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White-Collar Prison Terms Under Debate

Determining the length of punishment is far from an exact science, and the standards may be changing

July 11, 2004|Jonathan Peterson | Times Staff Writer

In late May, a 38-year-old Houston accountant and lawyer named Jamie Olis said goodbye to his wife and baby daughter and moved into a 79-square-foot cell at the Federal Correctional Institution in Bastrop, Texas.

It might be his home until 2028.

"I take no pleasure in sentencing you to 292 months," U.S. District Judge Simeon Lake told the Dynegy Inc. executive as he handed down the sternest penalty yet in the post-Enron crackdown on corporate crime. "But my job is to follow the law."

Yet what it means for judges to follow the law in punishing white-collar defendants has suddenly been tossed into limbo. A recent Supreme Court decision has cast doubt on the legality of the guidelines that determine federal sentences. That development could affect individuals convicted in the Justice Department's campaign against corporate fraud -- a crackdown punctuated by last week's indictment of former Enron Corp. Chairman Kenneth L. Lay.

Under the guidelines, a judge's calculation of investors' financial losses has largely determined the length of punishment. Late last month, the Supreme Court appeared to torpedo that approach, ruling that the facts used in sentencing must be considered by juries -- and not judges alone -- and proved beyond a reasonable doubt.

"That is a difficult standard, and unlikely to be met," said Kirby Behre, a former U.S. prosecutor and coauthor of a book on federal sentencing for business crimes.

The Supreme Court case involved a crime far different from the kind Olis was convicted of.

The justices overturned an extra three years in prison given to a Washington state man who had kidnapped his estranged wife and their son. The trial judge had determined that the kidnapper displayed "deliberate cruelty" and therefore deserved prison time beyond the maximum 53 months set by the state's sentencing guidelines.

But the Supreme Court said it was up to a jury to decide all aspects of a person's guilt -- a finding that many lawyers and court watchers believe extends to federal white-collar cases as well.

The Olis case, some say, is Exhibit A in that regard.

"I'm not saying that this guy is blame-free," said Avanidhar Subrahmanyam, a UCLA finance professor who has reviewed Olis' sentence. "But the way it was computed is very questionable."

In November, a Houston jury found Olis guilty of helping cook the books at Dynegy, the big Texas energy company. Olis was convicted of a battery of charges -- conspiracy, securities fraud, mail fraud and wire fraud -- related to an accounting scheme called Project Alpha, which cloaked $300 million of debt as revenue.

After the jury was dismissed, Lake -- a respected jurist who is chairman of the U.S. Judicial Conference's criminal law panel -- began considering Olis' sentence.

Under the sentencing guidelines, several factors -- including the skills required to perpetrate an accounting sleight-of-hand, the number of victims and a defendant's criminal history -- contribute to the length of a prison term for a white-collar criminal. The most significant factor in determining a sentence in a corporate fraud case, however, is the monetary loss.

Yet pinning down that loss is far from an exact science, and there are strong indications that Lake may have missed the mark.

At Olis' sentencing, Lake put the loss at a minimum of $105 million. He based that finding on his view of losses suffered by the University of California, a major Dynegy shareholder and lead plaintiff in a class-action lawsuit against the company.

During the trial, Jeffrey Heil, a former university investment official, testified that the UC system had lost a little more than $100 million on its Dynegy investment.

But in a recent interview, Heil made clear that he was not sure the punishment meted out to Olis was fair, considering the much lighter sentences given to senior corporate officers who have cut plea agreements in other cases.

"This doesn't make a lot of sense," said Heil, who served as UC's co-head of investments until January 2003.

Notably, Heil never testified that Project Alpha cost the university system more than $100 million. Rather, he told the court that UC lost that amount during its overall period of owning Dynegy stock in 2001 and 2002, a time when the shares dropped for any number of reasons: the market-rocking Sept. 11, 2001, terrorist attacks; Enron's spectacular collapse, which dragged down the whole energy sector; Dynegy's ill-fated attempt to acquire Enron; and the California energy crisis, which raised fears of a broad regulatory clampdown.

Stock Sell-Off

To be sure, that time frame also included Dynegy's negative disclosure that it was reclassifying $300 million from Project Alpha as debt and that the Securities and Exchange Commission was looking into the scheme. Those revelations sparked a major sell-off of the stock.

On April 25, 2002, the day Dynegy revealed those woes, its stock plunged 30%, falling to $19.21 from $27.30 a day earlier, an overall loss of $3.4 billion.

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