9/26/2011

By Matthew Nicholson, J.D. Candidate

For audiences in the market for "razzle-dazzle choreography," tickets are already on sale for “Enron,” the latest musical debut from Burning Coal Theatre Company of Raleigh, North Carolina. But off-stage, the lights have yet to go down on the tragic hero of the real-life scandal upon which that opus is based. Former Enron CEO Jeffery Skilling has filed a petition for certiorari with the United States Supreme Court, praying that the tribunal review the Fifth Circuit Court of Appeals’ April 6, 2011 denial of his appeal. If the Court decides to grant cert, it will be the second time the erstwhile "smartest guy in the room" appears before it.

Skilling’s sojourn through the criminal justice system began with a five-month trial at the close of which a Houston jury deliberated for five days before convicting Skilling of  19 counts, including conspiracy, securities fraud, false representations to auditors, and insider trading. See United States v. Skilling, 554 F.3d 529, 534 (5th Cir. 2009).  Skilling objected to the venue of the trial from the very start, on the grounds that it would be impossible to receive a fair trial in the epicenter of Enron’s collapse. The Fifth Circuit held that Skilling was entitled to a presumption of prejudice. Id. at 561. One particularly risible example of the inflammatory coverage giving rise to this presumption featured “Pethouse pet of the week” Jeannie, a one-year-old terrier, exulting at the sight of Skilling in handcuffs.

But the Court of Appeals found that Skilling had failed to demonstrate actual prejudice and that the voir dire was adequate to militate against any presumed prejudice. Id. at 564-65. The Supreme Court agreed that there was nothing defective about the selection of the jury, Skilling v. United States, 130 S. Ct. 2896, 2923 (2010), and that Skilling’s contention that four of the jurors were openly biased was without merit, id. at 2925. However, Skilling’s trip to Washington was not entirely in vain. The Court took the opportunity presented by the case toscratch its collective head in construing the statute that formed the basis for Skilling’s conviction for depriving his victims of “the intangible right of honest services,” see 18 U.S.C. § 1346, and determined that this (admittedly oracular) prohibition required paring down if it were to pass constitutional muster. Accordingly, it declared that the statute applies only to cases involving bribes and kickbacks, Skilling, 130 S. Ct. at 2931, possibly the only two financial crimes of which Skilling was not accused.

The ruling in Skilling on “honest services” has already made its presence felt in the white-collar crime landscape:

In the 1990s, Wall Street investment bankers David Wittig and Douglas Lake became top executives of Kansas' largest public utility, Westar Energy, Inc. In 2003, both men were charged with more than forty counts of wire fraud, money-laundering, circumventing internal financial controls, and conspiracy to commit the same, for questionable multi-million dollar transactions. The resulting legal battle spanned seven years. One month before the final trial, the government moved to dismiss all charges, and the U.S. District Court for the District of Kansas granted the motion. The government and court had relied on one case decided by the U.S. Supreme Court in June 2010, Skilling v. United States.

Charion L. Vaughn, Power Corrupts: Honest Services Fraud and Fiduciary Duties, 50 Washburn L. J. 713, 724-25 (2011).

Skilling, however, was not so lucky. Since the “honest-services” count formed only part of the basis for his conspiracy count, the Court remanded Skilling’s case to the Fifth Circuit to determine whether the conspiracy count would have succeeded on its other bases. 130 S. Ct. at 2934-35.

The Fifth Circuit affirmed Skilling’s conviction. It held that the jury was not confused by the instruction into convicting solely on the “honest-services” basis of the conspiracy charge, nor did the prosecution’s closing argument “force or urge it to do so.” United States v. Skilling, 638 F.3d 480, 483 (5th Cir. 2011). It then opined that the there was “overwhelming evidence” regarding the securities-fraud conspiracy charge and “concluded beyond a reasonable doubt that the verdict would have been the same absent the alternative-theory error.” Id. at 483-84.

Skilling’s latest appeal will attack the Fifth Circuit’s ruling on two grounds. First, that the prosecution could not actually have proven harmless error beyond a reasonable doubt when the jury returned a general verdict, and did not specify whether or not it relied on conspiracy bases other than the “honest-services” basis. See Def’s Mot. to Stay Ct.’s Mandate Pending Pet. for Cert., Case 06-20885, Filed September 2, 2011. Additionally, Skilling contends that the Fifth Circuit erred when it “categorically disregarded” his testimony at trial in its harmless-error analysis. Id.

The (probable) denouement of the Enron scandal is unlikely to rehabilitate Skilling’s reputation, and even less likely to end in meaningful reduction of his sentence. However, it does raise interesting questions, even beyond those Skilling will raise in an appeal, should one be granted. One commentator suggests that executives of unsuccessful companies might find themselves subject to prosecutorial scrutiny at a higher rate than their colleagues at enterprises that retain a strong-buy recommendation:

For example, Apple's popular chief executive Steve Jobs escaped punishment for conduct connected with backdating that was arguably similar to the conduct that sent Gregory Reyes of the more obscure Brocade Communications to jail. The deterrence value of prosecutions seems unrelated to whether defendants are running failed or successful firms. Indeed, the “lottery” may weaken deterrence by creating a perception that the criminal laws are being used to punish failure rather than crimes.

Larry E. Ribstein, Agents Prosecuting Agents, 7 J.L. Econ. & Pol'y 617, 632 (2011) (citing Holman W. Jenkins, A Backdating Sentencing, WALL ST. J., Dec. 19, 2007 at A20). Ribstein further argues that while zeal to see people like Skilling behind bars can convey society’s condemnation of the defendant’s conduct, it can also “reflect heated press coverage more than the considered judgment of legal and financial experts.” Id.

Mr. Ribstein may have a point, and I highly recommend his article for its insightful discussion of agency problems in criminal prosecutions. However, it is a discussion that will likely have to await a defendant on whom the court of public opinion has yet to pass such final judgment. But then, that only proves Mr. Ribstein’s point. And in the meantime, Jeffrey Skilling may get another chance to try to walk between the raindrops.