Grundfest supports Olis

The WSJ blog notes that Stanford law professor Joe Grundfest donated his (quite valuable) time to preparing an expert report blasting the government's expert report by Frank Graves supporting Jamie Olis' 24-year sentence for securities fraud.

The WSJ blog summarizes:

Dynegy had announced other bad news when Project Alpha was disclosed. Grundfest says in his declaration that Graves simply ignored the other problems investors had learned about at that time.

There's a lot more. Grundfest devotes almost 50 pages to basically eviscerating the Graves report. Read the whole thing.

This has special interest for me. In March, 2004, a month after I began this blog, I wrote my first post on Jamie Olis (entitled "free Jamie Olis"), making some of the same points Grundfest makes in his report.

Here's an excerpt from that blog post:

Jamie Olis, the former senior director of tax planning for Dynergy, was sentenced last week in a Houston court to 24 1/3 years, as reported widely in the news and noted by Yin Blog. If he's lucky and behaves he will only have to serve 21 years. Then he can introduce himself to his daughter, now 6 months old. Mr. Olis will only be 60 years old or so when and if he gets out.

Olis' sentence is based on the fact that his financial manipulation disguised company debt, supposedly causing $500 million in stock losses. His boss, who is cooperating, has not been sentenced, but is expected to receive less than five years. No doubt the sentence will send a message to Jeff Skilling, who will face the same judge.

I wonder if an expert could help me square the sentence with one for a first offender for, e.g., rape, manslaughter, drugs. To the extent that the sentence appears to be based on the amount of financial harm, there is no way Mr. Olis could be shown directly or indirectly to have contributed to $500 million in market loss. His actions alone surely did not cause in any meaningful sense a market inflation of that magnitude.

Apart from Olis' role in the fraud, it is extraordinarily difficult to establish that specific information had specific effects on the price of a stock traded in an efficient market, given the hurricane of information that causes market price fluctuations. One might guess, but wouldn't we want to be sure before taking somebody's life away?

And even if Olis' actions did cause such an overvaluation, he surely did not cause net harm (that is subtracting traders' gains from their losses) of anything like this magnitude. In that event, the market loss is not comparable to a theft of the same size.

I've since written two articles dealing in part with the flaky damage theories applied in the Olis sentence – Fraud on a Noisy Market, and Dabit, Preemption and Choice of Law. And the Olis case was the beginning of my interest in criminalizing agency costs on this blog, and in my short bloglike discussion in my Perils of Criminalizing Agency Costs.

Grundfest deserves a lot of credit for lending his effort and considerable prestige to the Olis cause. Hopefully Olis will be released, perhaps for time served. Olis' sentence has become an important symbol of the excesses of criminal prosecutions in the wake of Enron.  Freeing Olis would be a start toward correcting these injustices.