The Houston Chronicle is reporting that Jeff Skilling's appeal of his 24-year sentence to the Fifth Circuit was not as successful as it could have been.  Although eight months ago, when the appeal was heard, the tides seemed like they might have been turning for Skilling and other corporate defendants as the demonization of Enron and other companies was fading into history.  However, we are now in a resurgence of scorn and distrust for corporate executives, and it is against this backdrop that much of Skilling's very long sentence will stand.  One of the sentence enhancers that was used to calculate Skilling's sentence under the federal sentencing guidelines required that the defendant's conduct substantially jeopardize the soundness of a "financial institution."  The Fifth Circuit panel did not agree that either of the Enron employee benefit plans were "financial institutions."  (The WSJ blog has a link to the opinion.)

Watchers of the corporate criminal trials of recent years were most interested to see if all or part of Skilling's conviction would be thrown out after the Fifth Circuit determined in other Enron-related cases that the "theft of honest services" theory that the government was pursuing was flawed as applied to these types of executive wrongdong cases.  (See posts at Conglomerate here.)  However, this panel decided not to re-analyze the convictions under that reasoning.  In addition, the convictions seemed to hold despite allegations of prosecutorial misconduct (see Ideoblog for this storyline.)  According to the Houston Chronicle, without the "financial institution" enhancement (which was merely one of many guideline enhancements applied to Skilling's sentence), the sentence may be reduced to something between 15 and 19 years.  Although getting a decade of one's life back must seem like a gift, serving 15 years is still no picnic by any stretch of the imagination.

Will Skilling ask for a rehearing en banc?  Go to the U.S. Supreme Court?  These are once again hard times to be a corporate defendant.  Several Enron Broadband defendants, whose first trial ended in acquittals for some counts and hung verdicts for others, are set to be retried for the second time by prosecutors but have a petition for certiorari waiting at the Supreme Court right now.  Nevertheless, one of those defendants, Joseph Hirko, pled guilty recently (and fairly quietly) in return for serving no more than 16 months.  (Cert was granted for his co-defendants Scott Yeager and Rex Shelby after Hirko pled guilty.)  The prospect of going to trial in these "tough economic times" is fairly dicey for a corporate executive, to say the least.

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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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