Anything for a Conviction

As noted yesterday, the Enron Task Force refused Ken Lay and Jeff Skilling’s request to have the prosecution recommend to U.S. District Judge Sim Lake that half-a-dozen former high-level Enron executives who have declined to testify during the trial on Fifth Amendment grounds be granted immunity from having their testimony used against them in a subsequent prosecution.

Those witnesses — several of whom have been mentioned prominently in testimony during the trial — would likely provide exculpatory testimony for Lay and Skilling if they were to testify.

The Lay-Skilling defense team limited their immunity request to those six witnesses even though the Task Force fingered the unprecedented number of the Task Force identified over 100 former Enron executives as unindicted co-conspirators for the transparent purpose of preventing the jury from hearing the full story of what happened at Enron.

Now, according to this Mary Flood/Houston Chronicle article, the Task Force is requesting that Judge Lake go even further and instruct the Lay-Skilling defense team not to inform the jury during closing arguments of the Task Force’s decision not to allow the jury to hear all the witnesses with relevant testimony about the charges against Lay and Skilling.

In short, the Task Force’s position is “we don’t want the jury to hear all the relevant evidence, but we also don’t want the other side telling the jury that we don’t want them to hear all the relevant evidence.”

In the meantime, you can bet that the Task Force will tell the jury during closing argument that the testimony of the dozen or so former Enron executives who testified against Lay and Skilling under plea deals with the Task Force is pervasive evidence of Lay and Skilling’s guilt.

The destroyed lives, careers and economic wealth that lies in the wake of the Task Force’s previous Enron-related prosecutions is a foreboding legacy of this abominable Task Force tactic that ensures that juries will never hear exculpatory testimony for the defense.

During those earlier trials — the Arthur Anderson case, the Nigerian Barge case and the Enron Broadband case — the Task Force identified dozens of former Enron executives as either targets of the Enron criminal investigation or unindicted co-conspirators of the defendants. As a result, the Task Force effectively prevented many witnesses with exculpatory testimony for the defendants in those cases from testifying because of the threat that the witnesses’ waiver of their Fifth Amendment privilege would likely lead to criminal charges against them if they chose to testify contrary to the Task Force’s position in those cases.

The huge impact of this Task Force tactic was brought into full focus during the first trial of the Enron Broadband case last year. That trial initially appeared to be a sure-thing for the prosecution, but the Task Force’s case unraveled quickly as witnesses Lawrence Ciscon and Beth Stier both testified to a riveted jury about the Task Force’s threats of prosecution against them if they provided exculpatory testimony on behalf of the former Enron executives on trial in that case. That trial ended in a disastrous mix of acquittals and jury deadlock on the Task Force’s charges.

Arthur Andersen and the defendants in the Nigerian Barge trial were not so fortunate. In Andersen, the Task Force used the tactic in maliciously destroying a fine American company that had contributed to orderly commerce and the preservation of wealth in the U.S. for over eight decades. Likewise, in the Nigerian Barge case, dozens of witnesses from Enron and Merrill Lynch with exculpatory testimony for the defendants declined to testify because of the threat to Task Force retribution. The result was an an unspeakable injustice for the four Merrill Lynch executives convicted in that case.

Thus, our “Justice” Department is not really about “justice” at all. Rather than having a jury fairly evaluate all evidence relating to its charges against unpopular defendants or allowing defendants access to funds necessary to defend themselves effectively, our Justice Department is much more interested in indulging public bias against those defendants.

Indeed, that bias is so pervasive with regard to the Lay-Skilling case that the Houston Chronicle runs vile columns and blog posts on almost a daily basis embracing the prosecution’s calls for conviction of the defendants without so much as a mention — much less meaningful analysis — of the serious implications to justice and the rule of law arising from the government effectively preventing witnesses with exculpatory testimony for the defense from testifying in the case.

Something is seriously wrong with the administration of justice in America when the judiciary and the media blithely accept the government preventing a jury from hearing favorable testimony for defendants who are facing the overwhelming governmental power to imprison them for most of the rest of their lives.

12 thoughts on “Anything for a Conviction

  1. Did the defense make its case?

    Steve Ueckert: ChronicleJeff Skilling and his lawyer, Dan Petrocelli: Did they make their case? Some of the comments to recent Enron trial posts have examined various aspects of the defense’s case. In my column today, I offer my assessment of…

  2. Since the onset of the “fact finding” hearings on Enron by the House Energy & Commerce Committee in January 2002, America has witnessed a series of egregious governmental abuses of power, any one of which dwarfs the famous burglary at Watergate. Yet in the fire hose of verbiage about Enron, only a very few intrepid souls have voiced any concern about the rule of law, much less stood up for it. Why is this?
    Honest people despise frauds. But some otherwise honest individuals engage in intellectual dishonesty when they endorse governmental acts that are at least as dishonest as those of Andrew Fastow. How can anybody suppose that the government’s widespread pattern of witness tampering is either legal or ethical? How can anybody endorse criminal indictment of KPMG for acts which may not be criminal, much less Andersen for acts that are clearly not criminal? How is society harmed by allowing Jamie Olis, the Merrill Lynch executives or Ken Lay & Jeffrey Skilling a fair trial? How can any fair-minded person object to allowing the defense to present all relevant facts and witnesses?
    I wrote the following about the Andersen case, which in some respects has been the blueprint for later cases.
    “The formula for a police state can be summarized as follows:
    1) Engage in character assassination while denying the target(s) free speech;
    2) Indict targets — despite knowing their innocence — on the basis that they are bad actors because their character has been assassinated;
    3) Take another end run around the law by indicting the accused for asking employees to follow a decades-old document retention policy that is both legal & ethical;
    4) After accusing the target of witness tampering, allow the prosecution to tamper with witnesses;
    5) Make sure the jury does not know that the so-called “bad actors” were not the auditors of the SPEs that were under government investigation;
    6) Make sure that the jury does not know that numerous banks aided & abetted Enron’s frauds and that the government had exempted Enron from long-standinginvestor protection laws;
    7) Make sure the jury does not hear that the accused waived all attorney/client privilege and fully cooperated with the government. Hence the government can baldly and repeatedly state that Andersen was a bad actor due to lack of cooperation;
    8) Make sure that the jury does not hear that the accused saved multiple copies of the very documents that the government asserts are “the only copies in evidence” when, in fact, the judge has refused to enter the multiple copies into evidence;
    9) Eliminate any requirement that a criminal conviction requires any consciousness of wrongdoing, much less evil intent, thereby eliminating the presumption of innocence;
    10) Instruct the jury that they need not find any individual guilty of wrong-doing in order to find an inanimate partnership guilty, due to sweeping interpretations of the terms “knowingly”,”corruptly persuade” and “official proceeding”; and
    11) Scrap the requirement that the jury must find the accused guilty “beyond a reasonable doubt” in order to convict.
    This is the stuff of Kafka. It also bears a chilling resemblance to what was happening in Germany in the 1930’s.

  3. It was difficult to control my tears as I read this blog entry. Poor Ken Lay and Jeff Skilling! It was just a run on the bank, after all, that put Enron under! Plus the mean people at the Wall St. Journal who had the AUDACITY to publish factually correct articles about the partnerships. And let’s not forget the short-sellers. That’s what brought down the 7th largest company in Amercian in 2001. It had NOTHING to do with the massive accounting fraud. When Sherron Watkins warned Lay in August 2001 about imploding in a wave of accounting scandals, what did she know? Skilling’s resignation in August 2001, several months after returning to Enron (as the bad news was pouring in) — irrelevant. And speaking of irrelevant, please disregard the large number of senior managers who admitted in their plea bargains they engaged in criminal acts at Enron. What do they know? Also disregard the 600 million restatement of earnings in Nov. 2001. When you’re a multi-billion dollar company, does it really matter if you restate earnings by a measely 600 million? Chump change!
    So please read the blog and make sure you buy some Kleenex beforehand.

  4. Lay and Skilling said the Company’s assets were substantially greater than the Company’s liabilities.
    It was later discovered that the liabilities were actually much greater than the assets. So the Company went bankrupt. The assets were sold and guess what? The proceeds from selling the assets couldn’t pay off the liabilities.
    The mechanism for making the assets look greater than the liabilities was the Special Purpose Entities. Lay and Skilling were aware of the Special Purpose Entities. They were aware that the SPE’s distorted the investors view of the Company’s net value.
    How are their actions not a crime?

  5. Sander, your post reflects much of the public’s misunderstanding of Enron and the case against Lay and Skilling.
    The fact that Enron’s liabilities were greater than its assets when it went into bankruptcy is no surprise. Indeed, once the maturity of liabilities of virtually any company in America are accelerated through the filing of bankruptcy, those companies’ liabilities would also be greather than their assets. There is no crime in that.
    You observe that the mechanism for making the assets look greater than the liabilities was the Special Purpose Entities and that Lay and Skilling were aware that the SPE’s distorted the investors view of Enron’s net value. However, the Enron Task Force did not even attempt to make that case during the trial, probably because the SPE’s were fully vetted by Arthur Andersen and outside counsel. So, the evidence that somehow Lay and Skilling knew something about the SPE’s that everyone else did not is so weak that the Task Force hasn’t even attempted to make that case.
    Finally, the additional debt that Enron incurred as a result of a change in the accounting regarding a couple of the SPE’s (which change was not alleged to be fraudulent) was not enough, in and of itself, to bring Enron down. Rather, a mix of market forces — combined with probably a too low credit rating for a company with a huge trading book and a breach of trust in the market resulting from disclosure of Fastow’s shenanigans — is what caused Enron to meltdown.

  6. Thanks for posting my message and responding.
    For what they are worth, here are my thoughts.
    I still disagree with you. You said:
    “Indeed, once the maturity of liabilities of virtually any company in America are accelerated through the filing of bankruptcy, those companies’ liabilities would also be greather than their assets.”
    What you are describing is a liquidity crisis. In a liquidity crisis the assets are sufficient to pay off the liabilities. They just can’t be converted to cash quickly enough. Enron did have a liquidity crisis but that wasn’t the problem and I’m not claiming its the problem.
    Bankruptcy doesn’t create a liquidity crisis. It is a solution to a liquidity crisis but you are an attorney so I hardly need to tell you that.
    If Enron’s liabilities had been frozen (as in bankruptcy) and they were given all the time necessary to liquidate the assets at the best possible price, the assets still would have never covered the liabilities.
    You said that any American company forced into bankruptcy would have the same problem if the payment of their liabilities is accelerated by going into bankruptcy. What you are basically saying then is that basically the book value of most American companies is zero or negative. That is just not true. If most companies went into bankruptcy and sold all their assets at a fair price they could pay off their liabilities.
    You are correct that the prosecution didn’t delve into this. The history of getting a jury to understand it (or even listen to it) is very bad. Even someone as bright as you has a tough time understanding that hiding overpriced assets and massive liabilities off the balance sheet is not GAAP. It’s also not honest communication with investors.

  7. The SPEs were set up in accordance with rules mandated by the Financial Accounting Standards Board (FASB)and the SEC. Under those rules, consolidation of SPEs with Enron is not allowed if the sponsoring corporation (Enron) did not control the SPE and if the SPE had at least 3% outside equity. Because the SPEs were supposedly separate from Enron, they had separate auditors, namely KPMG.
    Due to Fastow’s fraud, the SPEs were found to fail both tests. Because Andersen was never the auditor of the SPEs, Andersen had no way of examining the books of the SPEs & had to rely on representations from Fastow & others that Enron did not have control of the SPEs. Representations made to Andersen re control were fraudulent.
    The SPEs did have valid investors, including institutional investors, corporations and some individuals. However, among those investors were some banks who signed documentation that they were “investing” in the various SPEs but in reality, they took back oral promises of repayment. The banks knew these were loans, not “investments”, because the same transactions were recorded on their own books as loans.
    When the side agreements between Fastow & the banks were uncovered, the problem was two-fold. Not only were there loans that had been deliberately hidden from Andersen, but the existence of those loans meant that there was not 3% outside equity. Consequently, the SPEs no longer met the requirements & the rules mandated that the SPEs be consolidated with Enron.
    Those are the rules, whatever we may think of them. Since 1988, Andersen had been advocating with the SEC & the FASB mandatory consolidation of all SPEs. In a letter to the Wall Street Journal, May 3, 2002, Patrick Dorton, Andersen spokesman, wrote:
    “We began discussing our concerns about the accounting model for SPEs with the SEC staff in 1988 and wrote letters to the FASB…on consolidation…in 1992, repeating our views in 1994, 1996 and 1999. In our December, 1994 letter we stated, ‘The real issue here is whether the SPE has sufficient substance to allow the sponsor not to consolidate the SPE. If the SPE lacks substance, its creation should not cause the accounting to be different than if the SPEs did not exist.’ In our January 16, 1996 letter, we told the FASB, ‘We are also concerned that the change the Board proposes will create significant new opportunities for “financial statement engineering” and accounting results that are contrary to the economics.'”
    The Enron collapse proves that Andersen’s concerns about the accounting model for SPEs were fully justified. However, Andersen was unable to sway the SEC and the FASB. The SPEs are immensely profitable with the banks whose auditors blocked Andersen’s proposed reforms of SPEs. Even after the collapse of Enron, there has been no substantive reform on SPEs. The requirement of 3% outside equity has now been changed to 10%, a change in form only, and a marginal one at that. Now Andersen is no longer around to advocate more transparent disclosure of SPEs.

  8. Lost in all of the hoo-hah over who did what to whom is one plain, clear, simple fact:

    Management signs a “Management Letter” as part of every audit they are subject to. In this letter, management accepts full responsibility for the contents of the financial statements, and they attest to the fact that the statements represent everything they are supposed to.

    Now, the issue at hand is that Enron reported things they shouldn’t have, at values that were, well, flat-out wrong. Whose responsibility is it for this?

    Well, according to the Management Letter … it’s management. Not *just* the CFO, or the Controller, or the VP in Charge of Putting Things On Top Of Other Things, but *all* senior-level management. And that includes the guy at the top.

    Some people are oh-so-willing to say that the guy at the top can’t possibly know everything … can’t possibly have known what was going on if someone was “tricking” him into believing otherwise … can’t watch everyone, all the time.

    But that’s what the top dog’s responsibility is … making sure that *everyone* plays by the rules … that *every transaction* is legal, ethical … that the books represent *exactly* what is going on.

    For Ken Lay to stand back now and say, “I didn’t know” … “It wasn’t me” … “I had rogue employees”, well, it rings very hollow.

    He says he “feels terrible” about what happened. I’m sure that all of his stock options and shares he sold after he “retired” will help him feel better … knowing that he won’t lose his house, his car, his family. He may lose some sleep over it … but the satin sheets and down comforter will help those feelings pass rather quickly.

    Remember, we once had a president of this country, who looked right into the camera and stated, “I am not a crook!” Then, we found out he was. Just because Ken Lay says that *he’s* not a crook … that doesn’t mean he isn’t.

    Methinks Ken Lay doth protest too much …

  9. I can’t believe that there have been no comments as to the relationship of Ken Lay to Bob McNair (Houston Texan owner). And, also their business relationships.
    Could I get a response on this please?

  10. Gale, I’m not sure what you mean. Enron bought McNair’s cogeneration business in the mid-1990’s. It’s my understanding that Enron made good money on the acquisition. Despite that acquisition, Lay and McNair have never been particularly close and indeed have been business rivals for many years. Although I’m sure that McNair is supportive of Lay, he is not a close friend of the Lay family or a close business associate of Lay.

  11. The new Robber Barons have been quick to justify their…extravagant (the word seems so inadequate) compensations with the assertion that they are, uniquely in all the world, supremely qualified to manage their companies to the heights of business excellence. They assure their shareholders, with their Boards of Directors nodding solemly in the background and murmuring “Amen,” that they are indeed worthy of, and entitled to, paychecks that have in many instances exceeded the earnings of their companies.
    How odd, then, that these same Masters of the Universe, when found with one hand in the cookie jar, and a finger on the other hand up their nose, immediately sieze upon the Doofus Defense: “I was just a victim, decieved by the Junior Woodchucks I so sincerely trusted. I’m just a naif. Come, feel my pain!”
    No legal posturing and positioning can mask the fact that these two scenarios, played out in sequence, constitute at least one and perhaps two clear cases of fraud: Either the shareholders were robbed throurh Unjust Compensation, or through Executive Shenanigans, or both.
    Scrushy was able to beat the rap through jury nullification. If Lay should win this one, for justice to be done he should cough up 80% of all compensation he received, with interest. He should return it to the shareholders from which he took it, as his defense assures us, under false pretenses.

  12. Your call for justice based on the “evidence” is a shameful attempt to muddy the issues by introducing a bunch of noise and of course, attacking the people who are trying to make Lay and Skilling pay for their crimes.
    Look, these guys served in the capacity as CEO. They were highly paid with compensation packages that were, by any standards, exorbitant. What then were their responsibilities? You believe that it is good and just and normal for someone in the position Lay to claim as his defense that he did not know what was going on? Get real. Get your head out from where it is and think a bit. If we cannot hold the CEO and his management team responsible for their actions or lack thereof, then who is responsible to the shareholders?
    Ken Lay, above all others, is a liar, a thief, and is incompetent. He, and the people responsible for putting him in that position, are responsible for the fall of Enron and the loss of shareholder money. These are the facts, and as they say in the movies, “they are undisputable.” They must pay for their crimes. Justice would be served if Lay and Skilling were stripped of all their wealth and sent to jail for the rest of their lives.
    The employees who lost their retirement savings are the victims, not Lay and Skilling. These employees should benefit from this transfer of illicit gains.

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