It’s been 600 days since the Enron Task Force disbanded after former Enron CEO Jeff Skilling received his sentence of 24 years in prison. As part of the wider commemorations of the anniversary, it was thought timely to check “Where Are They Now?” for a group characterized as a “huge success” and whom even the Coolidge Republicans of the Bancroft-era Wall Street Journal editorial pages said had “a good record overall.”
The Justice Department’s massive effort resulted in several dozen convictions or plea bargains, most of which have been upheld, and its breadth included Arthur Andersen and the London bankers known as the NatWest Three. In the light of unclear GAAP rules on Enron, the Task Force achieved regulation by prosecutorial deterrence.
More after the jump.
Enron
We contacted the DealBreaker energy trading desk this afternoon for a report on the state of the market, but the celtic tigers who are supposed to watch that market for us were already out getting drunk for Saint Patrick’s Day.
We rifled through the desk anyway, and came up with a few notes on what we think was supposed to be a report on the state of the market today. “Still haunted by the sudden loss of liquidity when Enron collpased, the nation’s energy markets remained stable with normal volumes Monday but traders admitted they are waiting for bad news from the financial sector which rescued it post-Enron,” the note said. At least that’s what we think it said. It was hard to tell because the page was stained with beer.
When we checked the screens we saw that April NYMEX gas futures contract had dropped like a rock. We called up and asked about it.
“Is this related to Bear Stearns? Is it because they’re selling off their energy portfolio?” we shouted trying to make ourselves heard above the din of the midtown dive.
“Get a life Carney. Not everything that happens today has to be because of Bear Stearns! Nobody thinks the price drops are related to BSC. When are you coming out and getting drunk?” our covert energy reporter said.
Soon, we answered. But the phone had already gone dead. And then we decided we’d attach a Bear Stearns tag to this post anyway.
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Bear Stearns
Is Bear Stearns The New Enron?
The Answer Is Yes But Not For The Reasons Many Think
By Bess Levin
Shareholders in Bear Stearns have been all but wiped out despite the rescue bid from the Federal Reserve and JP Morgan Chase, prompting comparisons to the collapse of Enron. CNBC has been airing videos of old interviews with former Enron CEO Ken Lay, which fell apart almost seven years ago destroying a great deal of shareholder value. Far more shareholder value, in fact, than at Bear Stearns.
Those comparisons are apt, Tom Kirkendall points out, but not for the reasons many would suspect. There’s a tendency among some—especially plaintiff lawyers and some in the media—to suspect criminal wrong-doing when a company collapses. How could so much value be destroyed without serious wrong-doing? But these suspicions are often wrong-headed, and may even be counter-productive if they encourage shareholders and regulators to concentrate on investigations or misguided regulations.
Kirkendall says that the risk of collapse from a loss of investor and customer confidence is inherent in the kind of businesses that both Enron and Bear Stearns ran.
The fact of the matter is that Enron was — and Bear Stearns and AIG are — trust-based businesses that fundamentally depend on the trust of the markets to sustain their value. Once that trust is lost, such companies lose value quickly and dramatically (a case in point — JP Morgan Chase’s proposed $236 million purchase price for Bear Stearns comes just hours after Bear’s market cap was $3.5 billion this past Friday and $20 billion as of January, 2007) Although unfortunate for the owners of such companies, such a dramatic loss of wealth does not necessarily mean that any criminal conduct caused or was even involved in the loss. Rather, such loss is simply one of the risks of investing in a company based on a trust-based business model. The sooner we all recognize and understand this risk — and avoid the mainstream media’s promotion of myths about them — the quicker we can put a stop to injustices such as this while advancing the discussion of how best to hedge the risk of such potential losses.
That pesky trust-based business model [Houston's Real Clear Thinkers via Ideoblog]
The Enron legal case continues to unwind. A federal judge in Texas just allowed former Enron executive Christopher Calger to withdrawn his guilty plea to wire fraud charges. Calgar had been accused of fraud in connection with a 1999-2000 asset sale that prosecutors claimed violated a “theft of honest services” statute—a theory that’s been in question ever since the Fifth Circuit started vacating sentences in both the Merrill Lynch and broadband cases.
U.S. District Judge Lee Rosenthal approved ex-Enron executive Christopher Calger’s request to withdraw his 2005 guilty plea to wire fraud in connection with an asset sale in 1999 and 2000.
Calger was the last of a string of former Enron executives to plead guilty to crimes. Former Arthur Andersen auditor David Duncan who handled Enron’s books, withdrew his guilty plea to obstruction of justice in 2005.
But not to worry. Prosecutors apparently have a never ending supply of possible Enron defendants to chase after.
Withdrawal of guilty plea allowed [Houston Chronicle via The Conglomerate]
One of the more creative Enron lawsuits was dismissed by a Manhattan federal judge yesterday. The plaintiffs were shareholders of JPMorgan Chase who said they bought the stock because of the company’s reputation for integrity and financial discipline but had been deceived because JPMorgan Chase was helping Enron, a major client. You can see how free-wheeling this kind of liability could get–and how it would really amount to a requirement that banks police all their clients for fraud.
Ever wonder how those science fiction worlds where the banks run their own police forces get started? Well, now we know. And we’re glad we don’t yet have to welcome our new banking police masters. Yet.
We will admit that there is some evil part of our brains that is sorry to see this lawsuit go. It’s the part that is going to miss the spectacle of JPMorgan arguing that it had not overstated its own reputation for integrity. They could have done this in two ways. First, by arguing that they fully deserved a high reputation, but our lawyer friends tell us that this would have been almost impossible to prove. Second, by arguing that their reputation wasn’t really all that. You know, the “look, bitch, you knew I was a snake when you picked me up” defense. This also might not have been the way JP Morgan wanted to go, either. But it sure would have been fun to watch them squirm between the unprovable and the unpalatable.
Enron Class-Action Suit Is Dismissed [Reuters in NYT]
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Enron
This, Of Course, Assumes That Lay Is Dead, An Assertion We Continue To Contend, But It’s For Charity, So What The Hey
By Bess Levin
Ikea just isn’t what it used to be, you know? Once a cool, hip, Swedey design company, it’s basically devolved into just a run of the mill furniture store whose difficulty to get to is rivaled only by the fact that it charges over a hundred dollars to deliver something worth less than forty, playing on the fact that some of us out there can’t fathom carrying a table up five flights of steps. But there’s hope yet! Saving Animals Across Borders is auctioning off the desks of former Enron employees Ken Lay, Jeffrey Skilling and Richard Kinder! Each one has a minimum bid of $25,000 and is made with “an elegant Makore Pommelle veneer,” to say nothing of the vintage edition copies of “Heart of Darkness” and “How To Win Friends and Influence People” (for those saracstic afternoons) in each top drawer. Personally, we’re saving our money for the shredder auction, but you should feel free to bid on these pieces of history today—you’ve got ‘til Sunday!
Ken Lay’s desk goes up for grabs [CNN Money]
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Enron
Enron Enablers’ Request That Court That Thinks The Whole Enron Deal Was ‘Totally Blown Out Of Proportion And, To Be Honest, A Bunch Of BS’ Be Taken Into Consideration Denied
By Bess Levin
U.S. District Judge Melinda Harmon has denied the pleas of Merrill Lynch, CSFB and Barclays PLC to delay a $40 billion lawsuit by former Enron shareholders and investors against them; the suit will now go to trial April 9. In their argument for a delay, defense for the banks—accused of playing a key role in the company’s collapse—argued that they should wait for a pending decision from the 5th U.S. Circuit Court of Appeals. In a motion, attorneys offered:
There is nothing sinister about the suggestion that since the Fifth Circuit will be ruling on that appeal, the court and the parties should take the time to apply the Fifth Circuit’s guidance to the class definition, the parties, the claims and the defenses before sending class notice and embarking on a jury trial estimated to last many months.
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While sinister may not be the right word to describe it—we’re a bit more partial to ‘underhanded,’ ‘conniving,’ ‘in line with the nature of unmitigated pricks’ [Ed.'s note: some around here think that last one was too mean, and prefer, 'in line with the schemes of evil genius lawyers']—, the desire to wait on the Fifth circuit would certainly be in the best interest of the banks, as the Fifth is the very same one that said there was trouble with Skilling’s convictions and seems to be very skeptical about the Enron case in general. In other news, we received a tip late last night that Ken Lay was spotted on line at the UWS Gray’s Papya. Anyone got confirmation?
Judge denies motion to delay Enron suit [AP via DealBook]
The criminalization of Enron is really starting to unwind. The Houston Chronicle reported last night that the Justice Department won’t seek to overturn a fifth circuit appeals court decision throwing out most of the 2004 convictions of several Merrill Lynch bankers.
The convictions for fraud and conspiracy of four Merrill executives were thrown out last August when the court ruled that the prosecutors had presented the jury with an improper legal theory. Prosecutors had argued that the conduct of the defendants had deprived Enron of its right to their “honest services.” The appeals court ruled that since the allegations did not involve bribery or theft, and the conduct of the defendants was consistent with Enron’s corporate goals, the defendants could not be convicted on the “honest services” theory.
Since the prosecution of former-Enron CEO Jeff Skilling, who is now serving a 24-year and four month jail sentence, also used the “honest services” theory, there has been some speculation that the court’s decision might be a sign that it could overturn some of his convictions as well. When the fifth circuit court denied Skilling bail in December, it noted that there were “serious frailties” with his conviction on securities fraud and insider trading convictions.
The decision by the government not to appeal the fifth circuit ruling means that Skilling’s appeal before the same court will be able to rely on ruling as controlling law. It may be too early for Skilling to pop the cork on the champagne. But it’s probably not too early to start putting some on ice.
Government won’t challenge appeal court’s decision in Enron-related case [Houston Chronicle]
Word is starting to spread that Jeff Skilling might not have to serve out the 24 years to which he was sentenced after his trial. Over at the Conglomerate blog, Christine Hurt lifts the following sentence out of the Fifth Circuit’s December 12th order denying 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.”
Hurt says this could all indicate that Skilling might end up serving a lot less time.
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.
She goes on to wonder why more wasn’t made of this at the time the order was issued, joking that she’s going to file the entry under “How Did I Miss This?” Well, as much as we hate to toot our own horn, she wouldn’t have missed it if she was reading DealBreaker, which mentioned the “serious frailties” the very next day.
Re-reading the Fifth Circuit’s Denial of Skilling’s Bail Pending Appeal [The Conglomerate]
It’s been eight days (or so) since Malcolm Gladwell’s article in the New Yorker got people talking about Enron again. Consider the Enron case officially re-opened. And by “officially” we mean “under debate on the interwebs.” So it’s not legally re-opened but there is at least a chance that the public understanding of Enron might begin to change from one dominated by The Most Evil Guys In the Room image to something a bit more reality based.
Tom Kirkendall takes on Enron prosecutor John Hueston’s recent contentions to task today. It’s a long post that deserves to be read all the way through. But since you’re busy, here’s Kirkendall on the claim that Jeff Skilling manipulated Enron’s earnings.
Moving on to Hueston’s other allegation against Skilling, the evidence that Skilling engaged in earnings manipulation is so sketchy (see more extensive discussion in the earlier comprehensive post) that Hueston resorts to attempting to tie Skilling to the alleged Global Galactic agreement between Fastow and Causey. Revealingly, only the non-believable Fastow testified during the trial that Skilling knew about Global Galactic and, even after Causey copped a courthouse steps plea deal to hedge the risk of the effective life sentence that Skilling received, the Task Force chose not to call Causey as a witness. More than likely, the reason that the Task Force did not call Causey is that Causey wouldn’t have corroborated Fastow at all, which raises a quite reasonable question — why did the Task Force prosecutors used Fastow’s testimony to convict Skilling when they knew that there was reasonable doubt about Fastow’s veracity? Indeed, what does Hueston have to say about the Task Force’s duplicity with regard to Fastow’s testimony during the Lay-Skilling trial? And again, what does Hueston have to say about the numerous witnesses who the Task Force effectively prevented from testifying who would have provided exculpatory testimony for Skilling and refuted Fastow’s testimony?
Your move Hueston.
Reacting to Gladwell’s Enron article [Houston's Clear Thinkers]
Wow. It wasn’t long-ago that Malcolm Gladwell was a media darling. Critical remarks on his writing came from only a few sources, including federal judge Richard Posner and writer Steve Sailer’s blog. But now he’s gone and challenged one of the central myths of our times–the Myth of Enron Evil–and all bets are off. The Times‘ Joe Nocera published a long, critical piece on Saturday (which we missed because, well, who reads the Times on Saturdays?).
(By the way, when we refer to the Myth of Enron Evil we don’t mean to imply that the folks running Enron did nothing wrong. By calling it a “myth” we simply mean to indicate how important it has become to the way people think. It has reached iconic, legendary almost religious status. Even though much of what people are angry at Enron for has little to do with the wrong-doing at the company.)
Anyway, here’s an excerpt of Nocera’s critique of Gladwell:
Mr. Gladwell makes much of Enron’s use of so-called special-purpose entities — those supposed “independent” partnerships that were run by the company’s chief financial officer, Andrew S. Fastow. Those entities, Mr. Gladwell argues, are incredibly complicated, and Enron’s were more complex than most. Mr. Gladwell calls them examples of Enron’s “recklessness and incompetence,” but not an example of inadequate disclosure. Even if Enron had publicly disclosed every page of every special-purpose entity, he says, it would have made no difference; they were just too convoluted.
This, however, is where he runs off the rails. Yes, the fact that the entities were run by “a senior Enron executive” is something that the company disclosed (usually in some buried footnote). And it should have raised a huge red flag. Shame on Wall Street for not picking up on it.
But Enron’s S.P.E.’s were not always used for some legitimate purpose. Mostly, they were used to hide poorly performing assets and to launder loans as income. Not all of them were structured illegally, but many of them were — a fact that Mr. Gladwell glosses over, and which Enron never disclosed publicly. Mr. Skilling, according to prosecutors, secretly guaranteed that Mr. Fastow’s partnerships would never lose money in Enron assets, violating the law. It is also a reason Mr. Skilling is in prison now.
The point is not the sheer volume of disclosure; it’s whether disclosure illuminates or obfuscates. Enron usually did the latter. In effect, Mr. Gladwell has conflated fraud with overvaluation. James Chanos, the short seller who first raised questions about Enron’s numbers, told me that until the summer of 2001, when Mr. Skilling abruptly and inexplicably resigned, “even I only thought it was a case of overstated earnings; that is all you could tell from their documents.” He thought he would ride the stock down for a while, and then, eventually, cover his position once the market corrected for the overstatement. You could find plenty of evidence of overstated earnings in Enron’s financial documents — but you’d never know that the company was a Potemkin village. The kind of information that would have led to such a conclusion was precisely the information Enron hid from investors.
But Gladwell’s over-arching point–that there may be something wrong with the disclosure model of corporate governance and that solutions demanding ever more disclosure might not help the situation–stands. (As does the point that Jeff Skilling’s 24-year sentence is groteque.)
Tipping Over a Defense of Enron [New York Times via the ledger.com]
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