A Setback For Prosecutors In The ?Enron Of Kansas? Case

It was called the Enron of Kansas.

David C. Wittig leaves federal court in 2004. This month, an appeals court overturned the 40-count conviction against him and Douglas T. Lake.

In September 2005, David C. Wittig, a former star investment banker, and his lieutenant, Douglas T. Lake, were convicted of looting the company they ran, Westar Energy of Topeka, the largest electric utility in Kansas. Mr. Wittig was sentenced to 18 years in prison, and Mr. Lake, 15 years.

But last Friday, a federal appeals court overturned the convictions of the two men on all 40 counts — most of which cannot be retried. A three-judge panel of the United States Court of Appeals for the 10th Circuit cited a fundamental failure of proof by the prosecutors: None of the evidence supported the core criminal charge — that the two men used corporate planes for their personal use and committed wire fraud by failing to disclose that use in filings with the Securities and Exchange Commission.

Disclosure of this perk is governed by S.E.C. regulations that prosecutors claimed were irrelevant. The case hung by a thin legal thread, the appeals court concluded.

The ruling is the latest in a recent series of setbacks for the government in white-collar cases. The crackdown on corporate misconduct that accelerated after the collapse of Enron has now hit a number of bumps, with judges questioning prosecutors tactics in some cases and overturning convictions in others. In August, a federal appeals court reversed the wire fraud convictions of four former Merrill Lynch executives for their role in a Nigerian barge transaction intended to inflate Enrons earnings at the end of 1999.

In that case, prosecutors charged wire fraud based on the theory that the scheme deprived Enron of honest services by acting against the companys interest. The United States Court of Appeals for the Fifth Circuit overturned the convictions, finding that, at Enron, all were concerned that Enron would suffer absent the scheme. In other words, their personal benefit also bolstered the company. Last month, the same appellate court denied Jeffrey K. Skillings request for bail pending appeal, but noted that its previous ruling in the barge case raised serious frailties with his conviction on some charges.

Peter J. Henning, a professor at Wayne State University Law School and editor of a blog on white-collar crime, said the rulings showed how fragile convictions of corporate wrongdoing could be on appeal.

Nobody denies what happened in any of these cases, he said. The bottom line is, Can the government prove that the defendants had the criminal intent to defraud?

The heartening thing that you take out of the Westar Energy case, is that courts are looking at these cases very carefully and they are scrutinizing the evidence of intent.

Former prosecutors and defense lawyers said no broad conclusions could be drawn from the Westar case; some criticized the tactics of the prosecutors. In this case, the prosecutors, who may have had little experience in sophisticated financial fraud cases, appear to have tried the case in the same generalized and simplistic way they might try a drug case, said Amy E. Millard, a former prosecutor now with Clayman & Rosenberg in New York. Their own lack of knowledge or experience can and does lead to improper convictions.

A spokesman for the United States attorneys office in Topeka declined to comment on the reversal of the convictions. His office has asked for an extension until Feb. 19 to consider whether to seek a review of the decision before the full appellate court. In 1995, Mr. Wittig, then co-chairman of mergers and acquisitions at Salomon Smith Barney, was recruited by Westar to return to his native Kansas, and he hired Mr. Lake, an investment banker at Bear Stearns, as his right-hand man.

The two transformed Westar into a deal-making machine. In 2000, Westars board voted to split the utility into regulated and unregulated businesses, a deal portrayed by prosecutors as central to the looting scheme because Mr. Wittig, the chief executive, would collect up to $65 million, and Mr. Lake, the chief strategy officer, up to $35 million in compensation under a change-in-control provision.

Julie A. Robinson, the federal judge who oversaw the two trials of the executives in Kansas City (the first trial ended in a hung jury), called the deal the crown jewel in the conspiracy. The proposed split, however, was rejected by the Kansas Corporation Commission.

At the trials, evidence of accelerated signing bonuses, improper payment of relocation expenses and purchase of life insurance contracts was presented to portray the men as avatars of corporate greed.

Almost everything in the case was irrelevancy and smoke, said Steven A. Reiss of Weil, Gotshal & Manges in New York, who represented Mr. Wittig on appeal. At both trials, prosecutors called an accountant to testify about the charter value of the defendants personal use of corporate aircraft, amounting to a $1 million benefit each over a period of five years.

This is not an unreasonable method of measuring the value of the trips, the appeals court noted, but it is not the method required by the S.E.C.

The S.E.C. requires disclosure only if the aggregate incremental cost of plane flights exceed either $50,000 or 10 percent of the executives salary and bonus.

At both trials, Judge Robinson denied the defenses request to instruct the jury about what the S.E.C. regulations required.

We begged the judge both times, said Adam S. Hoffinger of Morrison & Foerster, Mr. Wittigs lead trial counsel. The government created its own standard, and asked the jury to apply its common sense, essentially.

The defense called in a corporate governance professor from the University of Missouri-Kansas City to testify as an expert witness about the regulations, but Judge Robinson would not let him take the stand. The sole witness to testify about the regulations was Richard D. Terrill, the general counsel at Westar under Mr. Wittig, who admitted that he had not disclosed his own personal use of corporate aircraft.

The appeals court based its ruling on a 1960 Supreme Court case, Parr v. United States, that established that prosecutors must prove that a legally compelled mailing — in this case an S.E.C. filing — was false to meet the wire-fraud burden of proof.

Seth Waxman, the former solicitor general of the United States and now with the firm WilmerHale, represented Mr. Lake and cited the Parr ruling in his appeal.

Mr. Lake, 56, now lives in New Canaan, Conn. Mr. Wittig, 51, remains in a minimum-security prison in Minnesota on a bank fraud conviction not directly connected to the Westar case.

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