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ENRON-RELATED EXTRADITION By SALLY RAMAGE A
country can request that a UK citizen be extradited to that country to stand
trial for fraud and other criminal matters as long as the alleged offence is
a crime in both countries and carries a prison sentence of more than one
year. It
is now well known that the US-UK Extradition Treaty which was drafted to modernise and
streamline the 1972 Extradition Treaty has still to be ratified by the US. This
2003 Treaty , if ratified as it stands will cause the United States to
derogate its obligations under Article 9 of the International Convention on
Civil and Political Rights (ICCPR) and set aside the UN Refugees Protocol, the UK having already done so
since 1988 , in line with Article 4 ICCPR which allows a state to derogate
certain articles. Since
serious fraud is not synonymous with either terrorism or asylum, it follows
that these derogations do NOT apply. Serious fraud is an extraditable offence
under the 2003 US-UK Extradition Treaty because it is punishable by
imprisonment or other form of detention for more than one year in both
countries. In the UK, the offence of conspiracy to defraud is punishable by
seven years imprisonment as a maximum sentence with no minimum stated
sentence. A survey of the UK’s Serious Fraud Office’s trials over 5 years
showed that the SFO used the charge of "conspiracy to defraud", a
common law offence in 60% of its cases with 46% of defendants penalised with
1 or 2 year prison sentences. On
the other hand, the US treats conspiracy to defraud prescriptively U.S.C.S
1349 and S 1350. Section 902 of the Sarbanes-Oxley Act, codified at 18 U.S.C. S 1349,
provides a new offence for attempts and conspiracies to commit fraud,
including securities fraud. The Sarbanes-Oxley Act 2002 specifically contains an attempt to commit fraud which the
old laws under Title 18, United States Code, did not contain, although under pre-existing law even
an unsuccessful attempt to commit wire fraud was a crime. This offence
carries a 20 year prison sentence and a fine of $5 million. We can see the
huge disparity in punishment for the same crime. But
this new maximum penalty has been increased in the US from 5 year to 20 years
because of the Enron fraud and is part of the statutory increases to the
fines and terms of imprisonment for a variety of white-collar offences. This
20 year maximum prison sentence moreover, can be increased to 30years on
sentence plus one million dollar fine if the conspiracy affects a financial
institution1 as the Nat. West Bank is. An individual defrauded, the maximum
sentence could be as much as 25 years plus a maximum fine. Furthermore, in
the US criminal sentences are largely governed by the Sentencing Guidelines
and prosecutors can simply include multiple counts in the indictment if the
statutory maximum penalty falls below the potential sentencing guideline
range. Moreover, as a result of the Sentencing Commission’s amendments in
2001, (before the US-UK Treaty), the Guidelines’ range for fraud offences
involving large losses were already severe. In addition to these statutory increases
in penalties, Sarbanes-Oxley Sections 805, 905 and 1104 directed the U.S.
Sentencing Commission to review and amend the Sentencing Guidelines
applicable to crimes involving securities, obstruction of justice offences,
accounting fraud, and other related offences. In doing so, the Commission is
instructed to ensure that the Guidelines reflect "the serious nature of
the offences", the growing incidence of serious fraud offences, the
"need to modify the sentencing guidelines and policy statements to deter,
prevent and punish such offences" and the need for "aggressive and
appropriate law enforcement action to prevent such offences". 2 The
case of United States v Muldrew, Giles Robert Hugh Darby and
David John Bermington ,
conspiracy to defraud $7.3 million in transactions involving Enron Corp. has
come to public notice because the three and fighting extradition to the US.
The prosecution allege that, through a series of financial transactions, the
three former bankers secretly invested in an Enron Special Purpose Entity
(SPE), Southampton LP, and were able to siphon off $7.3 million that should
have gone to their bank. The
SPE is of particular importance to this massive fraud of creative accounting.
To look profitable Enron had to minimize losses and volatility, accelerate
profits and keep as much debt off its Balance Sheet in order to keep a good
credit rating. So SPE’s were used to hedge certain investments. As an
example, Enron would transfer its own stock to an SPE in exchange for a note
or cash3. It directly and indirectly guaranteed the value of the SPE. The SPE
would hedge the value of a particular investment on Enron’s balance Sheet,
using the transferred Enron stock as the principle source of payment4.
Because of its historically rising stock price, Enron judged the risk that it
would have to pay on its guarantees as remote. So when Enron’s stock price
fell unexpectedly, the SPE’s value also fell, triggering the Enron
guarantees, which further reduced stock price, which triggered additional
Enron guarantees5.When Enron’s investment and stock price both fell, the SPE
would lack sufficient assets to perform its hedge. This caused the SPE’s to
breach the US’ 3% independent equity requirement for non-consolidation, and
so the SPE’s debt became Enron’s debt on its Balance Sheet. Mr Fastow usually
was the SPE principal and when the SPE’s thrived he received massive
compensation6, mostly without Board approval. This was an ingenious fraud
only because the value of Enron’s stock became embedded in the value of the
SPE; when stock prices rose, SPE’s value rose but when the unexpected stock
price collapse came; the guarantees were called in and could not be met. Such
abuse of SPE’s raised fundamental questions about the legitimacy of
structured finance transactions, of which securitization transactions
constitute the bulk. In a typical securitization transaction, a company
transfers rights to payment from income-producing financial assets, such as
accounts receivable, loans or lease rentals, to an SPE. The SPE in turn
issues securities to capital market investors and uses the proceeds of the
issuance to pay for the financial assets. The investors are repaid from
collections of the financial assets. They buy securities based on their
assessments of the value of the financial assets.7 In
general, the global hedge fund industry is intensely secretive.8A recent
survey of the industry revealed that the sector is rapidly expanding. It is
estimated that there possibly may be 12000 hedge funds investing more than $7
trillion in the world’s financial markets by 2008. Research has revealed that
up to 1999, one could receive 30% returns, very lucrative indeed. Then most
hedge funds tried to emulate the best and today, hedge funds’ returns arte
less than 2%.in this $1000 billion industry. .The Chairman of the US Federal
Reserve describes hedge funds as the shock absorbers of the financial
markets.9 The corporate finance world is very complex and securitization is
not normally a way for a company to obtain lower-cost financing through
disintermediation. But securitization does avoid the mark-up charged by a
middleman of funds and it enables a company to raise funds cheaply based on
an allocation of risks that are assessed by parties having the most
expertise. The difference between normal securitization and Enron’s
manipulation of SPEs is that Enron had high risk that stock prices could fall
and that its asset values could fall So
the structured transactions have dubious economic value as in most Securitization
deals, the receivables are sold to SPEs with minimal recourse, so the SPE and
its investor take the economic risks of collection and once the deal is
closed nothing can happen to cause the risk allocation to be subsequently
reversed. The
evidence requirements of Article 8 of the Treaty have been fulfilled because
the allegations were made by guilty parties to the Enron fraud and the
alleged transactions did take place. The dual criminality of the offence is
positive as it is punishable in both countries by at least 1 year imprisonment.
It even qualifies for the requirements of the European Arrest Warrant as it
provides a "description of the circumstances in which the offence was
committed, including the time, place and degree of participation in the
offence by the requested person". In any case, the European Arrest
Warrant has
been in force since January 2004. The UK government cannot refuse extradition
because the death penalty does not apply to wire fraud. The UK cannot now
derogate from the new extradition obligation because the event is not
political, just criminal. The time that the charge has already stood is now 2
½ years or 30 months (June 2002 to January 2005). The 3 former bankers can
still be re-extradited to a third country, say in Europe. Also Switzerland
has a Mutual
Assistance Treaty
with the US and any hidden monies can be found. In
theory, the UK’s Proceeds of Crimes Act can be used to seize the disputed
profits gained by the three British Bankers charged with US wire fraud
because the profits relate directly to the offence charged. Section 88
provides that such monies be forfeited and dealt with in such a manner as the
court deems fit. When the UK-US Extradition Treaty becomes law, that is, when
the 1989 Extradition Act or when it implements the EU Framework Decision on a
European Arrest Warrant. The
2003 Treaty however complies with the UK’s Statute of limitations because
limitations do not apply to criminal offences. The Extradition Treaty 2003
does not change the evidentiary requirements for extradition from the United
Kingdom to the US but the requirements are lowered from a "prima
facie" standard to a "probable cause" standard. Therefore
there is nothing to stop the provisional arrest of the three men for
extradition. This
is indeed a strange case as the three were formally charged by the U.S.
Department of Justice with wire fraud in June 2002. The UK-US Extradition
Treaty was ratified by the UK government in May 2003, signed by the U.S
Attorney General on 31st March 2003, and implements the EU-US Treaty on extradition
signed in Washington on 25th June 2003 and in force in January 2004. The
United Kingdom already had an arrangement for mutual assistance with United
States in criminal matters. This was on entirely genera criminal matters and
applied to assistance in respect of proceedings related to criminal matters,
including any measure or step taken in connection with an investigation or
the prosecution of criminal offences, including the freezing, seizure or
forfeiture of the proceeds and instrumentalities of crime, and the imposition
of fines related to a criminal prosecution10. This Treaty permitted oral
requests later confirmed in writing.11 The
three defendants appealed against the extradition. This appeal was not heard until
28 September 2004 (27 months after being charged). On 15th October, the
English court recommended that the three be sent to Texas, US, for trial.
Although the three argue for a UK trial, it is not a ‘forum conviens’ for
jurisdiction because all of the discoveries, the principle place of business,
the other defendants, are in the US. Enron is a US company under US law. To
date many have pleaded guilty and the accountants Anderson gave $60 million
as restitution, Citigroup bank gave $300 million and the Canadian Imperial
Bank $80 million, totalling $440 million; they pleaded guilty and paid up and
this surely must indicate the basis on which the three bankers should be
extradited for Fraud. Footnotes 1. There
are new guidelines for such serious fraud and now a Chief Finance Officer of
a Fortune 500 company, say, could receive a prison sentence of 30 years to
life, with no possibility of parole, even if this was a first offence. 2. See
Sarbanes-Oxley Act 2002, ss 905 and 1104. 3. Powers
Report, page 13... 4. This
hedging was used in virtually all Enron’s SPE transactions. 5. Powers
Report pages 41-2. 6. But
even if he had board approval, performance-based compensation tied to a list
of goals such as return on equity, cost of capital and so on, make the goals
vulnerable to manipulation. Today the SEC has new rules on asset backed
securities 7. Schwarcz.
S. L, (1994), “The alchemy of asset securitization”, Stanford Journal of
Business and Finance. 8. Irving.R,
(2004), “Hedge fund aspirations may have to be trimmed”, Times Newspaper, 8th
November, 2004. 9. Cole.R,
(2004), “Transparency is needed for hedge funds”, Times Newspaper, 10th
November 2004. 10. Article 19(3) (e) UK-US Full
Mutual Assistance Treaty. 11. Article 4(1) UK-US Full Mutual
Assistance Treaty. ENDS |
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