My Letter to Judge Lake regarding Jeff Skilling

skilling 040711U.S. District Judge Sim Lake re-sentenced former Enron CEO Jeff Skilling to 14 years in prison yesterday. That was the most lenient sentence that Judge Lake could impose under the deal that Skilling cut with the Department of Justice without risking a government appeal of the sentence.

Skilling has already served almost seven years in prison and that he has to spend another day in prison — much less the four more years that Judge Lake’s re-sentence imposes — is highly unjust.

In the letter below that I sent a couple of weeks before Skilling’s resentencing hearing, I explain to Judge Lake why I believe that Skilling’s plight is a grave injustice and why releasing him would actually have a beneficial impact on educating business markets.

Tom Kirkendall Letter to U.S. Judge Sim Lake Regarding the Resentencing of Jeff Skilling by Tom Kirkendall

Larry Ribstein, R.I.P.

Larry RibsteinMy friend and Clear Thinkers favorite Larry Ribstein died unexpectedly yesterday at the age of 65. I convey condolences and deepest sympathies to Larry’s wife Ann and their daughters, Sarah and Susannah.

Larry was a teacher who understood precisely what his life’s purpose was and pursued it with an endearing combination of intellectual curiosity, vitality, humanity and good humor. Although I will miss Larry deeply, I feel blessed to have known him.

Larry and I came across each other in 2003, early in our respective blogging careers. The particular case that brought us together was that of Jamie Olis, which involved many of the issues about which Larry wrote passionately over his eight-plus years of blogging – criminalization of agency costs, over-criminalization generally, prosecutorial misconduct, anti-business mainstream media business reporting, etc.

But Larry and my friendship really ripened during the Enron case. Inasmuch as Larry and I both blogged frequently on business generally and business law issues specifically, we both watched in horror as the Enron case exposed many of the worst flaws of the American criminal justice system.

Larry and I were initially two of the only writers in the blogosphere who contended that most of the Enron-related criminal prosecutions were based on appeals to juror prejudice against business executives rather than true crimes, so we fast became blogging colleagues and commiserated often, eventually not only on Enron, but on a wide array of business law cases that arose after that seminal case.

Stephen Bainbridge, Ted Frank, Ilya Somin, Geoff Manne and others have already posted fine remembrances of Larry, whose academic contributions were prodigious. However, I believe that Larry’s most important contributions were his blog writings, which – along with those of Professor Bainbridge – have done more to improve the legal profession and general public’s understanding of complex business issues than any other information source over the past eight years.

To get a taste of Larry’s insights, just take a moment to review the dozens of Clear Thinkers posts over the years in which Larry’s research and observations are highlighted. The breadth and depth of his body of work is truly remarkable.

Beyond his special intelligence and intellectual honesty, though, the trait that drew me most to Larry was his humanity. Although he decried how our government’s senseless criminalization of business was destroying jobs and hindering the creation of wealth, Larry cared even more deeply about the incalculable damage to executives and their families that resulted from the absurdly-long prison terms that were often the product of such dubious prosecutions. When family members of wrongfully prosecuted executives came upon Larry’s writings, many of them would reach out to Larry for support, which he generously provided to them.

And I will never forget Larry’s touching note to me after he read a blog post that I wrote on the death of Bill Olis, Jamie Olis’ father. Larry understood in his big heart what it takes to be a loving father.

Larry Ribstein – husband, father, lawyer, teacher, scholar, colleague, writer, counselor, friend.

A fine legacy, indeed.

Look Who is Advising the FBI

So, former Enron Task Force director Andrew Weissmann has found his way back into government service, this time as general counsel to the Federal Bureau of Investigation.

This is the fellow who – among other outrageous tactics — is primarily responsible for prosecuting Arthur Andersen out of business and for destroying the careers of several innocent Merrill Lynch executives in the notoriously misguided Nigerian Barge case.

And now he is the primary counselor to the federal government’s primary investigative force.

Weissmann’s track record of abuse of power should be grounds to preclude him from such a position. But in this day and age, it is viewed as sound preparation.

Not a particularly pleasant thought to have if the Devil ever turns on you.

The WSJ’s Myths

Sherron-WatkinsWe Americans do love our myths, as the Wall Street Journal reminds us this week with its glowing 10-year anniversary (!) tribute to Enron “whistleblower,” Sherron Watkins.

Of course, even a cursory review of the facts demonstrates that Ms. Watkins is not – and never was — a whistleblower.

Nevertheless, the nation’s leading business newspaper persists in a myth that is demonstrably wrong. In fact, the Journal’s coverage of Enron was questionable from the start.

Why is that?

Well, such levels of disingenuity are rarely attributable to one or even just a few factors, but Dio Favatas notes an interesting aspect of the Journal’s coverage of another business executive – Frank Quattrone – whose stellar career was sidetracked by a dubious prosecution.

You may remember the Quattrone prosecution – a paper-thin case in the Enron mode that should never have been pursued. After Quattrone was convicted in a farce of a trial, the Second Circuit resoundingly reversed the conviction. Quattrone eventually settled with the prosecution in a favorable deferred prosecution agreement under which he admitted no wrongdoing whatsoever.

You would think that the injustice that was heaped upon Quattrone before the Second Circuit intervened would give the Journal pause regarding its demonization of Quattrone before, during and after the trial. But as Favatas chronicles, the Journal instead continues to attempt in a sophomoric manner to make Quattrone out to be something other than the hard-working, talented and successful investment banker that he is.

To make matters worse, in doing so, the Journal assigns a reporter to write the story who has a financial interest in making Quattrone appear to be a shady character.

Clarence Barron founded the Journal in the early 20th century on the personal credo that the Journal “must stand for what is best in Wall Street.”

It is sad to see how far the Journal has drifted from that salutary foundation.

Skilling II at SCOTUS?

The Fifth Circuit Court of Appeals has not exactly distinguished itself in regard to its handling of the various appeals that emanated from the various Enron-related criminal prosecutions.

In particular, the Fifth Circuit recently denied former Enron CEO Jeff Skilling’s motion for a new trial even though Skilling’s theory of the case for a new trial was upheld by Fifth Circuit panels in two other Enron-related appeals.

So, per the motion below, Skilling is once again preparing to petition the U.S. Supreme Court to reverse the Fifth Circuit yet again and order the Fifth Circuit to issue a mandate to the U.S. District Court to give Skilling a new trial.

Frankly, as implicitly reflected by the prosecution’s agreement to a stay of the Fifth Circuit’s current mandate pending Skilling’s appeal to the U.S. Supreme Court, Skilling has a good case for a new trial. Stay tuned.

Jeff Skilling’s Motion to Stay Fifth Circuit Mandate Pending Appeal to U.S. Supreme Court

The Second Circuit corrects an injustice

GenReOver the years, I’ve written quite a bit (for example, here, here, here and here) on the questionable nature of the prosecutions and convictions of the Gen Re and AIG executives who were involved in the finite risk transaction that prompted Eliot Spitzer to demonize Hank Greenberg. As if Spitzer needed any prompting to grab some cheap headlines.

By now, the story regarding this transaction is well-known among those in the legal and business communities who have followed it. AIG booked the finite risk transaction as insurance, which increased its premium revenue by $500 million and added another $500 million to its property-casualty claims reserves. Generally accepted accounting principles at the time required insurance and reinsurance transactions to transfer significant risk from one party to another if either party accounted for the transaction as insurance. Absent risk transfer, such transactions had to be booked as financing, which defeats the purpose of the transaction. In the General Re-AIG deal, $600 million of potential losses were transferred from General Re to AIG in return for the $500 million premium paid by General Re.

The deal did not affect AIG’s net income and was the type of transaction that AIG — and many other companies in the insurance industry – had done for years without any adverse market reaction, much less a criminal investigation. Moreover, the transaction in question was disclosed to and approved by AIG and General Re’s independent auditors.

That made no difference to avaricious prosecutors, who proceeded to pursue a dubious prosecution because any executive even vaguely associated with AIG after the Wall Street meltdown of 2008 were easy marks. They were right – the four Gen Re executives and the AIG executive were all convicted of conspiracy, mail fraud, securities fraud, and making false statements to the Securities and Exchange Commission

Thankfully, some appellate court panels (unlike some others) are still willing to correct such injustices. In the decision below, the Second Circuit Court of Appeals reversed the convictions of the Gen Re and AIG executives and remanded the case for a new trial. The essence of the decision is that the prosecution used spurious stock price data to inflame the jury against the defendants and persuaded the trial court to use an incorrect jury instruction on a key intent issue in the case.

However, as this appropriately scalding Wall Street Journal editorial points out, this case is really about abuse of prosecutorial discretion: “The collapse of this case renders even more appalling the way that prosecutors used it to force both companies to fire their CEOs–Joseph Brandon at Gen Re and Hank Greenberg at AIG. In the latter case, the resulting loss of shareholder wealth–and creation of taxpayer risk–has been staggering” and in this “latest embarrassing episode, the abuses include prejudicial evidence, botched jury instructions and ‘compelling inconsistencies’ suggesting that the government’s star witness ‘may well have testified falsely.'”

And although the Second Circuit came to the right result relying on a version of the facts most favorable to the prosecution, it’s important to note that most of the decision overrules the defendants’ other grounds for reversal where the prosecutors at trial may well have suborned perjury from the key prosecution witness.

It’s never easy being an appellant, even after a trial that is chock full of prosecutorial misconduct.

That’s why there shouldn’t be criminal trials in this type of case in the first place. Let the civil justice system sort out responsibility for any provable damages caused by wrongdoing among all of the parties involved.

That’s a far more just — not to mention humane — approach than throwing a few sacrificial lambs in prison over conduct of dubious criminality.

Update: Larry Ribstein, who has also been following this case from the beginning, notes an ironic — and extraordinarily damaging — aspect of this sordid prosecution.

US v. Ferguson, Et Al 2nd Cir Decision

Why Jeff Skilling’s Case Remains Important

skilling 040711So, why is it that prosecutors won’t go after Wall Street executives for supposed criminal conduct in connection with financial crisis that began in 2008 and continues to bedevil the U.S. economy to this day?

That’s essentially the question that this recent NPR story asks. It’s not hard to find other mainstream media pundits asking the same question.

Or course, NPR – as with most of the mainstream media — utterly fails to recognize that the government’s pursuit of criminal convictions of businesspeople over the past decade has had much more to do with chance and politics than truly criminal conduct.

Could it be that the lack of criminal prosecutions stems from federal prosecutors finally coming to the realization that merely taking business risk in an effort to create wealth and jobs really is not a crime? Indeed, the rationalization for the lack of villains now as compared to earlier crises has never been particularly compelling.

The truth is that criminal prosecutions based on merely questionable business judgment has always been fundamentally bad regulatory policy.

Few people object to criminal prosecutions of true business crimes, such as embezzlement and kickbacks.

But prosecutions based on failed business judgment obscure the true nature of business risk and fuel the myth that investment loss results primarily from criminal misconduct. Policy that deters business risk is counterproductive because such risk is what leads to valuable innovation, wealth creation and – most importantly these days – desperately needed jobs for communities.

Which brings us back to the sad case of former Enron CEO Jeff Skilling, who continues to serve a brutal 24-year sentence in a Colorado prison.

As I’ve noted many times over the years on this blog, the Fifth Circuit Court of Appeals has not distinguished itself in regard to the appeals emanating from Enron criminal cases, including Skilling’s.

First, there was the appellate court’s affirmation of a local U.S. District Court’s absurd criminal conviction of Arthur Andersen, putting a nail in the coffin of that legendary firm and over 30,000 jobs in the process.

Although too little and too late to save Andersen, that gem of a decision was subsequently overturned by a unanimous U.S. Supreme Court.

Then, in 2009, another Fifth Circuit panel affirmed a local U.S. District Court’s 2006 conviction of Skilling. Subsequently, in 2010, a unanimous U.S. Supreme Court disassembled that pearl of judicial wisdom and, in so doing, struck down the prosecution’s “creative” (and unsupported) use of honest services wire fraud to prosecute defendants over merely questionable business transactions.

But not to be outdone, on remand from the Supreme Court, the Fifth Circuit panel produced yet another clunker, this time affirming Skilling’s convictions on the conspiracy and securities fraud counts that the Supreme Court did not address in reversing Skilling’s conviction on the honest services counts. This panel decision is so bad that it contradicts two previous decisions in Enron-related criminal cases that other Fifth Circuit panels actually got right — the Kevin Howard case and the Nigerian Barge case.

In the second Skilling opinion, the Fifth Circuit panel rationalized that it was somehow “harmless error” for the prosecution to present the false honest services theory of criminal conduct regarding Skilling to the jury so long as there was sufficient evidence to support a guilty verdict on any valid alternative theory of criminality. The panel ruled that way even though the Skilling jury returned a general verdict that did not distinguish on which theory of criminality they actually relied in convicting Skilling.

Unfortunately, the Fifth Circuit panel – as pointed out eloquently by Skilling’s petition for rehearing en banc below – applied precisely the wrong standard in determining whether the remaining counts against Skilling should be reversed.

When the trial court committed the error of allowing the Skilling prosecution to obtain a conviction by pursuing its false honest services theory, the question as to the remaining counts is whether there was any evidence in the record that could rationally lead to acquittal of Skilling on those counts, not simply whether there was evidence that a jury could have relied on in convicting him. As the Skilling petition notes:

A “reviewing court making this harmless error inquiry does not .   .  . become in effect a second jury to determine whether the defendant is guilty.” [cite deleted] Because determining guilt or innocence is solely the province of the jury, an error requires reversal if a rational jury could have found for the defendant on the valid theory because of the contested evidentiary record. [cites deleted]

There is no question that Skilling provided substantial evidence at trial contravening all charges against him, including the conspiracy and securities fraud counts. No reasonable review of the Skilling trial record could conclude that a jury might not have found in favor of Skilling on those counts. In fact, the jury found in Skilling’s favor on nine of the original 28 counts in the first place!

In short, the Fifth Circuit panel blew the application of the standard in adjudicating the remand from the Supreme Court of the remaining counts against Skilling. If the Fifth Circuit judges are honest with themselves and the law, then they will withdraw the panel decision and remand Skilling’s case to the U.S. District Court for a new trial.

The mess that is the prosecution against Jeff Skilling is a quintessential example of what happens when government is given the leeway to bastardize charges to criminalize merely questionable business transactions and then appeal to juror resentment against a wealthy businessperson to procure a politically popular outcome.

The damage to the defendant, his career and his family that such an abuse
of power causes is bad enough. But the carnage to justice and respect for the rule of law is even more ominous.

Do any of us really believe that we could stand upright in the winds of such abusive governmental power if that gale of prosecutorial power was turned toward us?

The remaining charges against Jeff Skilling should be reversed and his case remanded to the District Court for a new trial in a fair and non-contentious environment.

Not only for his protection, but for ours.

Petition for en Banc Review and Hrg2

We do love our myths, don’t we?


The Wall Street Journal’s Bret Stephens makes a good point about the way in which the mainstream media pounced on a morality play in the initial reporting on the rape case against former IMF chief, Dominique Strauss-Kahn:

.   .  .  the media (broadly speaking) has too often been guilty of looking only for the evidence that fits a pre-existing story line. It doesn’t help that in journalism you can usually find the story you’re looking for, whether it’s record-breaking heat in some corner of the world, or malicious Israeli settlers making life miserable for their Palestinian neighbors, or evidence of financial chicanery in Manhattan, or of economic prowess in Shanghai.

But anecdotes are not data–which happens to be the world’s most easily neglected truism. Also true is that sloppy moral categories like the powerful and the powerless, or the selfish and the altruistic, are often misleading and susceptible to manipulation. And the journalists who most deserve to earn their keep are those who understand that the line of any story is likely to be crooked.

Of course, insightful bloggers such as Larry Ribstein have been pointing out this dynamic in regard to the mainstream media’s coverage of business-related matters for years.

And Stephens’ own employer still has not owned up to the fact that it embraced in the case of Jeff Skilling precisely the same type of morality plays that Stephens decries in the DSK affair. The fact that Skilling remains imprisoned under an effective life sentence makes the WSJ’s touting of myths in his case even more egregious.

Life is complicated. Government is powerful. When the MSM embraces the latter’s suggestion that the former is simple, beware.

Warren Buffett, self-preservationist

warren_buffett2Professor Bainbridge surmises that Berkshire Hathaway’s Warren Buffett threw David Sokol under the bus in connection with the Berkshire audit committee report on Sokol’s front-running stock purchases, which may be the subject of criminal investigations at this point. Frankly, the Professor makes a good case.

However, no one should be surprised if that was Buffett’s purpose. As noted here, here and here, there is certainly precedent for Buffett offering up sacrificial lambs to protect himself and Berkshire. That precedent certainly had consequences for the ones who were fingered, too.

Meanwhile, Jeff Skilling remains living in a Colorado prison under the cloud of a 25-year prison sentence, partly because he was unwilling to emulate Buffett’s behavior.

Neither Warren Buffett nor David Sokol is a criminal. But neither is Jeff Skilling. What is criminal is a system that offers perverse incentives for risk-takers who generate jobs and wealth to finger others to protect themselves from the government’s arbitrary exercise of its prosecutorial power.

So, Why No Pound of Flesh?

That’s essentially the question that this Gretchen Morgenson/Louise Story/NY Times article asks.

Why have there been so few criminal prosecutions in regard to the 2008 meltdown on Wall Street that prompted a huge federal government bailout that citizens will be subsidizing for decades?

Yet, the intrepid NY Times reporters can’t quite bring themselves to recognize that whether the government pursued and obtained a criminal conviction of a businessperson over the past decade has had much more to do with chance and politics than prosecution of truly criminal conduct.

Could it be that federal prosecutors are finally realizing that old-fashioned greediness really is not be a crime?

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

What the NY Times reporters refuse to confront is that business prosecutions over merely questionable business judgment is fundamentally bad regulatory policy.

Such prosecutions obscure the true nature of business risk and fuel the myth that investment loss results primarily from criminal misconduct.

Taking business risk is what leads to valuable innovation, wealth creation and – most importantly these days – desperately needed jobs for communities. Throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison may placate NY Times reporters, but it does nothing to educate investors about the true nature of risk and the importance of diversification.

Ignorance about business risk is one of the underlying causes of the the criminalization of business lottery. Basing criminal prosecutions on the luck of the draw breeds cynicism and disrespect for the rule of law.

Isn’t it about time that dubious policy be put to permanent rest?

Update: Larry Ribstein — who maintains an entertaining archive of blog posts that he wrote over the years on Morgenson’s misfires — comments on Morgenson’s latest posse-gathering effort here.