Prosector tells jury Dynegy case all about lying
By LAURA GOLDBERG
Copyright 2003 Houston Chronicle
The jurors chosen today to hear the fraud case of a former Dynegy executive may have to wade through columns of numbers and financial jargon, but prosecutors told them the charges aren't all that complex.
"This case is not about accounting," said Assistant U.S. Attorney Belinda Beek. "This case is about lying. It's that simple. It's about concealment."
The case of Jamie Olis -- who's charged with conspiracy and fraud -- is the first brought to trial by U.S. Attorney Michael Shelby's office in Houston in the wake of the energy-trading implosion that followed Enron Corp.'s downfall.
Diving into opening arguments the same day the jury was chosen, Beek made a 45-minute pitch that promised to explain the difference between Dynegy's cash flow and earnings, a descrepancy she said was hidden by conspirators at the Houston energy giant.
"They knew the numbers weren't right, and they had to do something about it because people were noticing," Beek said.
Defense attorneys will make their opening arguments Tuesday. After today's proceedings, defense attorney Terry Yates said he's preparing Olis as if the defendant will take the stand, but that decision won't be made now.
"We're just looking forward to present the case. We're anxious to start presenting evidence, " Yates said.
The jury seated today includes seven women and five men, two of whom are alternates. The selection was over within hours, and a list of potential witnesses was presented that included former CEO and Chairman Chuck Watson.
Legal experts say the trial will be closely watched to see whether prosecutors can make their case that Olis, as Shelby says, was involved in "accounting alchemy." Presenting a complex financial matter in a way the jury understands will undoubtedly be a key.
"I believe nationwide that prosecutors and the defense counsels in all of these complex corporate fraud cases will be watching this case closely to see what the issues are, and what tactics work and which don't," said Dan Hedges, a Houston lawyer who does business litigation and performs internal corporate investigations. He also served as the U.S. attorney in Houston from 1981 to 1985.
"They will be anxious to see what particular types of evidence make an impact on the jury and what kinds of evidence the jury simply cannot understand or chooses to give very little weight to," he said.
In this case, which is being heard before U.S. District Judge Sim Lake, the government contends Project Alpha, a complex five-year deal involving natural gas transactions, was a plan to borrow money and make it appear to the outside world that the money was generated by Dynegy's business operations.
About $300 million recorded by Dynegy as cash flow from operations should have been counted as debt, prosecutors said. Operating cash flow is an indicator of a company's health and is watched by investors and analysts.
Shelby, who said he intends to stop in the courtroom daily, said the larger point made in this case is: "No one is allowed to deceive the marketplace."
His office, which is investigating activities at companies that were involved in energy trading, recused itself from investigations into Enron because a number of employees in the office were related to current and former Enron employees.
Prosecutors in his office have already secured guilty pleas from two others indicted with Olis and have brought charges against two former Houston energy traders in unrelated matters.
Philip Hilder, a former federal prosecutor who represents a client with a suit against Dynegy for wrongful termination, said the Olis case is significant for Shelby's office.
"It involves an industry that is very important to the lifeblood of this community," said Hilder, who also does white-collar defense work. "I think there will be a lot of attention drawn to this prosecution."
An indictment against Olis and former Dynegy employees Helen Sharkey and Gene Foster was brought in June. Each was charged with one count of conspiracy, one count of securities fraud, one count of mail fraud and three counts of wire fraud.
Olis was senior director of tax planning/international when Project Alpha was done in 2001, and later became vice president of finance. Foster was vice president of tax. Sharkey had several different jobs at Dynegy, including being part of risk control, deal structure and asset management groups.
None were top-tier executives. None were household names.
"He's nervous. Scared," said Terry Yates, the Houston lawyer representing Olis. "But also he's ready to tell his side of the story and the truth about what happened."
Sharkey and Foster struck deals, each pleading guilty to one count of conspiracy to commit securities fraud, and have yet to be sentenced.
Their plea deals require them to testify in court proceedings, and observers expect the government to call them. The agreements also mention other unnamed, unindicted co-conspirators as having been involved.
Project Alpha was detailed in the indictment and by prosecutors in the following way:
A specially created entity called ABG Gas Supply was funded with $300 million from several big banks.
During the last nine months of 2001, ABG Gas bought natural gas at market prices and sold it to Dynegy at a discount. Dynegy then sold the gas at market prices, netting about $300 million.
Then, over the next 51 months of the contract, ABG Gas would buy gas at market prices and resell it to Dynegy at above-market prices. That money would flow to the banks, which would get back the $300 million, plus interest.
Prosecutors said Olis, Foster and Sharkey knew that in order to report the deal as cash from operations, ABG Gas and the lenders couldn't be guaranteed full repayment on their investment. They had to risk losing some of their money.
But the three secretly put into place agreements to ensure the lenders wouldn't lose any money, prosecutors say.
And, according to the indictment, those agreements were hidden from Dynegy auditor Arthur Andersen, as well as securities regulators and the public.
Because of Project Alpha, Dynegy also recorded a $79 million income tax benefit. Dynegy later restated financial statements, reducing operating cash flow and eliminating the tax savings.
Dynegy, which has new top management in the wake of Alpha and is cooperating with Shelby's investigation, last year paid $3 million to the Securities and Exchange Commission to settle allegations related to Project Alpha and another matter.
Citigroup earlier this year agreed to pay $19 million to settle Alpha-related allegations from the SEC. In both cases, the companies neither admitted nor denied the SEC's findings.
In a complex case such as this, the government is best served by keeping explanations to the jury as simple as possible, said lawyers experienced in white-collar crime cases.
"It is the large themes that decide jury trials," said David Berg, a Houston trial lawyer who's been involved in a number of white-collar cases.
He said he would make sure the jury understands how the investing public can be defrauded into investing in a company if financial statements filed with regulators aren't truthful or if information given analysts is deceptive.
The defense, though, may have an interest in throwing out lots of details. If jurors don't understand something, that tactic could help raise reasonable doubt.
"From a defense point of view, what I would try to do is muck it up. Try to show that it is not as simple as what the government is suggesting it is," said Douglas McNabb, a Houston lawyer specializing in federal white-collar defense cases.
Other common defenses in white-collar crime cases include showing that others, such as lawyers, accountants or higher-ups, signed off on something.
Yates said he intends to bring out the various roles played in Project Alpha by Andersen, others at Dynegy and outside lawyers.
An Andersen spokesman declined to comment.
There are also ways to deal with witnesses with plea deals. Defense lawyers can question their truthfulness or suggest they're really innocent but felt forced to plea.
Said Yates: "I think Mr. Foster and Ms. Sharkey, as well as Jamie, were in many respects all victims or scapegoats."
Houston Chronicle 11/3 |
