A federal appeals court on Tuesday overturned a 24-year sentence handed to former Dynegy Inc. executive Jamie Olis, ruling that a lower court relied on an exaggerated figure for investor losses directly caused by the fraud that Olis oversaw.
Legal experts said the ruling could push judges to be more rigorous in calculating financial losses in future corporate-fraud cases, although it wouldn't necessarily result in a rush to overturn other sentences handed out during the recent crackdown on white-collar crime.
In a 20-page decision written by Judge Edith H. Jones, the 5th Circuit Court of Appeals in New Orleans found no fault with Olis' conviction on charges of securities fraud, conspiracy, mail fraud and wire fraud, but ordered the judge who presided over his trial to resentence him.
Olis, 39, former director of tax planning for Houston-based Dynegy, created an off-the-books venture dubbed Project Alpha, which the jury found was a fraudulent scheme to make $300 million in loan proceeds appear to be cash from energy-trading operations. When the accounting fraud came to light in April 2002 and the Securities and Exchange Commission forced Dynegy to restate its earnings downward, its stock plunged 30%, lopping $3.4 billion off its market value.
Earlier, Dynegy had tried unsuccessfully to acquire larger hometown rival Enron Inc. as Enron slid toward bankruptcy amid its own financial scandal.
In sentencing Olis in March 2004, U.S. District Judge Simeon Lake acknowledged the harshness of the 292-month prison term he was imposing, but said he was bound by sentencing guidelines.
However, last March, in a drug case known as U.S. vs. Booker, the Supreme Court ruled that sentencing guidelines were not mandatory and that judges could use their discretion in meting out penalties.
"The Olis case was in some respects the high-water mark of rigid sentences" under the pre-Booker sentencing guidelines, said Seth C. Farber, a white-collar defense lawyer with Dewey Ballantine in New York. Since Booker, he said, judges have continued to consult the guidelines but have been more apt to depart from them.The lawyers involved in the case offered differing views of Tuesday's ruling.
"The court accepted our arguments about [the amount that investors lost] and confirmed that a sentence must be based on all the circumstances of the case," David Gerger, Olis' appeals lawyer, said in a statement.
The U.S. Attorney's office in Houston, which prosecuted the case, said in a statement: "We are pleased that the 5th Circuit affirmed, in all respects, the multiple fraud convictions of Mr. Olis. The case has been remanded only for resentencing. We are carefully reviewing all of our options, and we will advocate strongly for a sentence that fairly reflects his fraudulent conduct."
Although Olis never became a household name, his sentence was a signal that prosecutors of corporate wrongdoing were pushing for -- and obtaining -- prison time once associated only with violent criminals. In the post-Enron crackdown, the only tougher sentence than Olis' was the 25 years given to former WorldCom Inc. Chairman Bernard J. Ebbers, who was convicted of accounting fraud in July.
In deciding Olis' fate, the crucial question facing the trial judge was: How much did Project Alpha cost Dynegy shareholders?
Under sentencing guidelines at the time, a loss in excess of $100 million could potentially add years to the sentence.
Lake relied heavily on testimony that the University of California, a major Dynegy investor, had incurred losses of $105 million on its stock holdings.
The appeals court found that to be a mistake.
"As Olis pointed out at sentencing," Jones wrote, "two-thirds of the drop in Dynegy's price occurred either before the revelation of Project Alpha's problems or more than a week after the announcement of the restatement of earnings caused by Project Alpha."
Thus, Jones said, "a substantial portion of the entire loss on [UC's] investment in Dynegy, over $100 million, could not have been caused by Olis' work on Project Alpha."
Moreover, she said, Lake disregarded a defense analysis by a Rice University accounting professor who argued that Dynegy's shares had fallen in tandem with those of other energy-trading firms as the industry was roiled by the Enron bankruptcy, the California energy crisis, downgrades by bond-rating firms and the collapse of the dot-com stock bubble.
"These factors and others cited in the report suggested that attributing to Olis the entire stock-market decline suffered by one large or multiple small shareholders of Dynegy would greatly overstate his personal criminal culpability," Jones wrote.
Former federal prosecutor Kirby Behre, a sentencing-law expert with Paul Hastings Janofsky & Walker in Washington, said the ruling would prompt judges to be more deliberate and rigorous in loss assessments.
"Courts had gotten into a bad habit of accepting back-of-the envelope calculations from prosecutors in some of these cases," Behre said.