churches and playing up his religious ties. (The underlying point apparently being that such a ploy would not have worked on New York jurors). It seems like the same kind of tactics were employed in the bribery case. Complete with, according to the Washington Post, references in the closing argument to God and Martin Luther King’s “I Have a Dream” speech.

The fact that Scrushy was convicted this time of course may suggest that the defense took the tactics too far. But, by possibly discrediting the nullification theory, this conviction also sheds a different light on the first acquittal. Indeed, it leads me to wonder (a) if the first acquittal does in fact have implications for Sarbanes-Oxley since the case was the very first attempt to try a CEO under Sarbanes-Oxley (and prosecutors appear to have had better success with laws already on the books) or (b) if the first acquittal reflected the jury’s refusal to imply Scrushy's knowledge of fraud. Such a refusal seems inconsistent with other cases where jurors seem to have rejected the “I don’t know” defense, but arguably more consistent with the standard of intent in criminal cases.

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Tuesday a district judge finally weighed in on prosecutors’ practice of seemingly encouraging corporations and other entities to refuse to pay the legal fees of their employees accused of fraud or wrong-doing.  In a case involving tax fraud allegations against several former KPMG partners, U.S. District Judge Lewis Kaplan ruled that prosecutors unconstitutionally pressured KPMG into cutting off legal fees for its employees, apparently interfering with their right to a fair trial.  In a strongly worded opinion, Kaplan noted that the government had let “its zeal get in the way of its judgment.”

In sharply criticizing the legal fee policy, Judge Kaplan also calls into question the viability of the “Thompson memo.”  The memo sets forth a variety of factors that federal prosecutors must consider when determining whether to indict business entities, including the willingness of such entities to waive attorney-client privileges and whether the entities pay the legal bills of employees who are accused of misdeeds.   Prosecutors evaluate an entity’s cooperation based on its compliance with these factors.  In KPMG’s cases, it was able to avoid criminal prosecution in part because of its continued cooperation with the government.  And hence KPMG’s refusal to pay legal fees.  Prosecutors insisted that they applied no pressure on KPMG, but Judge Kaplan characterized their actions as holding the “proverbial gun” to the head of the company.

The decision may have a significant impact on the criminal prosecutions of corporate officials.   Post-Enron prosecutors apparently have utilized aggressively the tactics outlined in the Thompson memo, and those tactics seemed to have paid off because they essentially allow prosecutors to rely on the corporation to help build cases against various officers and directors within a corporation.  This appears to have resulted not only in the high profile guilty verdicts we have seen, but also in a host of guilty pleas from corporate actors.  Certainly cutting off legal fees to employees is just one of the techniques available to prosecutors outlined in the Thompson memo, but the tone of Judge Kaplan’s decision appears to raise concerns about government overreaching more generally—thereby casting a disapproving net over the entire Thompson memo.

It is not clear what kind of impact the decision will have on businesses and their employees embroiled in these suits.  Indeed, Judge Kaplan did not dismiss the suit against the KPMG employees.  Instead, the judge encouraged employees to file a lawsuit against KPMG for their legal fees.  As other commentators have noted, the decision appears to bind entities to pay the legal fees of its employees, even when there is no written agreement to that effect.  (KPMG apparently had an unwritten policy of paying such fees).  But this seems contrary to governing law, which of course does not require that corporations indemnify their employees.  At the very least the decision may encourage corporations and other entities to more affirmatively exclude particular employees from indemnification.  The decision also may make it more difficult for businesses to appear cooperative, forcing prosecutors to make good on their threat that such entities will be criminally indicted and suffer the fate of Arthur Andersen.  Given the Supreme Court’s ultimate resolution of the Arthur Andersen case, the realistic impact of that threat is not entirely clear.

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As the Enron trial proceeds, Larry Ribstein's catchy disparagement of the prosecution as "criminalizing agency costs" has grown legs. Most recently, Steve Bainbridge's piece, Are We Criminalizing Agency Costs?, just appeared in the TCS Daily.  Similar themes were apparently discussed at Lisa Fairfax's recent conference on the Criminalization of Corporate Law. The basic fear is that corporate officers are being prosecuted for taking legitimate business risks wholly within their legal discretion as corporate officers--in effect that they are being punished for bad outcomes.  This overdeters corporate actors from taking the very business risks that diversified investors want them to take.

Now, I confess to knowing very little about criminal law generally, or about white-collar crime in particular.  Only what I see on Law & Order (all 14 variations).  But as I sift through the blogosphere casually following this issue, it seems to me that some of the criticisms surrounding the Enron prosecutions are not unique to that case or white collar prosecution in general, but are endemic to criminal justice generally--and perhaps require fundamental reform. 

For example, Larry (here and here) and others have noted the price a defendant pays for going to trial.  The co-defendant who pleads and rats gets a lighter (sometimes much lighter) sentence than the plausibly innocent one who insists on a trial.

Similarly, the lottery-like nature of a criminal trial and the plague of ambitious and/or politically motivated prosecutors bringing the weight of the government to bear on individual defendants--these are not unique to Enron.

At some level, maybe these specific criticisms are just natural offshoots of the idea that we shouldn't criminalize agency costs--i.e., subjecting these folks to the particular burdens of the criminal justice system are outrageous because their behavior does not justify prosecution in the first place.  But that explanation seems a bit unsatisfying.  Nevermind that it seems hard to know at this point who knew what when, and whether it's just agency costs that are being prosecuted.  Every criminal defendant--presumed innocent--suffers these burdens, regardless of the crimes they are alleged to have committed. And if they unfairly burden Lay and Skilling, imagine their effect on less resourceful individuals.

Perhaps the particular nasty features of the criminal justice system are especially objectionable when targeted at otherwise productive and sophisticated members of society.  OTOH, the recent financial scandals show just how much more you can steal with a briefcase than a gun (nevermind that Puzo was referring to lawyers . . . ), and the harm that can do.  Perhaps the defendants here really should be presumed innocent, while the garden-variety criminal defendant should not?

Now, I'm not defending the prosecution tactics in Enron--some of which seem heavy-handed--or opining on whether Skilling or Lay committed crimes or "deserve" to be prosecuted.  And I suppose if I went to a bad movie, I'd complain about the theater's crummy sound sytem as well.  But even if one believes that Lay and Skilling are guilty only of bad management, it seems to me that the case for not subjecting agency costs to criminal prosecution is an analytically separate question from these various standard features of criminal justice.

UPDATE:  Larry Ribstein replies, summarizing the problems of applying the criminal justice system to corporate agency costs.

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On Monday, I posted about a new proposed rule that will affect the discovery of privileged documents in white-collar crime cases in which the federal government asks for a waiver of attorney-client and work product privilege in order to assess whether a corporation is cooperating.  That rule, which would have to be enacted by Congress to apply in both federal and state courts, was discussed at a public hearing at Fordham Law School on Monday.  Professor Daniel Capra (Fordham), who spoke on this issue at Marquette in a faculty workshop last week, has graciously emailed me the amended text of that rule, which reflects comments made at that hearing.  Professor Capra has for ten years been the Reporter for the Advisory Committee on the Federal Rules of Evidence, which drafted the rule.

The text of the rule has been changed substantially.  The rule is now more explicit that it applies to documents disclosed to federal investigators, but that a federal court order stating that a voluntary disclosure does not create a waiver of privilege as to any other party is effective in federal and state courts.  The rule also does not purport to change substantive privilege law.  The new rule is here: Download rule_502_to_standing_committee_2006_wpd.wpd.

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The topic of waiv