A Nigerian Barge Puzzle

I have long said that the Nigerian Barge case was the easiest of all the Enron cases to understand. There was no accounting. No sub of a sub of a sub you had to keep track of. It basically came down to the central question: did Andy Fastow guarantee to Merrill Lynch that Enron would buy back the barges? That’s it. The answer is no. However, I am curious what would happen if Merrill Lynch had attempted to enforce Andy Fastow’s so-called promise. That action simply wasn’t enforceable. Enron had the ability to take ML’s money and buy women and drugs and there wasn’t a damn thing ML could do about it because ML owned the barges. They accepted full responsibility. ML shouldered the risk that the boats would sink, or that Enron was corrupt and would collapse, or that terrorists would blow the barges up, or that a Soviet-era satellite would fall to earth, land on the barges, and sink them. Basically anything could have happened to those barges under ML’s watch and Enron could have, if it was so inclined, laughed and yelled “Suckers!” as it ran over the hill.

So if ML decided it wanted out of the investment, and the bankers called Andy and said, “We’re holding you to your promise, we want our money back,” what could they have done if Andy just laughed?

There was nothing they could have done. They were simply stuck with the barges because Andy’s so-called promise was not really a promise at all. There was nothing legally binding about any “secret side deal”. If Andy made that guaranty and ML accepted it, ML was then accepting not only the risk that the boats would explode, but that Andy Fastow would live up to his promise.

The ML bankers were bright, industrious people. Most of them had been in the business for many years; they didn’t just start working for ML that day. They knew how these deals were put together. I don’t think any of them would be foolish enough to accept an unenforceable promise. It’s Merrill Fucking Lynch. Not “Joe’s Bank of Dead Pig Junction, Arkansas.” They knew what they were doing. They were buying a couple of Nigerian barges.

James Brown Appeals To Fifth Circuit For New Trial

James Brown swings again! The former Merrill Lynch executive is appealing the district court’s order denying his Motion for New Trial for perjury and obstruction of justice. It is a fascinating brief. I was particularly taken by this passage:

Whether the district court misapplied the law and abused its discretion when it denied Brown’s motion for a new trial on perjury and obstruction given that it failed to address the new prosecutors’ disclosure of crucial, first-hand evidence that: (i) proves Brown’s testimony was true;

I love how how “proves Brown’s testimony was true” was the first item on the list – and how forceful that is.

James Brown is a man of integrity, of his word. Most of all, he is innocent.

James A. Brown Speaks to WSJ

The link requires a subscription so here is the article in full. I love seeing James Brown vindicated!

Retrial Dropped, Enron Figure Talks

By JOHN R. EMSHWILLER

James A. Brown didn’t act like a guilty man eight years ago when federal authorities contacted the Merrill Lynch executive during the early days of their Enron Corp. investigation.

Unlike some colleagues at the securities firm who didn’t talk, Mr. Brown spent hours answering questions. “I figured that as long as I told the truth I couldn’t get into trouble,” he says.

Still, he was convicted in 2004 of perjury, obstruction of justice, fraud and conspiracy. Mr. Brown went from minor-hero status for objecting inside Merrill to a suspicious Enron deal involving barges off the coast of Nigeria, to facing three decades in prison. His career was destroyed, and he spent 12 months in prison before an appeals court reversed part of the conviction.

Former Merrill Lynch executive James A. Brown says a key email of his was misunderstood.
The 58-year-old Mr. Brown has always maintained his innocence. In September, the Justice Department dropped the fraud and conspiracy charges only days before a scheduled retrial. Mr. Brown, still fighting his perjury and obstruction convictions, recently gave The Wall Street Journal his first interview about the legal ordeal.

Mr. Brown’s retelling of his part in the corporate scandal comes as federal investigators sift through the rubble of the financial crisis for possible crimes. Much of the nitty-gritty of such investigative work involves little-known figures of the corporate world like Mr. Brown, who often are snared by prosecutors hoping to nab higher-ranking executives.

The U.S. government’s Enron Task Force criminally charged about 30 individuals, including Mr. Brown, but said there were more than 100 other unindicted co-conspirators. The task force got guilty pleas from more than a dozen people and won a 2006 fraud conviction against former Enron President Jeffrey Skilling.

Some of the group’s courtroom victories have been upended on appeal. Mr. Skilling’s conviction and 24-year sentence are under appeals-court review following a Supreme Court decision invalidating part of his case.

Critics contend the Enron Task Force abused its powers by threatening potential defense witnesses and bludgeoning individuals into admitting to crimes. Government officials deny those assertions, and courts haven’t upheld any defense claims of prosecutorial misconduct.

Mr. Brown’s odyssey began in December 1999 when Enron asked Merrill to acquire an interest in electricity-producing barges it owned off the Nigerian coast so that the Houston company could book a $12 million profit on the deal by year end.

A Chicago native, Mr. Brown joined Merrill in 1994, turning to finance after tromping through snake-infested swamps in Florida, looking for phosphate deposits as a geologist, helped convince him to change careers.

Investigative records show Mr. Brown, then heading the Merrill unit that handled the barge deal, argued against the transaction. One of his worries: Merrill might be viewed as helping Enron manipulate earnings.

In the interview, Mr. Brown said he didn’t think the barge transaction was illegal—just a bad business deal. Senior Merrill officials gave a go-ahead anyway.

Enron collapsed in December 2001, and investigators later found documents suggesting the company had illegally guaranteed Merrill a profit on the barge deal, which would make the supposed “sale” a sham. Enron Chief Financial Officer Andrew Fastow allegedly made the guarantee to Merrill executives during a conference call. Merrill later sold its barge interest—at the allegedly promised profit—to a partnership run by Mr. Fastow.

“I had no feeling of danger,” says Mr. Brown, who didn’t participate in the conference call. He wasn’t one of the four Merrill officials sued in 2003 by the Securities and Exchange Commission over the barge deal.

Still, the transaction became a focus of the Enron Task Force. As the only Enron-related criminal case brought against people working on Wall Street, it aimed to send a message of “deterrence,” according to a person familiar with the situation.

Mr. Brown’s lawyer soon told him that prosecutors considered him a target for indictment. “I said: ‘How can I be indicted?’” he recalls now. “I haven’t done anything wrong.”

A possible turning point came when investigators discovered a March 2001 email written by Mr. Brown. He wrote that Mr. Fastow had made a “promise to pay us back no matter what.”

Mr. Brown says he wrote the email hastily and never meant to suggest an illegal guarantee. Instead, Mr. Brown says he heard Mr. Fastow had merely promised to use his “best efforts” to get Merrill out of the barge deal.

The criminal charges filed in September 2003 against Mr. Brown and three other former Merrill executives turned his comfortable life in suburban Connecticut, including a wife and two children, upside down. Nancy Brown says her husband “could hardly move or speak” on the arraignment day in Houston.

While family and friends were supportive, Mr. and Mrs. Brown’s 17-year-old daughter felt “ostracized” by some schoolmates, they say. Mr. Brown took Merrill up on its suggestion that he accept an early retirement.

Merrill, now owned by Bank of America Corp., still is paying Mr. Brown’s legal bills. A Merrill spokesman declined to comment.

The U.S. government recommended Mr. Brown get a sentenced of more than 30 years. He prepared a will and gave signing authority over assets to his wife. When a federal judge handed down a sentence of 46 months, “I felt like the firing squad had missed,” he says now.

Mr. Brown’s 22-year-old son nearly died in an auto accident shortly before the former Merrill executive reported to a low-security federal prison in Fort Dix, N.J. Weeks passed before it was clear the son would survive.

“After that, I said whatever else happens I can handle,” he says. In prison, Mr. Brown taught inmates about basic personal finance and dined once a week with mobsters while schooling them in reading newspaper stock tables, he recalls.

In 2006, a federal appeals court overturned part of the barge case, ruling the government had misapplied a controversial crime theory, known as “honest services” fraud. The court upheld Mr. Brown’s perjury and obstruction convictions, but he was released from prison.

The Justice Department moved in 2007 to send Mr. Brown back to prison, arguing that the law required him to serve the rest of his 46 months.

Sidney Powell, Mr. Brown’s lawyer, says one prosecutor claimed “he had ‘tremendous leverage’ and could force Jim to testify” against co-defendants in planned retrials. A judge rejected the government’s motion.

By early this year, the Justice Department dropped plans to retry any of the former Merrill officials, except for Mr. Brown, who was pressing claims that prosecutors in his 2004 trial withheld favorable evidence.

Days before jury selection for Mr. Brown’s retrial was to begin in September, the government abandoned the fraud and conspiracy charges. A Justice Department spokeswoman declines to comment. In court filings, the government denied withholding evidence and the judge rejected the misconduct claims. Mr. Brown says he plans to continue pressing that issue.

Write to John R. Emshwiller at john.emshwiller@wsj.com

Merrill Lynch’s Involvement With Hard Assets (Such As…Oh… Picking Something At Random….Nigerian Barges?)

One of the questions I occasionally come across, both directly from people and rhetorically from journalists attempting to find fault with the Nigerian Barge deal, is what in the name of cheeze whiz was Merrill Lynch doing buying a barge? Isn’t Merrill’s business in banking, they would ask with a glint of gotcha in their eyes. Even when I tried to tell them that in order to bank, one must have an asset to buy or sell, my words often fell on deaf ears.

But now I have irrefutable proof that the Nigerian Barge deal was not unusual for Merrill Lynch. How about this, from the publication Oilgram: [Volume 84 / Number 47 / Friday, March 10, 2006. Look. It. Up.]

Merrill Lynch takes capacity in USLNG plant

Deal with Sempra in Gulf moves bank into physical gas market

New York—While several large investment banks have increased their presence in the US natural gas marketing sector, Merrill Lynch has gone a step further, securing capacity for LNG at a new Gulf Coast import terminal.

Merrill Lynch Commodities has signed an agreement for capacity at Sempra LNG’s Cameron terminal in Hackberry, Louisiana, Sempra LNG announced March 9.

The 15-year full-service agreement allows Merrill Lynch to import 500,000 Mcf/d at Cameron. The deal is contingent upon the investment house finalizing its LNG supply arrangements, Sempra said.

Depending on the timing of those supply deals, Sempra could choose to fulfill the capacity contract either with the initial phase of Cameron LNG’s development, which is set for completion in 2008, or after the terminal’s proposed expansion is completed in 2010, Sempra said.

“We are pleased to have signed this terminal capacity agreement with a company as respected and well known as Merrill Lynch Commodities,” Sempra LNG president Darcel Hulse said in a statement. “Their knowledge of the marketplace confirms Cameron LNG’s position as a strategic gateway for LNG supplies in the United States.”

Last August, Sempra signed a 20-year agreement with Italy’s Eni for 600,000 Mcf/d of capacity at Cameron. Between the Eni and Merrill Lynch contracts, Cameron now has 1.1 Bcf/d of its initial send-out capacity of 1.5
Bcf/d spoken for. Last October, Sempra signed a non-binding Heads of Agreement with Algeria’s state oil company Sonatrach for 250,000 Mcf/d to 500,000 Mcf/d of capacity at Cameron. A Sempra spokesman said March 9 no final decision on that proposed contract has been reached.

Officials with Merrill Lynch could not be reached to discuss the company’s move into the physical gas business. In oil markets, the company is active in petroleum futures and over-the-counter swap markets, but has not
yet expanded into trading physical petroleum products. However, the oil trading group plans to lease tanks at some point and become an accredited pipeline shipper, possibly within the next year, to participate in US spot markets, according to a source at the company.

The recent steep contango in the gasoline market had kept most tanks in use as traders bought physical and sold forward futures contracts. Now that the forward curve has flattened, tanks may become more widely available for leasing, the source added. The Sempra spokesman also noted that preparations for an open season on the possible expansion of the company’s Energia Costa Azul LNG import terminal are still under
way. That terminal, a joint venture with Shell in Baja California, Mexico, would have initial send-out capacity of 1 Bcf/d.

So Merrill Lynch has a history of dabbling in hard assets that go bye-bye across the sea.

Oh beautiful, unconventional Merrill Lynch. How badly you’ve been maligned. And those sweet, good, honest men at Enron, how horribly you’ve been treated.

Let us remember that James A. Brown is set to go to trial in two months on charges stemming from this transaction. He is accused of … well, I don’t really know because the indictment apparently was written by someone who has not yet entered law school because they forgot to mention what his crime was. But it has something to do with the Nigerian Barge Deal.

James A. Brown, William Fuhs, Robert Furst, Dan Boyle and Dan Bayly are innocent.

Nigerian Barge Trial Testimony: Katherine Zrike Denies Parking Arrangement With Enron

As I learn more about Katherine Zrike, in house counsel for Merrill Lynch, I become more baffled by the prosecution and more proud of the defendants for withstanding this idiocy (as if I weren’t already proud of them!)

This is part of Katherine Zrike’s testimony on cross-exam by Matthew Friedrich:

Q. Let me start you, if I could, by referring you to — with Fuhs Exhibit 6. The handwritten notation that Mr. Fuhs had you read at the bottom of the page. Could you read that again, please?

A. Translated with my shorthand –

Q. Yes.

A. – or just exactly the way?

Q. If you could translate it with your shorthand into what the words meant to you.

A. Meant to me. Okay. “Real equity with only agreement from Enron to re-market our equity.”

Q. And that was your understanding; correct?

A. That was my understanding.

Q. Your understanding was that the only agreement was a re-marketing agreement; correct?

A. That’s correct.

Q. At any time, did anyone ever tell you that Enron and Merrill Lynch had reached a verbal agreement that, if the barges couldn’t be sold, that Enron would buy the barges back from Merrill Lynch?

A. No, they did not.

Q. Had they told you that, would you have allowed the transaction to go forward?

A. No, I would not.

Q. Why would you not have allowed the transaction to go forward?

A. I would have equated that to a park, to a prearrangement that would violate our year-end transaction rules. I would have felt it was a sham.

Q. Parking is wrong?

A. Yes.

Q. You would not have allowed the transaction to go forward; correct?

A. That’s correct.

Q. If it’s a parking transaction, then that means that Enron would not have been able to report a gain for the
transaction; correct?

A. They should not have been able to do it legally, under the accounting rules.

Q. You would have stopped the deal had you known that there was such an agreement; correct?

A. Yes.

Q. Ms. Zrike, at any time were you ever told that Enron and Merrill Lynch had reached a verbal agreement that
Merrill Lynch would receive a fixed rate of return from the barge deal?

A. I was never told that.

Q. Had you been told that, would that have caused you concern?

A. It would have caused me concern if it was Enron that was guaranteeing the price.

Q. And what would your concern have been?

A. That, again, it goes back to having the attributes of a park or an illegal transaction under the accounting rules, given what we understood Enron was going to be doing in recognizing the gain on the sale.

Q. Had you known that Enron had given Merrill Lynch a verbal agreement that it would pay fixed rate of interest, you would not have allowed the deal to go forward, would you?

A. No, I would not.

I really don’t know how much more clear this could be. Katherine Zrike was plainspoken and honest, in short: a terrific witness. She was an attorney; she wouldn’t risk her career for this transaction – particularly for Enron, a company she didn’t even work for.

Prosecutorial Abuse In The Nigerian Barge Case

The Enron Task Force has a long history of prosecutorial abuse, which has been documented well each time a new revelation comes to light. But the problem with documenting it is obvious: you have to have the documents! They withheld Andy Fastow’s raw 302 notes, after three different court orders, finally handing a summary over to Jeff Skilling only after Jeff had been convicted. They’ve destroyed evidence (Broadband), intimidated witnesses (Skilling, NatWest Three, Nigerian Barges), outright lied (Skilling, Broadband, Nigerian Barges, Arthur Andersen, NatWest Three) and they’ve generally run amok in court rooms when pro-government judges turn a blind eye to their antics.

So now another giant mudslide of documents have been produced which illustrate, once again, that they are untrustworthy custodians of justice. A slew of documents related to James A. Brown’s defense in the Nigerian Barge case has illustrated beyond any doubt the most egregious occurrences of prosecutorial abuse that I have ever had the misfortune to see.

I wrote about these documents here but I had no idea it was this bad.

What you are about to read will shock you. It will also anger you and it will frighten you. The Enron Task Force did this to innocent people. Even if they were guilty (and they are not!), they do not deserve to have the government steamroll them like this. These men are innocent. And the government’s disgusting behavior is just now coming to light.

Here is some quick background so you understand what you’re looking at:

Katherine Zrike was a Merrill Lynch counsel, as was Dolan. The huge thing the ETF intentionally omitted about Zrike was that the quote that had the buy-back language in it, and how she had tried to negotiate to protect ML but ultimately boiled down to best efforts being the best they could get.

Dolan said that HE took the buy-back language out of an engagement letter to Enron because they would not do a parking transaction and he knew they couldn’t do that.

Jeff McMahon is huge because he supposedly made the first guarantee and was on the phone call. He was emphatic as picked up by at least 3 of the interviewers that there was no further commitment, never guaranteed, etc.

A So the LAWYERS KNEW IT ALL, tried to document it, and the ETF’s whole case was a lie built on hearsay that they knew was refuted by the first-hand evidence they withheld.

For just a preview, this is the government’s summary of Katherine Zrike’s grand jury testimony. THE GOVERNMENT ITSELF highlighted the yellow parts to show what it was withholding. This is a striking, nearly unbelievable document. It depicts a grave Brady violation and proves that James A. Brown (and others) are completely innocent. [You can download this document in its original form here]

If that doesn’t make your blood run cold, here are some more documents that will:
Zrike SEC Testimony Vs Zrike Pre-Trial Brady Summary

Zrike 302 Proves Egregious Brady Violations070910

More to follow.

The Theoretical Stock Price After The Nigerian Barge Deal

On June 28, 2010, I somewhat glibly touched on the subject of Enron’s stock price as it related to the Nigerian Barge Deal. I said:

Do you honestly believe that if Enron reported $12 million less on a net income of $830 million, that analysts would have thrown up their hands, sunk to their knees and implored, Why, God, why?! No. Such a scenario defies common sense. If Enron was somehow $12 million short of its earning targets, it seems to me that the stock would not have wavered much at all. Shareholders likely would not have cared. Enron brass would have been chagrined but would probably not spend a lot of time dwelling on it. But if Andy Fastow conspired with several in his own group and ML to fudge a $12 million lie, ultimately, what would it matter? Who would be hurt by that? (Forget the fact that it’s unethical.) Would shareholders be hurt? By supposedly lying, shareholder value increased slightly or remained steady.

Well today I was browsing through the transcript of Daniel Bayly’s sentencing and came upon this passage, spoken by Judge Werlien:

The preferred way to begin to estimate loss in a case such as this is to compare the average stock price for a defined period immediately after the disclosure of the fraud.

In other words, loss from a misrepresentation or fraud can often be proved if the price of the stock or security actually declines when the misrepresentation or fraud is exposed…. The fraud in the Nigerian barge transaction was not revealed until after the value of Enron stock had completely collapsed due to other disclosures and events….

As the judge in the above statement goes on to say, a theoretical stock impact is just that: theoretical. A so-called “expert” in the case said that every person who bought stock after the announcement of Enron’s fourth quarter 1999 and fiscal year 1999 earnings may have overpaid by $0.01 per share because of the Nigerian barge deal.

On January 17, 2000, Enron met the analyst’s predictions and the stock fell by $2.87 per share. Three days later was the 2000 Analyst Conference in which Enron announced its Broadband division, and the stock bounced up $13.87, and then increased again the day after.

In the Broadband trial, an expert attempted to determine exactly what portion of the increase was due to the BOS – an impossible feat. We can’t know what could have been if another course had been taken. That is a fool’s game.

But if we accept that every share price was inflated by a penny because of the Nigerian Barge deal, my question is: so what? It is impossible to have perfect information. Turn on CNBC and you will hear the term “undervalued stock.” That is supposed to mean that we just can’t see how wonderful the stock is because all the information about it isn’t yet known. Well that doesn’t mean it’s undervalued to me – it means it will experience some volatility in the future when those facts become known. Likewise if it’s overvalued it will eventually fall to its mean. So attempting to say that the stock was somehow mis-priced doesn’t quite make sense to me.

But I guess my problem is more fundamental than that. I simply don’t understand what the Nigerian barge deal had to do with the price at all. The Department of Justice alleges in the Skilling / Lay / Causey Superseding Indictment that the Nigerian barge transaction was “designed solely to achieve budget targets” and that the accounting was invalid because there was a “secret side deal” between Andy Fastow and the bankers at Merrill Lynch. With the first point, I literally could not care any less. Why a company does something is of no concern to me. If Jeff Skilling was visiting a voodoo queen and she said he had to sell Nigerian barges and then sacrifice a virgin, I’m cool with that. But the second point – that the accounting is what made this a bad deal – is just baffling.

Companies make mistakes. People goof up the accounting all the time. Check Footnoted.com for some hilarious examples. So if this was a fraudulent deal it still wasn’t the end of the world. It would not have been prosecuted if Enron had not collapsed. If shareholders had become aware of it, they might have or might not pull out of the company. It was a tiny deal; I’ve used the figure $12 million but it was actually $7 million. I can’t imagine anyone would have cared about it very much if the “secret side deal” allegation had come to light while the company was still alive. I don’t believe the accounting was bad, but if Enron didn’t want to deal with the fallout, they could have easily restated it. A $7 million mistake would hardly even be noticed.

The Nigerian barge deal was absolutely legitimate. Enron stock was healthy and the Nigerian barge deal was so tiny, so utterly unimportant, that it had absolutely no effect on the stock.

Update
Enron made a profit of $53 Million on the barges when they sold them to AES three months later and properly reported all the gain and paid taxes on it. No one lost any money on the deal. They are still in service for AES.

Prosecutors Drop Case Against Daniel Bayly

Another victory for the good guys!

Via The Chron:

Former Merrill Lynch executive Dan Bayly should not be retried on accusations that he and others helped Enron Corp. inflate earnings through the sham sale of Nigerian barges, prosecutors said in a court filing.

Bayly, former global head of investment banking at Merrill Lynch, last month settled a related civil case brought by the Securities and Exchange Commission.

The SEC alleged Bayly assisted Enron’s sham barge sale in 1999 that allowed Enron to fraudulently book higher year-end earnings and flout securities laws. Prosecutors said the sale was a disguised loan and that Enron executives promised to resell or buy back the barges within six months.

In the settlement, Bayly admitted no wrongdoing and he has pleaded not guilty in the criminal case scheduled for trial next month.

The 2004 convictions of Bayly and codefendants were overturned in 2006 by the 5th U.S. Circuit Court of Appeals after it found the government tried them under an invalid legal theory.

Daniel Bayly Settles With SEC

The Securities and Exchange Commission announced today that, on December 31, 2009, the U.S. District Court in Houston entered a final judgment in the Commission’s civil action against Daniel H. Bayly, former global head of investment banking at Merrill Lynch.

On March 17, 2003, the Commission charged Bayly and three other former executives of Merrill Lynch with aiding and abetting Enron Corp.’s earnings manipulation with the Nigerian Barge deal.

That action is stayed against Bayly’s co-defendants pending resolution of a parallel criminal prosecution.

Without admitting or denying the allegations in the Commission’s complaint, Bayly was ordered to pay $300,001 in disgorgement and civil money penalties for deposit into the Commission’s Enron Fair Fund.

Today In Enron History

On December 29, 1999 Enron and Merrill Lynch finalized their written agreement concerning the Nigerian barge deal. The Nigerian Barge deal entailed Enron selling to Merrill Lynch its interest in Nigerian barges. Enron bought them back six month later, and then sold them to another company. The government alleges that it was a fraudulent transaction because Enron did not transfer risk to Merrill Lynch. This is demonstrably false. Read The Nigerian Barge Case Primer for more detail about the transaction.

Enron’s DASH, (Deal Approval Sheet) a form to approve the Nigerian Barge transaction, can be found here.

Nigerian Barge Deal Legal Status Primer

Preface

Here is a very brief primer about the Nigerian Barge Deal. It is meant only to give an overview of the challenged transaction of the December 1999 deal and does not delve into the legal cases of the four Merrill Lynch defendants.

Scope

This primer will only briefly cover the legal cases of the four Merrill Lynch defendants. It is meant to serve only as an orientation point. A future primer will explore the complex legal issues presented in this case.

What was the Nigerian Barge Deal?

The Nigerian Barge deal was a transaction in December 1999 in which Merrill Lynch purchased Enron’s interest in three Nigerian electricity barges for a total of $12 million. It was a simple transaction. There were no hedges, no subs of subs, nothing that would complicate the financing or the integrity of the deal.

Controversy

The controversy arose from the claim that the Nigerian Barge purchase was a done with a “secret side deal” between Enron CFO Andy Fastow and Merrill Lynch that Merrill Lynch would get its money back within six months. If this was true, it was not a true sale, and the entire transaction would be fraudulent.

The Merrill Lynch Bankers

Daniel Bayly. A thirty year veteran at Merrill Lynch, he had risen through the ranks to become the chairman of investment banking.

Robert S. Furst A former managing director at Merrill Lynch.

William Fuhs. A former Merrill Lynch Vice President.

James A. Brown. Former head of Merrill Lynch’s strategic leasing and finance group.

The Trial

In November 2004, the government prosecuted the bankers under the Honest Services theory, alleging that that the bankers had deprived their employer, Merrill Lynch, of their honest services as employees. The convictions of Daniel Bayly, James Brown and Robert S. Furst were overturned in 2006 by the U.S. Court of Appeals in New Orleans. [Daniel Boyle did not appeal his conviction. When the other three appealed, Boyle's attorney stated that Mr. Boyle had reached peace about the situation and simply wanted to serve his time. Incidentally, Fuhs was acquitted by the fifth circuit after serving 8 months in a *maximum security* prison.]

On June 17, 2009 the appeals court then rejected the men’s request to block their retrial on constitutional grounds.

“We could not have been clearer that our reversal was premised narrowly and solely on the failure of the honest services charge,” according to the appellate decision. “The opinion implicitly, if not explicitly, recognized the possibility that criminal wrongdoing might be proved in a retrial” under different statutes.

Double Jeopardy

Attorneys for the investment bankers had urged the court to block the government’s retrial attempt under constitutional safeguards against double jeopardy, or being tried twice for the same offense.

Conclusion

Presently the two choices open to the men are to endure another trial in which the government will try another theory, or they can appeal to the Supreme Court.

This case has an important element in common with Broadband’s Scott Yeager’s case. Yeager is arguing that he can not be retried because the issues of fact that were decided at his first trial can not be considered again because double jeopardy would apply. If Yeager prevails, it is seems possible that the Merrill Lynch cases will follow suit.

Merrill Lynch Execs Can Be Retried

Unbelievable:
via AP:

A federal appeals court says the retrial of three former Merrill Lynch & Co. executives connected to an Enron Corp. deal would not violate their constitutional protections against double jeopardy.

The 5th U.S. Circuit Court of Appeals on Tuesday upheld a Houston federal judge’s 2008 ruling that Daniel Bayly, James A. Brown and Robert S. Furst can be retried.

All three are accused of helping push through Enron’s sham sale of three power barges moored off the coast of Nigeria to the brokerage in 1999. The deal inflated earnings in Enron’s energy division.

They were convicted in 2004 of conspiracy and wire fraud. But the 5th Circuit, based in New Orleans, threw out their convictions in 2006 after finding fault with the government’s legal theory in the case.

I’ll update soon.

Madoff Pleads Guilty: Cara & Friend Discuss

On Tuesday, I received a flash-bang email from the NYT announcing that Madoff was about to plead guilty and would accept a life sentence. I forwarded it to a friend with a note:

If it’s a life sentence, why not go to trial? That way he at least has the hope of a few technicalities that might result in a lower sentence, or even acquittal (though that’s unlikely.)

My friend’s reply thrilled me:

Maybe Madoff is hoping that when he is sentenced, he will get less than the life sentence. Maybe the Feds agreed to recommend something less.

I don’t understand why the only punishment we seem to be able to come up with is prison. Why put non-violent white collar guys into prison? Why not simply make them get a regular job and pay a certain percentage of their earnings out as a penalty?

I have toyed with the idea of sending a proposal to Obama in which I say that I want to hire some white collar prisoners. I get to look at the resumes of all the business executives in all the prisons and choose the ones I want for my new business. I will pay them a market salary, and they must pay a certain percentage back to the government as a penalty. The government must release them from prison for this program. Not only would taxpayers not need to pay for their upkeep in prison, but they would actually be making money and paying taxes (and starting businesses to provide jobs to others). This idea is probably too rational for the Feds.

Wow! Brilliant.

I would like to suggest that our first hire should be Jeff Skilling. Second is the NatWest Three, the Merrill Bankers, Joe Hirko, Rick Causey…

I am completely serious when I say that I would trust any of those guys with my life savings before I would trust the government. Madoff, I’m not so sure – I don’t know the facts of his case – but I do know that my friend is right. There has to be a better solution than prison for white collar guys. They aren’t violent. They are generally well-educated, smart people. If they are guilty, then punish them appropriately. But don’t just throw them into the gulags and forget them.

Merrill Lynch Just Taunting Cuomo At This Point

Dealbreaker, despite the fact all the writers are Jeff Skilling haters, is hands-down the best place to laugh your butt off while reading about finance. To whit:

Cityfile reports that Merrill Lynch is in the process of hosting a Global Wealth Management “training session” at the Orlando Ritz Carlton Golf Resort. Before the lot of you get your knickers in a twit over this being an inappropriate use of TARP funds or something, 1) please realize that it’s been a really long time since MER last took a vacay (22 days) and 2) step off, bitch.

If you are not laughing right now, you can’t be my friend.

Cuomo Subpoenas Merrill Execs

WSJ continues documenting the drama over at Merrill Lynch. After Thain got the everliving hell questioned out of him, New York state’s attorney general, Andrew Cuomo, has issued subpoenas to several top Merrill Lynch & Co. executives who were each paid more than $10 million in cash and stock last year, “according to people familiar with the situation.”

In its waning days as a stand-alone company, Merrill paid out billions of dollars in bonuses, even though it wound up posting a fourth-quarter net loss of $15.84 billion. For all of 2008, the 10 highest-paid Merrill executives got a total of $209 million, and 11 were paid more than $10 million each according to people familiar with the situation. Merrill posted a net loss of $27.6 billion.

Who the fuck cares? It’s not my money. It’s not your money. Shut up, sit down, and wait patiently before I come slap you.

The compensation of anyone else is not your business unless they’re asking you to sign a pre-nup. I can’t help but think that all this moaning about executive salaries is really just class envy dressed up in its recession finest.

Late Wednesday, BofA filed a petition in New York state court to keep the pay data confidential.

Good luck with that.

Mr. Cuomo is investigating whether the bonuses violated securities laws. He is concerned that BofA and Merrill didn’t disclose, when the takeover deal was reached in September, their agreement to a bonus payout of as much as $5.8 billion, according to people familiar with the investigation. Mr. Cuomo also is scrutinizing the Charlotte, N.C., bank’s role in setting bonuses of several Merrill executives.

No, that’s not what Mr. Cuomo is “concerned” about. Mr. Cuomo is concerned with punishing the few producers left in our country. At this point, if Thain avoids prison it will be a miracle.

(And we really want Thain to avoid prison.)