Ideoblog

The Skilling debacle heads for the Supremes

While the Supreme Court is deciding whether the Enron prosecution was a misapplication of honest services and tried in the wrong court, Tom K suggests that even bigger problems are brewing on the prosecutorial misconduct front (here's more background).

This is all beside the basic questions Tom K and I have been asking for years about whether there was any criminal wrongdoing in this case (see, e.g., here and here).

In the end I think it may be commonly understood that the real crime in the Skilling case was his prosecution.

The impending moment of truth in the Skilling prosecution

Tom Kirkendall, as usual, has the details.

For starters, he has more on the widely reported cert petition for a hearing on the toxic venue and honest services issues.

But even more interesting, he notes that Skilling and the prosecution are jointly moving to delay Skilling's motion for a new trial based on prosecutorial misconduct.  

Tom asks:

So, what is going on here? Could it be that Skilling's team has discovered even more exculpatory evidence that the Task Force failed to disclose to the Skilling defense prior to the trial? Could it be that the government's current lawyers -- who were not members of the now disbanded Task Force and who have little incentive to cover for their predecessors -- are now finding themselves dealing with a serious failure of the Task Force members to comply with rules requiring the disclosure of exculpatory evidence to the defense in Skilling's case?

He concludes by wondering whether the climax of Skilling will be comparable to that in the Stevens trial.

After Stevens, what about Skilling?

Well, at least Ted Stevens got some justice. The Justice Department moved to set aside his conviction because it "recently discovered" that prosecutors withheld from the defense its notes of an interview with a major witness that contradicted his later testimony. Seems there’s something called the Brady Rule that requires the government to turn those notes over. This was only part of the prosecutorial misconduct in this case.

Now let’s think back to another case – that of Jeff Skilling, who’s currently rotting in jail. In order to convict Skilling, prosecutors had to prove he knew of the fraud perpetrated by underlings, notably including one Andy Fastow. A key part of their case on this point was a so-called “global galactic” document that Fastow testified he went through with Skilling detailing illicit side deals.

Funny thing, though: this critical document, like something out of a spiritual, once was lost then it was found, in Fastow’s safe deposit box. At trial, as I discussed at the time, Skilling’s lawyer wondered if the document didn’t "show up when you were making your deal with the government?"

As for that deal with the government, Tom Kirkendall has noted that what was supposedly a ten-year sentence somehow mysteriously morphed into a six-year sentence (a fourth of the time Skilling got).  If you had already shown a tendency toward fraud, might you create a document to save yourself four years in jail?  What might a jury think about that? 

Then, whadyaknow, it turns out that the government had not turned over to the defense raw notes of an interview with Fastow in which, as I discussed at the time Fastow told the Task Force he “doesn’t think [he] discussed list w/ JS.” Shades of Stevens. 

As the defense argued:

This obviously exculpatory statement was not included in the Task Force’s “composite” Fastow 302s given to Skilling. Nor was it included in the “Fastow Binders” the Task Force assembled for the district court’s in camera review of the raw notes. It is not possible that this omission was inadvertent. Fastow’s statement is one of the most important pieces of evidence provided during all his countless hours of interviews. Moreover, in preparing both the composite 302s and Fastow binders, the Task Force extracted and included other—relatively inconsequential—statements from the same interview date and even the same page of notes.

How important was all this? Consider that Enron prosecutor John Hueston’s crowing in a law review article about his triumph in convicting Skilling and Lay despite obvious problems with his case:

In a trial involving allegations of earnings manipulation and disputes over the defendants' respective understandings of the application of often arcane accounting rules, proof of criminal intent was of critical importance. Assembling such evidence proved challenging, however, as both Skilling and Lay clearly relied on the advice of inside and outside counsel, as well as their auditors. For instance, although Skilling resigned from Enron for “personal reasons” after a mere six months as C.E.O. and only four months prior to the company's bankruptcy in December 2001, he later took steps seemingly inconsistent with alleged criminal intent. Prior to Enron's collapse, he offered to return to the company as its steward, and in the weeks prior to bankruptcy he took several steps toward engineering and personally financing a private buyout. As forcefully argued by his counsel at trial, what fraudster would seek to return to what he understood was a collapsing house of cards? 

Hueston knew he had a problem with Fastow, as he discussed in the article:

If the defense was successful in portraying Fastow as criminally independent of Skilling and Lay, and without credibility in describing the involvement of Skilling and others in the accounting side deals set forth in Fastow's handwriting in the Global Galactic document, the jury would surely discard his testimony by the time Glisan was called to the stand months later.

Hueston then detailed how he skillfully set traps for the prosecution in his direct of Fastow. But he knew about the vulnerability on the authenticity of the Global Galactic agreement. Consider footnote 71:

Anticipating that the defense in its cross examination of Fastow might suggest that the Global Galactic agreement was fictional, we exercised our right to withhold Loehr's Jencks Act statements until the conclusion of Fastow's testimony. See 18 U.S.C. 3500 et seq. These statements revealed Loehr's ability to corroborate key aspects of Fastow's testimony about the document. For all other case-in-chief witnesses, prosecutors provided statements in advance of the time frame set forth in the act.

Yeah – but what about those raw notes of the Fastow interview?

Skilling's lawyer argued in the brief linked above:

By depriving Skilling of key exculpatory evidence that Fastow conveyed in his interviews, the Task Force was able to skew the proof and convince the jury to accept Fastow’s word over Skilling’s. As the Task Force later told Fastow’s sentencing judge and recounted in a law review article, Fastow’s testimony and credibility were the cornerstones to convicting Skilling.* * *

Tom Kirkendall adds:

The initial Fastow statements set out in the Skillling brief were not only not as damning as Fastow's trial testimony, they were irreconcilable with that trial testimony and described completely legal activity, even by Fastow. Consequently, had the Enron Task Force not been able to to pry Fastow off his original story, the core of the Task Force's case against Skilling and Lay would have have contradicted by Fastow, who was Skilling's main accuser at trial. And the fact that the DOJ did not disclose to the Skilling defense team how Fastow's incriminating testimony evolved over time from his exculpatory initial statements while Fastow and the Task Force were negotiating a dubious plea deal is beyond reprehensible. What is the DOJ going to say now, that they didn't disclose the exculpatory earlier statements to Skilling's defense team because Fastow was protecting Skilling in these initial meetings? Yeah, right.

Kirkendall, who has been on top of this case from the beginning, providing perspective the mainstream press has almost totally missed, says:

So, because of prosecutorial misconduct, the Justice Department decides to move for dismissal of the political corruption case against former Alaska senator Ted Stevens * * * Meanwhile, Jeff Skilling, who created billions of dollars in wealth and thousands of jobs by revolutionizing risk management of natural gas prices for producers and industrial consumers, sits in a Colorado prison cell under the weight of a barbaric 24-year prison sentence. Skilling's conviction involved even more egregious prosecutorial misconduct than the Stevens case. The criminal case against Skilling was materially weaker than the case against Stevens, too. It is a sad reflection of the current state of American rule of law that the DOJ readily concedes prosecutorial misconduct against a legislator, but ignores it in a shaky case against a businessperson who created many jobs and great wealth

Enron prosecutions: still wrong after all these years

I’ve been saying for a long time (see, e.g., my Corporate Crime and Enron archives) that the wave of corporate crime prosecutions following Enron, and particularly the Enron prosecution itself, were unfair, ineffective and counterproductive. The criminal law is wholly inappropriate for disciplining managerial agency costs, including disclosure violations. We’re likely to end up with some very close cases, pursued at enormous direct costs, and the even larger indirect cost of precluding a constructive effort to figure out what happened.

Dennis Berman makes these points in today’s WSJ:

Those looking for retribution against the executives of failed companies will quickly see that prosecutions won't come easy. The law gives executives wide latitude to run their business, no matter how terrible their decisions. And even convictions would seem an incomplete conclusion given that a system -- political and regulatory -- also failed the public.

Berman reviews potential criminal cases involving Lehman. As he quotes me in the article:

These are necessarily going to be very close cases," said University of Illinois law professor Larry Ribstein, a critic of some Enron prosecutions. Should Mr. Fuld "err on the side of panic, or state the risk pessimistically, he's got a full-scale bank run. If he gets optimistic, it's bordering on fraud."

Berman concludes:

It has been just 2,282 days since Sarbanes-Oxley was signed into law. Today, "we need to figure out root causes and get at them," Mr. Ribstein said. "We could go through all this and have no assurance the same thing won't happen again."

The question now: have we learned anything from Enron?

The Enronization of Lehman

Bear looked like Enron, as I discussed here and here. And now, based on today's WSJ, it’s Lehman’s turn. Then we can start looking into those banks. 

Kirkendall on the Pai settlement

Tom Kirkendall provides an unusually insightful and balanced view of former Enron executive Lou Pai’s recent settlement with the SEC – on why the case against him was not a slam dunk, why we should not punish him for getting out of Enron before many other investors, and generally why the negative reaction to the settlement is all part of the misguided “greed narrative” about Enron.

A former prosecutor looks at Enron and Bear

Writing in the WSJ, Robert Mintz, now gone over to the other side, says of the Bear hedge fund indictments,

[t]his is not Enron, where executives were charged and ultimately convicted of cooking the books* * * [L]ike all indictments, [it] benefits from the wisdom of 20/20 hindsight. We all know how the story ends, and it isn't pretty. But these two hedge fund managers were not alone in reaping huge profits for years from the subprime market. Nor were they alone in understanding the fundamentally risky nature of investments that relied so heavily on the misguided expectation of perpetual real estate appreciation. * * * Lying to the investing public is a serious breach that cannot be condoned if we are to maintain the integrity of our markets * * * But it is all too tempting for the government to ride in after a colossal collapse that many should have seen coming and look for someone to blame, when clearly there's plenty of blame to go around.

Ah, but it is Enron. 

Will Skilling walk?

Some commentators see this happening, via a Fifth Circuit decision that might be issued this week. See this Financial Week article (HT Sox First). 

Of course these sources see such a development with the standard media-conditioned trepidation.  But I first asked the title question two and a half years ago, before the conviction, and most recently in the wake of reports of prosecutorial misconduct (see Tom Kirkendall). 

The forthcoming decision will indicate whether a big part of Enron's enduring legacy is prosecutorial excess.

More on the WSJ's Enron coverage

Tom Kirkendall has more on WSJ’s John Emshwiller’s report on the Skilling appeal in the WSJ, which I analyzed on Sunday. Tom notes:

Even in the current article, Emshwiller is less than forthright in assessing what is truly going on in the Skilling appeal regarding the Fastow interview notes:

Normally, defense attorneys aren't allowed to see the raw notes of Federal Bureau of Investigation interviews with government witnesses. But Mr. Skilling's defense team, led by Daniel Petrocelli, sought them anyway, and the Fifth Circuit agreed to order the federal government to turn over the notes.

Emshwiller fails to explain that the Fifth Circuit granted the Skilling team's motion to obtain the raw notes because the Enron Task Force took the highly unusual step of providing the Lay-Skilling defense team a "composite summary" of the Form 302 ("302s") interview reports that federal agents prepared in connection with their interviews of former Enron CFO and chief Skilling accuser, Andrew Fastow. Those composites claimed that the Fastow interviews provided no exculpatory information for the Lay-Skilling defense, even though Fastow's later testimony at trial indicated all sorts of inconsistencies. In point of fact, the process of taking all the Fastow interview notes or draft 302s and creating a composite is offensive in that it allowed the prosecution to mask inconsistencies and changing stories that Fastow told investigators as he negotiated a better plea deal from the prosecutors over time. Likewise, the Task Force's apparent destruction of all drafts of the individual 302s of the Fastow interviews in connection with preparing the final composite is equally troubling. Traditionally, federal agents maintain their rough notes and destroy draft 302s. However, in regard to the Fastow interviews, what turned out to be the draft 302s were probably not "drafts" in the traditional sense. They were probably finished 302s that were deemed “drafts” when the Task Force prosecutors decided to prepare their highly unusual composite summary of the 302s.

This is important because it exposes the continuing slant in the WSJ’s coverage of the Enron trial. Without Tom’s analysis, a non-expert reader might conclude that the court was bending over backward to please Skilling’s high-priced lawyers – not what is actually the case, which is that the court’s extraordinary action indicates the potential presence of prosecutorial abuse.

As Tom concludes:

Regardless of what happens in the Skilling appeal, the WSJ has some deep soul-searching to do regarding its coverage of the aftermath of Enron's demise.

Update: Ellen Podgor has more on the Skilling argument tomorrow, focusing on the government's Fastow problem.

The WSJ shorts the Enron task force

Amid the WSJ’s John Emshwiller’s report on the Skilling appeal we read:

If the Skilling conviction is overturned, "all the guilty pleas obtained will be forgotten and the final grade of the Enron Task Force will likely be failure," says Jacob Frenkel, a former federal prosecutor now in private practice, referring to the Justice Department team that investigated Enron's 2001 collapse. . . . . The Enron Task Force was often described as the biggest criminal investigation ever done of a single corporation. It gained more than a dozen guilty pleas from former Enron officials including Mr. Fastow. But its record in court, the ultimate test of the strength of its cases, has been weak.

Of course none of this is new. These developments have been much better covered by Tom Kirkendall, e.g., here and here. I've been following along behind. The Economist was the first main stream source to pick up the story.

But it’s news that lead Enron reporter Emshwiller is finally coming around. In fact, Emshwiller even echoes a line taken by Tom K in noting that “some have argued that the collapse stemmed from miscalculations and misfortunes, not crimes. Mr. Skilling testified to that effect before Congress in 2002.” See Tom’s post on Enron as the forerunner of Bear – the quick collapse of a trust-based business – exactly what Skilling said years ago. The Economist later worked this angle.

So we’re seeing the mainstream media following rather than leading the blogs. This is not so surprising given the biases and conflicts that can infect any news source. In this case, as Tom K discussed long ago, Emshwiller had a particularly large investment in Enron's being a massive fraud -- the Gerald Loeb award for covering Enron, followed by a best-seller on Enron.  Emshwiller had almost as much of his career invested in Enron as David Duncan had. That's why we need blogs.

So after years of prodding by, among others, Skilling’s lawyers and Tom Kirkendall, it looks like the story is finally starting to change. The language quoted above from Emshwiller’s story sounds a bit like ground-preparation. Watch for the hounds of the press to turn full on against the Enron prosecutors if Skilling gets a new trial or reversal for prosecutorial misconduct. It's not going to be about losing one case.  It's going to be about the basic flaws in the Task Force, which was determined to get Lay and Skilling at all costs. Maybe Emshwiller already has a sequel in the works.

But as with Spitzer’s questionable conduct as prosecutor and governor, it’s too bad the press didn't catch on sooner.