Going Too Far? The Skilling Vredict and Anti-Fraud Prosecution
September 2010
IN THIS ISSUE
— The Fall of the House of Enron and the Quest for Accountability
— “Honest Services” Prosecutions as Anti-Fraud Tool: Too Broad of a Brush?
— A Skilling Chilling Effect? Debating the Aftermath of the Supreme Court’s Decision
GREETINGS!
Welcome to the September edition of our newsletter! In this issue, we’ll look at whether the U.S, Supreme Court’s recent ruling regarding former Enron Chief Executive Officer Jeffrey Skilling will affect other anti-fraud efforts.
THE FALL OF THE HOUSE OF ENRON AND THE QUEST FOR ACCOUNTABILITY
It has been nearly a decade since the swift collapse of Enron, an energy conglomerate that complemented its traditional power generation services with a complex, often byzantine, array of commodities trading platforms, as well as broadband Internet services. As the Supreme Court noted in its recent opinion regarding Skilling, Enron executives were determined to maintain the company’s high-profile success story at all costs, and “engaged in a scheme to deceive investors about Enron’s true financial performance by manipulating its publicly reported financial results and making false and misleading statements.”
As the schemes used to continue that deception began to unravel in 2001, Enron’s fortunes sank, taking with them those of the state-owned pension plans, hedge funds and individual investors who had seen the company’s success and wanted a share. A blizzard of investigations followed, including criminal prosecutions and Congressional inquiries. Some executives cut deals and went to jail, while Congress enacted a series of broad reforms to the accounting system which allowed the fraud, which cost investors an estimated $60 billion. Prosecutors sought accountability, but now, the Supreme Court faced the question: had they gone too far?
“HONEST SERVICES” PROSECUTIONS AS ANTI-FRAUD TOOL: TOO BROAD OF A BRUSH?
The prosecution of Skilling ultimately rested upon allegations that he violated his duty to Enron’s shareholders to provide his “honest services,” which prosecutors said he perpetrated via wire fraud; the subsequent securities fraud, wire fraud and making false representations were all charges that stemmed from Skilling’s furtherance of the scheme. The prosecution claimed that the “intangible right of honest services” due to Enron shareholders” had been breached.
On May 25, 2006, a jury empaneled at the U.S. District Court in Houston found Skilling guilty of 19 counts, including “honest services fraud”, and acquitted him of nine other counts. As part of his appeal, Skilling argued that the jury was incorrect to interpret the “honest services” statute as it did. The statute has, the Supreme Court noted, been strictly applied to cover only “bribery and kickback schemes,” as opposed to misconduct for indirect personal gain; efforts to broaden the scope were halted by the decision in McNally v. United States, which said that Congress had to clarify its intent if it sought to grant wider scope to the statute. Government attorneys in the Skilling appeal sought to push a similar line of reasoning, but the Supreme Court didn’t agree. “The Government urges the Court to go further by reading§1346 to proscribe another category of conduct: undisclosed self-dealing by a public official or private employee,” Justice Ruth Bader Ginsburg wrote in the majority opinion. “Neither of the Government’s arguments in support of this position withstands close inspection. … Skilling did not violate §1346, as the Court interprets the statute. The Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations.”
The language of Congress in pushing to expand the scope of Section 1346 may have been vague, but the court’s majority was clear in rejecting its application concerning Skilling. “The Government did not, at any time, allege that Skilling solicited or accepted side payments from a third party in exchange for making these misrepresentations,” the court wrote, adding later: “It is therefore clear that, as we read §1346, Skilling did not commit honest-services fraud.”
A SKILLING CHILLING EFFECT? DEBATING THE AFTERMATH OF THE SUPREME COURT’S DECISION
When the Supreme Court handed down its decision on June 24, 2010, commentators were quick to discuss the “chilling effect” the ruling might have on existing fraud prosecutions where “honest services” fraud was a tool. Ginsburg, in writing for the majority, saw strict interpretation of the statute as a check against overzealous prosecutions. “As to arbitrary prosecutions, we perceive no significant risk that the honest-services statute, as we interpret it today, will be stretched out of shape,” Ginsburg wrote. “Its prohibition on bribes and kickbacks draws content not only from the pre-McNally case law, but also from federal statutes proscribing-and defining-similar crimes.”
Investigators and prosecutors have been quick to discuss how the Skilling ruling would affect ongoing prosecutions, including that of an associate of former Washington lobbyist Jack Abramoff. A long-running fraud prosecution against Kansas’ Westar Energy was withdrawn due to the stricter interpretation imposed by the ruling. “”The law no longer supported our position,” U.S. Attorney Barry Grissom told The New York Times. “We were duty bound not to go forward with the prosecution.” The article noted a “flurry” of motions by defense attorneys based on the Skilling ruling’s interpretation. The long-term effects of the ruling remain to be seen, as does Congress’ ability to widen the scope of the law any further. The ruling remains a challenge to prosecutors and investigators who must now prove an intent to profit from fraudulent schemes with greater specificity. This makes the need for skilled investigative researchers, able to lay out the significance of even the most minute details, an even more essential tool against white-collar crime.