Fastow's Sentence, Future Civil Litigation, and D & O Insurance
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:
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.
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.
posted by Kevin LaCroix at 11:05 PM
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