Enron Suspects Enjoy Litigation 'Reforms'
Enron Hid Billions in Booty
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Enron Suspects Hide Behind the Law
"You can't sue me! I'm under FBI investigation!"
Unbelievably, that's the legal argument being made by Enron's former chief financial officer Andrew Fastow. Fastow is widely believed to have been the Enron official most responsible for the energy company's maze of fraud-ridden offshore partnerships. As such his name has climbed high on the civil litigation top ten defendants list.
And, Fastow is also believed to be a target of the FBI's criminal probe into Enron's business dealings.
Last week, attorneys for Fastow combined these two facts to argue that Enron shareholders and creditors suing Fastow should be forced to give their client a break.
Court papers filed by Fastow's lawyers plead that their client should not be forced to provide depositions or to produce documents in pending civil suits. The reason? Because, they complain, providing that kind of information could get their client indicted.
U.S. District Judge Melinda Harmon - the same judge who oversaw the Andersen trial - has not yet ruled on the motion. If she refuses to release Fastow from his civil obligations, Fastow's lawyers say, their client will simply invoke his Fifth Amendment right against self-incrimination in the civil trial.
Robin Harrison, a Houston attorney for former Enron employees, said Fastow is the only one of nearly 70 individual defendants to request protection from the lawsuits until criminal proceedings are finished.
Fastow's attorney complained that civil discovery "provides prosecutors with an unfair advantage" because they are investigating many of the same issues covered by the civil suits.
The attorney did not address the alleged unfair advantages Fastow enjoyed while at the top of Enron's pyramid. Fastow and other Enron officials allegedly used the offshore partnerships to not only hide Enron's growing losses, but also to produce tens of millions of dollars of quick profits for themselves. Fastow personally profited to the tune of $30 million from the partnerships he formed and operated.
Plaintiffs in the case are understandably not impressed with Fastow's plea for relief. The University of California, lead plaintiff in the investor lawsuit, told the court it should deny Fastow's request since it is a "predicament of his own making."
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Bad 1995 Law Helps White Collar Crooks
Even if corporate evildoers are not successful in leveraging the FBI's interest in them, they will still find plenty of protection against angry creditors in a 1995 law.
The law, passed as part of the GOP's 1994 Contract With America, is called the Public Securities Litigation Reform Act of 1995. The measure was vetoed by President Bill Clinton but was overridden in the Republican-controlled Congress and became law.
In a nutshell the PSLRA raised the bar for class action plaintiffs seeking civil recovery from the likes of Ken Lay et al. The law did so by reversing the civil law's natural order.
Under traditional civil statutes, bilked shareholders could sue corporate defendants, immediately gaining court-ordered discovery rights. Discovery is needed to pry loose corporate documents needed to prove shareholder claims of wrongdoing. Of course, guilty companies are understandably reluctant to turn such evidence over to plaintiffs and lobby Congress hard for a change in the law.
Under the PSLRA passed in 1995, plaintiffs must now first prove their case before the court will grant them the right of discovery. (For a full explanation of the PSLRA see the White Paper on this subject on this web site under Featured Content).
It was nice little Catch-22 peddled under the deceptively benign excuse of limiting frivolous lawsuits. In fact, the measure was heavily backed and financed by the accounting industry as well as most large companies, including Enron. Now, seven years later, legal filings by virtually every one of the 80-odd Enron defendants being sued cite the PSLRA as a defense. Here's a sampler:
Motion to dismiss by Jeffrey Skilling: "Every statement allegedly made by Mr. Skilling and claimed by plaintiffs to be false or misleading, is protected under PSLRA's safe harbor provisions…"
Motion to Dismiss by Andrew Fastow: "The PSLRA imposes a heightened pleading burden particularly upon securities fraud action…The PSLRA provides that where a plaintiff must allege that the defendant acted with a particular state of mind….As plaintiffs fail to meet this heightened pleading requirement a court is to dismiss the complaint."
Plaintiffs' attorneys say that the PSLRA creates a no win situation. In order to prove a defendant's state of mind at the time of the crime they need access to internal company memos and other documentation. But, without court-ordered discovery the company will not turn that evidence over to plaintiffs. And, under the PSLRA, without such evidence the court cannot grant discovery.
When Republicans swept the House in 1994, then Speaker Newt Gingrich (R-Ga) launched his party's control with the "Contract With America," a series of conservative reform measures among which were litigation reform and deregulation. The PSLRA is an offspring of the GOP's Contract With America.
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California's Money and Enron's "Cookie Jar"
Enron's collapse into bankruptcy last December left Californians scratching their heads. It just didn't make sense. After all, Enron had just spent the last two years pillaging and looting California's ratepayers' pocketbooks. How could the company now be broke? Where did all that money go?
Now we know. California investigators have discovered that during the state's energy crisis of 2000/2001 Enron pocketed over $1.5 billion in secret profits.
But, Enron quickly learned what every big drug dealer quickly learns - a ton of cash with no reasonable explanation can be a burden. At the time California ratepayers were already complaining to Washington that energy companies were up to no good. If all that cash landed on the company books then it would have been, well, politically inconvenient. At the time Enron's Ken Lay was telling Bush administration officials to ignore California's bellyaching, that the state was simply suffering from its own poorly executed energy deregulation.
So, rather than report all the profits, thereby confirming that the company was indeed gouging, Enron stuffed the money into an off-the-books "cookie jar."
The accounting trick provided several advantages. First, by dipping into the cash stash Enron was able to show Wall Street what appeared to be a respectable rate of growth. This, of course, was like so much that was Enron--an illusion. In reality the company was already terminally in debt - debts that were safely hidden in secret offshore partnerships.
And, Enron's leadership in manipulating California's energy supplies and prices had created a fresh source of hard cash for one grand final looting of company coffers. Just prior to Enron's bankruptcy the company approved over $740 million in last minute "bonuses" to Enron executives.
Finally Enron's books balanced, and Californians now know where their money went.
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New Subpoena Headed for the White House
Dirty air will collide with administration policy soon in the Senate Environment and Public Works Committee. That committee's chairman, James Jeffords (I-Vt) says he will subpoena the Bush administration this week for documents and e-mails relating to a recent decision by the administration to relax restrictions on emissions from older coal-fired power plants and refineries.
Jeffords has been pressing for months to no avail for documents describing the administration's deliberations on the policy. The new policy will allow existing old power plants and refineries to expand their operations without first meeting current clean air law requirements.
In response to Jeffords' earlier requests for documents the EPA provided 700 pages of documents and spreadsheets that committee staff members described as either blank pages or "incomprehensible."
"It is hard for me to understand why they are holding back documents that have no other purpose but to show the truth of the status of the pollution and its impact...on our country," Jeffords said. "The public has a right to know this, and we [on the committee] certainly do."
Environmentalists and many lawmakers immediately denounced the administration's rule changes as a massive rollback of the Clean Air Act.
Jeffords has grown increasingly frustrated with the administration and says he is determined to force the release of the information.
"We have a legitimate role as the committee of jurisdiction to ask for the information, and they have the responsibility to provide it in a timely fashion," a senior committee told reporters last week.
While governor of Texas, George W. Bush approved a host of clean air waivers to Texas refineries. As a result, by 1999 cities like Houston had passed Los Angeles in the number of dirty air days.
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Quiz of The Day
What energy company is the following journalist describing?
It's profits were the product of "fraud, deceit, special privilege, gross illegality, bribery, coercion, corruption, intimidation, espionage or outright terror."
If you said Enron, you were wrong. Actually, the above description is from Ida M. Tarbell's reporting on John D. Rockefeller's Standard Oil a century ago.
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