by T. GormanPosted on Posted in SECActions

The Enron Nigerian barge deal seems to be the deal that refuses to go away – and many wish that it would.   The deal as initially conceived was simple enough:  Enron sold an interest in electricity producing barges to Merrill Lynch and others, recording the sale price as income.  That income helped Enron meet its earnings goals for the period.  According to the government an unwritten promise from Enron specified that it would resell or buy back the barges by mid-2000.   According to the government and class action plaintiffs, this covert  promise compromised the sale and modified it into a disguised loan and, thus, fraud.


The Government.  In U.S. v. Brown, the indictment alleged that four Merrill Lynch executives who participated in the deal were guilty of conspiracy and wire fraud, engaging in a scheme to defraud Enron of honest services.  U.S. v. Brown, No. 05-20319 (5th Cir. Aug. 1, 2006).  According to the Fifth Circuit Court of Appeals the “honest services” language in the statutes has been interpreted to require actions close to bribery.  Since the government failed to offer proof of that type, the Fifth Circuit reversed the convictions of the Merrill Lynch executives who, by that time, had served part of their sentences.  


Now however, the government is seeking to retry three of the Merrill Lynch executives.  In a motion filed with the district court in Huston on December 4, 2006, the government sought to strike the “honest services” fraud allegations from the indictment.  See United States’ Motion to Strike the Honest Services Fraud Allegations from the Indictment, filed in U.S. v. Bermingham, Cr-H-02-0597 (S.D. TX. Filed Dec. 4, 2006).  If granted, this would leave the alternate theory of fraudulent deprivation of Enron’s money or property.  The case may proceed back to trial on this theory.


The Class Actions.  The same barges are involved in Regents of the University of California v. Credit Suisse First Boston.  That class action sought to hold Merrill Lynch and others liable for securities fraud based, in part, on the barge deal.   In a recent opinion the Fifth Circuit Court of Appeals reversed a class certification order. Regents of the University of California v. Credit Suisse First Boston, Inc., No. 06-20856, 2007 U.S. App. LEXIS 6396 (5th Cir. Mar. 19, 2007).  The Court held that the action could not proceed as to defendant investment banks in view of the Supreme Court’s decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), which eliminated liability for aiding and abetting in private securities fraud actions.  The plaintiffs recently requested the Supreme Court to hear this case.  
While these two cases are very different, one a criminal prosecution and the other a securities class action, they share more than a factual similarity based on selling barges.   The common thread from the Fifth Circuit seems to be that those outside Enron are not being held responsible for what Enron executives did to manipulate the financial statements of that now defunct company.  But neither the government in Brown nor the plaintiffs in Credit Suisse are listening.  Thus, the Enron barge saga will continue – at least for awhile. 
 

by T. GormanPosted on Posted in SECActions

The SEC is about to shift the way it assesses corporate penalties according to a story in the Washington Post today. Under a new formula crafted by SEC Chairman Cox, enforcement staff will have to obtain authority from SEC Commissioners prior to beginning negotiations with defense counsel on corporate penalties. Under the new methodology, the staff reportedly will be given specific authority on a case by case basis for negotiating corporate penalties. That authority may include a specific range for the penalty.

The new Chairman Cox system contrasts sharply with the traditional approach. Until now the enforcement staff typically negotiated with defense counsel over whether a penalty should be imposed and, if so its amount. Once an agreement was reached it was submitted along with the balance of the proposed settlement terms to the Commissioners for approval. According to an SEC spokesman, who apparently is the source for the Washington Post article, the new process is designed to speed a resolution of these matters and add to investor protection.

The SEC has been criticized for what some have called the increasingly harsh tone of its enforcement program. Some news reports have suggested that the five Commissioners are divided over the imposition of corporate penalties, with some arguing that the imposition of fines on companies only further harms the shareholders. These criticisms lead to the issuance by the SEC of its Statement on Financial Penalties on January 4, 2006. www.sec.gov/news/press/2006-4.htm. According to this statement the SEC considers a number of factors in determining whether to impose a penalty on an organization and if so the amount. The two key factors are suppose to be the presence or absence of a benefit to the corporation and the degree to which it will recompense/harm shareholders. This statement is the first of its kind by the SEC.While the SEC’s Statement on Penalties was a welcome first step, in reality it has done little to illuminate the process by which the agency determines whether to impose a penalty or how it decides on the amount. A review of recent settlements with issuers suggests only once constant — the SEC seems to be demanding a penalty almost as a matter of course. In what is perhaps the ultimate irony the SEC, which is suppose to be a disclosure agency fostering corporate transparency, discloses virtually nothing about how it determine corporate penalties. The SEC’s releases discussing settlement typically do not discuss how any of the factors in its Statement on Financial Penalties were applied in the case. Indeed, perusing through SEC corporate consent decrees suggests that the amount of the penalty has little to do with the underlying conduct. Rather, the amounts appear to be almost random.

The new policy being instituted by SEC Chairman Cox does not appear to address the transparency issue. Likewise, it is hard to see how it will speed the process or add to investor protection. What it will do for sure is give the Commissioners more direct impute into the settlement negotiations, although the Commissions already have all the impute they want if they chose to exercise their authority since everyone knows that a settlement negotiated with the staff is not final until approved by the Commissioners. The new Chairman Cox procedure will however add another layer of red tape to an agency which is already far to slow.

What the SEC really needs to do is disclose how it applies the factors in its Statement on Financial Penalties in particular cases. If this is going to part of the new initiative by Chairman Cox, then the extra layer of red tape may be worth while. If not, then it will just be more process which will slow an already far to slow process.