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SAN FRANCISCO � Criminal defense lawyer Nanci Clarence had just pulled on her wetsuit for a day of surfing at this city’s Ocean Beach on March 4 when the lead prosecutor in the Reliant Energy Services Inc. market-manipulation case called to say the settlement was on the rocks. In 2004, Houston’s Reliant Energy became the only corporation criminally charged with fraud and market manipulation in the aftermath of the California energy crisis of 2000. The indictment of the company and four of its traders became the biggest white-collar case in the San Francisco U.S. attorney’s office. Holding together the plea deal would be a test of whether Reliant’s years of hardball tactics in state and federal investigations and through the criminal indictment would prove to be a wise idea. While other companies � such as El Paso Natural Gas Co. and Enron Corp. � succumbed to government investigators and turned over documents or settled expensive claims, Reliant dug in its heels in the face of criminal prosecution. Line in the sand During five years of state and federal investigations and the federal indictment, Reliant’s line-in-the-sand litigation style had worn down special state Senate investigators, won critical federal court rulings and outflanked stumbling management of the prosecution that saw four teams of lawyers come and go from the U.S. attorney’s office. To be sure, Reliant had settled a variety of claims with federal regulators, California and private claimants totaling $500 million, but it hung tough in refusing to acknowledge that any of its conduct was criminal. By March 2, just 10 days before the start of the jury trial, Reliant’s board had approved the deal, a new U.S. attorney agreed and the four traders were on board, allowing Clarence, who led the negotiations for the traders, to celebrate with a Sunday surfing session. Now the years of work might come undone. Justice Department officials in Washington had become nervous about providing highly unusual deferred-prosecution agreements to each of the four individual traders. Deferred-prosecution agreements are becoming routine in corporate settlements with federal prosecutors but are still so rare for individuals in white-collar cases that the only other major defendant to receive one was Frank Quattrone, a former Silicon Valley investment banker, according to Reliant trial attorney William Jeffress of Baker Botts. The proposed settlement required no guilty pleas for the company or the individuals, no jail time for the traders, and the government’s consent to extend deferred-prosecution agreements not only to Reliant but to each of the individual traders. In exchange, Reliant would pay $22 million, institute corporate reforms and submit to loosely-defined monitoring for two years. It also agreed to a partial waiver of attorney-client privilege for federal prosecutors and federal regulators, but it was adamant that the waiver did not extend to private plaintiffs� lawyers or California regulators. Ultimately, lawyers for Reliant and the traders salvaged the deal and by March 5 informed the court of the plea agreement. ‘An embarrassment’ The details infuriate former state Senator Joe Dunn, a lawyer and Orange County Democrat who was locked in a three-year battle with Reliant to turn over documents for his Senate Select Committee to Investigate Price Manipulation in the California Energy Market. “Frankly, this is an embarrassment by the federal government again,” said Dunn, now CEO of the California Medical Association. “The single best way to break open the real truth is a broad-based attorney-client privilege waiver. I have no confidence in the federal government pursuing these companies to the end of justice. I have more faith in state regulators and private plaintiffs,” he said. Dunn sought subpoenas and contempt orders against Enron and Reliant while delving into the manipulation issue between 2001 and 2004. Enron gave up documents, revealing hours of incriminating tape recordings of market gaming. But Reliant refused for more than 18 months to even produce a privilege log categorizing the documents it was withholding, he said. “In the end we never got a response to our demand for the log and the committee disbanded,” he said. There was little dispute about the facts in the federal criminal case. Reliant and the traders were accused of shutting down some of its six California electric power-generating plants during the week of June 19, 2000, to drive up the price of electricity and cover $3 million in losses from a bad futures purchase by one trader. Reliant’s defense was that while the behavior might appear unseemly, it was not illegal at the time. In 2005, Reliant had come to a nearly identical deal to the one now on the table, only to have it vetoed by then-U.S. Attorney Kevin Ryan. Ryan is one of the eight U.S. attorneys at the center of the firing scandal in the Justice Department. Office turmoil over Ryan’s management style saw prosecutors regularly come and go on the case. In one instance, Ryan ordered a prosecutor to clear out of the office when she advised him she was looking for a job. Rather than seek a more typical transition period to break in a new team, Ryan sent her packing the same day. Ryan has refused to comment on this incident. The U.S. attorney’s office declined comment for this story. The Justice Department balking and the possibility that a new deal would blow up just 10 days before the scheduled trial start on March 12, “led to a round of frantic calling, trying to save the deal before it skidded off the rails,” said Clarence of Clarence & Dyer in San Francisco. Jeffress, the Reliant trial attorney, had other problems as well. He waited back in Washington for jurors to decide the fate of another of his clients, the perjury case against I. Lewis “Scooter” Libby Jr. While juror deliberation dragged on, Jeffress was on the phone for days with Reliant Senior Vice President and General Counsel Michael J. Jines and San Francisco attorney William Goodman, trying to broker the deal with Assistant U.S. Attorney Michael Wang, the fourth lead prosecutor to handle the case. “We made a Herculean effort two years ago on the deferred-prosecution agreements and came close, but it failed,” said Jeffress. With a weeks-long trial looming, Jines had brought in Joe Caldwell, another trial lawyer at Houston-based Baker Botts, in December fearing the Libby trial would prevent Jeffress from getting back in time. “From our point of view it was useful to have someone come in, like a juror, and hit the case cold, and expose some issues we had taken for granted because we had been involved for so long,” he said. The settlement negotiations had been separate, one for the company, another for the traders. But they were intertwined. If the traders’ pact fell apart, it was unclear whether Reliant would reject its deal as well, when faced with the prospect of all of the unflattering evidence resurfacing as public anger over the energy crisis had waned. “We never had to face that choice,” said Jeffress. He said the chances of a settlement revived as the trial date neared. “The primary negotiating of the deal was done two years ago with [former Assistant U.S. Attorney] Jeff Bornstein, said Jeffress. Bornstein left for private practice a short time later with Kirkpatrick & Lockhart Preston Gates Ellis. He declined to discuss the case. Two major rulings by Judge Vaughn Walker went against the government. Walker refused to allow the prosecution to use what was known as a market-monitoring protocol, part of the state’s trading rules the government contended would show Reliant created an “artificial price” for electricity by shutting down the plants. That ruling was appealed to the 9th U.S. Circuit Court of Appeals in 2005 and upheld last year. Then just three weeks before the March 12 trial date, Walker ruled that jurors could not be told Reliant had paid a $13 million fine to federal energy regulators to settle market-manipulation claims over the same incident. The government also faced a wild card. It originally charged Reliant under a 70-year-old commodities-manipulation law that had never been used in a criminal prosecution. On the other side, Reliant faced a jury trial with 12 Californians who had lived through the energy crisis and blackouts in San Francisco. “We had to think there would be 12 victims in the jury box,” said Clarence. “It would be a daunting case to put in front of a jury.” Then Ryan, fired in December, was gone by mid-February and a new interim U.S. attorney, Scott Schools, came out from Washington and took over. “We were able to dust off what happened two years ago,” Jeffress said. On March 2, everyone thought the deal was ready to present to Walker. On March 4, Clarence traded her wetsuit for jeans and sped across town to meet Wang in a Peet’s Coffee & Tea shop a block from the federal courthouse in hopes of saving the deal. They nursed lattes for nearly two hours smoothing out the differences, cutting a deal to protect the four traders.

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