The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Regular D & O Diary readers will recall my discomfort (as reflected here) with the Enron civil action plaintiffs' leniency pleas on Andrew Fastow's behalf at his September 26, 2006 sentencing. This week's Fortune Magazine has an article entitled "Why Enron's Fastow May Only Serve Five Years" (here), that explains how it came about that representatives of the lead plaintiffs in the civil action appeared at Fastow's criminal sentencing.

It turns out that John Kekar, Fastow's criminal defense attorney, has another prominent client - Bill Lerach, of the Lerach, Coughlin firm. Kekar represents Lerach in connection with the criminal investigation that has so far resulted in the indictment of the Milberg Weiss firm and two of its partners. Lerach also happens to be counsel for the Univeristy of California, the lead plaintiff in the Enron civil action.

According to the article, in an "11th hour deal," Fastow agreed to aid Lerach in the civil case, by providing detailed debriefings (the 175-page declaration Fastow supplied the plaintiffs' counsel can be found here) and also agreeing to sit for a deposition. In return, Fastow received "the formal support of the Enron investors in a plea for leniency (a factor the Judge explicitly noted)." Fastow was also dismissed as a defendant from the civil suit and "even got the plaintiffs' lawyers to pay his legal fees for his deposition." As a result of the plea for leniency, the 10-year sentence to which Fastow agreed when he first entered his guilty plea was reduced to 6 years. According to the article, if Fastow is accepted into a prison drug-treatment program for his claimed addiction to anti-anxiety pills, he could be out of prison in five years.

As the article points out, Fastow's cooperation provides a "massive windfall" for Lerach. Not only does Lerach get fresh evidence aiding the civil claims against the remaining Investment Bank defendants, but Fastow's assistance could help "enrich Lerach, adding $100 million or more to the contingency fee for the plaintiffs' lawyers and raising the prospect that they could walk away with close to $1 billion from the case." (Readers will recall that it was this enormous potential fee benefit that made me so uncomfortable with the civil plaintiffs pleading for leniency at Fastow's sentencing.)

Lerach's involvement in the ongoing Milberg Weiss investigation may also be causing him problems in the Halliburton securities fraud lawsuit. According to a December 13, 2006 post on the Legal Pad blog entitled "Lerach Firm Will Fight Client to Stay in Halliburton Case" (here). The lead plaintiff in that case, the Archdiocese of Milwaukee Supporting Fund (AMS Fund), has filed a motion to remove the Lerach Coughlin firm, and its co-lead counsel Scott + Scott, as lead plaintiffs' counsel and to substitute David Boies of the Boies, Schiller & Flexner firm. Apparently, Lerach's involvement in the criminal investigation was a factor in the AMS Fund's decision to file the motion.

The Halliburton case has an "unusal procedural history." An early agreement to settle the case for $6 million was scuttled when the AMS Fund, represented at the time by Scott + Scott alone, opposed the settlement as inadequate. The court agreed, and the case went forward. The Lerach Coughlin firm then intervened in the case on behalf of three public pension funds. The Lerach Coughlin firm was appointed co-lead counsel with Scott + Scott. However, the departure from Scott + Scott of Neil Rothstein seems to have been a turning point in the case. Rothstein remained "special counsel" to the AMS Fund, and in fact filed the motion to substitute Boies for Lerach on the AMS Fund's behalf. Lerach has opposed his client's motion, on the ground's that the substitution would be disruptive and that Boies has a conflict of interest. The court has not yet ruled on the motion.

There is a certain symmetry here; at least according to Wikipedia (here), David Boies also represented Andrew Fastow.

Rothstein now runs Truth in Coporate Justice LLC, which appears to maintain a website (here) about the Halliburton case. Rothstein's account (here) of his unsuccessful attempt to attend the May 17, 2006 annual meeting of Halliburton makes for some interesting reading. Not every annual meeting has a SWAT team on the roof of the meeting building.

Another Backdating List: One of the byproducts of the options backdating scandal has been the proliferation of lists. For example, my ongoing tally of options backdating related lawsuits may be found here. Jack Ciesielski of the AAO Weblog (here) recently published a very thorough list of the all of the companies that have mentioned investigations of option granting practices in their filings, or have been mentioned in the news. The list, which can be found here, identifies over 200 companies (including 45 members of the S & P 500).

Little Blog Horn: As I can attest, maintaining a blog is a lot harder than it looks. So there should be little surprise that even in the few short months I have been contributing to the blogosphere that several other blogs have emerged, briefly breathed, and then blinked out of existence. The Vangal blog (here) is one of the many to meet that fate. Two more recent departures from the blogging scene, the Governance News Watch blog (here) and the Securities Litigation Watch blog (here) will both definitely be missed. But for those of you who, like me, had become fans of the Governance News Watch during its brief but interesting existence will be pleased to learn that the blog's author, Janice Brand, has moved on to a new blog, Brand on Business, which may be found here. The new blog looks promising and we here at The D & O Diary wish Janice well.

PLUS D & O Symposium: It may be hard to believe, but the 2007 Professional Liability Underwriting Society (PLUS) D & O Symposium is only a few weeks away. The 2007 Symposium will take place on January 31 and February 1, 2007, at the Marriott Marquis in New York City. I will be co-Chairing this year's Symposium with my good friends Ivan Dolowich and Jeffrey Lattman. Among the many panelists and speakers will be such luminaries as Linda Thomsen, the head of the SEC Enforcement Division; Nell Minow, the founder and editor of the Corporate Library; and Charles Elson, Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, as well as many other distinguished speakers and guests. The keynote speaker will be former Senator and Secretary of Defense George Mitchell. The entire program schedule can be found here. The Registration materials are here. I look forward to seeing everyone there.

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The following is the text of a speech (modified to optimize Internet capabilities) prepared for the Professional Liability Underwriting Society (PLUS) International Conference on November 9, 2006.


Shortly after former Enron CEO Jeffrey Skilling's October 23, 2006 sentencing (see prior post here), the Enron Task Force announced that it was closing down, declaring that its mission was mostly complete. The media treated these events as endpoints in the Enron criminal scandal; for example, the Washington Post ran an article entitled "End of Enron's Saga Brings Era to a Close." (here, registration required). Whether or not these events really do represent the end of an era, it may now be time to take a look at the Enron scandal and to assess its lasting impact.

This post examines several questions: Have we indeed reached the end of an era of high profile criminal prosecutions? And now that the key figures in the Enron scandal have all had their day in court, what are Enron's legacies? Finally, what does it all mean for D & O risk?

The End of an Era? While Skilling's sentencing was highly anticipated and had all the air of a culminating event, a fresh wave of scandals suggests that white collar criminal prosecutions will remain an important part of the legal landscape for the foreseeable future. Indeed, the same week as Skilling's sentencing, Comverse Technology's former CFO became the first corporate official to plead guilty to criminal charges in connection with the options backdating scandal (here). In addition, that same week, Refco's former CFO was indicted for accounting allegations raised following the company's ill-fated IPO (here). These are just the latest signs that white collar crime prosecutions will remain a high prosecutorial priority for the foreseeable future.

And though Skilling's sentencing may represent a high water mark of sorts, it is far from the end of the Enron saga itself. There are still a number of Enron-related prosecutions in the pipeline. For example, three British bankers (the "NatWest Three"), extradited to the U.S. earlier this year, will stand trial in early 2007 on allegations that they stole from their former employer in connection with an Enron-related transaction (here). There may be new trials for several former Enron executives whose earlier proceedings ended in mistrials. Several key Enron defendants, including former Enron Chief Accounting Officer Richard Causey, are yet to be sentenced. The civil lawsuit against Enron's investment banks (at least the ones that have not yet settled) remains pending. For a rundown of the remaining Enron-related events, refer here.

And even when the book is finally closed on Enron, whenever that may be, the assault on corporate fraud seem likely to continue. This forward-looking thought leads to the next question: now that the Enron Task Force has disbanded, what are Enron's legacies?

Enron's Legacies: The word "Enron" has moved into the language, both as a reference to the company itself and the scandals that followed its demise, and as a shorthand expression for all of the corporate scandals that were uncovered earlier in this decade. While these two senses of the word are distinct, the two meanings merge when looking at Enron's legacies, because Enron's impact has been specific (for example, in connection with the criminal prosecution of former Enron officials), and general (in connection with the larger impact on markets, legislation, and corporate culture). Using "Enron" in both of these senses, here are a few of its legacies:

1. New Corporate Culture of Governance: Without question, the most important of Enron's legacies is the new culture of corporate governance. In Enron's wake, no corporation can ignore the implementation of serious internal compliance systems to detect and deter corruption. By the same token, the role and functioning of corporate boards has also been dramatically altered. Boards are now active, independent and involved, and in many important ways providing meaningful oversight of corporate management. Just one aspect of the way boards have changed is the increased emphasis on independent board composition. According to the National Association of Corporate Directors, 83% of boards now say that more than half of their directors are independent, up from only 54% in 2000.

These changes hold out the intriguing possibility that improved corporate governance will result in reduced D & O risk. Indeed, some commentators believe that improved governance explains the reduced number of securities fraud lawsuits that have been filed so far in 2006. For example, Stanford Law Professor Joseph Grundfest has stated (here) that "extensive and expensive corporate efforts to improve governance and accounting have reduced plaintiffs' ability to allege fraud." There is no question that the governance reforms have improved corporate officials' sensitivity to potential wrongdoing. But even allowing for this heightened vigilance, other commentators remain skeptical that governance reforms alone can explain the reduced number of lawsuits. As D & O authority and prominent coverage attorney Dan Bailey has written with respect to the impact of corporate governance reform on the number of securities lawsuits (here), "it appears unlikely that this is a major contributing factor to the reduced filings."

In fact, increased board independence and oversight has also in some cases led to boardroom turmoil that in turn has resulted in claims against, between and among directors and officers. The unfortunate and highly publicized events involving H-P's Board are but the most prominent example of this effect. (See my October 2006 InSights article discussing board turmoil and D & O Risk here.)

And so, while improved corporate governance is an unquestionably important part of Enron's legacy, the positive significance of that legacy in terms of D & O risk still remains uncertain. In addition, as discussed further below, there are movements afoot that could potentially alter this legacy.

2. Whistleblower Protection: The new culture of oversight is not limited just to the boardroom. Serious internal compliance programs, combined with the provisions of the Sarbanes-Oxley Act providing corporate whistleblower protection, encourage employees to speak up and report conduct they believe may have crossed the line. (The Sarbanes-Oxley whistleblower provision, here, is of course a legislative tribute to Enron's own whistleblower, Sherron Watkins.)

The existence of the whistleblower provisions potentially could translate to increased D & O risk, in light of the possibility of claims based on the whistleblower's disclosures. It has not turned out that way, at least so far, as the few whistleblower cases to emerge have gotten bogged down in procedural delays of a kind that could well deter future whistleblowers. (See my prior post on Sarbanes Oxley whistleblower procedural delays here.) Certainly there have been no dramatic cases where a whistleblower's surprising revelations have resulted in significant claims against corporate officials.

The whistleblower provisions may yet have this effect, but so far, the whistleblower provisions have not had a significant impact on D & O claims activity.

3. CEO's in the Hotseat: With all of the improved corporate governance procedures has also come increased scrutiny of senior corporate management. There is no doubt that following Enron and the other corporate scandals that CEOs' hold on their jobs is more precarious. Since early 2005, the boards of some of the country's largest companies have ousted their CEOs - including Bristol-Myers Squibb, Fannie Mae, Pfizer, Merck, and American International Group. In addition, executive compensation has come under intense scrutiny. More active boards and a greater willingness to challenge management, as well as a changed regulatory environment, have all contributed to this effect.

Significant turnover at the most senior levels of management creates a volatile environment in which accusations of wrongdoing may more easily arise. Recurring questions about executive compensation merely add to this atmosphere of increased tension. The recent wave of lawsuits involving options backdating allegations illustrates how quickly questions about compensation and management performance can lead both to executive departures and to D & O claims. (To see my running tally of Options Backdating litigation, refer here.) The increased scrutiny under which top management now operate is an important new source of D & O risk.

4. White Collar Crime Enforcement: One of Enron's most durable legacies is the creation of a prosecutorial police force to identify and punish corporate crime. Even though the Enron Task Force has disbanded, the Corporate Fraud Task Force remains in existence and continues to find activities to investigate and prosecute. This picture of a permanent white collar fraud police force was vividly illustrated in the recent remarks of Timothy J. Coleman, a former U.S. Justice Department official who was responsible for the Corporate Fraud Task Force and who supervised the Enron Task Force and the Criminal Fraud Section. An October 25, 2006 Washington Post article (here, registration required) attributed to Coleman the statement that:

The legions of investigators hired by securities regulators, federal prosecutors and the FBI will pay lasting dividends because they will become a "standing army" ready to target business wrongdoing. "Whether it's stock options, mutual funds or something else, corporate America should expect a continuing series of major, nationwide investigations for the foreseeable future," Coleman said.

A "standing army" to prosecute crime will inevitably find offenses to investigate, prosecute, and punish, and so the likelihood of a series of future major corporate crime investigations is one of the Enron's most tangible legacies.

With the increased prospect of prosecutorial scrutiny comes the increased possibility of D & O claims. Just as all of the major corporate criminal scandals involved parallel civil claims, and just as the options backdating investigations have also meant a new wave of shareholder lawsuits, so too the criminal investigations yet to come will also lead to civil claims against directors and officers. The threat of future claims arising from corporate criminal investigations is perhaps the most important way that Enron has affected D & O risk.

5. Increased Severity of Civil Securities Fraud Lawsuits: Enron and the other corporate scandals have also changed the environment for civil securities fraud lawsuits. These changes have important implications for D & O carriers and their insureds. Specifically, average settlements in securities fraud lawsuits have escalated enormously due to the civil cases arising out of the corporate scandals. (See my prior post, with links to the leading studies, here.) It may be that the egregiousness of these cases drove an increase in average severity that will diminish once the worst cases have played through the system. But while the average settlements may diminish somewhat after the worst cases are gone, the rough idea of "what cases like this settle for" has been ratcheted upwards in a way that is unlikely to completely go away. This heightened severity standard has important implications for D & O carriers' average expected severity (particularly for excess carriers) as well as for D & O insurance buyers' limits selection. Both carriers and policyholders must now be prepared for much more expensive outcomes.

How Permanent Are Enron's Legacies? Shortly before the Enron Task Force disbanded, another group, the Committee on Capital Markets Regulation, formed to take a look at the effect of regulatory burdens on the competitiveness of the U.S securities markets in the global economy. (The Committee has become known as the Paulson Committee because of the public support that Treasury Secretary Henry Paulson has given the Committee.) The Committee consists of leading figures from academia and business, and includes prominent figures from the current Bush administration. The Committee is taken a look at regulatory reforms that might improve U.S. competitiveness. (See my most recent post regarding the Paulson Committee here).

Among other things, the Paulson Committee is reviewing whether Sarbanes-Oxley represented an overreaction, and whether there are revisions that might swing the regulatory pendulum back to the middle. The Committee's work has been accompanied by public statements from President Bush and Vice President Cheney that perhaps Sarbanes-Oxley went too far. The Committee's report is due to be released on November 30, 2006. Of course, merely because the Committee will make proposals does not mean that changes will necessarily follow. But the Paulson Committee clearly has the administration's support. The extent of its recommendations and the regulatory reforms that could follow potentially could affect the permanency of some of Enron's most significant legacies.

Conclusion: There may yet be more of the Enron story to be told, and the current scandals (such as the options backdating investigations) undoubtedly will have an impact on corporate culture. The work of the Paulson Committee may also affect the post-Enron regulatory environment. But even though the picture may continue to evolve, that does not diminish the enormous, categorical changes that Enron has wrought. Principles and practices of corporate governance are changed forever. Corporate compliance programs are now an important part of every company's internal operations. White collar fraud prosecution is empowered and an important component of the contemporary legal landscape. And D & O insurers and their policyholders face a changed claims environment characterized by increased risk and heightened severity expectations. By any measure, Enron's demise was a milestone event in the history of American corporate culture, and its ramifications will affect companies for years and decades to come.

To see my prior post regarding the significance of Enron, refer here . To see my prior post regarding the sentencing of former Enron CFO Andrew Fastow, refer here.

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According to an October 25, 2006 Washington Post article entitled "End of Enron's Saga Brings Era to a Close" (here, registration required), the sentencing of former Enron CEO Jeffrey Skilling "closed the book on an era of high profile corporate malfeasance." Among other things, the Post article reports that "[h]ours after a judge sentenced Skilling...the leaders of the Enron task force announced they would close up shop, saying their mission was mostly complete." But does the Skilling sentencing and the winding up of the Enron task force really mean the end of an era of high profile criminal prosecutions?

Even the Post article itself is quick to point out that a fresh wave of scandals already under way suggests that white collar fraud prosecutions will remain an important part of the judicial landscape for the foreseeable future. This week's guilty plea of Comverse Technology's former CFO in connection with the company's options backdating investigation (here), and the indictment of REFCO's former CFO (here), are but the latest signs that white collar crime will remain a high prosecutorial priority.

For that matter, even though Skilling's sentencing might represent a high water mark, it is far from the end of the Enron saga. As detailed in an October 24, 2006 Houston Chronicle article entitled "Other Trials Likely; Shareholder Suit on Tap" (here), there are still quite a number of Enron-related criminal prosecutions remaining in the pipeline. For example, three British bankers, extradited to the U.S. earlier this year, will stand trial early next year on allegations that they stole from a former employer in connection with an Enron-related transaction. There may be new trials for several former Enron executives whose trials ended in mistrials. Several key Enron defendants, including former Enron Chief Accounting Officer Richard Causey, are yet to be sentenced. The civil lawsuit against former Enron investment banks (at least the ones that have not already settled) and the Houston law firm of Vinson and Elkins remains pending.

And even when the book is finally closed on Enron, whenever that may be, the assault on white collar fraud is likely to continue. In one of the more interesting quotations in the Post article cited above, Timothy J. Coleman, a former prosecutor and Justice Department official who, while at DOJ, was responsible for the President's Corporate Fraud Task Force and supervised the work of the Justice Department's Enron Task Force and Criminal Fraud Section, predicted that:

The legions of investigators hired by securities regulators, federal prosecutors and the FBI will pay lasting dividends because they will become a "standing army" ready to target business wrongdoing. "Whether it's stock options, mutual funds or something else, corporate America should expect a continuing series of major, nationwide investigations for the foreseeable future," said Coleman.

A "standing army" is expensive to maintain. It also has to justify its existence. Reasonable minds may question whether a permanent corporate crime military force is really in the best interests of investors, and what effect it will have on America's competitiveness in the global economy. The standing army may be one of the least attractive legacies of Enron. (Consider what the Enron Task Force did to Arthur Anderson. ) More comments on the "standing army" follow below.

The D & O Diary's prior comments on Enron's Legacy can be found here.


Skilling's Sentencing: Comment from the Blogosphere: Skilling's sentence provoked a wide variety of comments in the blogosphere (links to blog posts here; The D & O Diary's post on the topic can be found here.) But the most interesting comments appear on the White Collar Fraud blog (here). Regular D & O Diary readers will recall that the White Collar Fraud blog is maintained by none other than Sam E. "Sammy" Antar, the former CFO of Crazy Eddie's. (See my prior post about Antar here). Antar states:

The sentencing of Mr. Skilling will not stop any crimes in progress or cause any criminal to wake up the next day with any new found morality. Criminal can only be prevented through effective deterrents through barriers such as strong internal controls, effective oversight, and "checks and balances."

In an earlier post (here), Antar wrote:

No criminal changes their moral compass and no crimes in progress are stopped as they read about long prison terms imposed on felons like Bernie Ebbers...However, as an ex-felon I can say that criminals fear barriers such as a strong internal control structure, well educated, skilled, and trained external public accountants who are truly independent. Criminals fear oversight. White collar criminals think in terms of the successful execution of their crimes (like a project) and are undeterred by strong prison sentences (which we require to exact responsibility and accountability on criminals, but are not a significant preventive measure).

Antar's concluding remarks in his post about Skilling's sentence:

Punishment and prison are important. However, unless integrated with prevention, professionalism (competence), and power (legislation), there will be many more Enrons to come.

Antar's comments ring true to me. They also raise questions about the wisdom of maintaining a "standing army" to prosecute the perpetrators of the future Enrons, as opposed to concentrating on trying to prevent future Enrons from occurring in the first place. Resources and efforts would be better invested in trying to deter and prevent wrongdoing rather than punishing it once it has occurred. Vast resources tied in up in a "standing army" devoted to finding people to punish and then punishing them is a misallocation of social assets.

Enron in Cyberspace: As noted in the Daily Caveat (here), there is a "ridiculously cool" Enron Explorer website (here), that contains a searchable, graphically relatable database of over 200,000 emails that traversed through Enron as it careened toward oblivion. I recommend this site; it is unspeakably weird to be able to get lost inside an unfolding American corporate catastrophe. The WSJ.com Law Blog has isolated a few of the "highlights" (here), such as this sarcastic excerpt: "Certainly all of you can stop shredding documents for 5 minutes to respond."

It is Always About Harvard (Just Ask a Harvard Grad): Enron is no exception. Details on the Harvard connection to Enron, here.

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On Monday October 23, 2006, the final chapter in the Enron criminal saga will conclude when Judge Sim Lake sentences former Enron CEO Jeffrey Skilling. Pundits' estimates of Skilling's likely sentence range from 20 to 25 years (here). The accumulated anger of the legions of Enron employees and investors seem to require a harsh sentence. But even given the consensus view that Skilling is the bad guy in the Enron story, circumstances have conspired to put Skilling in an even worse position for his sentencing. It is nearly impossible to want to rally to Skilling's defense, but something - perhaps just an instinctive impulse to be contrary - compels me to wonder whether Skilling might receive a sentence based on factors other than his just deserts.

Within the narrative framework of the 21st century morality play that the Enron criminal trial has become, Skilling's role is unmistakable. His arrogance and greed border on caricature. All he needs is a cape and a curled mustache to turn him into a cartoon of a bad guy. Stories about how big a jerk have collected around him since Enron's collapse. Legend has it that in response to a Harvard Business School entrance interview question whether Skillling was smart, he supposedly responded, "I'm fucking smart."(here) During an April 2001 recorded analyst conference call, one of the analysts questioned Enron's accounting practices, commenting that Enron was the only company that released its earning statement without a balance sheet, to which Skilling replied, "Well, thank you very much, we appreciate that ...asshole." (here)

In response to his criminal prosecution, Skilling has been unwaveringly defiant and remorseless. He disregarded his lawyer's advice to refuse to answer questions based on his Fifth Amendment privilege against self-incrimination, but instead answered every question posed to him by Congressional investigators. He even submitted to a lengthy SEC interview.

Skilling has managed to make things even worse for himself by getting arrested twice, once before the trial (here) and once after the trial (here), in alcohol related incidents involving disorderly conduct and public drunkenness.

Skilling's character and conduct have virtually assured him an unfavorable sentencing profile. But as bad all of that is, circumstances that should have nothing to do with his sentencing have put him in an even worse position.

First, Ken Lay's July 2006 death has left Skilling as the last man standing. Enron employees, furious that Lay cheated the hangman, and even angrier that Lay's conviction was abated, are demanding that Skilling be punished for Lay's crimes as well as his own. According to former federal prosector Robert Mintz (here), "In theory, the death of Ken Lay should have no impact on the sentence that Mr. Skilling receives. But it's hard to ignore the reality that Jeff Skilling is now standing alone as the figurehead who orchestrated Enron's demise. There will certainly be pressure to make an example of Jeff Skilling and send a message with his sentence.''

Second, Andrew Fastow's conspicuously lenient sentence left former Enron employees enraged. (here). The perception that Fastow pulled a fast one on the Court (which apparently has left the government considering the possibility of appealing Fastow's conviction, here) has united public opinion in the view that Skilling at least must be made to pay, and perhaps make up for the fact that Fastow got off light.

Adding to all of this is the prosecutorial feelings of vindictiveness against Skilling for his steadfast refusal to acknowledge guilt or show any remorse. Skilling seems to have done everything he can to antagonize the government, even referring to them in a post-trial interview (here) as "the Gestapo."

So if the over/under on the length of Skilling's sentence is twenty years, the smart money is betting on the over option.

There is no doubt that Skilling must receive a lengthly prison term. He was found guilty on 19 of the 28 counts against him, including one count of conspiracy, one count of insider trading (although he was acquitted on nine other insider trading counts), five counts of making false statements to auditors, and twelve counts of securities fraud. Each conviction carries a maximum sentence of 5 to 10 years in prison. His conviction of these crimes required that he serve a substantial period of incarceration.

But while Skilling's crimes demand a substantial punishment, he should not be punished for any of the swarm of other factors surrounding his sentencing. His well-deserved reputation for arrogance and greed should not affect the length of his sentence. (If arrogance or greed were punishable offenses, most of Wall Street would be behind bars.) His insistence on exercising his constitutional rights to a presumption of innocence and to a jury trial should not increase the length of his sentence. His guilt is no greater because it was determined by a jury verdict rather than by his own admission in the form of a guilty plea.

Nor should his sentence be affected by what happened after the trial to Lay and Fastow.
When Skilling stands in the dock to receive Judge Lake's sentence, he will stand alone. He should be punished for his crimes, but only for those for which he himself has been found guilty. He should not bear a heavier punishment because others evaded their just penalty.

Skilling will go to jail for a very long time no matter what happens. But the time he serves should reflect only the crimes for which he was convicted -- and nothing more.

Update: On October 23, 2006, Judge Lake sentenced Skilling to 24 years and four months in prison. Judge Lake estimated the shareholder loss that Skilling had caused at $80 million, which under the applicable federal sentencing guideline indicated a sentence in the range of 24.3 years to 30.4 years, so Skilling's sentence was at the low end of the indicated range. An October 23, 2006 New York Times article describing the sentencing can be found here. Interesting commentary in the White Collar Crime Prof blog about the Skilling sentence can be found here.

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In an October 4, 2006 Law.com article entitled "Enron's True Legacy Is a Lesson on Compliance" (here), Andrew Weissmann, the former director of the Enron Task Force and now a partner at the Jenner & Block law firm, lays out his assessment of the lasting effects of the Enron scandal and criminal prosecution. Weissmann makes essentially four claims for Enron's legacy:

• A New Culture of Corporate Governance: "Enron's unintended commentary on the state of corporate governance produced an important cultural paradigm shift and led to fundamental changes in the way business is done in this country. In the shadow of Enron, not a single major American corporation can afford to ignore the implementation of serious internal compliance systems to detect and deter corruption."
• Safety to Blow the Whistle: "Serious internal compliance programs serve to encourage employees to speak the truth to power - to report conduct that they believe may have cross the line."
• Document Preservation: "Companies have devoted millions of dollars in creating and enforcing document policies that properly 'hold' documents in anticipation of litigation."
• More Active Boards: "Boards of directors that often served no more of a check on corporate malfeasance than a grand jury does on a federal prosecutor are newly emboldened to display true oversight and backbone."

In describing Enron's legacy, Weissmann is clearly using the word "Enron" both to refer to the Enron criminal prosecution and as a shorthand for all of the corporate scandals and their repercussions. Weissmann is absolutely correct about the changed governance culture. This cultural shift has affected not only the board rooms of America's largest companies, but the effect has also extended to private companies and even nonprofit entities. And Wiessman certainly is correct about the heightened independence of corporate boards. According to the National Association of Corporate Directors (as quoted in the Wall Street Journal, here, subscription required), 83% of boards said that more than half of their directors are independent, up from 54% in 2000. The increased predominance of independent directors clearly has shifted board participation away from the passive nonconfrontational approach that may have prevailed in the past, toward a more active and even distrustful dynamic.

But in addition to claims Weissmann has made for Enron's legacy, I would add a few additional considerations, assuming for the sake of discussion that the term "Enron legacy" encompasses the effects of the entire wave of corporate scandals:

• CEOs in the Hot Seat: There is no doubt that as a reaction to the wave of corporate scandals CEOs' hold on their jobs is far more precarious. By way of illustration, since early 2005, the boards of some of the country's larges companies have ousted their CEOs -- including Bristol-Myers Squibb, Fannie Mae, Pfizer, Merck and American International Group. In addition, there has been intense scrutiny of executive compensation, including most recently the phenomenon of backdated options. More active boards and a great willingness to challenge management, as well as a changed regulatory environment, have all contributed to this effect.
• White Collar Crime Enforcement Apparatus: Enron begat the Enron Task Force. Even though the Enron criminal trial itself is nearly played out, the Enron Task Force itself has no plans to disband. U.S. Deputy Attorney General Paul McNulty, the current head of the Corporate Fraud Task Force, was quoted in the September 2006 issue of CFO Magazine (here), as saying that the Task Force continues to find activities to investigate and prosecute. In the same vein, the SEC Enforcement Division's budget was dramatically increased in the Sarbanes-Oxley Act. There is no movement to shrink that budget back down. So one of the most concrete legacies of the Enron era is the permanent structure of prosecutors and regulators focused on corporate malfeasance.
• Hardball Prosecutorial Tactics: The wave of corporate scandals and the subsequent criminal proceedings has institutionalized a host of aggressive tactics for white collar crime prosecutions, including, for example, the obligatory "perp walk;" the use of threatened charges against family members; and the compulsion of corporate investigatory targets to cut-off support for employees who assert their constitutional right against self-incrimination.
• Increased Severity of Civil Securities Fraud Lawsuits: There is no doubt that the average settlements of securities fraud lawsuits has escalated enormously from the civil cases arising out of the corporate scandals. It may be that the egregiousness of those cases drove an increase in average severity that will diminish once the worse cases have played through the system. But while average settlements may decline, the rough idea of "what cases like this settle for" has been ratcheted upwards in a way that is unlikely to completely go away.

There are other potential legacies of the Enron era. For example, evolving notions of appropriate sentences for white collar crime are being sorely tested as the various defendants receive their prison terms. It is also possible that Andrew Fastow's success in using his cooperation with the civil plaintiffs' attorneys in order to support his plea for lenience in his criminal sentence (discussed in a prior D & O Diary post, here), will engender increased collaboration between criminal defendants and the plaintiffs' bar.

In some respect, Enron and the wave of corporate scandals is still too recent to be certain of all of its legacies and consequences. But there is no doubt that the environment of corporate conduct has been dramatically changed, and there will be no going back.

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On September 26, 2006, U. S District Judge Kenneth Hoyt sentenced former Enron CFO Andrew Fastow to six years' imprisonment, a reduction from the ten-year term to which Fastow had agreed in his January 2004 plea agreement. According to news reports (here and here), apparently among the factors that Judge Hoyt relied upon in support of leniency for Fastow was Fastow's cooperation with the plaintiffs' lawyers in the civil litigation arising out of the Enron scandal.

The plaintiffs in the civil litigation have already recovered over $7.3 billion from a host of defendants, including investment banks such as JPMorgan Chase and Citigroup. But the plaintiffs' lawyers continue to pursue claims against other investment banks, including Merrill Lynch and Credit Suisse First Boston. According to Bloomberg.com (here), Fastow began cooperating with plaintiffs' attorneys "over three weeks ago," and on the day before Fastow's sentencing provided them with a 175-page declaration (the declaration can be found here) that supplied a wealth of specific information and documents in support of the plaintiffs' claims against the investment banks. Among other things, Fastow's declaration states that:

Certain Enron banks, particularly Merrill, CSFB, RBS, and Barclays, worked to solve certain of [Enron's] financial problems. We told certain banks our financial objectives and they, in many instances, created solutions utilizing complex financial structures....We paid a premium - in the aggregate, hundreds of millions of dollars - in order to engage in structured finance transactions that contributed to causing Enron to report its financial statements in the desired manner.... My conversation with senior bankers led me to believe that certain banks understood that some transactions were done primarily for generating certain accounting benefits and financial-reporting objectives for Enron.

In exchange for this substantial assistance, plaintiffs' attorneys and a representative of the University of California (the lead plaintiff in the civil litigation) requested leniency for Fastow at his sentencing. According to Bloomberg.com (here), Retired U.S. District Judge Lawrence Irving, a special counsel to the lead plaintiffs' firm, told Judge Hoyt, "Andy Fastow is a critical witness for the victims of this fraud...His cooperation could result in the recovery of additional billions of dollars. That opportunity is unprecedented and reason unto itself for leniency." According to the Houston Chronicle (here), Bill Lerach, the lead plaintiffs' attorney, said "(Fastow) makes it clear for all to see that not only did the Enron banks drive the getaway car in one of the great financial scandals in our nation's history, but the Enron banks served as the actual masterminds behind the scheme to defraud."

The plaintiffs' lawyers' support for Fastow apparently had its effect on Judge Hoyt; in delivering the sentence, Judge Hoyt, according to the Bloomberg.com article, specifically referenced Fastow's efforts "to not simply right the criminal ship but to right the civil ship."

There may be some who find it unutterably bizarre for the representatives of the injured shareholders to be pleading for criminal sentencing leniency on behalf of one of the architects and main beneficiaries of the scheme that injured the shareholders in the first place. If you can get past that cognitive speedbump, there is the further question about what impact this development may have on future criminal defendants' behavior. Will they too reach out to the plaintiffs' bar with an offer to aid the civil case, in exchange for support for leniency at the time of criminal sentencing? If it worked for Fastow, surely it can work for others too? As the WSJ.com law blog put it (here), "are prison sentences the currency with which plaintiffs' lawyers buy information to help them with their cases?"

It may be that Fastow had uniquely valuable currency to trade. After all, there are very few cases where a criminal defendant can offer information worth billions of dollars of potential civil recoveries. And just think about what that might mean for the plaintiffs' attorneys' potential fee recovery -- no wonder the plaintiffs' lawyers felt compelled to ask Judge Hoyt to go a little easy on Fastow. But as Professor Ellen Podgor observes in the White Collar Crime Prof blog (here), does the criminal defendant who is unlucky enough to lack anything to trade, or is merely last in line, have to be condemned to a longer jail term? The D & O Diary notes that there used to be an idea in criminal law that the length of the criminal term was supposed to have something to do with the degree of culpability -- not the strength of the criminal defendant's bargaining position with civil plaintiffs' attorneys.

In any event, there may be an insurance consideration that could constrain plaintiffs' attorneys willingness to set up a leniency-support-for-information barter system, at least where the plaintiffs' attorneys hope to use the information in civil claims against a defendant company or other defendant directors and officers. That is, most D & O insurance policies contain a so-called "Insured vs. Insured" exclusion, that precludes coverage if the action is not (to quote one leading carrier's form) "totally independent of, and totally without the assistance of" any director or officer of the company. If an insured person within the meaning of the policy is providing substantial information upon which plaintiffs' attorneys intend to rely in support of claims against other directors or officers or the company, that could be the type of "assistance" that could preclude D & O coverage under the policy. (There is some judicial authority requiring an added element of "collusion" for coverage to be precluded- an added consideration that is worthy of a separate blog post in and of itself.)

So a criminal defendant's offer to exchange information for leniency support may be a poisoned chalice for the plaintiffs' attorneys, because accepting it and using the information against other directors and officers could potentially have the effect of precluding D & O insurance coverage. However, the criminal defendant's information offer might still be attractive to the plaintiffs' lawyers if the D & O coverage is already blown or out of the picture, or if the offer will aid plaintiffs' claims against defendants other than the directors and officers or the company. This possibility has to be one of the more unexpected legacies of the Enron scandal.

The D & O Diary finds this idea of information-for-leniency barter with the plaintiffs' bar pretty damn unsavory, particulary where, as in Fastow's case, the plaintiffs' attorneys chances of gaining an enormous fee are substantially advanced by the criminal defendant's help.

Roll the Tape: Reasonable minds may differ about the appropriateness of Fastow's six-year sentence, particularly in comparison to the six-year sentence imposed against Jamie Olis, a lower level Dynegy employee who did not personally benefit from his criminal conduct, whose conduct did not destroy the company, but who did have the temerity to insist on his constitutional presumption of innocence and his constitutional right to a jury trial. (See The D & O Diary 's post here about Olis's sentence, and see interesting commentary on the Fastow/Olis sentence comparison here.)

It is worth asking whether it was even appropriate for Fastow to request leniency, or for prosecutors to present evidence of Fastow's cooperation in support of Fastow's leniency bid, given Fastow's testimony at the criminal trial of Ken Lay and Jeffrey Skilling. According to the trial testimony reproduced at length here, Fastow testified -- in response to prosecution questioning and in order to rebut Skilling's lawyer's suggestion that Fastow was shaping his testimony to curry favor with prosecutors in a bid for a lighter sentence - that the 10-year term to which he agreed in his plea agreement could not be reduced.

In fairness, it should be noted that the prosecutors did not themselves request to have Fastow's sentence reduced. They did, however, provide information upon which Fastow relied in support of his request for leniency.

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FLSA "Explosion": The June 5, 2006 issue of the Wall Street Journal has an article (subscription required) commenting on the "explosion" in cases under the Fair Labor Standards Act (FLSA). The article also contains statistics showing the number of FLSA actions increased four-fold between 2000 and 2005. EPL insurers have been struggling to find the appropriate marketplace response to this increased risk. The National Underwriter recently carried an article (subscription required) describing wage-hour claims as "the next frontier" for employment practices liability insurance (EPL) carriers. To date, the extent of available coverage for this type of claim seems to be restricted to sublimited defense cost coverage, available from only a few carriers.

Enron Trial Redux: In case you missed it over the weekend, the June 4, 2006 issue of the New York Times carried a lengthy article detailing the prosecutor's development of the legal strategy used in the criminal trial against Kenneth Lay. The Times article has generated much commentary, not all of it flattering to the prosecutors. Perhaps most notable are the comments of Professor Larry Ribstein in his Ideoblog post discussing the Times article. Among other things, Professor Ribstein comments:

Many people no doubt will get a warm feeling from the job our government servants have done in finally nailing the evil Lay. But as I said at the beginning, there's an alternative narrative. The prosecutors were out to get Lay, who had already been convicted by public opinion just for being associated so closely with Enron, which of course journalists, filmmakers and other shapers of public opinion had already elevated into the symbol of whatever it was that went pop at the end of the big boom.

The WSJ.com lawblog also has a commentary on the Times article and Professor Ribstein's post. The WSJ.com lawblog post has attracted some interesting responses, which are reproduced following the WSJ.com lawblog post.

Class Action Internet Sites: Lies, Damned Lies and Forward Looking Statements, the blog written by plaintiffs' lawyer Adam Savett, has a very useful post. that contains links to separate case-specific Internet resources devoted to the major securities class action cases, including the Enron, WorldCom and IPO Laddering cases, among others. Find the post here.

Fannie Mae Settlement: The CorporateCounsel.net blog has a thoughtful June 5, 2006 post with perceptive commentary on the "Lessons on the Fannie Mae Settlement." The author's comments contain some interesting observations about corporate governance and board functioning. Find the post here.

Category: Tales from the Fringe, Subcategory: "Oogabooga": For those of you who have always wondered what the legal consequences would be from the inadvertent inclusion of the word "oogabooga" in an Australian tribunal's ruling on a Burmese refugee's asylum application (I am not making this up), you will want to look here. We will have to wait for another day to find out the consequences of the intentional use of the word "oogabooga."

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