The Fifth Circuit punts on the Skilling case again

skilling 040711The Fifth Circuit Court of Appeals has not exactly distinguished itself in regard to the appeals emanating from Enron criminal matters.

First, there was the appellate court’s affirmation of the U.S. District Court’s ludicrous conviction of Arthur Andersen. That gem was subsequently overturned by a unanimous U.S. Supreme Court.

Then, a Fifth Circuit panel affirmed the District Court’s brutal conviction of former Enron CEO Jeff Skilling. That pearl of judicial wisdom was disassembled by a largely unified the Supreme Court last year.

As if on cue, a Fifth Circuit panel has predictably produced another clunker, this time affirming Skilling’s convictions on conspiracy and securities fraud counts because the erroneous reliance of the prosecution on Skilling’s honest services wire fraud amounted to harmless error.

In short, the Fifth Circuit rationalizes that the prosecution really didn’t rely all that much on all that honest services stuff in convicting Skilling, so his convictions on the other charges should stand.

Yeah, right. The prosecution didn’t rely on the honest services counts all that much? Poppycock. For example, remember the absurd amount of time that the prosecution spent during trial on Skilling’s alleged honest services violations in regard to Photofete?

What is most striking about the Fifth Circuit’s decision is its utter vacuity. For example, the decision contends that there was “overwhelming evidence” that Skilling committed securities fraud by engaging in fraudulent accounting in regard to several Enron units. But the decision fails to cite any of the supposedly “overwhelming evidence” and doesn’t even address the rather important point that the prosecution did not accuse Skilling of falsifying any of Enron’s accounting. In fact, the prosecution didn’t even put on any expert evidence that Enron’s accounting for the allegedly misleading disclosures was wrong, much less false. This tortured logic took this Fifth Circuit panel six months to generate?

Oh well, this matter is far from over. Not only is the case going back to the District Court for re-sentencing, but now Skilling finally gets his opportunity for the first time to seek a new trial on the egregious prosecutorial misconduct (see also here) that was uncovered after the conclusion of the first trial. And you can bet that the Fifth Circuit panel’s most recent rationalization will eventually be the subject of another appeal to the Supreme Court.

Meanwhile, a man who was a primary component in creating enormous wealth for investors and thousands of jobs for communities continues to sit in a Colorado prison.

Sure seems to me as if we could use more of those in the business community these days.

Update: Ellen Podgor has her typically cogent analysis of the Fifth Circuit decision here.
Fifth Circuit Skilling Decision 06-20885-CR1.wpd

What’s the difference?

Lottery Ticket and dicesThe NY Times Joe Nocera notes that Countrywide Financial’s Angelo Mozilo is the latest winner of the criminalization of business lottery.

Meanwhile, Charles Gasparino explains why those who made faulty business decisions that led to a major U.S. banking crisis really shouldn’t be prosecuted for crimes.

Yet, the reality is that there is no discernible difference between what Mozilo did at Countrywide or what Dick Fuld did at Lehman Brothers with what Jeff Skilling did at Enron.

Yet, Skilling continues to serve a 24-year prison sentence and endure the immense collateral damage of his fate.

On the other hand, Mozilo and Fuld deal with civil litigation and move on with life.

Neither Mozilo nor Fuld should be prosecuted for trying to save their companies. Any responsibility that they have for the demise of their companies can be allocated in the civil justice system among all the responsible parties.

But that Jeff Skilling remains in prison – particularly given the despicable way in which he was put there – remains a serious blot on the American criminal justice system.

A truly civil society would find a better way.

A self-righteous delusion

skilling_201.jpgSo, the Wall Street Journal is reporting that a court aide to the judge in the trial of former OAO Yukos chairman and CEO Mikhail Khodorkovsky has admitted that the judge was forced to render a verdict in the case that was different from the one that he had drafted. As the WSJ article notes righteously:

“Everyone in the judicial community understands perfectly that this is a rigged case, a fixed trial,” said [the aide],adding that she had decided to go public with her allegations because she had become disillusioned with the judicial system.
[The aide’s] claims support the widespread view that the latest trial of Mr. Khodorkovsky, once Russia’s richest man and the former owner of oil giant OAO Yukos, was politically motivated. Kremlin officials have repeatedly denied those allegations. But courts in several countries in Europe have ruled in related cases that the prosecution of Mr. Khodorkovsky and the court-ordered breakup of Yukos appeared driven by the Kremlin’s desire to scotch Mr. Khodorkovsky’s political ambitions and nationalize his company.

Bad stuff, indeed.
However, is what happened to Khodorkovsky really all that much different than what happened to former Enron CEO Jeff Skilling right here in the good ol’ USA? At least Khodorkovsky is scheduled to be released from prison in 2017. Skilling is currently scheduled to be released around 2030!
And let’s just say that the WSJ was a healthy tad less righteous in its reporting on the misconduct that took place in Skilling’s trial than it is with regard to the hijinks that went on in Khodorkovsky’s.
Frankly, I don’t know what is sadder. That the Skilling case makes the U.S. justice system look much like the kangaroo court that convicted Khodorkovsky in Russia, or that the U.S.’s leading business newspaper still doesn’t recognize the similarity.

The Myth of the Enron Whistleblower

Sherron-WatkinsJust about the time that you think that Sherron Watkins has faded back into obscurity, she finds yet another way to promote herself:

Sherron Watkins, the former vice president at Enron who tried to blow the whistle on the accounting violations at the scandal-plagued Houston energy-trading giant, told an audience at a seminar Friday on the new whistleblower provisions in the Dodd-Frank Act that she and other whistleblower employees would probably take their concerns to WikiLeaks rather than the Securities and Exchange Commission now.”People now will go to WikiLeaks to protect themselves,” she said during a briefing at the New York State Society of CPAs’ Foundation for Accounting Education offices in Manhattan. “WikiLeaks is a huge, huge sledgehammer that many employees will go to. People like myself will just go to WikiLeaks.” Watkins, a CPA, said that since she came forward, she has been unable to get a job in corporate America despite her years of experience as an accountant and portfolio manager. “The label whistleblower is stuck on my head,” she said. She now makes her living by giving speeches, and said she has heard from other whistleblowers about their inability to get jobs in their old occupations.

Well, isn’t that interesting? Courageous whistleblowers such as Watkins now have in WikiLeaks another valuable conduit for publicizing alleged corporate wrongdoing.

There is only one problem with that narrative, at least as it applies to Watkins.

She was never a whistleblower.

I wonder whether Watkins’ difficulty in finding a job “in corporate America” is at least partly attributable to the fact that most prospective employers are not inclined to hire someone for a management position who disingenuously presented herself to Congress, the mainstream media and the public as a whistleblower when she really wasn’t?

Agents Prosecuting Agents

ribsteinInasmuch as I’ve been in an extremely busy period in my practice recently, I haven’t had time to blog much. But I came across something yesterday that I wanted to pass along.

Larry Ribstein — the University of Illinois law professor who has done more than anyone in the blogosphere to decry the enormous financial and human cost of the federal government’s criminalization of business lottery over the past decade – has posted on SSRN a new paper that he has been working on for some time – Agents Prosecuting Agents:

Significant questions have been raised concerning the efficiency of criminalizing agency costs and the problems of excessive prosecution of crimes committed by corporate agents. This paper provides a new perspective on these questions by analyzing them from the perspective of agency cost theory. It shows that there are close analogies between the agency costs associated with prosecutors in corporate crime cases and those of the agents being prosecuted. The important difference between the two contexts is that prosecutors are not subject to many of the standard mechanisms for dealing with corporate agency costs. An implication of this analysis is that society must decide if prosecuting corporate agents is worth incurring the agency costs of prosecutors. [.  .  .]

This paper contributes to this debate by approaching the subject from the perspective of agency theory and analogizing abuses of power by prosecutors to those of corporate agents. It shows that prosecutors’ conduct involves many of the same agency cost problems as the corporate conduct they are prosecuting. At the same time, the sort of market and institutional mechanisms that can constrain corporate agents may not be effective for prosecutorial agents. Moreover, the particular challenges of corporate criminal prosecutions exacerbate prosecutorial agency costs in this context.

This agency analysis illuminates whether and to what extent corporate agency costs should be criminalized. It shows that if the criminal justice system is to be used to punish corporate agents for harm they cause in the course of their employment, then society must be prepared to tolerate increased costs associated with delegating discretion to its own agents, those who prosecute these crimes. Prosecutorial agency costs, in turn, must be taken into account in designing and weighing the costs and benefits of criminal liability of corporate agents. [.  .  .]

The agency costs associated with prosecution of corporate crime are at least as consequential as those related to the crimes being prosecuted. This matters for at least two reasons. First, combining analyses of the two types of agency costs sheds light on how to appropriately constrain excessive or misguided corporate prosecutions. Second, prosecutorial agency costs bear on the extent to which the conduct of corporate agents should be criminalized at all given the weak constraints on prosecutorial conduct in enforcing the criminal law. The criminal laws may provide significant deterrence of corporate agents’ misconduct that other mechanisms cannot fully supply. However, we should not assume that it is socially valuable to use the criminal laws to ensure totally loyal corporate agents unless we are ready to demand similar perfection from our prosecutors.

We in Houston know all about the implications of the problem that Professor Ribstein addresses.

Old narratives die hard

PD*27270710A Russian criminal court sentenced former OAO Yukos chairman and CEO Mikhail Khodorkovsky to another seven years in prison last week. As if on cue, the mainstream U.S. media reported on the event as a reflection of the capricious and arbitrary nature of the Russian legal system.

We really are better than those corrupt Russians, aren’t we?

Meanwhile, the mainstream media continues to neglect — and often promotessimilar mistreatment and persecution of business executives in the U.S. I mean, really. Would R. Allen Stanford fare much worse in a Russian prison than he has in U.S. jails?

And to that the unnecessary and shameful criminalization of large segments of American society in other respects and you start wondering whether those writing for the mainstream media have any idea of what is going on in their own backyards?

Yeah, Russian criminal justice system is corrupt. The U.S. system is far superior.

Old narratives die hard.

Will justice be done in Jeff Skilling’s case?

skilling Oral argument before a Fifth Circuit Court of Appeals panel in Houston occurs today on the U.S. Supreme Court’s reversal and remand of former Enron CEO Jeff Skilling’s appeal of his criminal conviction.

Although the Supreme Court did not overturn all counts of Skilling’s conviction, it remanded the remaining counts to the Fifth Circuit to determine whether any of them should stand given the Supreme Court’s reversal of the other counts based on the invalid “honest services” wire fraud charges.

In essence, Skilling is arguing on remand that the government relied on the amorphous nature of that invalid theory of criminality in obtaining a conviction against him on numerous different charges. Having relied on that invalid theory of criminality, Skilling contends that the government cannot now prove that the jury didn’t rely on it in convicting Skilling on the other charges, too. Although results rarely occur as they should in misdirected criminal prosecutions, Skilling really should win his release and a re-trial.

Meanwhile, rather than address the merits of Skilling’s important case, the Wall Street Journal – which already has a dubious record of coverage in Enron-related criminal prosecutions – serves up the following characterization of the Enron-related prosecutions in this recent article on another miscarriage of justice related to the demise of Enron:

The U.S. government’s Enron Task Force criminally charged about 30 individuals, including Mr. Brown, but said there were more than 100 other unindicted co-conspirators. The task force got guilty pleas from more than a dozen people and won a 2006 fraud conviction against former Enron President Jeffrey Skilling.

Some of the group’s courtroom victories have been upended on appeal. Mr. Skilling’s conviction and 24-year sentence are under appeals-court review following a Supreme Court decision invalidating part of his case.

Some of the [Enron Task Force’s] courtroom victories have been upended on appeal“? In reality, not any of the criminal convictions that the Enron Task Force obtained after a trial have been upheld on appeal. Not one.

Seems like something that the nation’s leading business newspaper would get right, don’t you think?

Will Skilling be released?

jeff-skilling-.jpgOn the heels of his brief on the merits in support of his motion to be released from prison pending further disposition of his case by the Fifth Circuit Court of Appeals and the U.S. District Court, Jeff Skilling filed his reply brief below (download it to review the bookmarked version) to the government’s merits brief opposing his proposed release.

Skilling’s brief hammers home why he should be released:

As the standard is articulated in [Neder v. U.S., 527 U.S. 1 (1999)], the case on which the government relies, a court cannot find the presence of a factually supported invalid theory to be harmless beyond a reasonable doubt where the defendant contested the [valid theory] and raised sufficient evidence to support a contrary finding. 527 U.S. at 19. In that situation, it cannot be presumed that rational jurors necessarily would have accepted the valid theory, and so it remains impossible to tell which theory the jury selected.

As shown below, the government cannot prove that the honest services error was harmless because, for every count of conviction, the record, the instructions, evidence, and argument allowed a rational juror to reject the valid theory asserted, while relying on the invalid honest-services theory to return a conviction. Because it is thus impossible to tell whether the jurors selected the valid or invalid path to conviction for any count, every count must be reversed.

Stated simply, the government relied on the amorphous nature of an invalid theory of criminality in obtaining a conviction against Skilling on numerous different charges. Having relied on that blather, the government cannot now prove that the jury didn’t rely on it in convicting Skilling on all charges.

Although results rarely occur as they should in misdirected criminal prosecutions, Skilling really should win his release and a re-trial. Stay tuned.
Jeff Skilling’s Reply Brief on his Motion for Bail

Where are all the villains?

VaderCould it be that folks are finally realizing that old-fashioned greediness really should not be a crime?

Of course, the rationalization for the lack of villains now as compared to earlier crises has never been particularly compelling.

Business prosecutions over merely questionable business judgment obscure the true nature of risk and fuel the myth that investment loss results primarily from criminal misconduct. Taking business risk is what leads to valuable innovation and wealth creation. Throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison does nothing to educate investors about the true nature of risk and the importance of diversification.

Ignorance about business risk has led in part to the criminalization of business lottery. Such a lottery breeds cynicism and disrespect for the rule of law. Isn’t it about time that dubious policy be put to permanent rest?

Jeff Skilling requests his release from prison

skillingDuring my unexpected absence from the blogosphere last week, the Seventh Circuit Court of Appeals released Conrad Black from prison pending his re-trial on various business fraud charges.

That got me to thinking about what was going on in Jeff Skilling’s case on the same issue, so I checked in at the Fifth Circuit and found that Skilling has also requested his release from prison. That motion — as well as Skilling’s memorandum of law on why all remaining counts against him should be reversed and the entire case remanded for retrial — are below.

These two documents arguably provide the best description yet of the unjust nature of the criminal case against Skilling. In short, the government knew that it had a flimsy case against Skilling on conventional securities fraud (he simply believed in and touted his company like any other CEO) and wire fraud charges (he didn’t steal a dime from Enron).

So, the government relied on the defective honest services wire-fraud theory to convict Skilling of crimes based on amorphous, non-criminal acts such as not acting in the best interests of the company or promoting an unhealthy culture at Enron. Having relied heavily on the now-discredited honest services wire-fraud theory in obtaining convictions against Skilling on the more conventional charges, the government simply cannot prove beyond a reasonable doubt (it’s burden on remand under such circumstances) that the jury did not rely on the acts relating to the honest services wire-fraud charges in convicting Skilling on the other charges.

It looks to me as if this case should be going back to the District Court for re-trial on all charges. Skilling and the government have agreed to an expedited briefing schedule on the issues and Skilling has requested that the Fifth Circuit review the matter on an expedited basis. Thus, look for a decision sometime next month.

Jeff Skilling’s Motion to the Fifth Circuit Court of Appeals for Release Pending Retrial

Jeff Skilling Opening Merits Brief on Remand