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A Houston federal judge who sentenced former Merrill Lynch & Co. executives involved in the Enron meltdown may be the first to apply in a criminal sentencing a recent U.S. Supreme Court holding that securities fraud plaintiffs must link a company’s loss in value to a defendant’s misrepresentation. The Houston judge sentenced Daniel Bayly, who was convicted of fraud with four others for their role in artificially inflating Enron’s earnings, to a 30-month prison term-substantially below the 180 months sought by the U.S. Department of Justice. Also, the judge in U.S. v. Bayly, No. 4:03CR363 (S.D. Texas), ordered substantially less restitution and fines than requested by the Justice Department. Counsel for Bayly credit the break in his sentence to a U.S. Chamber of Commerce amicus memorandum filed in the case, which argues that a civil “loss causation” standard should apply in a criminal case when a court determines sentence enhancements. The chamber had made an analogous argument as amicus in a Supreme Court case, Dura Pharmaceuticals v. Broudo, No. 03-932, issued two days before Bayly’s sentencing. In Dura, the Supreme Court unanimously held that a plaintiff asserting a federal securities fraud claim must show that an alleged loss in share price value is caused by a company’s misrepresentation. “In the criminal context,” the chamber had argued in its Bayly memorandum, “when a business fails, it is vital that corporate officers and employees do not face draconian increases in criminal punishment when there is no causal connection between a defendant’s misrepresentation and the losses of that company.” The chamber made a similar argument in Arthur Andersen v. U.S., No. 04-368, argued before the high court two weeks ago. Instrumental factors Lawrence S. Robbins, a lawyer for Bayly, said he thought the Dura opinion and the chamber’s memorandum had been instrumental in informing U.S. District Judge Ewing Werlein Jr.’s sentencing decisions. “I have no doubt that [they] had a huge impact in the whole series of events that led to Judge Werlein’s thinking,” said Robbins of Washington’s Robbins, Russell, Englert, Orseck & Untereiner. He added that Bayly, to his knowledge, is one of the first applications of Dura. The issue of loss causation is “of great importance not just for the defendant but for the business community as a whole,” he said. Last month, Werlein sentenced Bayly to 30 months in jail, a $250,000 fine, $295,000 in restitution to Enron-one-fifth of the $1,475,000 actual loss for which the court determined Bayly and his four co-defendants to be responsible-and an additional $295,000 restitution. Bayly and the others were convicted of wire fraud for their part in the “Nigerian barge” case, a 1999 deal that involved “parking” Enron assets-an interest in electricity-generating power barges moored off the coast of Nigeria-with Merrill, which resulted in artificially inflating Enron’s 1999 earnings. The prosecution-Justice Department lawyers on the Enron task force-had sought 180 months’ imprisonment and two times the losses it “conservatively” estimated at $43.8 million per count. Robbins said the government’s theory of loss was based on measuring the amount of total inflation of the stock price of Enron times the number of shareholders that bought stock-a view the sentencing court rejected. “The critical thing here is the Enron task force was shooting for the moon,” Robbins said. Bayly and his colleagues have appealed their convictions. The government may appeal the court’s sentence, though Justice Department spokesman Bryan Sierra said no decision has been made yet. The chamber argued in its memorandum that the government could not seek sentence enhancements based on its theory for three reasons: Prosecutors could not and did not prove that the defendants’ misrepresentations caused an actual decline in the stock price. Prosecutors could not use the decline in Enron’s share price-which preceded the disclosure of the misrepresentation at issue-as proof that the share price fell due to the defendants’ misrepresentations. The court should interpret “loss” in sentencing guideline Section 2F1.1 by “its established meaning under securities and common law-viz., the decline in price attributable to a defendant’s misrepresentation,” the memorandum said.

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