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To: stockman_scott who wrote (3562)4/6/2011 9:46:38 PM
From: Glenn Petersen
1 Recommendation   of 3591
 
Jeff Skilling will not be getting a new trial:

Appeals Court Refuses New Trial for Ex-Enron Chief

By THE ASSOCIATED PRESS
Published: April 6, 2011 at 9:08 PM ET

DALLAS (AP) — Former Enron Corp. CEO Jeff Skilling should not receive a new trial on his convictions of 19 counts arising from the once-giant Houston-based energy company's downfall, a federal appeals court panel ruled Wednesday.

In a 13-page ruling, a three-judge panel of the 5th U.S. Circuit Court of Appeals upheld all 19 convictions of conspiracy, fraud and other crimes. It also reaffirmed its 2009 decision that vacated Skilling's sentences of more than 24 years in federal prison and ordered a resentencing.

In the 2009 ruling, the appeals court ruled that the sentencing judge misapplied federal sentencing guidelines.

In challenging the convictions, Skilling's attorney, Daniel Petrocelli of Los Angeles, argued that a June Supreme Court ruling that an anti-fraud law was used improperly to help convict Skilling meant he should receive a new trial. In oral arguments before the appeals court panel on Nov. 1, Petrocelli argued that the federal jury that convicted Skilling in 2006 in Houston of 19 counts received bad instructions that could have tainted their decision-making.

The arguments focused around a short addendum to the federal mail and wire fraud statute that makes it illegal to scheme to deprive investors of "the intangible right to honest services." The Supreme Court ruled that prosecutors can use this only in cases where evidence shows the defendant accepted bribes or kickbacks.

Petrocelli argued that under the new interpretation of the law Skilling did not conspire to commit honest-services fraud because his misconduct entailed no exchange of money.

The federal government argued that the instructions given to the jury were "harmless" because the evidence against Skilling was overwhelming. The government said the 19 convictions for conspiracy, securities fraud, insider trading and lying to auditors should stand.

In a statement issued Wednesday, Petrocelli said he would keep fighting the convictions.

"We disagree with the court's decision and believe it does not conform with the law," he said.

Skilling, 57, is the highest-ranking executive of Enron Corp. to be punished for the accounting tricks and shady business deals that led to the loss of thousands of jobs at what was once the nation's seventh-largest company, more than $60 billion in Enron stock value and more than $2 billion in employee pension plans after the company imploded in 2001.

Company founder Kenneth Lay also was convicted of conspiracy, fraud and other charges, but he died less than two months later of heart disease and his convictions were vacated.

___

Associated Press writers Ramit Plushnick-Masti and Juan A. Lozano in Houston contributed to this report.

nytimes.com

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From: Labrador5/18/2011 8:33:07 AM
2 Recommendations   of 3591
 
Enron’s Andy Fastow returns to Houston

fuelfix.com

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To: stockman_scott who wrote (3562)6/22/2011 6:27:21 PM
From: Glenn Petersen
1 Recommendation   of 3591
 
The doctrine of "harmless error" offers no hope for Skilling and Black:

When a Legal Victory Isn’t a Victory

By PETER J. HENNING
New York Times
DealBook
June 1, 2011, 2:31 pm

Even when a criminal defendant wins a case before the United States Supreme Court, there is no guarantee the person will avoid a conviction and escape serving time in a federal prison. Two former chief executives, Conrad M. Black and Jeffrey K. Skilling, have learned that lesson the hard way because of an important legal doctrine called harmless error, which is frequently invoked to uphold convictions in jury trials.

The Supreme Court on Tuesday refused to hear a second appeal by Mr. Black, the onetime newspaper baron, of his 2007 conviction of defrauding his company, Hollinger International, after the United States Court of Appeals for the Seventh Circuit found that any error in his case was harmless. This outcome may well result in his return to federal prison once Mr. Black is resentenced in the Federal District Court in Chicago.

In April, Mr. Skilling, once the head of Enron, was similarly unsuccessful having his 2006 conviction for conspiracy, securities fraud, making false statements to his company’s auditors and insider trading overturned by the United States Court of Appeals for the Fifth Circuit, which applied the same harmless-error standard. While he can also appeal that decision to the Supreme Court, there is a good chance his petition will receive the same treatment as Mr. Black’s.

Mr. Black and Mr. Skilling challenged their original convictions, which included allegations that they violated the federal “honest services” statute, 18 U.S.C. § 1346. In each case, the Supreme Court found that the trial judges had failed to give the juries a proper instruction on the scope of that provision.

The Supreme Court used Mr. Skilling’s case last year to narrow the meaning of “honest services” substantially by requiring the government to prove the defendant obtained a benefit through bribery or a kickback, and not just that the person breached a fiduciary duty or acted under a conflict of interest.

The Supreme Court overturned the convictions for both men, but those victories were only temporary because the cases were sent back to the lower federal courts to review whether the error in the instructions had any appreciable impact on the jury’s decision to convict. For each defendant, the federal appellate courts, applying the harmless-error standard, found that the problem with the “honest services” fraud theory did not affect the verdicts because there was more than enough evidence to establish their guilt beyond a reasonable doubt regardless of any mistakes in the instructions.

In Mr. Skilling’s case, the Fifth Circuit held there was “overwhelming evidence that Skilling conspired to commit securities fraud.” While he still awaits resentencing to correct an earlier error in the case, Mr. Skilling’s is likely to be required to continue to serve most of the 24-year prison term he initially received.

For Mr. Black, the Seventh Circuit concluded that the evidence of fraud was “so compelling that no reasonable jury could have refused to convict.” With the Supreme Court’s decision not to hear the case again, he faces the prospect of returning to federal prison to serve out at least a portion of his original 6½-year term.

Appellate courts use terms like “overwhelming” and “compelling” to describe the evidence against a defendant because harmless-error review puts the burden on the government to establish that the error had no effect on the jury’s decision to convict. In other words, if the evidence was equivocal, then the conviction should be overturned and a defendant granted a new trial. Finding that the government’s case was powerful allows the court to avoid granting a defendant the remedy of a new trial because the result would, in all likelihood, be the same.

What this type of terminology also does is make it almost virtually impossible for there to be any further meaningful review of the decision to uphold the conviction.
The Supreme Court concentrates on cases involving significant constitutional or statutory issues, and it is usually loath take a case requiring it to resolve close questions about whether the evidence at trial was sufficient to support a conviction — that is what the lower courts are for.

By calling the government’s case “overwhelming” and “compelling,” the Fifth and Seventh Circuits’ have taken steps that make their decisions largely unreviewable, meaning that any hopes Mr. Skilling and Mr. Black have of getting another day in court to prove their innocence have been pretty much dashed. The Supreme Court’s decision not to hear another appeal by Mr. Black shows that overcoming a finding of harmless error is nearly impossible.

The harmless-error doctrine demonstrates how much the balance tilts against a defendant once a jury has returned a guilty verdict. While the defendant gets the benefit of the doubt during trial, and the government must prove its case beyond a reasonable doubt, after a conviction the courts will bend over backward to uphold a jury verdict absent a clear legal error that had a significant impact on the evidence introduced at trial or the legal instructions given to the jurors. Simply arguing that the jury was mistaken, or that it could plausibly have returned a “not guilty” verdict, gains no traction from the courts.

For a defendant like Raj Rajaratnam, the head of the Galleon Group hedge fund, the outcome of the appeals of Mr. Black and Mr. Skilling are a good illustration of just how difficult it will be for him to overturn the guilty verdicts last month on 14 counts of insider trading. His lawyers have asked Judge Richard J. Holwell in Federal District Court in Manhattan to throw out a few counts, arguing that the evidence was insufficient, but even this will be a difficult argument to win because the trial court will construe the evidence in favor of upholding the verdict.

As I discussed in an earlier post, Mr. Rajaratnam’s best hope of getting his convictions overturned is on the legal issue concerning whether the government complied with the Wiretap Act in obtaining the recordings that proved so effective against him at trial. If the recordings were properly admitted as evidence, then it will be difficult to win the argument that there was insufficient evidence to show he engaged insider trading. And any other legal errors that might have cropped up in the trial are likely to be forgiven under the harmless-error standard.

The old saw that “you win some, you lose some” usually does not apply when the Supreme Court rules in your favor. But even winning there does not guarantee a victory for a criminal defendant.

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

dealbook.nytimes.com

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To: stockman_scott who wrote (3562)7/5/2011 7:55:30 PM
From: Glenn Petersen
1 Recommendation   of 3591
 
Looking at Ken Lay and the Lack of Financial Crisis Cases

By PETER LATTMAN
New York Times
DealBook
July 5, 2011, 4:15 pm

Kenneth L. Lay, the former chief executive of Enron, died of a heart attack five years ago today. The stunning news came a month after a Houston jury convicted him of securities fraud and three months before his scheduled sentencing.

Mr. Lay, along with Enron’s president, Jeffrey K. Skilling, became the public symbol of executive wrongdoing and financial malfeasance after the stock market boom of the late 1990s turned to bust.

Why does this matter today?

The media and public continue to hammer away at the lack of criminal prosecutions related to the financial crisis. In a New York magazine cover story this week, Frank Rich wrote: “What haunts the Obama administration is what still haunts the country: the stunning lack of accountability for the greed and misdeeds that brought America to its gravest financial crisis since the Great Depression. There has been no legal, moral, or financial reckoning for the most powerful wrongdoers.”

And over the weekend, my uncle Ronald, an accountant on Long Island, whom I have always considered a proxy for public sentiment, approached me at a family wedding. “Why isn’t Angelo Mozilo in jail?” he asked.

Federal prosecutors bristle at such criticism. Irresponsible business practices do not necessarily lead to criminal cases against bank executives, they say.

“In any arc in a movie, when someone treated his or her spouse badly, you want to see that person pay for that later,” Preet S. Bharara, the United States attorney in Manhattan, said in a recent interview in The New Yorker. “Doesn’t mean it’s a criminal act. There are lots of bad people out there who I can’t charge criminally.”

Which brings us back to Mr. Lay. After the late-2001 collapse of Enron punctuated the end of that era, the Bush administration acted swiftly in taking an aggressive stance on white-collar crime. In July 2002, President Bush, who counted Mr. Lay as a friend and financial supporter, created the Corporate Fraud Task Force in the Justice Department.

That task force secured nearly 1,300 corporate fraud convictions, including cases against more than 200 chief executives, company presidents and chief financial officers, according to a 2008 report.
Many of the highest-profile prosecutions from that era, including those of Mr. Lay and Mr. Skilling, were hardly layups. Securing a conviction in a complex corporate accounting case is challenging as trials often get bogged down in complex financial arcana and can confuse a jury.

President Obama terminated the Corporate Fraud Task Force with the establishment of the Financial Fraud Enforcement Task Force in November 2009.

Last Thursday, the Senate Judiciary Committee held a sleepy and sparsely attended hearing on the work of the task force. At the session, Justice Department officials trumpeted the prosecutions of Lee B. Farkas, the head of the Taylor Bean & Whitaker Mortgage Corporation, who was sentenced to 30 years last week, and Charles J. Antonucci Sr., the former head of Park Avenue Bank, who pleaded guilty to stealing more than $11 million in taxpayer bailout funds.

Seemingly dissatisfied, Senator Amy Klobuchar, Democrat of Minnesota, asked a federal prosecutor from her home state for another example of someone in prison as result of the task force’s work. He cited Tom Petters, a Minnesota businessman serving time after admitting to perpetrating a large corporate Ponzi scheme.

Farkas. Antonucci. Petters. While all serious criminals, the three barely register as footnotes of the financial crisis.

Those names stand in stark contrast to Mr. Lay and his fellow corporate executives brought low in the last wave of corporate-crime prosecutions.
Mr. Lay and Mr. Skilling were among the most admired executives in corporate America. So were Bernard J. Ebbers of WorldCom, John J. Rigas of Adelphia, and L. Dennis Kozlowski of Tyco.

Except for Mr. Lay, whose death wiped out his conviction, each of them still sits in prison.

dealbook.nytimes.com

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To: stockman_scott who wrote (3562)7/7/2011 9:34:33 PM
From: Glenn Petersen
1 Recommendation   of 3591
 
Fallout from the Enron prosecutions:

The department began pulling back from a more aggressive pursuit of white-collar crime around 2005, say defense lawyers and former prosecutors, after the Supreme Court overturned a conviction it won against the accounting firm Arthur Andersen. That ended an era of brass-knuckle prosecutions related to fraud at companies like Enron.

Behind the Gentler Approach to Banks by U.S.

By GRETCHEN MORGENSON and LOUISE STORY
New York Times
July 7, 2011

As the financial storm brewed in the summer of 2008 and institutions feared for their survival, a bit of good news bubbled through large banks and the law firms that defend them.
Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.

Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive, involving a process known as deferred prosecutions, signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,” Sullivan & Cromwell, a prominent Wall Street law firm, told clients in a memo that September.

The guidelines left open a possibility other than guilty or not guilty, giving leniency often if companies investigated and reported their own wrongdoing. In return, the government could enter into agreements to delay or cancel the prosecution if the companies promised to change their behavior.

But this approach, critics maintain, runs the risk of letting companies off too easily.

“If you do not punish crimes, there’s really no reason they won’t happen again,” said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney. “I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space.”

While “deferred prosecution agreements” were used before the financial crisis, the Justice Department made them an official alternative in 2008, according to the Sullivan & Cromwell note.

It is among a number of signs, white-collar crime experts say, that the government seems to be taking a gentler approach.

The Securities and Exchange Commission also added deferred prosecution as a tool last year and has embraced another alternative to litigation — reports that chronicle wrongdoing at institutions like Moody’s Investors Service, often without punishing anyone. The financial crisis cases brought by the S.E.C. — like a recent settlement with JPMorgan Chase for selling a mortgage security that soured — have rarely named executives as defendants.

Defending the department’s approach, Alisa Finelli, a spokeswoman, said deferred prosecution agreements “achieve these results without causing the loss of jobs, the loss of pensions and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it or were unable to prevent it.”

The department began pulling back from a more aggressive pursuit of white-collar crime around 2005, say defense lawyers and former prosecutors, after the Supreme Court overturned a conviction it won against the accounting firm Arthur Andersen. That ended an era of brass-knuckle prosecutions related to fraud at companies like Enron.

Another example of this more cautious prosecutorial strategy: Government lawyers now go to companies earlier in an inquiry, and often tell companies to figure out whether improper activities occurred. Then those companies hire law firms to investigate and report back to the government. The practice was criticized last year when the Justice Department struck a settlement with Beazer Homes USA, a home builder accused of mortgage fraud.

This “outsourcing” of investigations — as some lawyers call it — has led to increased coziness between the government and companies, some critics say.

In banking, the collaboration is even stronger, dating to the mid-1990s when banks were asked to regularly report suspicious activities to the Treasury Department, an effort that aimed at relieving regulators of some of their enforcement loads. But it gave regulators a false assurance that banks would spot and report all wrongdoing, former investigators say. Moreover, companies are not as likely to come forward with evidence related to senior executives or to widespread patterns of misbehavior, some academics say.

Intended to make the most of the government’s limited investigative resources, the government’s cooperation with corporations and industry groups can work well and save money when business hums along as usual. But some veterans of government prosecutions question such collaboration in financial crisis cases, and contend they should have been pursued more aggressively.

“Traditionally, a bank would tell the Department of Justice when an employee engaged in crimes, but what do you do when the bank itself is run by a criminal enterprise?” said Solomon L. Wisenberg, former chief of the financial institutions fraud unit for the United States attorney in the Western District of Texas in the early 1990s. “You have to be able to investigate without just waiting for the bank to give you the referral. The people running the institutions are not going to come to the D.O.J. and tell them about themselves.”

A Clash of Agencies

Beazer Homes, based in Charlotte, N.C., became one of the nation’s 10 largest home builders in the 2000s — in large part because of mortgage lending options that attracted buyers. But its mortgage business eventually attracted prosecutors, too.

In March 2007, the inspector general and officials of the Department of Housing and Urban Development began investigating claims that Beazer had engaged in mortgage fraud, causing losses to the Federal Housing Administration’s insurance fund that covered mortgages when buyers couldn’t pay.

Investigators found that Beazer had been offering a lower mortgage rate if buyers paid an extra fee, but then not giving them the lower rate. And it was enticing homeowners by offering down payment assistance, but not disclosing that it then raised the price of the house by the same amount.

The Beazer board’s audit committee hired the law firm of Alston & Bird to conduct an internal investigation. Documents supplied to Congress by HUD show that Justice Department officials advised HUD investigators not to interview borrowers or former Beazer employees until Alston & Bird completed its review.

In April 2009, justice officials notified HUD that a deferred prosecution agreement with Beazer had been reached — the sort of deal that Sullivan & Cromwell had celebrated in its client memo a year earlier — essentially shutting down the HUD investigation.

Beazer agreed to pay consumers and the government as much as $55 million under the deal. It also paid approximately that amount to Alston & Bird, investigators found. While a member of the justice team told HUD that criminal proceedings would be forthcoming against individuals at Beazer, the documents show, there has been only one indictment: of Michael T. Rand, the company’s former chief accounting officer, whose trial is to begin this fall.

A year after the settlement, Kenneth M. Donohue, the inspector general of HUD at the time, raised questions about its handling. He said he was disturbed by the interference by the Justice Department and its calls to stop pursuing Beazer executives so the deferred prosecution deal could be completed. “As a law enforcement official for over 40 years,” Mr. Donohue wrote in a letter to Eric H. Holder Jr., the attorney general, “I have never witnessed a like action in any of my varied dealings.”

In a recent interview, Mr. Donohue, now a senior adviser at the Reznick Group, an accounting firm in Bethesda, Md., said of the Justice Department: “The most important point of this whole thing is the fact that they threatened the HUD office of the inspector general that we would not be allowed to go forward with our investigation of executives if we didn’t agree to their settlement.”

David A. Brown, acting United States attorney on the case, said: “What we do is work cooperatively as a team in conducting these investigations. We don’t tell agencies to stand down when they are working as part of the team.” He said that the investigation was continuing, and that the Justice Department was proud of the deferred prosecution agreement and the restitution Beazer paid, which more than covered the losses of the Federal Housing Administration fund.

Beazer did not respond to an e-mail, and Alston & Bird did not return a call seeking comment.

Ms. Finelli, the department’s spokeswoman, said that deferred or nonprosecution agreements had led to charges against individuals in many cases; of the 20 companies she cited, three were financial companies. But none were cases related to the financial crisis.

Still, some lawyers applaud the closer relationship between the government and business. “Given the scanty resources that have been committed to corporate crime enforcement, I think the government’s leveraging of its prosecution power from corporations and their lawyers has been critically important,” said Daniel C. Richman, professor of law at Columbia and a former assistant United States attorney in New York.

But Professor Richman added that the government should have “a much more developed, funded and empowered S.E.C., Federal Reserve, E.P.A. and other agencies to do regulation, to do enforcement and feed cases where necessary to criminal prosecutors.”

Changing Course

The names have become synonymous with corporate wrongdoing — and forceful prosecution: Not just Enron, but also WorldCom, Tyco, Adelphia, Rite Aid and ImClone. In the early part of the last decade, senior executives at all these companies were convicted and imprisoned.

But by 2005, a debate was growing over aggressive prosecutions, as some business leaders had been criticizing the approach as perhaps too zealous.

That May, Justice Department officials met ahead of a session with a cross-agency group called the Corporate Fraud Task Force. It was weeks after Justice Department lawyers had presented to the Supreme Court their case against Arthur Andersen, which was seeking — successfully, it would turn out — to overturn its criminal fraud conviction in a prominent case.

In the meeting, the deputy attorney general at the time, James B. Comey, posed questions that surprised some attendees, according to two people there who asked to remain anonymous because they were not supposed to discuss private meetings.

Was American business being hurt by the Justice Department’s investigations?, Mr. Comey asked, according to these two people, who said they thought the message had come from others. He cautioned colleagues to be responsible. “It was a total retrenchment,” one of the people said. “It was like we were going backwards.”

Mr. Comey said recently that he did not recall this conversation.

Around the same time, the Justice Department was developing instructions on dealing with companies under investigation — particularly companies that work with the government. It issued a memo in 2003 that gave companies more credit for cooperating than in the past. That message was reinforced in another memo in 2006.

As the first memo put it, “it is entirely proper in many investigations for a prosecutor to consider the corporation’s pre-indictment conduct, e.g., voluntary disclosure, cooperation, remediation or restitution, in determining whether to seek an indictment.”

During this period, the Justice Department increased the use of deferred prosecutions or even nonprosecution agreements.

Many well-known companies have benefited. In 2004, the American International Group, the giant insurer, paid $126 million when it entered a deferred prosecution agreement to settle investigations into claims that it had helped clients improperly burnish financial statements.

Deals over accounting improprieties also were struck that year by Computer Associates International, a technology company, and in 2005 by Bristol- Myers Squibb, a pharmaceutical concern. Prudential Financial entered into a deferred prosecution in 2006 over improper mutual fund trading.

No such prosecution deals for large banks have yet arisen out of the financial crisis. Some bank analysts say they may be coming. The government may eventually strike one with Goldman Sachs, which it continues to investigate for its mortgage securities dealings, Brad Hintz, a securities analyst at Sanford C. Bernstein & Company, wrote recently. “If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department,” he added.

Goldman Sachs declined to comment.

The S.E.C. can also file deferred prosecutions, and it sometimes issues reports about wrongdoing in lieu of litigation. It has been increasing the number of reports it files, and is considering issuing one about misleading accounting at Lehman Brothers, Bloomberg News has reported. The S.E.C. did something similar last year to resolve a credit ratings investigation of Moody’s Investors Service. The reports from the commission are intended to give companies guidance on appropriate practices.

Such results provide bragging rights among corporate defense lawyers, according to longtime observers of the legal system.

“The corporate crime defense bar has this down to a science,” said Russell Mokhiber, the editor of Corporate Crime Reporter, a publication that tracks prosecutions. “I interview them all the time, and they boast about how they’ve gamed the system.”

Industry Advantage

Even as companies cooperate with the government, they also work closely with one another, creating industrywide strategies in response to investigations. Legal representatives for Goldman Sachs, Morgan Stanley, JPMorgan Chase and others talk regularly about what they hear from the government, according to lawyers in the industry. They have long held these conversations — known as joint-defense calls — but given the increased cooperation of the government with companies, lawyers can exchange more information.

Goldman’s recent battle against the S.E.C. — in which it agreed to pay $550 million to settle claims that it had misled investors in a mortgage security it sold — was helpful to other banks, according to one lawyer who participates in these calls. On several occasions in 2009 and 2010, after Goldman and its law firm, Sullivan & Cromwell, visited the S.E.C., lawyers representing other banks received intelligence on the government’s areas of interest. The result has often been that banks walk into prosecutors’ offices well-prepared to rebut allegations.

One assistant United States attorney, who requested anonymity because he is not allowed to speak with the news media, said many inquiries had been tabled because banks had such good answers.

“They’ll hire a counsel who is experienced,” said the assistant attorney, who has direct knowledge of cases related to the financial crisis. “They often come in and make a presentation: ‘We’ve looked at this and this is how we see it.’ They’re often persuasive.”

Some defense lawyers say it is easier to make a persuasive case because prosecutors, having becoming more dependent on companies for investigative legwork, are less knowledgeable and thus less likely to counter with evidence they have uncovered.

The process, in the end, is cloaked, some critics say. The Justice Department does not disclose any details about its decision-making in specific cases, such as why it did not charge individuals at a company.

“We will not get an explanation of why there haven’t been prosecutions; at best, we will get a reference back to the Department of Justice manual that leaves the discretion to the prosecutors,” said Professor Ramirez of Washburn University. “The legal representatives will argue that since recoveries can be had by using civil measures, even private litigations, there’s no need to bring criminal measures. I disagree with that very much.”

nytimes.com

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To: stockman_scott who wrote (3547)8/3/2011 12:34:13 PM
From: Glenn Petersen
   of 3591
 
When Enron fell, its former directors fell on their feet:

The trend also underscores the decline in the importance of reputation on Wall Street — even since the time of Enron. Prior bad conduct simply is often not viewed as a problem.

Ex-Directors of Failed Firms Have Little to Fear

By STEVEN M. DAVIDOFF
New York Times
DealBook
August 2, 2011, 8:56 pm

Do the former directors of the institutions that collapsed during the financial crisis have anything to worry about? If the experience of Enron is any example, the answer is a resounding no.

A look back at the career paths of onetime Enron directors indicates that the former directors of Bear Stearns and Lehman Brothers will continue their prominent careers.

Enron collapsed into bankruptcy in 2001 amid accusations of accounting improprieties and outright fraud. The scandal sent shock waves through corporate America, but compared with the global financial crisis, it almost seems small and quaint.

Still, in the case of Enron, unlike in the financial crisis, top corporate executives went to prison. Most prominently, Jeffrey Skilling, a former chief executive of Enron, was sentenced to 24 years in prison.

Yet while some Enron executives paid a price for the scandal, it is a different story with Enron’s former directors — the people charged with overseeing the company. A search of their current whereabouts shows that they have recovered nicely from the scandal.

Four former Enron directors still serve on public boards.
Frank Savage, for example, still heads his own investment firm and serves on the boards of Bloomberg L.P. and Lockheed Martin. Norman P. Blake Jr. serves on the board of Owens Corning, where he is the head of that company’s audit committee.

A number have gone back to or entered academia. Wendy Gramm, the wife of the former senator Phil Gramm, vice chairman of UBS investment bank, is still in residence at the Mercatus Center at George Mason University.

Robert K. Jaedicke, who was chairman of Enron’s audit committee, teaches at the Stanford University Graduate School of Business. And Lord John Wakeham has remained chancellor of Brunel University in London.

The private sector Enron directors also continued their careers without much of a hiccup. Ken L. Harrison retired as chief executive of the Portland General Electric Company last year. And Ronnie C. Chan has remained chairman of the Hang Lung Group in Hong Kong since Enron’s collapse.

Most of the remaining directors have since retired or now work in small private or family businesses, a euphemism for semiretirement.

John Mendelsohn, for example, is to retire next month as head of the University of Texas MD Anderson Cancer Center.

Then there is Rebecca Mark-Jusbasche. She was named one of the “luckiest persons in Houston” by Fortune magazine. Ms. Mark-Jusbasche left the Enron board in 2000, selling more than $80 million worth of company stock. She now runs family properties in New Mexico and Colorado.

A few of the directors conveniently omit Enron from their biographies, but they do not appear to remain tainted, staying in their chosen professions.

The only court penalty placed upon them was related to a $165 million settlement of shareholder litigation arising from Enron’s demise. The directors personally had to pay a relatively large $13 million. The rest was covered by insurance.

The experiences of the Enron directors over the last decade would appear to offer great hope to the directors of Bear Stearns and Lehman Brothers.

Indeed, many of these directors remain not only as directors of public companies from before the financial crisis, but they have joined new boards. Even Alan Greenberg is still on the Viacom board with a fellow Bear board alumnus, Frederic V. Salerno, who serves on six public company boards. In all, 6 of the 12 Bear directors at the time of the investment bank’s collapse are still directors of public companies.

None of the Bear directors have appeared to have career difficulties. The two academics on the board were the Rev. Donald J. Harrington, who remains the president of St. John’s University, and Henry S. Bienen, who is emeritus president of Northwestern University. Frank T. Nickell is still chief executive, president and chairman of Kelso & Company, while Paul A. Novelly remains C.E.O. of the Apex Oil Company.

In fact, with the exception of James E. Cayne, none are fully retired or appear to be having trouble finding good positions.

It is the same for Lehman Brothers, with Richard S. Fuld Jr., the former chief executive, bearing the brunt of the public approbation. He is at his own firm, Matrix Advisors, and — fairly or unfairly — remains the focus of blame for Lehman’s demise.

As for the other Lehman directors, six of them held directorships as recently as January. Jerry A. Grundhofer was appointed to the Citigroup board after Lehman’s fall. He has since resigned from that board, but he remains on the boards of EcoLab and the Midland Company. Roland A. Hernandez joined the Sony board and still remains on the boards of MGM Mirage, the Ryland Group and Vail Resorts.

The rest of the board members were mostly private investors. Roger S. Berlind was and still is a theatrical producer. Michael L. Ainslie, former chief executive of Sotheby’s, is a private investor. Christopher Gent is a senior adviser to the consulting group Bain & Company as well as nonexecutive chairman of GlaxoSmithKline.

So the Bear and Lehman directors are returning to public company service even quicker than the Enron directors. In part this reflects the old boy network on Wall Street, which keeps people in the same positions because of friendships. It is not a coincidence that two former Bear Stearns directors serve on the Viacom board.

The trend also underscores the decline in the importance of reputation on Wall Street — even since the time of Enron. Prior bad conduct simply is often not viewed as a problem.

But in the case of the Bear and Lehman directors there is another significant factor. The financial crisis was an enormously complex event, and people will be debating its causes for years to come. Blame can be dispersed, and an executive or director can simply say it was the crisis itself — not poor management or inadequate board supervision — that caused their firm’s demise.

I am not arguing that these directors be tarred and feathered or that they should not be able to earn a living, but rather that there should be market penalties for failure — just as Ms. Gramm’s Mercatus Center often argues. At a minimum, one would think that other public companies might be more hesitant to keep these failed directors on their boards.

In the end, the directors of companies that failed in the financial crisis will most likely receive an even freer pass than the Enron directors.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

dealbook.nytimes.com.

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To: stockman_scott who wrote (3547)10/18/2011 12:08:36 PM
From: Glenn Petersen
1 Recommendation   of 3591
 
From the ashes of Enron:

Enron castoffs became pipeline empire

By TOM FOWLER, HOUSTON CHRONICLE
Published 09:20 p.m., Monday, October 17, 2011

Ten years to the day after Enron Corp. began its rapid fall, Rich Kinder made a move that may signal his rise to new heights.

On Oct. 16, 2001, Enron - from which Kinder had resigned as president five years earlier - reported a surprise third-quarter loss.

The loss marked the beginning of the end for the one-time energy giant as it began its spiral to a Dec. 2, 2001, bankruptcy filing, thousands of local layoffs, the collapse of the energy trading business and years of criminal and civil litigation.

On Oct. 16 a decade later, Rich Kinder's company, Kinder Morgan Inc., announced plans to acquire natural gas pipeline giant El Paso Corp. in a $21.1 billion deal that will make Kinder Morgan the fourth-largest energy-related business in the country behind oil giants Exxon Mobil Corp., Chevron Corp. and ConocoPhillips.

The deal may be the pinnacle of a 15-year journey that saw Kinder take a handful of unwanted pipelines from Enron and build them into a booming energy empire.

It took a combination of patience, conservative budgets and the skillful use of a once-esoteric business structure known as a master limited partnership.

"Rich was the guy who helped build up the most stable part of Enron's business and had the foresight, good luck - whatever you might call it - to leave at the top," said Dan Pickering, chief energy strategist with Houston-based TPH Asset Management.

"He has a knack for being in the right place at the right time. And I can tell you from experience that's usually not just luck."

Bought Enron pipeline

Kinder, a Missouri native and lawyer by training, was at Florida Gas in the 1980s when the company was acquired by Houston Natural Gas.

He helped the late Ken Lay build the company into the multifaceted powerhouse called Enron, then left in 1996 when he was not promoted to succeed Lay as CEO.

A year later he joined
Bill Morgan, another former Enron executive, and purchased a small pipeline business from Enron for $40 million.

It was not nearly as sexy as trading weather derivatives and broadband data capacity or building power plants overseas - activities that made Enron a stock market darling in the late 1990s.

But it was a solid, conservative business that - at scale - creates enormous cash flow.

Over the years Kinder Morgan grew through dozens of acquisitions and a smaller number of major project expansions.

Like a toll road

"We're not a complicated company to understand. We're just a gigantic toll road," Kinder once told the Chronicle, explaining why the pipeline company's fortunes don't rise and fall with oil and gas prices. "We just get paid a fee to move products, and we don't care what gets moved down the highway."

Key to Kinder Morgan's success has been a corporate financial structure that's obscure to most people - the Master Limited Partnership, or MLP.

The one associated with Kinder Morgan Inc. is Kinder Morgan Energy Partners.

An MLP must pay out most of its profits to shareholders, helping it avoid most corporate income taxes and keeping its borrowing costs low.

Increased payouts

MLPs have been around for years, but by focusing on the idea of increasing payouts to investors, Kinder was able to grow the companies more quickly.

"Rich Kinder has been an exceptional financial engineer," said John Olson, a longtime Houston energy analyst who has followed Kinder and his companies for years. "He is able to orchestrate a very attractive record on Wall Street and continued to find more opportunities."

Kinder took Kinder Morgan Inc. private in a leveraged buyout in 2006, saying investors were undervaluing the business. He brought it back to the public markets earlier this year in a $3 billion initial public offering.

Despite the size of the El Paso deal, Kinder and his company eschew flash in favor of a more conservative approach.

The company doesn't have corporate jets. Base pay for executives is capped below industry standards in favor of a strict "pay for performance" program.

Dollar a year CEO

Kinder famously takes just $1 per year in salary, although his ownership of nearly one-third of the sharesof the Kinder Morgan companies' general partnermakes his net worth close to $6.5 billion, according to Forbes.

On Monday, one former banker who has worked with Kinder Morgan pointed to another sign of its straightforward approach, in the shareholder presentation about the El Paso deal: The company was sure to put in red ink the one time in the last 11 years it failed to hit its targeted distribution to shareholders - in 2006 when it missed projections by two cents.

"It's the appropriate way to do business," he said.

The company publishes its annual budgets and planned dividend payments a year in advance, where it typically under-promises and over-delivers. It's a technique analysts love, says Olson.

"Rich can read Wall Street like a book," Olson said.

tom.fowler@chron.com Twitter/Houstonfowler

chron.com

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To: stockman_scott who wrote (3547)1/4/2012 9:49:22 AM
From: Glenn Petersen
1 Recommendation   of 3591
 
A tough looking judge with an historic case load:



James Estrin/The New York TimesJudge Arthur J. Gonzalez, chief judge of the federal bankruptcy court in Manhattan, handled Enron and WorldCom. He is set to retire in March.
____________________

<!-- — Updated: 8:49 am -->A Judge Who Reshaped the Corporate Landscape
By MICHAEL J. DE LA MERCED
DealBook
New York Times
December 29, 2011, 6:07 pm

Many judges are lucky to handle just one era-defining case during their tenures on the bench. In his 16 years as a federal bankruptcy judge, Arthur J. Gonzalez has handled three.

The first, Enron, came up in late 2001. Eight months later, WorldCom followed, forcing the judge to handle both cases simultaneously. And the last, Chrysler, arrived in 2009.

Now, Judge Gonzalez, 64, is set to retire in March as the chief of the United States Bankruptcy Court in Manhattan. His career has been a vivid illustration of the important role that the court, located in a Beaux-Arts courthouse at the southern end of Manhattan, has played in helping reshape corporate America.

The Chrysler case proved in some ways to be the most difficult one of them all.

He recalled how he approved the sale of Chrysler’s core assets to Fiat of Italy just after 11 p.m. on June 1, 2009, after three days of marathon hearings and more than 300 objections. Almost immediately, however, Chrysler bondholders appealed, and within 10 days the matter rose to the Supreme Court.

“If you had asked me at the beginning of the case, I wouldn’t have thought it would have gone to the Supreme Court,” he said in an interview. “But this decision was important for the case to get done.”

After brief deliberations, the Supreme Court declined to hear the case, essentially reaffirming Judge Gonzalez’s decision.

On the bench, the judge has a quiet and subdued demeanor, keeping proceedings moving and rarely cracking jokes. Off the bench, however, his mood lightens considerably. During a conversation in his office, which has a dozen Hess toy trucks that he has collected over the years, he points fondly to the numerous pictures of his beloved Brooklyn Dodgers hanging on the wall.

Becoming a bankruptcy judge was not what Judge Gonzales, a Brooklyn native, had planned. After graduating from Fordham in 1969, Judge Gonzalez became a New York schoolteacher, teaching in East New York. (A photo from 1973 in his office shows him with seven of his students from Public School 189, with a thick mass of curly, dark hair.)

His interest in the law was stoked by his role as a representative for the United Federation of Teachers. After taking night classes at Fordham Law, Judge Gonzalez left teaching to take up a position at the Internal Revenue Service. After brief stints at two private firms, he joined the Justice Department’s trustee division, eventually being named to the bench in 1995.

Retirement, he says, should mean shorter work days than the 12 hours he now averages. (He arrives before 6 a.m. and generally leaves around 7 p.m. or 8 p.m.)

And it could leave more time to pursue his favorite pastime, running. He has run 30 of the last 32 New York City marathons, missing two because of injury.

Even now, he runs in triathlons and the annual 86-flight sprint up the Empire State Building. And he regularly runs with a fellow bankruptcy judge, Martin Glenn, who is overseeing MF Global’s Chapter 11 proceedings. Judge Gonzalez finished this year’s marathon at 4:45, far from the 3:26 he ran in 1980 but not exactly where he wants to be.

Judge Gonzalez said he was unlikely to take the well-worn route of former judges (and that of his daughter, a recent law school graduate) of joining a major law firm. Instead, he plans to continue teaching at New York University’s law school.

“If I decide I want to go home, I can go home,” he said. “I have control of my life.”

To those who argued before him, the judge has proved to be an efficient conductor of bankruptcy proceedings.

“He has a demeanor that exuded fairness, but was also very decisive and wrote brilliant decisions at a fairly rapid clip,” said Martin Bienenstock, who worked as Enron’s lead bankruptcy lawyer.

Of the three mammoth bankruptcy cases Judge Gonzalez handled, Enron was the first, filed over the weekend on Dec. 2, 2001. The judge came in early the next day and was told shortly afterward by a clerk that “the wheel,” the court system that assigns cases, had selected him to oversee the matter.

As Enron’s efforts to reorganize failed, quickly dissolving into an extensive liquidation, Judge Gonzalez’s time was consumed in grappling with a mounting investigation into accounting issues. The court allowed him to forgo new cases for six months.

“I think I spent the first six weeks of Enron on the bench every day,” he said.

In May 2002 Judge Gonzalez started accepting new cases again. Two months later, the wheel landed on him, impelling him to handle two of the country’s biggest bankruptcy cases at the same time.

“By the time WorldCom came in, I felt that yes, I could handle both at the same time,” he said. “Enron was not coming to me every day looking for relief.”

Though it was huge — WorldCom was the biggest Chapter 11 case on file until Lehman Brothers collapsed in September 2008 — Judge Gonzalez said that it was easier to manage. WorldCom successfully reorganized within 15 months, in October 2003, and Enron finally emerged from bankruptcy nine months afterward.

Still, the two cases produced reams of paperwork and required scores of opinions to be written, and Judge Gonzalez did not take on new matters for six years.

Then came Chrysler in May 2009. While Enron and WorldCom were the subject of numerous federal investigations, the carmaker posed its own challenge: politics. Bondholders had battled with the Obama administration over its plan to sell the bulk of Chrysler to Fiat, using the bankruptcy process to shed billions of dollars in debt owed to investors, dealers and accident victims.

Judge Gonzalez acknowledged that it was tough to ignore the cloud of politics surrounding the case, and knew that his decisions would be hotly contested by irate bondholders.

“It was a big political issue of whether the government should be involved,” he said. “But that wasn’t an issue before the bankruptcy court.”

dealbook.nytimes.com

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To: stockman_scott who wrote (3562)1/17/2012 4:42:46 PM
From: Glenn Petersen
1 Recommendation   of 3591
 
Enron Creditors Get 53 Percent Payout, Aided by Lawsuit Accords

By Linda Sandler
January 17, 2012, 3:29 PM EST

Jan. 14 (Bloomberg) -- Defunct Enron Corp.’s creditors have received $21.8 billion in cash and stock so far, with money from lawsuits and settlements helping to give general unsecured creditors a payback three times higher than the estate had projected, a report shows.

Once the biggest U.S. energy trader, Houston-based Enron filed for bankruptcy in 2001 and won approval of a liquidation plan in 2004. The 53 percent payback to general unsecured creditors was triple the 17 percent recovery estimated in the plan, according to a report by Enron Creditors Recovery Corp., set up to liquidate the company’s remaining operations and assets.

Enron investors in December 2008 began receiving their share of $7.2 billion from settlements with the failed energy trader’s lenders, auditors and directors.

A judge that year approved a $1.7 billion settlement with Citigroup Inc., sued by investors as part of a move to hold lenders liable for the fraud that destroyed the company. Citigroup also agreed to give up an estimated $4.3 billion in claims against Enron to settle the allegations about its role in the company’s collapse. JPMorgan Chase & Co., another former Enron lender, said in 2005 it would pay $2.2 billion to resolve litigation.

The creditors’ payout includes $267 million of interest, capital gains and dividends, according to yesterday’s report.

Lay is Dead

Enron, then run by Chief Executive Officer Jeffrey Skilling and Chairman Kenneth Lay, filed for bankruptcy after restating $586 million in earnings. Its shares lost $68 billion in value from their peak in 2000 to its bankruptcy filing. More than 5,000 Enron employees were fired and about $1 billion in retirement money was lost. Skilling is in prison and Lay is dead.

More than $780 million in total fees were approved in 2004 for advisers in the three-year Enron bankruptcy, at the time the second-largest in U.S. history after WorldCom Inc. Lehman Brothers Holdings Inc., which collapsed in 2008, set the record as America’s most costly bankruptcy in 2010, and now has paid managers and advisers about $1.5 billion.

Lehman is embarking on a $65 billion liquidation plan and has estimated it will pay the average creditor less than 18 cents on the dollar.

The Enron recovery corporation has stored 2,600 boxes of documents and destroyed at least 43,000 boxes in accordance with court orders, according to the report. Litigation documents are stored on electronic tape media.

The Citigroup suit is Enron Creditors Recovery Corp. v. Citigroup Inc., 03-9266, and the bankruptcy case is In re Enron Corp., 01-16034, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Christopher Scinta in London. Editors: Peter Blumberg, Charles Carter

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

businessweek.com

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To: stockman_scott who wrote (3562)3/27/2012 5:35:30 PM
From: Glenn Petersen
1 Recommendation   of 3591
 
Andrew Fastow draws on Enron failure in speech on ethics at CU

By Mark Jaffe
The Denver Postdenverpost.com
Posted: 03/20/2012 01:00:00 AM MDT
Updated: 03/20/2012 03:53:21 PM MDT


Andrew Fastow, former chief financial officer of Enron, speaks Monday to Leeds School of Business students, faculty and staff at Macky Auditorium at the University of Colorado at Boulder. (Patrick Campbell, University of Colorado)
____________________

Andrew Fastow, the former Enron chief financial officer who went to prison for securities fraud, told an audience at University of Colorado-Boulder Monday night that following the rules isn't enough.

"When I was initially charged I still thought I was not guilty because I had followed the rules," Fastow told more than 1,000 students at the Leeds School of Business session at Macky Auditorium.

Fastow told the more than 1,200 students that it took him a couple of years to realize he had "used the rules to subvert the rules."

"Therefore I am guilty," said Fastow, who completed a six-year prison sentence in December.


The complex off-balance sheet that Fastow created to funnel tens of millions of dollars into executives' pockets and hide corporate losses contributed to the collapse in 2001 of the energy trading giant, which had once been valued at $60 billion.

"I didn't think I was committing fraud," Fastow said. "But the net effect of all these deals was to create a misrepresentation of the company."

The key problem, Fastow told the students, was that when rules are vague and complex it creates "a business opportunity."

"There are people who look at the rules and find ways to structure around them. The more complex the rules, the more opportunity," Fastow said.


That was what Enron was doing, Fastow said, with the approval of the board of directors, attorneys and accountants. "I thought we were freakin' geniuses," he said.

"The question I should have asked is not what is the rule, but what is the principle," Fastow said.

Fastow contacted the university and asked if he could speak to students. He had read an op-ed column, published by Bloomberg BusinesWeek in January, written by Leeds Dean David Ikenberry and Donna Sockell, director of the school's Center for Education on Social Responsibility. The piece was about the need for deeper ethics training in business schools.

"Enron was an incredible corporate failure," Ikenberry said. "And this was a unique teaching opportunity."

Fastow fielded questions from CU students for about 40 minutes tonight. They asked him if he thought his punishment was adequate for the harm he had done. Fastow said he had served the sentence the court gave. One student asked how much money Fastow still had. The former Enron executive said that it was none of the student's businesses.

One asked what Fastow thought about mark-to-market accounting, which allows the value of an asset to be changed as its market value fluctuates. It was another accounting device Enron used to inflate value.

"Mark-to-market accounting is like crack," Fastow replied. "Don't do it."

Mark Jaffe: 303-954-1912 or mjaffe@denverpost.com

http://www.denverpost.com/recommended/ci_20210676

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