Securities Fraud—Acquittal

The former vice president of Duke Energy has been acquitted on all charges of falsifying trading data to inflate profits.^[1] Todd Reid had been accused of illegally manipulating Duke Energy’s gas and power trades from March 2001 to May 2002 in order to skew reported profits and to increase bonuses.^[2]

According to the government, profitable trades were recorded in a book that used “mark-to-market accounting” while unprofitable trades were recorded in another book that used “accrual accounting.”^[3] Using two different accounting methods allegedly allowed the company to recognize profits immediately while deferring losses; 400 such trades were allegedly done, which resulted in roughly $50 million worth of profits that were then used to calculate bonuses.^[4]

Mr. Reid’s co-defendant, Timothy Kramer, has been acquitted on seven of the nineteen charges he faces, and jurors will resume deliberations on Thursday.^[5]

Mr. Reid was charged with 19 counts of conspiracy, wire fraud, mail fraud, money laundering, bypassing accounting controls, and falsifying public company books.

Conspiracy
There are two conspiracy charges that Mr. Reid faced. The first was the general conspiracy statute, 18 U.S.C. § 371, and the second was the RICO conspiracy statute, 18 U.S.C. § 1962.

Under 18 U.S.C. § 371, it is a crime for a person to conspire with one other person to defraud the United States and then do an overt act in furtherance of the conspiracy. The punishment for violating section 371 is a fine, imprisonment for up to five years, or both.

Under 18 U.S.C. § 1962, it is a crime for any person to be engaged in a conspiracy^[6] that includes a person employed by an enterprise engaged in interstate or foreign commerce who conducts or participates in conduct of an enterprise affairs through a pattern of racketeering activity.^[7] The racketeering activity in question is wire fraud, mail fraud, and money laundering.^[8] The punishment for a violation of section 1962 is a fine, imprisonment for up to 20 years, or both.^[9]

Wire Fraud and Mail Fraud
Wire fraud and mail fraud are substantially similar offenses. Both make it a crime for a person to devise a scheme or artifice to defraud, but wire fraud, covered by 18 U.S.C. § 1343, prohibits the use of the nation’s telecommunications technology to carry out the fraud, while mail fraud, covered by 18 U.S.C. § 1341, prohibits the use of the nation’s mail system to carry out the fraud. Both offenses are punished by a fine, imprisonment for up to 20 years, or both.

Money Laundering
The money laundering statute used in this case is 18 U.S.C. § 1957(a), which makes it a crime for a person to knowingly engage or attempt to engage in a monetary transaction in criminally derived property worth more than $10,000 which is derived from specified unlawful activity. The specified unlawful activity in this case is wire fraud or mail fraud.^[10] The punishment for a violation of section 1957 is a fine, imprisonment for up to 10 years, or both.

Circumvention of Accounting Controls and Falsifying Public Company Books
Circumvention of accounting controls and falsification of public company books are covered by 15 U.S.C. § 78m(b)(5) which states that no person “shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in [section 78m(b)(2)].” 15 U.S.C. § 78m(b)(2) states that every public company must make and keep accounting records which, “in reasonable detail,” accurately and fairly reflect the transactions and dispositions of the company’s assets. The company must furthermore devise a system of internal accounting controls which provide reasonable assurances that transactions are authorized and are recorded as necessary to permit the preparation of financial statements. The punishment for a willful violation of this section is a fine of not more than $5 million, imprisonment for up to 20 years, or both; if the violator is not a “natural person,” a fine not to exceed $25 million may be imposed.^[11]

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[1] Tom Fowler, Former Duke Energy Executive Acquitted, Houston Chronicle, Dec. 7, 2005.
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] 18 U.S.C. § 1962(d).
[7] Id. § 1962(c).
[8] Id. § 1961(1)(B).
[9] Id. § 1963(a).
[10] Id. § 1956(c)(7)(A) (incorporating offenses found in 18 U.S.C. § 1961(1)).
[11] 15 U.S.C. § 78ff.