The 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

Inasmuch 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.

On 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