That was quick.

Just yesterday we worried that our optimism about the tide turning against the war on white-collar crime might be misplaced. The Wall Street Journal had just won a Pulitzer Prize for its sometimes misleading “gotcha!” reporting on backdating. We hoped that the backlash against the scandalization of backdating might provoke some rethinking about criminalizing corporate executives.

“I think that it's more likely that the Pulitzer itself will just spur more Watergate-itis in business reporting,” Ideoblogger Larry Ribestein wrote. And a part of us feared that Larry was right. We might be in for a very long haul of journalists, regulators and prosecutors marching against what they see as rampant greed and theft in corporate board rooms and executive suites.

But we hadn’t seen the most recent issue of The New Yorker yet. James Surowiecki, the guy employed by magazine to explain finance to its readership, has a relatively balanced article that echoes a lot of the sentiments expressed here and elsewhere about the criminalization of business going too far.

Sending executives to prison for bad judgment is costly, not just for the C.E.O. but also for the economy as a whole, because it discourages other executives from taking reasonable risks. So we do need to be careful about criminalizing agency costs, to use a phrase coined by Larry Ribstein, a law professor at the University of Illinois.

Surowiecki warns that caution about criminalization need not involve the wholesale rejection of prosecuting white collar criminals. Of course it does not. What academics like Ribstein have been calling for is not immunity for genuine thieves but a re-assessment of the costs and benefits of what seems to have been an abandonment of reasonable caution in the past decade.

The quibble aside, it’s certainly reassuring to see these ideas in a middle-brow, mainstream magazine like The New Yorker. Perhaps our hope wasn’t so misplaced after all.

Free Agents[New Yorker]
Surowiecki on criminalizing agency costs [Ideoblog]

Another hedge fund scammer has been caught allegedly posting false gains while he burnt lost investors money on questionable investment, the Washington Post reports today. The latest accused hedge fund con-man and his Canadian partner Stephen Chesnowitz had a unique way of getting investors—they took them out to lunch!

Over the past two years, the two traders sent out mass mailings advertising a free "gourmet meal" and the opportunity to "earn excellent returns with a guarantee against market risk." More than 150 people, mainly from Montgomery and Prince George's counties, attended the seminars and gave Williams a total of $9 million. He transferred the money to Chesnowitz's hedge funds in Canada and the Cayman Islands.

As always, the way to a man's wallet is through his stomache.

William's "investments" included a Canadian bed-and-breakfast and two vintage cars. Presumably one for himself and the other for Chesnowitz. After posting phony gains on his website, Williams allegedly took a standard 20% hedge fund commission on the gains. Nice work if you can get it.

Hedge Fund Manager Charged in Fraud [Washington Post]

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]

David Stockman is under investigation for his role running Collins & Aikman, an autoparts company. You might recall the name Stockman. it became a household name when he was appointed budget director in the first Reagan administration. Before that he had been a member of Congress with a reputation for being allied with the tax-cutting supply siders.

Shortly after he started working on the Reagan budgets he voiced his complaints about the budget process built around cutting taxes while deficits mounted to a reporter named William Greider, and that conversation became an article titled "The Education of David Stockman." Despite the scandal of this article, which referred to the supply-siders tax-cuts as a "Trojan Horse," Stockman managed to stick it out in the administration for several more years. After leaving in 1986, he published a book claiming that the "Reagan revolution" had failed because Congress had refused to embrace spending cuts.

After leaving politics, Stockman spent the next dozen or so years running around the finance world, first at Salomon Brothers then at Blackstone. Eventually he left Blackstone to start his own private equity firm, Heartland Industrial Partners, L.P., which specialized in buying up companies in decidely unfashionalbe industries, especially the auto industry. A few years ago, Stockman installed himself as CEO of Collins & Aikman. And, apparently, that's where the trouble really started.

From the New York Sun:

Federal investigators and prosecutors are preparing a case against Mr. Stockman and other corporate officers from Collins & Aikman and expect to present the findings soon to a grand jury in New York City, the official said.

The investigation is focused on whether Mr. Stockman and other corporate officers at Collins & Aikman misled investors about the financial health of the company by artificially inflating stock prices. ABC News reported on the case Monday.

Reagan Official Is Investigated For Possible Fraud [New York Sun]

Is there some special shame that attaches to being convicted in one of the biggest financial scandals of the era and yet still being a nobody? Probaby not. If he took the Ken Lay out, we're betting he'd just end up in whatever ordinary Hell accountants usually go to.

Former Enron Corp. Chief Accounting Officer Richard Causey was sentenced to 5 1/2 years in prison for his role in the fraud that destroyed the company, an 18-month reduction from the term offered in his plea deal.

Causey, 46, was charged with more than 30 counts and faced trial alongside former Enron Chief Executive Officers Kenneth Lay and Jeffrey Skilling, both convicted in May of spearheading the fraud that forced the company into bankruptcy in 2001. Skilling was sentenced to 24 years in prison. Lay's conviction was thrown out because he died before his appeal.

Former Enron Accountant Causey Gets 5 1/2-Year Term [Bloomberg]

In retrospect, perhaps investing in a hedge fund named for a poisonous snake wasn’t such a good move.

The Securities and Exchange Commission yesterday sued a San Francisco hedge fund manager, Edward S. Ehee, and the funds that he managed, Viper Capital management and Compass Fund Management, accusing him of fleecing 18 investors out of about $5 million.

Mr. Ehee raised the money from investors, including a neighbor who gave his children’s trust funds to Mr. Ehee and the neighbor’s mother-in-law, who invested her entire retirement savings in the funds, according to the complaint.

Rather than invest the millions he raised, Mr. Ehee gave the money to family members and used it to pay for his mortgage, his cars and vacations in Las Vegas, the complaint says.

S.E.C. Accuses Hedge Fund Manager of Deceiving Investors [New York Times]

Come on. You know you're hoping the "unidentifed Texas oilman" is the ghost of Ken Lay.

Disgraced corporate tycoon Dennis Kozlowski sold his opulent Colorado mountain mansion for $10 million - and got an extra $750,000 for the furnishings, court papers revealed yesterday.

An unidentified Texas oilman agreed to plunk down the giant chunk of cash for the ex-Tyco mogul's 8,627-square-foot palace, complete with a heated driveway, three wine cellars, two hot tubs and a stuffed mountain lion.

"At 10 million, it's a decent house, although some people I talked to thought it wasn't worth more than eight," said David Nilges, a real estate broker not involved in the sale. "The view is to die for."

But Kozlowski, who is serving 8-1/3 to 25 years in prison for looting up to $1 billion from Tyco, won't be pocketing a dime from the big deal.

Kozlowski will use the proceeds to chip away at the $59 million in outstanding restitution he still needs to make. He has already turned over more than $100 million.

Ex-Tyco looter sells mansion in snowy Colo. for cool $10M [New York Daily News]

The Wall Street Journal reports:

Former CA Inc. Chief Executive Sanjay Kumar was sentenced to 12 years in prison and fined $8 million Thursday for his role artificially boosting financial results at the software maker.

At a hearing in federal court in Brooklyn, U.S. District Judge I. Leo Glasser sentenced Mr. Kumar, 44 years old, to 144 months in prison, to be followed by three years of supervised release.
Judge Glasser said though Mr. Kumar was not a violent criminal, he "did violence to the legitimate expectations of shareholders."

Uhm, we know Kumar’s totally supposed to be, like, the Worst. Corporate. Fraudster. Ever. And all that. But Judge Glasser’s statement there is a little troubling. It kind of makes it sound like Kumar got 12 years based on a metaphor. We’d be more confident Kumar deserved his sentence if the judge could deliver it without resorting to literary devices.

Kumar Is Sentenced to 12 Years For Role in CA Accounting Fraud

The noose just got a little tighter around the neck of ex-Comverse CEO Kobi Alexander. The company’s former general counsel, William F. Sorin, is expected to plead guilty to charges stemming from controversially “backdated” stock options grants made by Comverse.

Under a practice now known as backdating, dozens of companies have revealed that they pegged the options to dates earlier than the date they were actually granted, making the grants potentially more valuable to recipients. Because the date fudging wasn’t disclosed to investors or tax-authorities, backdating has led to investigations and indictments by the SEC and federal prosecutors.

Sorin is the second Comverse executive to plead guilty to backdating charges. It is expected that they are cooperating with prosecutors. Federal officials currently seek the extradition of Alexander from Namibia, where the fugitive executive has been since sometime this summer. Although many companies have revealed that backdating occurred in years past, federal prosecutors seem to have focused on Comverse because high-level executives seem to have gone to extraordinary lengths to conceal the practice from shareholders and board members. ANd it probably doesn't hurt that, everyone knows, Kobi Alexander is no where near as popular as the CEO of another famous backdating Company, Steve Jobs. That guy invented the Ipod so you totally can't indict him.

Comverse Executive to Plead Guilty [Reuters in the New York Times]

It’s check-in on your favorite white-collar criminal day at the New York Post, so be sure to read all about Steve Dunleavy’s day with former Tyco head Dennis Koslowski. The Koz is definitely not king in the Mid-State correctional facility. His wife has only visited him once—to deliver the message that she wanted a divorce. Ouch.

On Her First Visit [New York Post]

The New York Sun thinks that the allegations made against Pequot Capital and Morgan Stanley chief John Mack have been getting a little too much ink from the New York Times. And they think they know why.

Mystified New Yorkers were left wondering what could possibly explain the Times's fascination with this story. Some might say it's Mr. Mack's connection to Mr. Bush, but it could just as easily be Mr. Mack's connection to Morgan Stanley. That is the bank that, earlier this year, withheld its proxy votes for members of the board of the New York Times Co. to protest the Sulzberger family's preferential voting status. A Morgan Stanley analyst complained at the time that the Times was underperforming as a business in large part because of the ossified management perpetuated by the ruling family's use of super-voting shares to control the Times despite a relatively puny stake in the Times company.

It's a scandal about the scandal! And just insanely paranoid enough to possibly be true!

‘A Full Airing' [New York Sun]

[Disclaimer: John Carney has written for the New York Sun and the Times, and he's friendly with a couple of the girls at both papers. Morgan Stanley was a client on several deals he worked on. He's never met John Mack or anyone named Sulzberger. George Bush won't return his phone calls.]

If you’ve read the transcripts or seen even a day of testimony of the government’s prosecution of an exchange floor trader, you know how complex these trials can be. Much of what goes on is an attempt to educate the jury about the habits and dialect of specialists, and some of it is so obscure that at least one judge announced that he had lost his way amidst the jargon.

So it was a bit surprising when the jury in the trial of Bank of America specialist Dave Finnerty came back with a verdict after just one day. Similar trials have seen juries spend days deliberating the charges. The guilty verdict in Finnerty’s trial came back so quickly that even the judge overseeing the case voiced concern.

Quick verdicts can cut both ways. They can mean that the defendant was really, really obviously guilty. Or they can mean the jury didn’t understand the charges or consider all the evidence. Now it’s up to an appeals court to decide which way this one went.

Trader Floored [New York Post]

As it turns out, we’re not quite alone in lamenting the quasi-life sentence handed out to Jeff Skilling yesterday. Twenty-four years seems an awfully long time for what Skilling was convicted of to a lot of other folks as well.

• Larry Ribstein says “the lynch mentality that has surrounded Skilling and Lay is appalling” and notes that Skilling got “13 years longer than Al Capone.”

• Ellen Podger asks “If we are so intent on punishing the wrongdoer with heavy prison time, then how can we accept Andrew Fastow being sentenced to 6 years, or Scott Sullivan receiving 1/5 of the sentence received by Bernie Ebbers. It becomes clear that what we are really doing here is punishing individuals who exercise their right to a jury trial. And permitting the government to continue this practice is not proper.”

• Geoffrey Manne says: “…Skilling’s sentence is problematic not only because…it is probably disproportionate to the actual crime (which I take it is the point Dave wants to see the rest of us make about drug prosecutions), but also and primarily because the costs of excessive prosecution are so large.”

• And Christine Hurt explains why defending Jeff Skilling is hardly indefensible.

Wow. That’s a pretty smarty pants group of folks coming in on the DealBreaker tequila soaked Skilling Prison Blues side of things. Which is kind of scary. Usually when this many academic types start to agree with us we start wondering if we've got it wrong.

The verdict is in! Jeff Skilling got sentenced to 24 years for his role in the Enron collapse. Certainly one of the harshest white collar crime sentences on record but short of the record-breaking number that some had predicted. In our reader poll, 13% picked 21 to 25 years for his sentence. Sixty-three percent of our readers who responded to the poll thought Skilling would get 20 years or less.

So why did our respondents think the sentence would be lighter? We suspect that twenty-four years strikes a lot of people involved in business and finance as extremely harsh for the crimes Skilling was convicted of. In any case, Jeff's probably had his last margarita for a long time. Don't worry Jeff, we'll order one for you at the bar tonight and then give it away to a stranger in your honor. Preferably a good looking stranger with post-modern moral views.

Former Enron CEO Skilling sentenced to 24 years [Associated Press in Seattle Times]

New York magazine this week carries the story of Angelo Haligiannis, the college drop-out turned high-flying hedge fund manager turned fugitive. For a couple of years he brought in some wild returns by trading tech bonds and then, well, you know what happened. Only instead of letting investors know he had lost $17 million, he went for the cover-up. After that, the tale pretty much writes itself.

Take the Hedge-Fund Money and Run [New York Magazine]

As expected, a federal judge voided Ken Lay’s conviction yesterday. The founder of failed energy trading outfit Enron had been convicted by a Texas jury of conspiracy and fraud for his role in the 2001 collapse of the company six weeks before his death. The judge in the case ruled yesterday that because Lay died before having a chance to file for appeal, the conviction had to be set aside.

Of course the real deal here isn’t about freeing Ken Lay’s ghost from the calumny of criminal conviction. The public perception of his role as a villain in one of the biggest corporate scandals ever will likely survive any legal technicalities. Like so much else, this is really about money. You see, the decision will make it far more difficult for the government to order the forfeiture of the $43.5 that prosecutors say he pilfered from Enron.

Which isn’t the say that Ken Lay’s heirs can rest assured that Lay’s fortune will be theirs to keep. Civil suits will proceed apace, and often these do not require the presence of a defendant in the way a criminal trial does. Yes. You read that right. You and your estate can be sued even once you’ve taken shelter in the grave. We’ll leave the legal technicalities to the specialists over at AboveTheLaw, though.

Later today we’ll check in with the various Ken Lay Lives factions to see how the “living Ken Lay” is reacting to news that his alleged alleged death has vacated his conviction.

Judge vacates Ken Lay's Enron conviction [Houston Chronicle]

We know you are all preoccupied by the changes at the top of Ford and Viacom so you may have missed the news that Edulink, Inc. has a new chief executive—Aleksandr Shvarts, former head of Global Equities Group.

Yes. That Global Equities Group.

The one that shut down after the NASD began investigating it for fraud. The one whose owner, president, vice-president and two brokers were charged with stock fraud and manipulation for their high pressure sales tactics. The place that could have been the model for Boiler Room’s J.T. Marlin.

Gary Weiss, author of Wall Street Versus America, reacts:

I think it's just great Edulink is not intimidated by Shvarts's guilty plea to securities fraud or his 41-month prison sentence or the $837,436.80 in restitution that he was ordered to pay, and which he is still paying off.

I guess Shvarts owning most of the stock in the company might have something to do with this, but it doesn't matter. Not to me. What matters is that a company is doing something nice.

Edulink does some kind of media stuff, and the hard-hearted bureaucrats at the SEC just suspended trading in its stock.

The New York Post’s Christopher Byron reports this morning on another casualty of the War on Terror—white collar crime enforcement. Despite some high profile cases, prosecutions have dropped off by 27 percent since 9/11.

Last week, the Christian Science Monitor joined The Post in sounding an alarm that has been raised repeatedly over the years in this space yet almost nowhere else: Five years after 9/11, we are losing the war on terror on a front where we don't even know we are fighting it: Wall Street.

On this battleground, white-collar criminal law enforcement has fallen victim to the massive shift in federal resources and priorities that was set in motion when the Twin Towers fell and a scar was ripped open in the side of the Pentagon and in a Pennsylvania field.

According to data released last week by a Syracuse University research group financed by the Rockefeller Foundation, those events have triggered a 24 percent rise in the number of federal criminal cases filed by the DOJ, with virtually all the growth coming from the ramped-up prosecution of cases involving illegal immigration, weapons felonies and alleged terrorist activities.

To meet the demands of this increased workload, the DOJ has been forced to cut back elsewhere, and the steepest cuts have come in the area of white-collar law enforcement, where prosecutions have plunged by 27 percent since 9/11.

White-collar crime is the smallest of the five major practice areas for federal prosecutors, and it's also the one to which they have the least institutional commitment, in part because responsibility for developing cases is awkwardly split between the SEC, which does the investigating, and the DOJ, which decides whether to prosecute.

While Byron writes as if this is simply a matter of bureaucratic structure and budget priorities, we have to wonder if the decline in white collar crime enforcement is not also a product of the broader political climate. After all, the time period he cites also coincides with George Bush’s taking office in 2001 and the Republican recapture of the Senate in 2002. It would not be surprising if SEC and DOJ officials overseen by GOP lawmakers and a GOP administration were not as interested in bring criminal charges against corporate executives and Wall Street. Could it be that Gary Aguirre’s charges of political favoritism at the SEC are a metonymy for the broader culture of business law enforcement?

That said, we’re not convinced that Byron’s solution—concentrating enforcement in one agency rather than two—would necessarily improve the situation. While the FBI is surely less under the thumb of business and financial interests than the SEC, we imagine that would change very quickly if the location of enforcement power was shifted. In fact, it would likely become easier for those who want to quite regulators to exert their influence if they only had to worry about one agency rather than two.

Bring In the FBI [New York Post]

Soon after publishing our reminiscence of the Pan Motor Company swindle we received an email from our Minnesota Bureau* informing us that we were simply buying into the propaganda of Big Auto. It seems that out in the wilds of the Midwest, there are still partisans of the great Pandolfo out in St. Cloud and they believe that his company was brought down by a conspiracy of eastern financiers, big auto manufacturers and aggressive, careerist federal prosecutors.

So times really never do change. There will always be failed companies. There will always be some who see the failure as a result of a swindle. And there will always be those who see it as the result of a conspiracy and the prosecution of the executives as a result of out-of-control law enforcement. Sadly, all too often both sides are right.

St. Cloud's big dream [Minnesota Public Radio]

*That’s what we’re calling the hot Swedish girl we met in the Back Room a couple of weeks ago.

Dick Grasso will likely lose one of the most powerful forces he has on his side —Williams & Connolly attorney Brendan Sullivan. A recent ruling moving the trial date up to September from late October, probably means that Sullivan, who famously represented Oliver North in the Iran-Contra hearings, will not be able to serve as lead attorney at trial, according to CNBC’s Charlie Gasparino. Sullivan is already set to represent another client in a trial scheduled for the same time.

Surprisingly, Grasso may ultimately benefit from the new date. Lawyers working for Attorney General Eliot Spitzer have complained that the new date doesn’t give them enough time to prepare for the case.

Oh, and the headline comes from Sullivan’s famous reply to lawmakers who complained he was objecting too much to their questions to Colonel North. “I'm not a potted plant. I'm here as a lawyer. That's my job,” Sullivan said. Reportedly, the guy now running Grasso’s defense, Gerson Zweifach, is not potted plant either.

Grasso loses Brendan Sullivan [SquawkBlog]