It’s been a week now since Malcolm Gladwell’s New Yorker article on the injustice of the case against Jeff Skilling. One of the more revealing reactions to the article resulted from a question that Gladwell posed in this blog post relating to his article:

Can anyone explain – in plain language – what it is Jeff Skilling and Co. did wrong? . . . The question is strictly a legal one: according to the way the accounting rules were written at the time, what specific transgressions were Skilling guilty of that merited twenty-four years in prison?

Peter Lattman forwarded Gladwell’s question to former Enron Task Force prosecutor John Hueston, who is now in private practice.

You may recall Hueston from the Lay-Skilling trial — he was the prosecutor who conducted a largely disingenuous cross-examination of the late Ken Lay and then bragged after the trial to the New York Times that he and the other Task Force prosecutors had brilliantly convicted Lay even though the case against him was weak (he is proud of that “accomplishment”?).

At any rate, Hueston’s response to Lattman’s request largely avoids addressing Gladwell’s straightforward question, preferring instead to speak in the platitudes that have become all too familiar to anyone who attempts to have an objective discussion of anything having to do with Enron. However, toward the end of his email to Lattman, Hueston makes three conclusory statements that are at least somewhat responsive to Gladwell’s question:

Skilling was found guilty because he was caught flat-footed in lies about the performance of highly-touted business units such as Enron Broadband Services, telling employees the sour truth about the dismal state of the EBS business and then reversing course in a public call with analysts just eight days later. Skilling didn’t suspect earnings manipulation, he condoned and promoted it with CFO Fastow and CAO Causey, who kept a tally sheet that included accounting side deals that unequivocally violated accounting rules.

Likewise, Ken Lay repeatedly and falsely misrepresented the performance of Enron’s business units, told employees and others to ignore the Wall Street Journal exposes and reports from short sellers, and lulled them with reports of his purchases of Enron stock as he quietly dumped $70 million of his Enron holdings.

Taking Hueston’s point about EBS first, and as noted in this earlier comprehensive post on the Enron Task Force’s case against Skilling, the Task Force attempted to prove that Enron lied about the health of EBS exclusively through the testimony of four cooperating witnesses who had copped pleas with the Task Force to hedge the risk of long prison sentences — former Broadband executives Ken Rice and Kevin Hannon, and former Enron investor relations executives Mark Koenig and Paula Rieker.

Of course, Hueston doesn’t mention that fact, nor the fact that the Task Force effectively prevented witnesses with exculpatory testimony for Skilling from testifying during the trial and disputing the cooperating witnesses’ allegations.

Moreover, the documentary evidence regarding EBS introduced during the trial actually supported Skilling’s defense. Documents showed that EBS experienced substantial growth during 2000 in volumes traded and number of counterparties, and that Enron repeatedly had disclosed sales of fiber through monetizations as part of EBS’s business.

Even more importantly, far from being the vehicle for fraud that Hueston suggests, Enron’s broadband unit was attempting to develop and deliver the video-on-demand service that is now a popular and profitable product of cable television and Apple’s iPod. These systems are a creative accommodation to copyrighted music and video programming under which enormous wealth is generated for artists and shareholders. As Skilling passionately testified during his trial:

And one last thing — I’ll make the last one argument for Broadband because people criticize me about Broadband, and I will take the criticism. We — certainly, we made a mistake. But it wasn’t big. I mean, it was a billion dollars. We invested a billion dollars in the Broadband business. If it had worked, it could have been worth $30 billion. It didn’t work. We lost a billion dollars, but if you can make those kinds of bets, that’s the kind of the risk you [should be taking] as a corporation. And if you do a lot of [deals with a] downside of a billion and upside of 30 [billion], you’re doing a good job for your shareholders in the long run, in my opinion. This one didn’t work.

Frankly, given the current value of video-on-demand technology, Skilling’s valuation of Enron’s Broadband business — had the company been able to capitalize on its investment — was probably low. Yes, Enron ended up being ahead of the market in regard to this investment. But what public policy does it serve to have the likes of Hueston use government power to prosecute businesspeople who take the risks necessary to facilitate the development of this type of valuable asset?

Moving on to Hueston’s other allegation against Skilling, the evidence that Skilling engaged in earnings manipulation is so sketchy (see more extensive discussion in the earlier comprehensive post) that Hueston resorts to attempting to tie Skilling to the alleged Global Galactic agreement between Fastow and Causey.

Revealingly, only the non-believable Fastow testified during the trial that Skilling knew about Global Galactic. Moreover, even after Causey copped a courthouse steps plea deal to hedge the risk of the effective life sentence that Skilling received, the Task Force chose not to call Causey as a witness.

More than likely, the reason that the Task Force did not call Causey is that Causey wouldn’t have corroborated Fastow at all, which raises a quite reasonable question — why did the Task Force prosecutors use Fastow’s testimony to convict Skilling when they knew that there was reasonable doubt about Fastow’s veracity?

Indeed, what does Hueston have to say about the Task Force’s duplicity with regard to Fastow’s testimony during the Lay-Skilling trial? And again, what does Hueston have to say about the numerous witnesses who the Task Force effectively prevented from testifying who would have provided exculpatory testimony for Skilling and refuted Fastow’s testimony?

Finally, as to Hueston’s allegations regarding the late Mr. Lay, one can only ponder what he is remembering? Lay was charged with wrongdoing for only about a two-month period following his return to Enron’s CEO position after Skilling resigned unexpectedly in mid-August, 2001. Had Lay not made that ill-fated return at the behest of the Enron board, he presumably would not have been charged at all.

Moreover, Hueston spent most of his time cross-examining Lay during the trial about his lavish lifestyle and his line-of-credit arrangement with Enron, neither of which represented the core basis of any of the criminal charges against him.

In fact, the entire line-of-credit issue reflects how the Task Force elevated form over substance in the Lay-Skilling prosecution.

Lay traditionally took a substantial part of his compensation from Enron in stock, which was a good thing for both the company and him. As an accommodation to Lay, Enron’s board approved a line of credit — eventually reaching $7.5 million — that allowed Lay to monetize the stock efficiently by borrowing on the line and then repaying it with his Enron stock. Each year, Lay and Enron complied with the requirement under SEC rules to disclose Lay’s use of stock to pay the credit line.

That arrangement probably wouldn’t have made any difference except that Lay made what turned out to be a bad decision in regard to his personal financial affairs well before the time that the Task Force contended he was involved in wrongdoing at Enron. Because his at-one-time $300 million-plus net worth was almost entirely invested in Enron stock, Lay and his financial advisers decided that he should diversify his portfolio.

However, Lay continued to believe that Enron stock was the best value in his portfolio. So, rather than selling the stock and using the proceeds to buy other securities, Lay borrowed $100 million from third party financial institutions, pledged his Enron stock as collateral and began buying other assets with the loan proceeds. Accordingly, Lay was actually exhibiting an optimism and confidence in the underlying value of Enron, a fact that the Hueston blithely ignores in alleging that Lay knew that Enron was a sinking ship.

The steady decline in Enron stock price during 2001 undermined the value of the Enron stock collateral for the $100 million in personal loans that he had used to diversify his portfolio. Thus, as the collateral value fell and margin calls resulted, Lay used the most efficient facility at his disposal to repay about $70 million of debt in 2001 — i.e., the proceeds from draws on his company line of credit, which he repaid with his Enron stock.

During his cross-examination of Lay, Hueston hammered Lay relentlessly over the fact that Lay did not disclose to Enron employees in late October, 2001 that he was using Enron stock to repay the line of credit, on one hand, while advising the employees at the same time that he was purchasing Enron stock and that the stock remained a good value, on the other.

However, Hueston is simply wrong in his contention that Lay was dumping Enron stock at a time when he was advising employees and the market that it was a good value.

In September 2001, Lay accepted $10 million in cash and another $10 million in Enron stock in return for agreeing to step back into the CEO role after Skilling resigned, and Lay used the $10 million in cash to repay a portion of his margin loans.

In so doing, Lay effectively bought $10 million in Enron stock, meaning that Lay acquired over $20 million in Enron stock roughly a month before he made the statements to Enron employees of which Hueston complains.

Consequently, even though Lay was also paying his line of credit with Enron stock at the same time, his acquisition of another $20 million in Enron stock is consistent with the optimistic view about Enron that Lay was communicating to employees and the public. In his quest to demonize Lay, Hueston simply ignores that fact.

So at the end of the day, Hueston falls squarely into what Gladwell calls the Higgs Boson syndrome with regard to answering Gladwell’s question. Hueston is gung-ho for nailing Skilling and Lay, but he just can’t plainly explain their guilt without leaving out important parts of the story.

Of course, it is far easier to conclude that someone is guilty of a crime if you start from the presumption that they are guilty of the crime.

In reality, Hueston’s view simply plays to the real presumption in the case against Skilling and Lay — that Skilling and Lay were rich, Enron went bust, and investors had big losses, so Skilling and Lay must be guilty of something.

Although they made some bad business judgments (as well as some very good ones), Skilling and Lay are not the villains that Hueston and many in the mainstream media portray them to be. Skilling and Lay may not have been saints, but it should give us all pause that the government’s overwhelming prosecutorial power has been manipulated to hand them effective life sentences for, at worst, denying that their business dream had ended.

In a few days, unless the Fifth Circuit grants his motion to remain free on bond pending appeal of his conviction, Jeff Skilling will report to prison to begin serving a 24-year prison sentence.

The image of Skilling entering that Minnesota prison will be a powerful reminder of the collossal failure of the American criminal justice system in the case against him and others caught up in the Enron maelstrom.

Given the societal bias against Skilling and nearly everything else related to Enron, it’s not all that surprising how little most people know about the case against Skilling. “Wasn’t he prosecuted for Enron’s fraudulent accounting?” I am often asked. Well no, he was not. The government dropped those charges.

“Well then,” they ask. “Wasn’t he prosecuted for causing Enron to go bankrupt?” Again, no, I reply patiently, Enron Task Force prosecutors repeatedly declared throughout Skilling’s case that they were not prosecuting him because Enron failed.

Of course, those same prosecutors quickly dispensed with that myth during Skilling’s sentencing hearing when they blamed him for Enron’s failure so that they could heap a huge prison sentence on him. But that’s another issue.

“But wait,” they invariably say. “Didn’t they go after him because of those shady partnerships that he did with that guy Fastow?” No, I point out, the prosecutors didn’t even attempt to prove that any of those special purpose entities (“SPE’s”) were illegal.

“Well, shoot” most folks finally throw up their arms in exasperation. “He’s rich and a bunch of people lost money when Enron went down the tubes. He must have done something criminal.”

I have had literally hundreds of conversations similar to the foregoing. The ugly reality is the same one that we didn’t want to confront when Ken Lay died and one that we resist confronting now — Jeff Skilling was lynched by an angry mob.

The primary justification that the mob gives for the absurdly-long sentence for Skilling almost always is the plight of the innocent employees and investors who lost their nest eggs when Enron went bankrupt.

But the main reason that those nest eggs ever had value in the first place was because Skilling had 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 there is nothing wrong with having compassion for folks who lose money on an investment, rarely is it mentioned in the Enron morality play that many of those investors who lost their nest egg when Enron melted down were imprudent in their investment strategy. They 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 things did not go as planned.

Even though virtually all of those innocent Enron investors carry insurance on their homes and cars, one can only speculate why they didn’t attempt to hedge the risk of their investment in Enron stock. Probably, most of them simply did not understand how Enron’s risk management services created their wealth in the first place. Thus, when that wealth evaporated during Enron’s meltdown, they didn’t even try to understand what had occurred. They simply joined the unruly mob calling for Skilling’s scalp.

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

Thus, instead of attempting to tell the entire story, much of the mainstream media simply became a part of the mob. 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 to Skilling and others.

Although the Enron Task Force has succeeded in securing a few convictions for the anti-Enron mob, the mob’s work has not withstood scrutiny on appeal. After the mob had caused enormous wealth destruction and job loss by indicting and convicting Arthur Andersen, the Supreme Court unanimously reversed the conviction, concluding that the Task Force had obtained an improper mens rea instruction that allowed the jury to convict the firm for merely negligent or innocent conduct.

Then, in the Nigerian Barge case, the Fifth Circuit reversed the Merrill Lynch defendants’ convictions (but only after each of them had been forced to endure a year in prison) because the Task Force had pressed for an improper “honest services” theory of liability that stretched the wire fraud statute beyond any reasonable interpretation.

Finally, after the spurious conviction of former Enron Broadband Services executive Kevin Howard, the Task Force recently conceded that the Fifth Circuit’s decision in the Nigerian Barge appeal requires that all but one of the counts of conviction be vacated.

In fact, you won’t read about it much in the mainstream media, but Skilling’s appeal presents the same issues as Andersen and the Nigerian Barge case.

As in Andersen, the Task Force in Skilling’s case successfully argued at trial for an improper mens rea instruction on “deliberate ignorance” that invited the jury to convict Skilling based on a civil, “should have known” standard of liability.

Similarly, the Task Force rested its core conspiracy count and the ensuing substantive charges against Skilling on the same “honest services” theory of criminal liability that the Fifth Circuit rejected in the Nigerian Barge case,

So, just what was it again that Skilling did that could possibly justify a 24-year prison sentence for a man who was not even accused of stealing a dime from his company?

As our criminal justice system places this man in a prison cell for perhaps the rest of his life, take a few minutes to review the following summary analysis of what Skilling was accused of doing and the evidence that was presented at trial relating to those charges. It’s a foreboding tale for those who understand the fragile nature of justice and the rule of law in even a civil society.

In February 2004, after three years highly-publicized investigation, the Enron Task Force filed a sweeping 35-count indictment against Skilling, alleging conspiracy to commit securities fraud, securities fraud, wire fraud, making false statements to Enron’s external auditors, and 10 counts of insider trading.

The same indictment contained 11 counts against former Enron chairman and CEO Ken Lay and another 34 counts against former Enron chief accounting officer Richard Causey. Just days before the trial was scheduled to commence, Causey pled guilty to one count of securities fraud in exchange for a maximum seven-year sentence with the possibility of less time should he cooperate with the Task Force (he was eventually sentenced to a 5.5 year prison term).

At the outset, it should be noted that it is impossible to determine what specific fraudulent conduct the jury concluded that Skilling committed because the jury returned only a general verdict (Skilling’s lawyers requested that a special verdict to the jury, but U.S. District Judge Sim Lake denied that request). As noted above, Skilling was not charged with causing Enron’s bankruptcy and, unlike Enron’s chief financial officer, Andrew Fastow, Skilling was not charged with self-dealing, stealing or other acts by which he directly profited from the company. Indeed, Fastow later conceded during his testimony that he had successfully concealed his fraud from Skilling and others at the company.

At trial, the Task Force’s case against Skilling was based almost entirely on the testimony of cooperating witnesses, all of whom agreed to testify in exchange for leniency and favorable sentencing recommendations from the Task Force. Dozens of other witnesses who would have provided exculpatory testimony for Skilling were “iced” by the Task Force from testifying out of fear that they would be indicted if they did so.

The Task Force’s case relied on virtually no documentary proof — in fact, there were no documents or other pieces of tangible evidence directly implicating Skilling in any crime.

Skilling’s defense was simple and straightforward. He essentially contended the following:

Enron was a sound company that was enduring the transient post-bubble pressures that many public companies were facing during much of 2001; There was no wide-ranging conspiracy to cook Enron’s books or lie about the company; The challenged statements made to the public were true and that the challenged financial transactions were proper; and most of the cooperating witnesses pled guilty because of fear and pressure, not because they had committed crimes.

The theory of Skilling’s defense is particularly important because it did not rely on an “I didn’t know” or “ostrich” defense. Nevertheless, the Task Force convinced the Judge Lake to give the jury a “deliberate ignorance” jury instruction and other instructions permitting the jury to convict Skilling for depriving Enron of his “honest services.” As is now clear Fifth Circuit law, such a theory of liability applies only where the defendant looted from the company or engaged in self-dealing. Those faulty jury instructions are now at the core of Skilling’s appeal of his conviction.

Despite the myriad of claims that the Task Force initially asserted in its indictment against the Skilling, the Task Force’s case against Skilling at trial ultimately boiled down to only seven discrete areas:

1. Use of SPEs/LJM Partnership to misrepresent Enron’s financial condition;

2. Use of Enron Wholesale reserve accounts to misrepresent Enron’s financial condition;

3. Misrepresentation of Enron Energy Services’ financial condition;

4. Misrepresentation of Enron Broadband Services financial condition;

5. Misrepresentation of Enron’s third quarter 2001 earnings;

6. Involvement in filing false SEC Annual and Quarterly Reports; and

7. Skilling’s September 17, 2001 Enron stock sale.

The following summarizes the evidence on each of the foregoing areas:

1. Use of SPEs/LJM Partnership. As with the Nigerian Barge case and the Kevin Howard case, the Task Force argued at trial that Enron’s off-balance sheet accounting treatment for several transactions entered into with the LJM Partnership — one of Fastow’s infamous SPE’s — was rendered fraudulent by virtue of “secret side deals” between Skilling and Fastow. To prove the side deals, the government relied on the testimony of Fastow, former Enron treasurer Ben Glisan, and a former junior Enron finance division executive, Christopher Loehr.

With the exception of Fastow, no witness directly implicated Skilling in the alleged oral side deals. Loehr never mentioned Skilling in his direct testimony, stating only that he had heard from Fastow about an understanding with Enron.

Glisan testified that he had no knowledge of Skilling giving an oral guarantee or verbal assurance on any deal. Indeed, with respect to the Nigerian Barge transaction, Glisan testified that he heard that an “oral assurance” came from Causey, not Skilling. Likewise, Glisan’s notes indicated no improper dealings involving Skilling.

The Task Force elected not to call Causey as a witness.

Even Fastow conceded that Skilling never used the word “guarantee” in their conversations and that Skilling’s alleged “bear hug” in regard to the Cuiaba transaction was not legally enforceable. The Task Force produced no documents, emails, memos, or notes that corroborated Fastow’s testimony regarding the alleged side deals.

Skilling denied having made any oral side agreements or secret guarantees, or being aware of anyone else at Enron making them. He explained that Enron’s internal and external accountants and lawyers reviewed each of the transactions and signed off on the accounting treatment. Moreover, although accountants such as Glisan and former Arthur Andersen partner Tom Bauer testified that an oral guarantee would invalidate Enron’s accounting of the LJM transactions, the Task Force did not ask either one whether the words that Fastow alleged Skilling said to him — “you won’t get hurt; you won’t lose any money” — constituted such a guarantee or would invalidate the accounting treatment.

2. Use of Wholesale Reserve Accounts. The Task Force attempted to prove that Enron improperly manipulated its earnings by adjusting reserve accounts in the company’s Wholesale business unit. Former Enron accountant Wesley Colwell and former Enron Wholesale executive David Delainey testified that they personally used reserve accounts to meet quarterly estimates, and Andersen accountant Bauer opined that such use of reserves violated accounting rules.

However, the Task Force introduced no evidence that Mr. Skilling authorized, directed or even knew about any improper use of reserves. Colwell’s interactions were solely with Causey. Colwell testified that Causey had told him that Skilling would “like an additional two pennies of earnings” in the second quarter of 2000 and later, in the fourth quarter of 2000, that Mr. Skilling would like to “land the quarter” on a specific number. But the Task Force introduced no direct evidence that Skilling’s alleged statements — or even the statements of Causey, for that matter — directed or even suggested to Colwell that he should improperly use reserves to meet earnings or revenue targets.

As with his testimony regarding the SPE’s, Skilling testified that Enron’s experts on establishing reserves advised him that the reserve amounts were appropriate. Accounting expert Walter Rush, who appeared as an defense expert (the Task Force did not call an independent expert on this issue), testified about the accounting rules applicable to reserve accounts and concluded that the reserve amounts for both second and fourth quarters of 2000 were proper and lawful.

Likewise, Andersen accountant Bauer confirmed that Arthur Andersen had independently reviewed the reserve amounts each quarter and determined them to be the appropriate number.

Finally, the evidence at trial reflected that the second quarter reserve ended up being almost precisely equal to the value of the contingency for which it was originally established, and that the fourth quarter volatility reserve tracked almost exactly the volatility in the marketplace.

3. Enron Energy Services. The Task Force attempted to prove that Enron and Skilling lied about EES’s growth while simultaneously hiding mounting EES debts. Relying on the testimony of Delainey, Timothy Belden, and Wanda Curry, the Task Force asserted that EES first moved an uncollectable receivable to the Wholesale division in the fourth quarter of 2000 and then transferred the entire EES risk management book to Wholesale in the first quarter of 2001 (“the resegmentation issue”). According to the Task Force’s theory, these events occurred solely to make EES look more profitable than it really was.

The various witnesses expressed different opinions as to the reasons for the moves with regard to EES, but not one of them stated that someone had told them that the reason for the moves was to bolster EES’s profitability.

Likewise, not one of the witnesses attributed knowledge of that alleged motive to Skilling. With respect to the transfer of the fourth quarter 2000 receivable, the Task Force did not dispute that Arthur Andersen had analyzed the transfer and approved the accounting treatment. Defense witness Diann Huddleson testified that Enron management believed it could collect on the receivable and ultimately did collect the majority of the outstanding amount.

As for the resegmentation issue, Skilling testified that moving the risk book made sense from a business standpoint, and former Wholesale division executive Rogers Herndon confirmed Skilling’s version by testifying that the Wholesale unit improved the efficiency and value of that risk book. Even Delainey, the government’s primary witness on this issue, conceded that he ultimately recommended to Skilling that the risk book be moved and accounting expert Rush testified that the transfer complied with applicable accounting rules.

4. Enron Broadband Services. The government attempted to prove that Enron lied about the health of EBS through the testimony of former Broadband executives Ken Rice and Kevin Hannon, and former Enron investor relations executives Mark Koenig and Paula Rieker. They testified that the floundering unit had no customer base and propped up its revenue numbers through the sale of dark fiber, investment returns, and monetizations, all of which constituted non-core activities. They also testified that Skilling told analysts that EBS was a strong division with sustainable high earnings power when, at the same time, the unit was starting to lay off employees.

The Skilling defense refuted all of that testimony. Documentary evidence showed that EBS experienced substantial growth during 2000 in volumes traded and number of counterparties, and that Enron repeatedly had disclosed sales of fiber through monetizations as part of EBS’s business.

As to the allegations regarding layoffs, both government and defense witnesses refuted the Task Force’s allegations. Marla Barnard, former head of human resources for EBS, testified that she developed the redeployment plan and it was a bona fide redeployment. Task Force witness Hannon also confirmed that the EBS employee reassignments were the result of a redeployment, not a layoff.

5. Third Quarter 2001. Skilling announced his resignation to Enron’s Board early in the third quarter of 2001 and resigned on August 14, 2001. As a result, he could not have participated in the alleged third quarter frauds and misrepresentations. Nevertheless, the Task Force attempted to connect him to information discussed during an August 13, 2001 joint meeting of the Board, which the Task Force claimed should have been disclosed to the public.

Rieker, Koenig, Glisan, and Fastow testified about two parts of that meeting. The first was a liquidity presentation that previewed a series of events that could result in a bankruptcy of Enron and also showed that Enron had recorded several assets at a combined $5 billion dollars above their present value. The second was a discussion about several challenges facing the company, including EES and EBS income issues, Wholesale trading and the Raptor transactions, all of which had increased the company’s financial risks.

Skilling explained in his testimony that there was nothing fraudulent or even particularly unusual about the liquidity presentation. It had been prepared at his direction by the company’s Risk Assessment and Control Department as part of established procedures to manage Enron’s risks. The presentation analyzed several extreme risk scenarios, including nuclear disaster, credit downgrade, recession and hurricane. Notably, the presentation concluded that, even under these highly unlikely worst-case scenarios, Enron would be able to survive.

Similarly, Skilling refuted the allegation that Enron’s asset portfolio was inflated. The asset valuation question had been referred to the accountants, who opined that an impairment was not necessary.

In addition, documentary evidence indicated that the valuation was preliminary in nature and based on dated models. The lower estimate of value that Skilling provided was his best estimate as to what Enron could generate for the assets in a “fire sale” given unfavorable foreign currency markets.

Finally, with respect to the business challenges that Enron faced, these were all issues that management and the board knew needed special attention, but they were not particularly unusual for a company of the size and complexity of Enron and did not present revenue concerns. On the contrary, the Skilling defense presented evidence that corroborated Skilling’s view that Enron was in great shape when he resigned.

6. SEC Annual and Quarterly Reports. The Task Force argued that Skilling, along with Causey, was responsible for the preparation, drafting, and accuracy of Enron’s financial statements. In the Task Force’s view, any proven misrepresentation not disclosed in the financial statements was unlawful.

Although Skilling was responsible for the accuracy of those statements, he did not prepare or draft them. Rather, he reviewed them at the very end of a lengthy preparation and review process, which involved scores of business unit personnel, accountants, and lawyers. Defense witness and former Enron general counsel Jim Derrick testified about this process and stated that Skilling had never once overruled a recommendation concerning preparation of Enron’s financial statements. Derrick’s testimony was uncontroverted at trial.

7. September 17, 2001 Sale of Stock. Skilling was acquitted on all counts of insider trading except for his sale of 500,000 shares of Enron stock for approximately $31 dollars per share on September 17, 2001.

The Task Force contended that Skilling knew about the alleged criminal conspiracy at Enron and chose to unload his stock before the fraud was disclosed. The Task Force further alleged that Skilling met with Lay and others at Enron after his resignation, and intimated that Skilling must have known about the Sherron Watkins memo and related investigation. That allegation was unsubstantiated by any testimony or evidence during the trial.

The actual evidence at trial showed that Mr. Skilling’s historical trading patterns were inconsistent with a scheme to pump and dump Enron stock. From January 1999 until he left Enron in August 2001, Skilling increased his stock holdings by 255%. Moreover, as Skilling explained, and contemporaneous tape recordings and the testimony of witness Glenn Ray corroborated, he received no inside information after his departure from Enron, did not trade on any inside information and did not have a plan to sell his Enron stock prior to the attacks on New York and Washington, D.C. on September 11, 2001.

Shortly after resigning, Skilling shorted the stock of one of Enron’s competitors, AES Corp. As a result, Skilling was considering selling shares of Enron on September 6, 2001 to create what is known as a bull hedge to spread risk throughout his portfolio.

However, Skilling’s broker advised him that he could not execute the sale at that time because he had not yet received a letter from Enron confirming Skilling’s resignation. After additional discussion with the broker, Skilling elected not to sell any Enron shares at that time.

After September 11, Mr. Skilling (along with most investors) became concerned about the effect that the event would have on the market and sold a large portion of his Enron shares on the day the markets reopened. By then, Skilling and his broker had been advised by Enron general counsel Derrick and SEC lawyer Rex Rogers that he was free to sell Enron stock.

After Enron melted down, the SEC, toward the end of a lengthy examination of Skilling, asked him why he sold the 500,000 shares of Enron stock on September 17, 2001. Skilling replied that he feared the market reaction to the tragic events of September 11. The SEC then asked if there was any other reason why he sold the stock, and Skilling replied, “[t]here was no other reason other than September 11th that I sold the stock.” The SEC followed up, asking if Skilling had a plan to sell his Enron stock before September 11, and he replied “no.”

At trial, the Task Force argued that Skilling’s tape-recorded conversation with his broker on September 6 proves that he lied to the SEC and that his trial testimony that he had forgotten about the September 6 call was not credible. However, Skilling’s September 6 broker call was hardly a part of any plan to liquidate his Enron position — he was simply exploring whether to sell some stock as a part of a bull hedge. When he discovered that he could not do so at that time, he moved on to other matters with the broker and soon thereafter terminated the call.

Inasmuch as Skilling sold 2.5 more shares of Enron stock on September 17 than he was contemplating selling on September 6, it is certainly reasonable that Skilling could have simply forgotten about his September 6 conversation with the broker, particularly given that he was asked about it during the SEC examination at the end of a long day.

So, there you have it. Is that a record that even comes close to being enough to throw a talented and tortured man behind bars for most of the rest of his life?

Not in a truly civil society.

The truth is that Enron was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation that got caught in a liquidity crunch when the markets became spooked by revelations about Fastow embezzling millions in the volatile months after September 11, 2001.

Fastow’s embezzlement is a crime, but Enron’s unfortunate demise is not, nor should it be. Beyond the shattered lives and families, the real tragedy here is that the angry anti-Enron mob convicted Jeff Skilling, trumping the rule of law and the dispassionate administration of justice along the way.

The truth is that none of us would be able to survive “in the winds that blow” from the exercise of the government’s overwhelming prosecutorial power in response to the demands of the mob.

Here’s hoping that Skilling’s unjust conviction and sentence are reversed on appeal. Not only for his benefit, but for ours.

So, as Peter Lattman reports, most recent Enron Task Force director Sean Berkowitz is the latest in a long line of former Task Force prosecutors who parleyed prosecuting unpopular Enron executives into a more lucrative career than government work.

Berkowitz led the team that obtained convictions against Jeff Skilling and Ken Lay, but his main attribute as the Task Force director is that he was not as bad as his predecessor, Andrew Weissmann, who was primarily responsible for the economic and human carnage of putting Arthur Andersen out of business and of sending four Merrill Lynch executives to prison for over a year before their utterly unjust convictions were vacated and, in one case, reversed.

However, one interesting item about Berkowitz arose shortly after the Lay-Skilling trial when the New York Magazine reported that Berkowitz was having a whirlwind romance with Bethany McLean, the co-author of the original Enron expose’, Smartest Guys in the Room.

Inasmuch as McLean had covered the trial for Fortune magazine, both Berkowitz and McLean were careful to state publicly that they didn’t start dating until after the conclusion of the trial.

However, several reporters who covered the trial confided to me after the romance became public that they had suspected something was up between the two during the trial because of how chummy they had become.

All of which reminded me of something that occurred at an early stage of the Lay-Skilling trial. Taking a page from this earlier post that criticized the Wall Street Journal’s coverage of the trial, lead Skilling lawyer Daniel Petrocelli sent a letter to the Fortune editor pointing out the rather clear conflict of interest that McLean and her Smartest Guys co-author, Peter Elkind, had in covering a trial in which they had a vested interest in the outcome.

As this Talk News Biz post relates (the entire letter, published by Fortune on March 2, is here, but you have to scroll down), Petrocelli noted as follows:

It is ironic that so much of Elkind and McLean’s criticism of Enron has been based on their claimed outrage about a conflict of interest at Enron. These two have an obvious financial interest in having the trial — or at least the public’s perception of the trial — turn out consistent with the one-sided and ultimately cartoonish depiction of Enron and my client in their book and in the so-called documentary to which they have lent their names and other support.

To which the Fortune Editor — presumably not yet aware of the budding Berkowitz-McLean relationship — replied self-righteously as follows:

Peter Elkind and Bethany McLean are journalists of the highest reputation, as well known for their integrity as they are for their knowledge of Enron. While they have certainly chronicled the failings of the company and its management, they have neither a rooting interest nor a financial interest in the outcome of the trial.

Yeah, right.

As noted here, here, here and several other times on this blog over the past couple of years, the mainstream media’s coverage of the Enron-related criminal trials has been spotty at best, shameful at its worst, particularly as it embraced and perpetrated the Enron Myth in reporting on the trial and sentencing of Jeff Skilling. Thus, this Ayn Rand Institute press release of yesterday caught my attention:

The Media’s Mistreatment of Jeff Skilling
Irvine, CA–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 misportrayal 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 mainstream media’s slanted coverage of Enron in general and Skilling in particular is a subject that is ripe for examination. We have not heard the last of this issue.

Former Enron CEO Jeff Skilling was sentenced on Monday to spend most of the rest of his life in prison for causing Enron’s bankruptcy and resulting loss to investors.

However, Skilling was neither prosecuted nor convicted for that crime.

Skilling began working at Enron in 1990 as the sole employee and head of a wholesale division, was made president and chief operating officer of Enron in 1997, and was eventually elevated to CEO in February 2001.

During his tenure, Enron grew into an international, multi-billion dollar corporation with earnings that rose from a couple of hundred million dollars in 1990 to $1.6 billion in 1998, of which his trading division produced over half.

By 2000, Enron’s revenue had risen to $100 billion and, as of August 23, 2000, Enron’s stock price peaked at $90 per share.

Skilling resigned about a year later, by which point the stock had declined 51% in a troubled post-bubble market for energy and broadband companies. But from January 1999 until he resigned in August 2001, Skilling increased his stock holdings in Enron by over 250%.

After listening to Enron”s October 23, 2001 conference call with market analysts, Skilling called Enron chairman Ken Lay and asked to return to the company. On the heels of revelations about former CFO Andy Fastow’s embezzlement of millions from the company, Enron was caught in the beginning stages of losing the trust of the marketplace, and Skilling believed that his return would send a strong signal to the market of his confidence in the strength of the company.

The company declined Skilling’s offer, at which time Skilling attempted to arrange a liquidity infusion — including most of his net worth — to stem the company’s death spiral. The efforts failed and Enron filed a chapter 11 case on December 2, 2001.

So, if Skilling wasn’t convicted of causing Enron’s failure, then what is it that he is being thrown in jail for until he is in his mid-to-late 70’s?

For allegedly lying about Enron’s financial condition (and one throw-in count of insider trading). But even though Skilling’s alleged lies may have changed the identity of the investors who ended up holding the bag when Enron failed (a group that included himself, by the way), they did not cause Enron’s failure.

And it goes without saying that Skilling was given no credit whatsoever during his sentencing for contributing to the creation of enormous wealth for investors in many valuable markets.

So, make no mistake about it — Jeff Skilling was not sentenced yesterday in regard to the crime for which he was prosecuted and convicted. Rather, he was sentenced for causing Enron’s failure.

There is a big difference between those two crimes, and a quasi-life sentence for Skilling fails to distinguish between them.

Former Enron CEO Jeff Skilling’s sentencing hearing is Monday afternoon, so it’s a good time to provide some links that will provide a basis for an objective evaluation of Skilling’s case as a counterbalance to what the mainstream media typically serves up.

By now, we all know the myth — Enron was merely an elaborate financial house of cards that a massive conspiracy led by the greedy and lying Skilling and the late Enron chairman Ken Lay hid from innocent and unsuspecting investors and employees.

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 common themes of almost every mainstream media report on Skilling and Enron.

The power of the Enron Myth and the real presumption in the criminal case against Skilling are such that an objective jury probably could not have been found in Houston and the jurors who did serve dispensed with critical thinking skills when confronted with the biggest business conspiracy even alleged in the history of federal prosecutions.

Given the power of the Enron Myth, the jurors were content with a prosecution that cast Skilling as a liar about Photofete and his one sale of Enron stock after he left the company, and ignored the paucity of evidence of any massive conspiracy or even the true reasons why Enron collapsed.

That same view has been readily embraced by a wide-range of societal forces, such as publicity-seeking politicians who don’t allow facts to get in the way of demonizing unpopular entrepreneurs for political gain, government prosecutors who improperly expand the reach of criminal laws to further their careers, supposedly “objective” journalists who work literally hand-in-hand with the Enron Task Force or who simply perpetuate the myth in spite of the facts, competing businesspeople and lawyers seeking to profit from Enron’s demise, and a general public that finds it easy to resent wealthy businesspeople, particularly after the bursting of a stock market bubble.

The myth is so pervasive and accepted — why bother with the truth?

The carnage of the Enron Myth is now piled high — the destruction of Arthur Andersen, the death of Ken Lay, the outrageous prosecution and imprisonment of the four Merrill Lynch executives in the Nigerian Barge case, Richard Causey, Kevin Howard, Christopher Calger, the NatWest Three — 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.

In fact, any challenge to the myth is now commonly met with derision and appeals to even more resentment over the Enron failure.

As has been chronicled on this blog, 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 the company’s CFO and his relative few minions.

That Jeff Skilling did not predict that Enron would fail under those conditions does not make him a criminal. Unlike his main accusers Andy 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 post-bubble market conditions during 2001? Sure, 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 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 throw away the keys, but examining objectively what really occurred at Enron is far more likely to result in real justice.

Here are some links to prepare you for the Skilling sentencing hearing:

Peter Henning analyzes the Skilling sentencing issues here, while Doug Berman provides a handy archive on Enron-related sentencing issues;

The trial penalty issue in the Skilling sentencing is explained in this Ellen Podgor post, while this post previews the Skilling appeal issues;

Larry Ribstein places the Skilling sentencing in the perspective of the government’s purchase of testimony with pleas and questions the legitimacy of this policy;

Skilling’s fascinating testimony during his trial is summarized here and here, and

Finally, Skilling’s legacy of beneficial risk-taking, and what might have been had Ken Lay made a different decision in 1997.

US District Judge Sim Lake has overruled the Enron Task Force’s dubious opposition and dismissed the indictment against the late Enron chairman, Kenneth Lay. Judge Lake’s memorandum opinion is here, and his conclusion pretty well says it all:

Since the Fifth Circuit Court of Appeals has adopted the abatement rule, and since . . . the United States . . . has raised any legal basis for denying the ruleís application in this case, the court concludes that Layís conviction must be vacated and that this action against him must be dismissed. Accordingly, the Motion of the Estate of Kenneth L. Lay to Vacate His Conviction and Dismiss the Indictment (Docket Entry No. 1082) is GRANTED, . . . The indictment against Kenneth L. Lay is DISMISSED.

As noted earlier here, here and here, I don’t believe Ken Lay was guilty of anything other than making some bad business decisions (among many good ones, too). Dismissing the charges against his legacy is not only the right thing to do legally, but also morally.

One of the many troubling aspects of the Enron Task Force’s prosecution of former Enron CEO Jeff Skilling is the “trial penalty” that Skilling faces in connection with his sentencing (which is next Monday, October 23rd).

The trial penalty is the additional time that Skililng faces in prison because he chose to assert his Constitutional right to defend himself against the government’s charges in comparison to similarly-situated defendants, such as former Enron CFO Andrew Fastow (six years) — who copped a plea under a cooperation agreement with the Task Force — or former Enron chief accountant Richard Causey (no more than seven years), whose deal with the Task Force does not include an obligation to cooperate in other cases.

Exhibiting the same professional integrity that Joseph Grundfest recently displayed in the sad case of Jamie Olis, University of Illinois law professor and criminal law expert Margareth Etienne has filed an amicus curie brief in connection with the October 23rd Skilling sentencing hearing. Professor Etienne bears down on the key issue (citations are omitted):

[A] plea discount must be differentiated from a trial penalty. A plea discount–or a limited reduction such as acceptance of responsibility that takes into account factors such as a guilty plea–have been deemed constitutional; but a trial penalty–a punishment for exercising Fifth and Sixth Amendment rights–would clearly be unconstitutional insofar as it would violate the “unconstitutional conditions” doctrine. The “unconstitutional conditions” doctrine simply states that the imposition of a penalty for exercising a constitutional right creates an unconstitutional condition. Imposing a sentence on Mr. Skilling that is several times that of the sentences faced by his co-defendants–when the only material distinction between their cases appears to be Mr. Skilling’s decision to go to trial–strongly suggests that Mr. Skilling is being penalized for exercising his constitutional rights. This is particularly true in a determinate sentencing (or guideline) regime where the potential benefits bestowed on co-defendants for acceptance of responsibility (and cooperation with the government, when applicable) are easily quantifiable.

Accordingly, the question for sentencing courts is whether there is a point at which a permissible plea discount becomes an impermissible and unconstitutional trial penalty. At the very least, when the disparity in sentences between similarly situated defendants can no longer be attributed to easing the government’s burden by entering a resource-saving guilty plea, such a disparity risks being an unconstitutional trial penalty. Such an unjustified disparity, when it violates norms of fundamental fairness and proportionality, may also rise to the level of a Fifth and Fourteenth Amendment violation.

Not only is the trial penalty a horrifying injustice for individuals such as Skilling, it is also a substantial factor in the great waste of the government’s dubious regulation of business-through-criminalization policy.