On November 2, 2010 the Fifth Circuit Court of Appeals agreed to take under advisement a request for a new trial for the ex-CEO of disgraced energy giant Enron. Attorneys for Skilling argued that the decision of the Supreme Court in June that the Justice Department had been misapplying a crime theory, known as “honest services” fraud, in Skilling’s and other cases against corporate officers involved in fraud should lead to a new trial. The court held that honest-services fraud could only be used when someone failed to live up to his or her fiduciary duties as a result of taking a bribe or kickback, which did not occur with Skilling. However, as Houston Chronicle columnist Loren Steffy points out in his blog today on the Skilling affair (http://www.blogs.chron.com/lorensteffy/), Justice Ruth Bader Ginsburg noted that removing the honest services from the equation doesn’t necessarily undermine the conspiracy charge against Skilling and the government has a strong case on securities fraud.
What is it that Skilling did? The book and video, The Smartest Guys in the Room, does a great job explaining what happened. It’s a long story but here’s a condensed version. Enron set up off-balance sheet entities (special-purpose entities) to borrow funds from banks and financial institutions and then transfer the cash to Enron in return for some of its under-performing assets. The debt was reflected on the SPEs books and not Enron’s even though in some cases Enron was ultimately responsible to pay back the loans if the SPEs failed to do so. The transactions also allowed Enron to record gains on the transactions thereby inflating its profits because the cash received from the SPEs was greater than the value of the assets transferred to it. If you’re not confused yet, let me add that these transactions should have been approved by Skilling. Andy Fastow, the CFO, would not have executed the transactions without direct or tacit approval from Skilling. So, Enron was cooking the books, making it look stronger from a liquidity and earnings perspective, and the lower level of debt enabled the company to continue borrowing for its own needs.
There were 19 counts against Skilling including conspiracy, securities fraud, and insider-trading. He enriched himself by hyping Enron’s stock while the fraud took place. He may have been delusional in thinking the bubble would never burst. That’s typical of the arrogance of members of top management that engage in fraud. It would be a shame if the Fifth Circuit granted Skilling’s request for a new trial. Thousands of employees lost their jobs and retirement funds that were invested in Enron stock based on the glowing statements about Enron’s future by top management including Skilling. Many lives were ruined and Skilling, the mastermind of the fraud along with Fastow, should not be able to escape criminal liability because of the misinterpretation of the honest-services fraud provision. What do you think?