One of the pleasures of government is the opportunity occasionally to do justice. Team Obama has two such opportunities before it.
Yesterday, a federal appeals court overturned the landmark backdating conviction of former Brocade CEO Greg Reyes on grounds of prosecutorial misconduct. His case has been remanded for retrial, but this was a Bush-era prosecution and the Obama Justice Department should feel no pride of authorship for a case about which it's impossible to feel much pride. Mr. Reyes should be allowed to go in peace.
In court, the government insisted over and over that Mr. Reyes had misled his own finance department about the use of "lookbacks" to grant employees "in the money" options without having to expense them (a senseless accounting rule at the time). Never mind that this story flew in the face of the publicly known facts or that the government's sole witness, a junior finance department official, later recanted, saying she had been bullied by prosecutors. Hilariously, even as Justice argued in one courtroom that Brocade's finance department had been kept "in the dark" about backdating, the SEC was simultaneously impaling two former heads of Brocade's finance department for aiding, abetting and benefiting from backdating.
In a final indignity, after Mr. Reyes's conviction, the government admitted it knew its central contention was false, thanks to numerous, immunized statements from finance department officials. As Justice official Amber Rosen told the appeals panel in oral argument this past May: "Defendants aren't entitled to a perfect trial. . . . Misstatements happen."We won't belabor the media's own role in making a mountain out of this particular molehill. Hundreds of executives and companies have been implicated in backdating, but Mr. Reyes was singled out for criminal prosecution on the grounds he'd concealed the practice from his own staff. In fact, all the evidence shows backdating was a routine, accepted, mostly uncontroversial practice at Brocade and dozens of other Silicon Valley companies whose CEOs have not been subjected to criminal prosecution.
The second opportunity for Team Obama to render an act of justice concerns the cases of two former Merrill bankers, Daniel Bayly and Robert Furst, who just learned the government will try them again in February, in what amounts to mindless harassment after their previous convictions were thrown out. A miasma of prosecutorial misbehavior hangs over this case too.
The Merrill bankers were charged in their original trial with participating in a "sham" transaction by which Merrill bought some barge-mounted power plants from Enron in Nigeria in 1999. Allegedly, no risk was transferred because, in a phone call, Enron CFO Andy Fastow had promised to protect Merrill from loss and guaranteed a reasonable return. In essence, if so, the sale was a disguised loan to Enron.
However, the government's case on this vital point consisted of hearsay from Enron employees and emails between people who weren't party to the phone call. Kept from the defense, it later emerged, were FBI notes with Mr. Fastow in which he explicitly denied making such a promise. As Mr. Fastow explained it, he only later fibbed to Enron colleagues about such a promise in order to "light a fire" under them to find a permanent owner of the barges.
All this may still sound fishy, but fishy is not the same as illegal. The $12 million profit generated by the sale was not material to Enron's books, despite the government's claim to the contrary. At the time, Enron was a squabbling, chaotic company torn between Jeff Skilling, who favored an "asset-light" trading model, and Rebecca Mark, who ran its international operations and favored what proved to be disastrous investments in fixed infrastructure, such as the barges and a related Nigerian power plant, commitments that Mr. Skilling promptly began dumping after Ms. Mark left in 2000.
Why it was so urgent that someone, anyone be found in 1999 to take the barges off Enron's hands may be hard, after the fact, to fathom. But then hard to fathom after the fact are the company's internal dynamics and how it might have served Mr. Skilling's purpose in moving Enron in a new direction.
In any case, if sin there was, it was on Enron's part, not the Merrill bankers, even more so given evidence of prosecutorial misconduct in withholding the Fastow notes.
From day one, both these cases were dubious attempts to make crimes out of business judgments and misjudgments in the heat of battle. The ethical culture of the plaintiffs' bar is clearly infiltrating the prosecutor's sanctum. Facts were deliberately distorted to make criminals out of everyday citizens. Nor are these episodes mere ancient history. Similar temptations will surely arise from the subprime meltdown. Let's hope Team Obama draws the right lessons.
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Correction: Ford Motor Co. says I misinterpreted a footnote in its 10-K as meaning that, in the event of bankruptcy, for every 50 cents that goes collectively to the common shareholders, holders of the Ford family shares are entitled to $1. Ford says the rule, as fully spelled out in its Certificate of Incorporation, actually means each family share would collect $1 only after each common share collects 50 cents. I defer to Ford's reading.
