Category Archives: Legal – Criminalizing Business

Those darn unintended consequences

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Dollar BillsYesterday’s post touches on the enormous direct costs attributable to the federal government’s questionable policy of regulating business through criminalization of bad or simply incorrect business judgments.

However, as enormous as those direct costs are, the indirect costs of criminalizing bad business judgments dwarfs the direct ones.

Whether management makes such judgments correctly is a fundamental risk of business ownership. Criminalizing that risk — through the prism of hindsight bias — will simply make executives in the future less likely to take the risks necessary to build wealth and create jobs while not deterring in the slightest the Bernie Madoffs of the world from embezzling money.

Business owners deserve protection from theft, but not from risk taking, and it’s not clear that government prosecutors know — or even care about — the difference.

Those indirect costs came to mind again as I read this Wall Street Journal article (H/T Russ Roberts) on the unintended consequences arising from the government?s new regulations concerning rating agencies:

Ford Motor Co.’s financing arm pulled plans to issue new debt, the first casualty of a bond market thrown into turmoil by the financial overhaul signed into law Wednesday.

Market participants said the auto maker pulled a recent deal, backed by packages of auto loans, because it was unable to use credit ratings in its offering documents, a legal requirement for such sales. The company declined to comment.

The nation’s dominant ratings firms have in recent days refused to allow their ratings to be used in bond registration statements. The firms, including Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, fear they will be exposed to new liability created by the Dodd-Frank law.

The law says that the ratings firms can be held legally liable for the quality of their ratings. In response, the firms yanked their consent to use the ratings, hoping for a reprieve from the Securities and Exchange Commission or Congress. The trouble is that asset-backed bonds are required by law to include ratings in official documents.

The result has been a shutdown of the market for asset-backed securities, a $1.4 trillion market that only recently clawed its way back to health after being nearly shuttered by the financial crisis.

Professor Roberts sums it up in his post by quoting Hayek:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Ungagged.net: The Other Side of the Enron Story

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A common topic on this blog has been the power of anti-business myths within American society.

Take Enron, for example. The anti-business myth contended that that Enron — at one time one of the largest publicly-owned companies in the U.S. — was really just an elaborate financial house of cards that a massive conspiracy hid from innocent and unsuspecting investors and employees.

The Enron Myth is so widely accepted that otherwise intelligent people reject any notion of ambiguity or fair-minded analysis in addressing facts and issues that call the morality play into question. The primary dynamics by which the myth is perpetuated are scapegoating and resentment, which are common themes of almost every mainstream media report on Enron.

The mainstream media — always quick to embrace a simple morality play with innocent victims and dastardly villains — was not about to complicate the story by pointing out that the investors in Enron could have hedged their risk of loss by buying insurance quite similar to that which Enron developed in creating their wealth in the first place.

Instead of attempting to examine and tell the nuanced story about what really happened at Enron, much of the mainstream media simply became a part of the mob that ultimately contributed to the death of Ken Lay and hailed the barbaric 24 year sentence of Jeff Skilling. Ambitious prosecutors, given wide latitude to obtain convictions of key Enron executives regardless of the evidence, gladly took advantage of the firestorm of anti-Enron public opinion to lead the mob.

As noted in many subsequent posts here over the years, it is far more likely that the truth about Enron is that no massive conspiracy existed, that Skilling and Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation.

Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst choppy post-bubble, post-9/11 market conditions when the markets were spooked by revelations of the embezzlement of millions of dollars by Enron CFO Andy Fastow and a relative few of his minions.

The carnage of the Enron Myth is now piled high — the destruction of Arthur Andersen, the death of Lay, the outrageous prosecutorial misconduct involved in the case against Lay and Skilling, the senseless prosecution and imprisonment of the four Merrill Lynch executives in the Nigerian Barge case, Richard Causey, Chris Calger, Kevin Howard, Joe Hirko and the other Enron Broadband defendants — the list goes on and on.

In the wake of such destruction of careers and lives, the public is even less willing to confront the vacuity of the myth and the destructive dynamics by which it is perpetrated. indeed, even though what happened to Enron has now happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses over the past two years, much of the public and the mainstream media still cling to the Enron Myth.

Attempting to challenge this enduring myth is a wonderful new resource — Ungagged.net: The Other Side of the Enron Story.

Created, funded and filmed by Beth Stier — who was the subject of prosecutorial misconduct as a non-party witness in the trial of the Enron Broadband case — Ungagged.net is a “webumentary.” That is, a website comprised of short modules of documentary-style content, organized into two main categories: “What It Was Like to Be on The Other Side of the Enron Story,” and “Behind the Scenes of The Other Side of the Enron Story.”

Ungagged.net currently features over a dozen relatives of defendants, attorneys, former Enron executives and employees telling their stories about what they experienced personally in dealing with the overwhelming governmental power and societal forces at work in the Enron saga. Moreover, six experts in economics, political science, finance, UK law and civil liberties — including Clear Thinkers favorites William Anderson and Harvey Silverglate — provide their views on the ominous implications that the government’s handling of the Enron case have on us all.

Ms. Stier continues to add new information to the site, the latest of which are dozens of snippets from fascinating interviews of David Bermingham and Gary Mulgrew, two of the NatWest Three bankers from England who were caught up in an international firestorm in connection with the Enron Task Force’s effort to turn Fastow and his right-hand man, Michael Kopper, into witnesses for the Task Force against Skilling and Lay. This series of interview modules paints an absolutely fascinating tale of three regular fellows from the U.K. having their lives, families and careers turned utterly upside down by governmental forces that viewed them as mere pawns in a much larger game.

Apart from the its egregious human toll and the serious abuse of state power that its promoters ignore, the Enron Myth’s devastating impact is that it obscures the true nature of investment risk and fuels the notion that investment loss results primarily from someone else’s misconduct. As Larry Ribstein has been asking for years, do we really want to be sending a message to investors that risk is bad when it often leads to valuable innovation and wealth creation?

For example, self-settled derivative prepay transactions are not particularly intuitive (no product actually changes hands) and are not well-understood outside the trading business. Nevertheless, such transactions provide the valuable benefit of hedging risk for companies, who pass along that benefit to consumers in the form of lower prices for their products and services.

Do we really want to allow prosecutors and regulators to paint such beneficial transactions as frauds and then manipulate the public’s ignorance to demonize innovative risk-takers who are attempting to create wealth? How does throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison do anything to educate investors about the true nature of risk and the importance of diversification and hedging?

Ungagged.net is currently a lonely voice in the wilderness advocating against such governmental overreach. Here’s hoping that voice grows louder as those of us who are concerned by the pernicious growth of abusive governmental power listen to the stories and observations contained in this valuable resource.

The trailer for the webumentary is below.

Cassano wins the lottery

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lotteryLarry Ribstein notes that AIG scapegoat Joseph Cassano appears to have won in his turn enduring the criminalization-of-business lottery.

Meanwhile, Conrad Black was released from prison this week pending a re-trial of the charges against him, but he is ruined financially by his turn at the lottery.

And Jeff Skilling remains in prison and James Brown awaits another trial in his seven-year ordeal.

So, does the decision not to prosecute Cassano indicate a government move away from the lottery policy of regulating business?

Iíll believe it when I see it.

The SEC’s strike suit against Goldman

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GoldmanSachs-SEC-071510As noted in April when the Securities and Exchange Commission brought its lawsuit against Goldman Sachs, the case was destined to settle with Goldman paying a hefty settlement, which the SEC announced last week. But Larry Ribstein expands on that thought in this timely post on what the proposed settlement means to the folly of the current reform movement regarding governmental regulation of financial firms:

The SEC is heralding the $550 million settlement in its suit against Goldman as ìthe largest penalty ever assessed against a financial services firm in the history of the SEC,î and ìa stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.î Surely the agency had a strong incentive to try to use the Goldman settlement to obscure the memory of Madoff, Stanford and the Bank of America settlement. Meanwhile,todayís NYT concludes its Goldman story with a quote suggesting Goldman got off lightly.

The truth is far more disturbing: the SEC got a big payday in what would have been seen as a strike suit had it been a private securities class action lawyer. [.  .  .]

What clues on all this can be gleaned from a settlement that involves a huge amount of money but only an admission of a ìmistakeî?

The bottom line is that this suit has proved to be no more than a common ìstrikeî suit, no better than the sort of private securities class actions that triggered Congressional reform 15 years ago. Instead of attorneysí fees, the SECís objective appears to have been purely political. In the end it extracted a ransom payment from Goldman so the firm could reclaim its reputation and get back to business.

The court must now review the settlement. It should take a cue from the dissenting Commissioners and reject it because of the puzzling and troubling inconsistency between the amount of the settlement and Goldmanís meaningless admissions. The SEC should have to prove exactly what Goldman did wrong. This will force Goldman to either litigate or make a meaningful settlement. Goldman is hardly an object of pity at this point. In any event, the issues here go far beyond Goldman to, among other things, the proper role and function of the SEC.

It is sad that the SEC not only cannot be trusted to find fraud, but that it can no longer be trusted to litigate and settle cases involving the supposed frauds that it finds. But this is where we find ourselves in the days following ìfinancial reform.î

Expecting the SEC to regulate a firm as sophisticated as Goldman Sachs effectively is about as rational as investing oneís entire nest egg with Bernie Madoff or Allen Stanford.

James Brown’s Hell

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Does the end of convicting a business executive of a crime justify the means by which government prosecutors accomplish it?

James Brown, the former Merrill Lynch executive and one of the defendants in the Enron-related criminal case known as the Nigerian Barge case, has to be asking himself that question as he continues to endure what is now his seventh year of prosecutorial hell.

Even in the littered landscape of failed Enron-related prosecutions, the Nigerian Barge prosecution stands out for its sheer brazen nature.

The Nigerian Barge prosecution was baseless from the start and, as later developments revealed, trumped-up to boot.

But as Brown’s Supplemental Memorandum below filed this past Friday explains, “trumped-up” is too kind a term to describe what the prosecutors did to Brown and his fellow Merrill co-defendants.

A quick history of the case is helpful. After prosecuting Arthur Andersen out of business in the intensely anti-business post-Enron climate of Houston in 2004, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which the firm did by offering up Brown and fellow Merrill executives Dan Bayly, Robert Furst, and William Fuhs.

Through a deferred prosecution agreement with Merrill, the Task Force hamstrung the Merrill defendants’ defense by limiting access to other Merrill Lynch executives who were involved in the barge transaction and who would have testified favorably for the defendants. To make matters worse, the Task Force then intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the Merrill defendants’ defense.

Thus, after bludgeoning a couple of plea deals from former Enron executives Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the Merrill defendants, which was good enough to obtain convictions in Houston’s deeply-hostile environment in 2005 toward anyone having anything to do with Enron.

Of course, most of the convictions were vacated on appeal (and in Fuhs’ case, thrown out completely). However, each of the Merrill defendants served over a year in prison during their appeal while their families endured the substantial human cost of this and other misguided Enron-related prosecution.

Even after the convictions of the Merrill defendants were vacated, the Department of Justice initially threatened to pursue a retrial of the three remaining Merrill executives. But then the DOJ recently dismissed all charges against Bayly, while Furst cut a favorable plea deal that will lead to a dismissal of the remaining charges against him.

So, logic dictates that the DOJ would dismiss its charges against Brown, the only remaining defendant. Right?

Well, not so fast.

The DOJ has inexplicably teed up another trial of Brown, who was the only one of the Merrill defendants who was convicted on additional charges of perjury and obstruction of justice for having the temerity of protesting his innocence to the grand jury that originally investigated the Nigerian Barge deal. Brown’s new trial is currently scheduled to begin on September 20.

But in the meantime, Brown’s legal team has been leafing through enormous amounts of exculpatory evidence that the Enron Task Force withheld from the Merrill defendants in connection with the first trial back in 2005, but which the DOJ has recently been forced to disclose.

The result of the Brown team’s effort is set forth below in the Supplemental Memorandum in support of a motion for a new trial for Brown on the perjury and obstruction charges (the downloaded version of the memo is bookmarked in Adobe Acrobat to facilitate ease of review). The memorandum details the appalling length that the Enron Task Force went during the first trial in suppressing exculpatory evidence in favor of Brown and his co-defendants and generally disregarding the rule of law in order to obtain convictions. As the memorandum concludes:

The conclusion is now inescapable that the ETF engaged in a calculated, multi-step process to deprive Brown of his constitutional right to Due Process. (1) They repeatedly denied the existence of Brady material, told this court they had met their Brady obligations and fought vehemently against producing anything [exhibit reference and footnote omitted]. They highlighted only selected material in a veritable garden of Brady evidence — much of their selections being vague, tangential or marginal — while working around clear, declarative, relevant exculpatory material even in the same page, paragraph or document. (3) When ordered by the Court to produce summaries to the defense, they further redacted even the Brady material they had themselves highlighted and withheld the crucial facts that they had highlighted as Brady. (4) They egregiously capitalized on their misconduct at trial by making assertions that were directly belied by the exculpatory evidence they withheld.  .  .  .

The memorandum goes on to set out dozens of Brady violations, including charts that compare the exculpatory statements that the Enron Task Force withheld prior to the first trial with the incriminating statements that the Enron Task Force extracted from witnesses during that trial.

Folks, this is really bad stuff. But as bad as it is, I have not seen any mention of it in the mainstream media.

When is the mainstream media going to realize that the scandalous behavior of government prosecutors in prosecuting business executives in connection with the Enron case dwarfs the true crimes that were committed at Enron?

Or is the media’s stubborn refusal to challenge the Enron narrative an even bigger scandal than the prosecution’s misconduct?

James Brown Supplemental Memorandum in Support of Motion for a New Trial

At least tell him that he is a sacrificial lamb

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Department of Justice LRegular readers of this blog are familiar with the technique that federal prosecutors used in the post-Enron era to score easy convictions against businesspeople.

Threaten to go Arthur Andersen on a company, offer to let the company off the hook under a deferred prosecution agreement in return for offering up an executive or two as sacrificial lambs to be prosecuted, and then bludgeon the individualís career, life and family into bits under the sledgehammer of the DOJís prosecutorial power.

Jamie Olis was arguably the first of those sacrificial lambs, and there were plenty in connection with the Enron-related prosecutions. Heck, the DOJ is even getting ready to tee up a re-trial of one such case this September.

But check out this example of DOJ brazenness that Ellen Podgor passes along. The DOJ enters into a deferred prosecution agreement with American Express and, as a part of the deal, has AE enter into a side-letter agreement that, absent the DOJís prior consent, prohibited AE executive Sergio Masvidal from obtaining employment with an AE unit or any company that bought the AE unit.

Given the DOJís heavy-handed approach in such matters, that part of the deferred prosecution agreement is not all that unusual. But one aspect of this particular deal was.

The DOJ didnít bother to disclose the side-letter to either Masvidal or the District Court that approved the deferred prosecution agreement.

Masvidal eventually found out about it when he was denied employment by the company that bought the AE unit. So, he sued the DOJ, which eventually led to the DOJís issuance of the letter below, which admits that the DOJ did not disclose the side-letter to the District Court on purpose and that the DOJís investigation ìdid not reveal any evidence that Mr. Masvidal had committed any criminal offenses or violated any banking regulations.î

Now, do you still have any doubts that the same bunch was capable of this and this?

 

 

DOJ’s Clearing Letter in Sergio Masvidal Case

A fork in the road for Dell?

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michael-dell Remember back when Micheal Dell and Austin-based Dell, Inc. were among the early beneficiaries of what Larry Ribstein brilliantly coined as the Apple Rule of the criminalization-of-business lottery?

Well, as Dellís stock closed down yet again yesterday at $12.06 a share ñ far from the lofty $40 a share price of five years ago ñ this 24/7 Wall Street post makes clear that Dell was quite fortunate to have the benefit of the Apple Rule:

Some of the troubling behavior at Dell, which added up is an extraordinary amount for any large company, occurred when Michael Dell was CEO. All of it happened when he was the firmís chairman. Dell can argue that his is a huge company. He cannot know what all 94,000 of his workers are doing at any one time. That is almost certainly true. But a companyís values are established at the top and that behavior is s a by-product of corporate culture.

I submit that there is no rational basis for criminalizing Jeff Skillingís conduct as chief executive officer of Enron and not doing the same in regard to Michael Dellís. Or Tim Geithnerís for that matter.

Michael Dell is not a criminal. But neither is Jeff Skilling and he remains locked up in a Colorado prison.

Financial Ed 101

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abacus Itís good to see that James Surowiecki has come around to my way of thinking that better investor education is far more likely to hedge the risk of future financial scandals than throwing a few business executives in prison:

The governmentís new consumer-protection agency has the authority to ìreview and streamlineî financial literacy programs, but thatís not enough. We really need something more like a financial equivalent of driversí ed. Thereís evidence that just improving basic calculation skills and inculcating a few key concepts could make a significant difference. One study of the few states that have mandated financial education in schools found that it had a surprisingly large impact on savings rates.   .   .   .The point isnít to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that.

Surowiecki is spot-on with his observation (as is this TGR post on Surowiecki’s article), but the promoters of the Greed Narrative continue to protest — what about the innocent victims who lost their nest eggs as a result of the collapse of a company such as Enron?

Well, one of the main reasons that those victims’ nest eggs ever had value in the first place was because innovative executives such as Jeff Skilling and Ken Lay transformed Enron into the world’s leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers.

Although itís fine to feel sorry for someone who loses money on an investment, the Greed Narrative ignores the fact that most of those "victims" who lost their nest eggs were imprudent in their investment strategy. Taking Enron as an example, those investors should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron’s stock price while being protected by a floor in that share price if it fell below a certain value. Those are the type of precautions that a prudent ñ and well-educated ñ investor would take in regard investing in a trust-based business.

Incongruously, while virtually all of those Enron "victims" hedged the risk of their investment in their homes by purchasing homeowner’s insurance, few of them hedged the risk of their investment in Enron stock. Most of them simply did not understand how Enron’s risk management services created their nest egg in the first place. Thus, when those nest eggs evaporated during the bank run on Enron, those investors didn’t even try to understand what truly had occurred. They simply embraced the easy-to-understand Greed Narrative.

The Greed Narrative’s devastating impact is that it obscures the true nature of investment risk and fuels the myth that investment loss results primarily from someone else’s misconduct. As Larry Ribstein has been asking for years, do we really want to be sending a message to investors that risk is bad when it often leads to valuable innovation and wealth creation?

Do we really want to allow prosecutors and regulators to paint such beneficial transactions as frauds and then manipulate the public’s ignorance to demonize innovative risk-takers?

At a time when America desperately needs innovators and entrepreneurs to create jobs and wealth, better education for investors makes much more sense than the paths we have been taking.

The Wall Street Journal’s Inadequate Apology

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It’s as if the nation’s leading business newspaper doesn’t want to face the ugly reality of what it helped create.

This Wall Street Journal editorial applauds the U.S. Supreme Court’s opinion reversing Jeff Skilling’s conviction on honest services wire fraud charges. But when it comes to the WSJ’s role in fanning the flames of public disdain toward business executives that helped to allow this injustice to occur, the WSJ apologizes only to Conrad Black:

The Black and Skilling cases are precisely the kind involving high-profile, unsympathetic defendants in which willful prosecutors like Mr. Fitzgerald are inclined to abuse the honest services law. They know the media won’t write about the legal complexities, and they know juries are often inclined to find a rich CEO guilty of something. We regret that in the case of Mr. Black, that failure of media oversight included us.

But what about an apology to Mr. Skilling? Take it from me WSJ, that lack of media oversight also included you in regard to the Skilling and other Enron-related criminal cases.

Indeed, four years ago the WSJ editorial board was patting the Enron Task Force on the back despite the fact that it was clear at the time that the Task Force had improperly applied the honest services wire fraud statute and engaged in massive prosecutorial misconduct in regard to the Skilling prosecution and numerous other Enron-related criminal prosecutions.

The WSJ’s failure to admit its egregious failures in its coverage of Enron reminds me of a point that John Carney raised several years ago in regard to Eliot Spitzer’s odious tenure as New York Attorney General:

Why didn’t [the mainstream media covering Spitzer’s investigation of Grasso] reveal the slimy tactics of the Spitzer squad?

We suspect part of the problem was the fear of being “cut off” of access. Reporters compete for scoops, and often those scoops depend on sources who will leak information to them. In the NYSE case, reporters assigned to the story were largely at the mercy of the investigators, who could cut-off uncooperative reporters, leaving them without copy to bring to their editors while their competitors filed stories with the newest dirt. They probably felt – not unrealistically – that their very jobs were on the line.

This reveals an unfortunate state of affairs. Playing bugle boy while government officials call the tunes from behind a veil of anonymity is not investigative journalism – it’s hardly journalism at all. It’s closer to propaganda. It would have been far better had the journalists turned their backs on the Spitzer squad, or even revealed these tactics to the public. Sure they may have lost some “good” stories but they could have painted a truer picture of what was going on. But that’s probably too much to hope for.

The same type of mainstream media dissonance went on in regard to the Enron-related prosecutions.

In point of fact, this Ayn Rand Institute press release that was issued in 2006 just a couple of months after the WSJ patted the Enron Task Force on the back is remarkably prescient in regard to the mainstream media’s abysmal coverage of Enron in general and Skilling’s trial, in particular:

The Media’s Mistreatment of Jeff Skilling.

Upon hearing the news that former Enron CEO Jeffrey Skilling was sentenced to 24 years, most Americans, trusting the newspaper articles and books they have read on Enron, think that justice has been served.

But, said Alex Epstein, a junior fellow at the Ayn Rand Institute, “Jeff Skilling has not gotten justice, and the media bear a major portion of the blame.”Few Americans know that during Skilling’s trial, the prosecution came nowhere near proving its central allegation that Jeff Skilling engineered a conspiracy to defraud investors. Few know that Skilling, upon leaving Enron five months before its collapse, destroyed no documents, nor did anything else resembling a criminal cover-up. Few know that the prosecution, unable to prove a conspiracy, spent huge swaths of the trial taking pot-shots at Skilling with issues not even mentioned in the indictment, such as the failure of Skilling, a multi-millionaire many times over, to disclose a failed $50,000 investment to Enron’s board.”

“The media’s mis-portrayal of the case against Skilling long predates the trial. Ever since the fall of Enron, most of the media have treated as fact every conceivable smear against Skilling made by ax-grinding prosecutors or ex-Enron employees, while treating as absurd Skilling’s claim that he neither engineered a conspiracy nor lied to investors.”

“There can be no doubt that the media’s treatment of Skilling contributed to his conviction for a phantom conspiracy–and to the outrageous 24-year sentence that he has now received. And the mistreatment of Skilling is part of a broader trend: the trend of treating businessmen as guilty until proven innocent. Our journalists and intellectuals, accepting the idea that the pursuit of profit is morally tainted, assume that whenever anything goes wrong in business, it is the result of crooked behavior by greedy, rich CEOs–and slant their coverage accordingly. This practice is putting numerous innocent men in jail, and instilling terror throughout corporate America.”

“During Skilling’s appeal, let us call for the media to start treating Skilling–and all businessmen–fairly.”

The WSJ was right to apologize to Lord Black. But it also owes one to Jeff Skilling, as well as to its readers.

Skilling wins at the Supreme Court

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skilling 040711The U.S. Supreme Court vacated Jeff Skilling’s criminal conviction yesterday on the charge of conspiracy to commit wire fraud under 18 U.S.C. 1346 (“Section 1346”), throwing his entire conviction on nineteen counts into question.

The Supreme Court also reversed Conrad Black’s conviction on the same issue, as well as Bruce Weyhrauch’s. Lyle Dennison has this excellent summary of the Court’s opinion, while Stephen Bainbridge provides his usual spot-on analysis of the opinion from a public policy standpoint.

Interestingly, most of the 114 page opinion deals with an issue on which the Court ruled against Skilling – i.e., that the trial should have been moved out of Houston because inflammatory media coverage made it impossible for Skilling to receive a fair trial.

Nonetheless, the Court’s opinion was a resounding victory for Skilling, as all nine justices agreed that Skilling did not commit honest services wire fraud. The only difference is that Justices Scalia, Thomas and Kennedy would have struck down Section 1346 entirely, while the majority simply restricted it’s application to bribery and kickback cases.

The Court remanded the case to the Fifth Circuit Court of Appeals for further disposition consistent with the Court’s opinion, primarily to determine whether the Skilling’s conviction on the honest services wire fraud charge should lead to a reversal of most or all of the other counts of his conviction.

As the Court notes in footnote 47 on page 50, the Fifth Circuit has already indicated that Skilling’s conviction should be set aside in its entirety if any of its three bases (honest services wire fraud, money-or-property wire fraud, or securities fraud) is reversed, but the Supreme Court ordered the Fifth Circuit to review that issue again.

In view of the fact that the Enron Task Force prosecution heavily relied on the honest services wire fraud charge in presenting its case to the jury against Skilling, my sense is that the Skilling team has the decidedly better argument that the prosecution’s mistake in prosecuting him on that charge was not harmless error and that most or all of the rest of his conviction must be reversed.

Moreover, even though a majority of the Court ruled against Skilling on the issue of whether the trial court erred in not moving the trial away from Houston, Justice Sotomayor’s lively dissent on that issue is the best part of the decision.

Justice Sotomayor — who is the most experienced trial judge on the Supreme Court at this time — is clearly appalled at the trial court’s screening of prospective jurors in the face of the overwhelmingly adverse media treatment of Skilling. Here are a few snippets [all citations to the record deleted]:

In concluding that the voir dire “adequately detect[ed]and defuse[d] juror bias,” the Court downplays the extent of the community’s antipathy toward Skilling and exaggerates the rigor of the jury selection process. The devastating impact of Enron’s collapse and the relentless media coverage demanded exceptional care on the part of the District Court to ensure the seating of an impartial jury.

While the procedures employed by the District Court might have been adequate in the typical high profile case, they did not suffice in the extraordinary circumstances of this case to safeguard Skilling’s constitutional right to a fair trial before an impartial jury.[ .  .  .]These deficiencies in the form and content of the voir dire questions contributed to a deeper problem: The District Court failed to make a sufficiently critical assessment of prospective jurors’ assurances of impartiality.

Although the Court insists otherwise, ante, at 26, the voir dire transcript indicates that the District Court essentially took jurors at their word when they promised to be fair. Indeed, the court declined to dismiss for cause any prospective juror who ultimately gave a clear assurance of impartiality, no matter how much equivocation preceded it.

Juror 29, for instance, wrote on her questionnaire that Skilling was “not an honest man.” During questioning, she acknowledged having previously thought the defendants were guilty, and she disclosed that she lost $50,000 – $60,000 in her 401(k) as a result of Enron’s collapse. But she ultimately agreed that she would be able to presume innocence.

Noting that she “blame[d] Enron for the loss of her money” and appeared to have “unshakeable bias,” Skilling’s counsel challenged her for cause. The court, however, declined to remove her, stating that “she answered candidly she’s going to have an open mind now” and “agree[ing] with the Government’s assertion that we have to take her at her word.”

As this Court has made plain, jurors’ assurances of impartiality simply are not entitled to this sort of talismanic significance.   .   .  [.  .  .]Indeed, the District Court’s anemic questioning did little to dispel similar doubts about the impartiality of numerous other seated jurors and alternates. In my estimation, more than half of those seated made written and oral comments suggesting active antipathy toward the defendants. The majority thus misses the mark when it asserts that “Skilling’s seated jurors . . . exhibited nothing like the display of bias shown in Irvin.”Juror 10, for instance, reported on his written questionnaire that he knew several co-workers who owned Enron stock; that he personally may have owned Enron stock through a mutual fund; that he heard and read about the Enron cases from the “Houston Chronicle, all three Houston news channels, Fox news, talking with friends [and] co-workers, [and]Texas Lawyer Magazine”; that he believed Enron’s collapse “was due to greed and mismanagement”; that “[i]f[Lay] did not know what was going on in his company, he was really a poor manager/leader”; and that the defendants were “suspect.”

During questioning, he said he “th[ought]” he could presume innocence and “believe[d]” he could put the Government to its proof, but he also acknowledged that he might have “some hesitancy” in telling people the government didn’t prove its case.[Footnote 21] The majority also notes that about two-thirds of the seated jurors and alternates (11 of 16) had no personal Enron connection. This means, of course, that five of the seated jurors and alternates did have connections to friends or colleagues who had lost jobs or money as a result of Enron’s collapse — a fact that does not strike me as particularly reassuring.

Meanwhile, the government’s case against Skilling continues to look shaky in other respects. Largely overshadowed by the Supreme Court’s decision is the fact that the Fifth Circuit’s previous opinion invited Skilling to file a motion for new trial in the District Court based on issues of prosecutorial misconduct that Skilling raised after discovering the evidence after the trial.

Specifically, the Fifth Circuit was particularly concerned about the failure of the Enron Task Force to comply with federal rules requiring the disclosure of exculpatory evidence to the defense from the Task Force’s pre-trial interviews with main Skilling accuser and admitted felon, former Enron CFO Andrew Fastow.

Fastow testified at trial that he told Skilling about the Global Galactic agreement, which purportedly documented a series of illegal “side deals” between Fastow and former Enron chief accountant Richard Causey that guaranteed Fastow would not lose money on certain special purpose entities that he was managing. Skilling denied any knowledge of the purported agreement.

After Skilling’s conviction, the Skilling defense team discovered the existence of Fastow interview notes that the Enron Task Force had failed to disclose to the Skilling team prior to trial. Among other things, those notes revealed that Fastow had told the Task Force lawyers that he didn’t think he had told Skilling about the Global Galactic agreement. The Fifth Circuit characterized the Task Force’s non-disclosure as “troubling” in inviting Skilling to file a motion for new trial with the District Court.

So, despite his resounding Supreme Court victory, Skilling’s legal battles are not over. But slowly the truth about Enron and Skilling’s role there is emerging from the cloud of prejudice under which he was tried, both in court and in the mainstream media.

The truth about Enron is that no massive conspiracy existed. In reality, Skilling and the late Ken Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation.

Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst choppy post-bubble, post-9/11 conditions when the markets were spooked by revelations of the alleged embezzlement of millions of dollars by Fastow and a few of his minions.

That Jeff Skilling did not predict that Enron would fail under those conditions does not make him a criminal. Unlike his main accusers Fastow and Ben Glisan, Skilling didn’t embezzle a dime from Enron. Did he tirelessly advocate this highly-leveraged but innovative company that was dealing with difficult market conditions during 2001? You bet. But since when is it a crime for a CEO to be optimistic — even overly-optimistic — about his company?

Beyond the shattered lives and families, the real tragedy here is that the mainstream media’s demonization of Skilling has distracted us from examining the tougher issues of what really caused Enron’s demise and understanding the how such a company can be structured to survive in even the worst market conditions. It’s a lot easier just to throw a good and decent man such as Jeff Skilling in jail and simply conclude that it was all his fault. But examining objectively what really occurred at Enron is far more likely to result in real justice.

Who knows? Such an approach might have even prepared us better to deal with this.