During the criminal trial of Ken Lay and Jeff Skilling, attorney Paul Fisher and economist Jim Johnston of the Heartland Institute authored this piece regarding the unjust prosecution Lay and Skilling that echos a common theme of this blog regarding almost all of the Enron-related criminal prosecutions — that the prosecutions were fundamentally weak criminal cases that were really a smokescreen to promote an underlying political agenda of regulating beneficial risk-taking that generates robust markets, wealth, and jobs.

Following on their earlier piece, Fisher and Johnston have written this excellent article that speculates on what the business legacy of Lay and Skilling should be. In so doing, Fisher and Johnston note another common theme of this blog — the intrinsic weakness of the convictions against the two executives:

We are left with two convictions that are devoid of any gain to the perpetrators and illogical to the extreme. The real culprit, in our opinion, is the political establishment in California, primarily Democrats, who were intent on punishing a friend of President George W. Bush and his father. While the California Democrats have escaped unscathed, except for ex-governor Davis, the energy trading system is impaired and corporate accounting is now in chaos. It remains to be seen if these institutions will recover any time soon.

However, even more importantly, Fisher and Johnston note the extraordinary wealth creation that resulted from Lay and Skilling’s risk-taking at Enron, and lament how the understanding of the beneficial nature of that risk-taking is now largely lost amidst the media and government-hyped societal condemnation of Lay, Skilling and Enron:

At the end of the day, when the successes and mistakes are tallied for Ken Lay and Jeffrey Skilling, we predict the result on balance will be positive. Perhaps the biggest contribution was to provide risk management of natural gas prices for producers and industrial consumers. Enron operated the over-the-counter market for a year until the exchange-traded futures and options contracts were offered on the New York Mercantile Exchange in 1990. Those futures contracts are now among the most liquid in the world.

The electricity markets established for California are no longer traded. However, there is a market in the PJM (Pennsylvania, New Jersey, Maryland) region and an auction is to be established soon in Illinois. In the meantime, natural gas contracts serve as a hedging vehicle because gas is the fuel used at the margin to generate electricity.

Enron’s failed broadband joint venture with Blockbuster was intended to bring video on demand. This now exists on cable and is similar to the iPod offered by Apple Computer. This latter system is a masterful accommodation to copyrighted music and video programming where artists are compensated.

Weather derivatives started by Enron and Koch Industries in 1996 for a swap in the following year have evolved into an exchange-traded contract offered by the Chicago Mercantile Exchange. Futures and options contracts based on temperatures in 18 U.S., nine European, and two Asia-Pacific cities are now traded in this market.

Finally, the establishment of a robust water market by Enron failed. However, much was learned from the effort and there is optimism about another try.

We fervently hope that Ken Lay and Jeffrey Skilling will be remembered for their extraordinary contributions, rather than their politically-inspired prosecution.

Amen.

As noted in many of my posts on the Lay-Skilling trial and the Nigerian Barge case, the Enron Task Force turned the Enron-related criminal cases into morality plays that appealed to the dynamics of resentment and scapegoating in disingenuously portraying legitimate and productive business transactions as complex frauds.

The result has been a dangerous misuse of the government’s overwhelming prosecutorial power to impose burdensome regulatory costs on valuable markets.

In reality, a far more progressive government policy would be to encourage precisely the type of risk-taking that Lay and Skilling promoted at Enron to facilitate productive markets, employment growth and wealth creation.

Overall, the Houston Chronicle’s coverage of the Enron case has at least been exhaustive, if not particulalry balanced. But in the interests of exhaustive coverage, was it really necessary for the hometown newspaper to have society columnist Shelby Hodge attempt to crash the funeral of Ken Lay in Aspen on Sunday?

Former Enron chairman and CEO Ken Lay died yesterday of a heart attack. Given the stress that Mr. Lay had endured over the past five years, such a fate is certainly not surprising.

However, my sense is that the heart attack was merely the physical manifestation of what really killed this proud, talented, and flawed man — his inability to overcome the Enron Myth and the societal implications of it.

By now, we all know the myth — Enron was merely an elaborate financial house of cards hidden from innocent and unsuspecting investors and employees by a deceitful management team led by the greedy and lying Mr. Lay.

The Enron Myth is so thoroughly 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 exhibited everywhere:

The Houston Chronicle’s business columnist ridiculing Mr. Lay and calling for his conviction on almost a daily basis throughout the trial;

The community outpouring of celebration over the guilty verdict against Mr. Lay and the self-righteous indignation over his continued claim that he committed no crimes;

A Houstonian interviewed on radio yesterday contending that she was unsatisfied because Mr. Lay’s death had allowed him to escape appropriate punishment;

A prominent Houston-based blogger mocking Mr. Lay’s death (here and here);

Without a smidgen of evidence, a Houston criminal defense attorney suggesting during an interview on MSNBC yesterday that Mr. Lay may have committed suicide to void his conviction.

These are but a few examples of the frequent eruptions from the cauldron of societal bitterness over Enron that are palpable reminders of the fragile nature of civil society.

The Enron Myth conveniently serves to obscure that which most people do not want to confront. Loss, fear, and anger expose our essential human insecurity — Christians sometimes refer to it as our “brokenness.” The vulnerability that underlies such insecurity is scary to behold, so we use myths and the related dynamics of scapegoating and resentment to distract us.

Therefore, a wealthy and powerful businessman who is easy to resent becomes a handy scapegoat. We rationalize that he did bad things that we would never do if placed in the same position and thus, he is deserving of our punishment. That the scapegoat is portrayed as greedy and arrogant — just as we are — makes the lynch mob even more bloodthirsty as it attempts to purge collectively that which is too sordid for its members to face individually.

As noted in this prior post, even the Task Force prosecutors have admitted that the legal case against Lay was extraordinarily weak. But the power of the Enron Myth and the real presumption in the criminal case against Mr. Lay are such that even presumably fair-minded jurors dispense with critical thinking skills when confronted with supposedly the biggest business conspiracy in the history of federal prosecutions.

Rather than seeking the truth regarding that alleged mass conspiracy, the jurors were content with a prosecution that cast Mr. Lay as a liar about Photofete and his company line of credit, and ignored the paucity of evidence of any alleged massive conspiracy or even the true reasons why Enron collapsed. The myth is so pervasive and accepted — why bother with the truth?

The carnage of the Enron Myth and similar myths is now stacked high — the destruction of Arthur Andersen, the vapid Enron-related Congressional hearings, the shallow Enron documentary, Martha Stewart, Jamie Olis, Daniel Bayly, William Fuhs, Frank Quattrone, Hank Greenberg, Mr. Lay’s co-defendant Jeff Skilling (see also here), the NatWest Three — the list goes on and on.

In the wake of such destruction of wealth and lives, the public is even less willing to confront the vacuity of the myth and the destructive dynamics by which it is perpetrated. In fact, any challenge to the myth is now commonly met with derision and appeals to even more resentment over the Enron failure.

Such syndromes are not only an abuse of our justice system. They are also a serious affront to civil society. Ken Lay was no criminal. Did he fudge the truth? Maybe. But even if so, did his lies justify public humiliation, a physically-draining criminal trial, and a life prison sentence?

Not in a truly civil society.

Ken Lay’s sudden death is a terrible tragedy for his family and friends. My family’s thoughts and prayers are with them.

But the larger tragedy is that a myth has again played out as “justice” in our criminal justice system while distracting us from examining what really happened at Enron, understanding the benefits and risks of such a company, and educating ourselves on how to take advantage of such benefits while hedging those risks prudently.

Such a sober undertaking is not as easy as rationalizing a financial failure by calling a rich man a crook and reveling in his demise. But it’s far more likely to result in a better — and far more honest — understanding of investment and markets.

As well as ourselves.

Former Enron chairman and CEO Ken Lay died early this morning in Colorado, reportedly of a heart attack. He was 64 at the time of his death.
I have a day’s worth of meetings that prevent me from collecting and conveying my thoughts immediately on Mr. Lay’s death, but I wanted to pass along a couple of recent posts (here and here) about Mr. Lay and the weakness of the criminal case against him, one of which includes this excerpt about the man that Mr. Lay was:

Lay is clearly a proud man who desperately wants to tell his side of the story, and it is quite a story. Born and raised in a family with little money, Lay worked his way through college and graduate school, landed his first job with Houston-based Humble Oil (the predecessor to ExxonMobil), and then served his country admirably as a Naval officer and Deputy Undersecretary of Interior for Energy for six years during the Vietnam War. After his governmental service, Lay rose quickly through the executive ranks of a couple of gas pipeline companies before assuming the chairman and CEO position of the company that eventually became Enron in 1985. From that perch, Lay accumulated a personal net worth of about $350 million as of 2000 as he oversaw the growth of Enron into one of the largest publicly-owned companies in the U.S., and then saw that net worth evaporate over the past four-plus years since Enron’s collapse into bankruptcy.
But as difficult as that fall must have been, Lay does not appear to be the type of man who is bothered all that much by the loss of wealth, and certainly not nearly as much as he is aggravated by the Task Force and mediaís ravaging of his reputation over the past five years. According to media reports, Lay and [defense counsel Mac] Secrest struggled somewhat during the early stages of Layís direct examination, and my sense is that their struggles were attributable largely to Layís frustration with not being able to explain to the jurors directly ó without the limiting framework of a trial ó the utter contradiction between his life story and the nature of the criminal charges against him.

And, as usual, Larry Ribstein has these insightful observations on Mr. Lay’s death and Peter Henning passes along an interesting implication of Mr. Lay’s death on the criminal case against him.

In the least surprising post-verdict motion to date, the Washington Post’s Carrie Johnson reports that the Enron Task Force filed its forfeiture motion yesterday against former key Enron executives Ken Lay and Jeff Skilling. A bookmarked pdf copy of the motion can be downloaded here.
As expected, the Task Force requests that the remaining net worth of both Skilling and Lay be forfeited to the government to satisfy the Task Force’s contention that the two should pony up about $183 million as the undeserved fruit of the securities fraud for which the two were convicted. In addition to the defendants, the Task Force’s forfeiture request will probably generate opposition from various parties in the civil litigation still swirling around the Enron case, which parties are also seeking compensation from Lay and Skilling on various business and securities fraud claims. Finally, both Lay and Skilling owe substantial amounts to their respective defense teams, so the claims of those firms will also need to be sorted out in connection with the Task Force’s forfeiture claim. Lay and Skilling have requested that U.S. District Judge Sim Lake schedule a bench trial regarding forfeiture issues sometime this fall, but it remains unclear at this time just how Judge Lake will handle the Task Force’s forfeiture request.

In a strong indication that he believes that the matter raises important appellate issues, U.S. District Judge Sim Lake issued a 22 page opinion late last week in the criminal case of former key Enron executives Ken Lay and Jeff Skilling expanding on the reasons for his ruling during the trial denying Lay and Skilling’s request that Judge Lake grant defense immunity to a half-dozen or so former Enron executives who Lay and Skilling believe would have provided exculpatory testimony for the defendants.

Lay and Skilling contend that the Enron Task Force used the threat of indictment against those former executives and dozens of other former Enron executives to induce the witnesses to assert the Fifth Amendment against self-incrimination rather than provide exculpatory testimony for Lay and Skilling.

The Task Force’s tactic of icing favorable witnesses for Lay and Skilling has been swirling around the case from the beginning. Lay and Skilling raised the issue prior to trial in regard to the Enron Task Force’s alleged intimidation of witnesses.

Then, Lay and Skilling raised the issue again during the trial as the defendants struggled to corroborate their testimony that key Task Force witnesses Ben Glisan and Andrew Fastow were lying when they testified that they had cautioned Lay and Skilling about Enron’s shaky financial condition at various times when Lay and Skilling were making positive statements to the market regarding the company’s finances.

In a key part of the ruling, Judge Lake explains his reasoning for denying Lay and Skilling’s request for the Court to grant defense immunity to the proposed witnesses:

The testimony that defendants expect the proposed witnesses would provide may be relevant and exculpatory, but it falls far short of being essential exculpatory evidence for the simple reason that defendants do not — and cannot — argue that these are the only witnesses capable of providing exculpatory evidence on these issues.

When defendants filed their motion to immunize the proposed witnesses both defendants had testified and their testimony contradicted the government’s evidence on these issues. At best, the anticipated testimony of [the witnesses] would be cumulative of the testimony of defendants and of other evidence presented by defendants. Accordingly, the court concludes that the defendants have failed to establish that the testimony that defendants seek to immunize would constitute essential exculpatory evidence.

This reasoning seems oddly superficial. Not only does it fail to address the fact that the Task Force’s witness-icing strategy allowed the prosecution to use hearsay statements from alleged co-conspirators against the defendants, the reasoning ignores the important impact that corroborating testimony has in a criminal trial.

Just as prosecution witnesses testifying under draconian plea deals have a powerful incentive to testify favorably for the prosecution, defendants asserting their innocence have a similar incentive to testify consistent with that position.

Juries intuitively understand this dynamic, and thus often discount such testimony while placing more weight on the testimony of corroborating witnesses who are not subject to those pressures. That Judge Lake’s opinion does not address that important impact of the Task Force’s witness-icing strategy will almost certainly be a key point on the appeal of this issue.

By the way, the same prosecution witness-icing strategy that was used in Lay-Skilling case is already an issue in the Nigerian Barge appeal. Inasmuch as a number of the convictions in the barge appeal already appear to be unraveling, the Fifth Circuit may even issue a ruling on the issue before the Lay-Skilling appeal arrives at the Fifth Circuit’s doorstep.

In his first meaningful public comment since being convicted on 19 criminal charges, former Enron CEO Jeff Skilling agreed to this Wall Street Journal ($)/John Emshwiller interview in which he concedes, among other things, that his decision to testify before the SEC in the aftermath of Enron’s collapse into bankruptcy provided prosecutors with the information (particularly Photofete) that they were able to use to undermine his credibility with the jury during his trial.

Inasmuch as Skilling made his decision to testify in front of the SEC and Congress against the advice of his counsel, one of the many legal ramifications of Lay-Skilling trial is that any future corporate executive confronted with a criminal investigation into his company’s business will almost certainly assert the Fifth Amendment privilege in connection with any investigation and decline to provide the executive’s perspective about what happened at the company.

Thus, the prosecution’s use of Skilling’s faulty memory about Photofete and his attempted Sept. 6, 2001 Enron stock sale reinforced a perverse incentive for business executives — if an executive declines to assist in determining what really caused the business failure of the executive’s company, then the chance of the executive being successful in what Larry Ribstein calls the lottery of corporate criminal trials improves.

Some public policy, eh?

Meanwhile, WaPo’s Carrie Johnson reports on Skilling’s attempt to use a portion of the $60 million or so that the prosecution has frozen in connection with the criminal charges against him to pay his defense firm.

By my estimate, the Lay-Skilling defense teams have now incurred a total of over $100 million in defending the charges against the two former executives. In the great waste of criminalizing corporate agency costs, the price of asserting innocence continues to increase.

By the way, Skilling and Lay’s sentencing hearing has been postponed for six weeks to October 23.

U.S. District Judge Vanessa Gilmore’s decision to conduct the re-trial of former Enron Broadband executives Kevin Howard and Michael Krautz during the latter stages of the media-saturated Lay-Skilling trial was highly prejudicial to Howard and Krautz.

As it turned out, the juries in both cases deliberated at the same time, and the Howard-Krautz jury was deliberating amidst the media firestorm on the Thursday before Memorial Day weekend when the Lay-Skilling verdict was announced.

The following Tuesday, the Howard-Krautz jury returned a verdict convicting Howard and acquitting Krautz.

The dubious nature of the decision to conduct the Howard-Krautz trial during the Lay-Skilling trial is now becoming readily apparent.

This John Roper-Purva Patel/Houston Chronicle article reports that Howard’s defense team has filed a motion for a new trial that contains statements from two jurors and two alternate jurors in the Howard-Krautz trial alleging that the Howard-Krautz jury deliberations were seriously compromised and that certain jurors promoted a vindictive environment in the jury room “to fry” top Enron executives, including Howard.

It does not appear that the Chronicle reporters had a copy of the motion when they prepared their article, but the motion and affidavits confirm the following troubling allegations:

Jurors holding out for acquittal for Howard were threatened with physical harm from jurors pushing for conviction;

Contrary to Judge Gilmore’s instructions, certain jurors regularly discussed the case between themselves during the trial and, after deliberations began, discussions among certain jurors took place outside the jury room;

One male juror asserted that he was an expert on Enron because he had read one of the books on the Enron scandal, and used information from the book in persuading jurors to convict Howard;

The jury in the Howard-Krautz trial deliberated in a room literally next door to the room used by the Lay-Skilling. When the Lay-Skilling jury agreed on a verdict, the loud applause and cheering from the Lay-Skilling jury room was readily apparent in the Howard-Krautz jury room; and

Without advising attorneys involved in the case, Judge Gilmore met with and answered questions from the jurors at least twice during deliberations, including immediately after the Lay-Skilling verdict was announced.

According to the jurors quoted in Howard’s motion, Judge Gilmore told the jurors after the Lay-Skilling verdict that they had to reach a unanmious verdict, leaving the holdout jurors with the impression that a hung jury was not an option.

Moreover, one juror also advised the rest of the jurors that the hung jury in the previous Enron Broadband trial (a fact that was not brought up during the retrial) was a failure that would be emulated by jurors in the retrial if they also could not reach a verdict.

Although the allegations regarding Judge Gilmore’s ex parte communications with the jury will likely put her on the defensive and prone to deny Howard’s request for a new trial, the motion indicates that the Howard-Krautz trial probably should not have been conducted in Houston and, at very least, should never have been allowed to proceed during the Lay-Skilling trial.

The Fifth Circuit — which already has some issues with Judge Gilmore — is likely to take Howard’s appeal on these issues very seriously.