It makes me happy to remember the company at its zenith. Watch and remember what a great company Enron truly was.
Monthly Archives: March 2008
Having used the weekend to study the government’s reply to Jeff Skilling’s supplemental brief, I am deeply comforted. The facts laid bare are emphatically in Skilling’s favor for overturned convictions. The main thrust of the government’s reply to Jeff Skilling’s Brady arguments seems to be something along the lines of: “Had we been on the jury, we wouldn’t have found these things material.”
Brady doesn’t allow for that kind of judgement. Brady simply requires the government to turn over the evidence and let the jury sort it out. The government’s concession that they had exculpatory material yet chose not to turn it over seems a clear violation of Skilling’s Constitutional rights.
This might be the most egregious violation – but it’s far from singular in a case that is riddled with prosecutorial abuse. Without even discussing the legal issues, substantial violations, lies, and wrong theories posited at trial, the Enron Task Force is guilty of acting like the criminals they accused Ken Lay and Jeff Skilling to be. To whit:
*Prosecutors used highly prejudicial “perp walks” to poison the jury pool.
*Prosecutors used highly prejudicial press conferences about the case to poison the jury pool.
*Prosecutors pushed for the trial to take place in Houston, where the energy company was headquartered and where thousands were still furious and reeling from lost jobs, lost retirement funds, and the feeling of disgrace.
*Voir Dire was incomplete.
*Prosecutors have used that god-forsaken “un-indicted co-conspirator’s” list to keep exculpatory witnesses silent.
*Prosecutors refused to grant immunity to those who could testify on Skilling’s and Lay’s behalf.
*Prosecutors threatened witnesses, warning them away from testifying on behalf of Jeff Skilling and Ken Lay.
*Prosecutors suppressed evidence (ie, the Fastow Notes).
*Prosecutors used plea bargains to manipulate innocent people into confessing to crimes they didn’t commit – and dragging down others with them.
*Prosecutors tried to have Skilling’s bond revoked for drinking too much one night.
*Prosecutors tried to have Skilling’s bond revoked when he said “Hi” to a prosecution witness he saw while on a walk in their neighborhood.
*Prosecutors encouraged Fastow to lie on the stand (substantiated by the Fastow Notes.)
*Prosecutors know the “personal reasons” Skilling left Enron, yet at trial they continued to press him to give another reason. They allowed the jury to believe he might have left because he feared Enron was a “house of cards” about to come crashing down.
*Prosecutors pointed out Skilling’s jury consultant during the trial. Of course they had their own jury consultants but it made Skilling appear rehearsed.
*Prosecutors asked Skilling about the Photofete investment at trial which he was not prepared for because it had nothing to do with the charges against him.
*Prosecutors implied Skilling used inside information and told his ex-wife and current wife to sell Enron stock (without prosecuting the wives for insider trading or any other crime).
*Prosecutors pushed for a broad interpretation of the “honest services” statutes and a willful blindness concept that essentially did away with the jury having to find criminal intent. (Dan Petrocelli even tried to point out at sentencing that there was no mens rea; that Jeff Skilling never set out to commit a crime. His argument fell on deaf ears.)
*Prosecutors successfully pushed for inadequate reliance and materiality instructions.
*Prosecution successfully pushed for no jury instruction of secret side deals.
*Prosecutors swore up and down that Andy Fastow was “locked” into a ten year sentence and thus had no reason to lie. In fact, his sentence was only six years.
*Jeff Skilling’s sentence of twenty-four years is unreasonable and punishes Skilling for the bankruptcy of Enron – which was not even an allegation the Task Force made, much less could sustain.
*Jeff Skilling’s sentence was enhanced for threatening a “financial institution”, which Enron was not.
*The District Court erred in assigning Skilling an enhancement for “obstruction of justice.”
The list goes on and on. Jeff Skilling was never a man on trial for his life. He was a scapegoat being used to prove a point about Enron – and about the power of the government at a time when the American people needed a hero wearing an American flag on his lapel.
This weekend I read and even commented on a few of Loren Steffy’s Enron columns at the Chronicle, which is usually a waste of time. However, as I was perusing, I noticed something interesting. Come with me, won’t you, on an irony tangent.
When President Bush was re-elected in 2004, the Left immediately separated themselves from the majority, even going so far as to apologize to the whole world for electing President Bush. Soon, ridiculous emails began to circulate supposedly demonstrating that Red State citizens had a lower average IQ than Blue Staters, which was appropriately debunked. Kerry voters thought of themselves as constitutionally more intelligent than their Neanderthal brethren, who could barely understand the complexity of world events like war and national security. They were just better people, the smartest guys in the voting booth. Red States were all tards and the superior Blues were all clean, beautifully pressed Harvard graduates… sort of like Jeff Skilling…which brings us back round to the Chronicle and the debate over Enron.
One of the primary problems with the Skilling/Lay trial was the jury. It was one of the major points Dan Petrocelli brought up in the appeal. Though Petrocelli shied away from saying the jury was a group of Red State tards, maybe he should have.
Enron was a sophisticated company with billions of dollars flowing through it every day, billions of dollars in assets, billions of contracts to manage. For someone who is not a specialist in the energy industry, it is easy to quickly become lost in the complexity of the business. Anyone who is not an MBA or a CPA is going to have a steep learning curve to understand even the basics. Yet the Enron jury was expected to understand Jeff Skilling’s testimony about hedging vehicles, accounting rules, electricity, natural gas, international projects and finance.
I am trying to think of other cases where lay people are expected to judge the performance of professionals. A medical malpractice suit, for instance, might require a jury to ascertain whether or not a surgeon made the right call. For a case like that, one would expect the attorneys to do their very best to illustrate the problem and show how the problem was approached. The plaintiff in this hypothetical case would also try to show what should have been done. But even in case like that, the ‘education’ would be very specific. The plaintiff would show that while the patient was having a myocardial infarction, the surgeon was treating a stroke – and the difference is XYZ. When attempting to judge Enron, or any huge company, it’s not enough to merely educate a jury on how energy accounting works. One must in fact re-create the company for the benefit of the jury, showing not only Skilling’s job responsibilities but also every other executive, and the junior executives, and so on. Anyone who ever touched any of the business transactions must be put into context (ie, was Arthur Andersen negligent for approving some of the challenged transactions? Or was the responsibility Skilling’s? Or the person who wrote the contract?)
Jeff Skilling said numerous times that there was no fraud at Enron. His words might have been believed if the jury had a fundamental understanding of the capitalist system (one must wonder, however idly, if the recent Bear Stearns collapse has perhaps caused a touch of Enron Juror’s Remorse?) Or if the jury understood just what Enron was doing. Or if they understood how widespread fraud would have been impossible.
The jury simply didn’t understand any of the charges against Jeff Skilling and was in no position to actually deliberate on his guilt. Yet this point is deeply contentious among the pro and anti Enron factions.
The very same people who believe that Red Staters are too stupid to live believe that the Enron jury was a lab of supreme intelligence. They were smart. They were so intelligent that they came to the conclusion of Skilling’s guilt in just five days. Why, they were the only twelve folks in the entire Red State conglomerate who actually had a brain at all!
So Texas was so stupid it elected George Bush twice, yet was ‘smart’ enough to convict Jeff Skilling and Ken Lay on extremely complex, technical charges. Texans are a group of gun-toting troglodytes, but the are so bright they can fairly judge the credibility of an executive with a Harvard MBA who managed a company worth $111 billion dollars.
I think not. And I find the presumption laughable.
President Bush is expected to nominate two Democrats to the fill empty seats on the SEC panel.
Elisse Walter, former deputy director of the SEC’s corporation finance division, and Luis Aguilar, a former SEC lawyer, will be nominated for the vacant positions, the White House said in a statement. Both are Democrats.
By law, no more than three commissioners can be of the same political party as the president.
The worst part is this: the two Dems were recommended to Bush by Senate Majority Leader Harry Reid of Nevada in November. Harry Reid, of the scammy real estate deals. The “we are lost in Iraq” rhetoric. I just do not trust Democrats – or at least the current crop of Democrat leaders – in positions of authority. War and money are adult issues.
With these Dems seated now, as the markets are all over the place, I see a lot more regulation in the future; mission statements that include allowing shareholders to vote on executive compensation and new crackdowns on backdating stock options (which is quite legal at the moment if it’s done correctly.) I just see bad things happening at a time when we need more freedom. We need to worry less about disclosure and let executives do their damn jobs.
Of course, from where I stand, I think the SEC should be eliminated altogether (and all white collar/anti-trust laws repealed). But that’s unlikely to happen so, instead, all I can do is bitch about it. And promise to shake my fist at President Bush next time I see him.
Thank you, President Bush, for distorting the meaning of the word ‘architect’. Thanks to calling Karl Rove the ‘architect’ of your 2006 re-election, there is a strange patina of negativity in the word, which I picked up again while watching a video of Dan Petrocelli, Jeff Skilling’s lead attorney, discussing the appeal. This happened:
Enron architect wants new trial? Really? Caesar Pelli, the man who built the Enron towers in downtown Houston, wants a new trial? Jeff Skilling, the former Enron CEO or President or Visionary is the one who wants a new trial. There are plenty of accurate descriptors to choose from. One needn’t try to get cutesy with ‘architect’ this and ‘architect’ that.
Jeff Skilling is not an architect.
I had to double check all my calendars today because I’m starting to feel like it’s 2001 all over again. The culprit of the moment is this New York Times article which states:
A sweeping five-month investigation into the collapse of one of the nation’s largest subprime lenders points a finger at a possible new culprit in the mortgage mess: the accountants.
New Century Financial, whose failure just a year ago came at the start of the credit crisis, engaged in “significant improper and imprudent practices” that were condoned and enabled by auditors at the accounting firm KPMG, according to an independent report commissioned by the Justice Department.
My advice to KPMG: destroy evidence. Do it now, before they find something completely innocent and turn it into a felony. Shred like you’ve never shredded in your life. Take sledgehammers to your servers. Set fire to every paper document you can find. Leave your offices, taking with you everything you can carry. Shred your personal cell phone bills. Move to a new town. Scorched earth is good.
This is only the beginning of a second wave of “improper business practices” crackdown, and anyone who believes that innocence will triumph over the zeal of federal prosecutors on the hunt to make a name for themselves is seriously naive, if not deluded.
This is exactlythe setup for Arthur Andersen, and that eighty-five year old accounting firm didn’t make it out alive. Oh sure, the Supreme Court unanimously overturned every AA conviction, but it was far too late for the company, and the people who worked there. I sincerely hope KPMG makes it through this intact, but after witnessing what happened to Enron and Arthur Andersen, my skepticism is infinitely high.
At close of business today, Chron posted its report on the government’s reply to Jeff Skilling’s supplemental brief. Though I can’t find the original brief, I think it’s pretty clear from the report that I was exactly right when I said the Task Force would claim their withholding Brady evidence was immaterial.
Former Enron CEO Jeff Skilling’s claims that federal prosecutors hid critical evidence to buff up their case against him while illegally undermining his defense are overblown with “hyperbolic rhetoric,” the government said in a filing with an appeals court today.
When I see the words “hyperbolic rhetoric”, I immediately think of Judge Sim Lake saying Jeff Skilling had condemned thousands to a lifetime of poverty. Merely claiming, correctly, that the government withheld Brady evidence is not hyperbole.
In a rare supplemental appeal filing earlier this month, Skilling’s lead trial lawyer, Daniel Petrocelli, alleged that more than 400 pages of FBI notes of interviews with former Enron finance chief Andrew Fastow show inconsistencies and outright contradictions between his early statements and his testimony in Skilling’s 2006 trial.
As a result, Skilling’s lawyers say, prosecutors presented evidence they knew was contradicted by information they failed to disclose.
The government responded today that claims prosecutors shirked the legal duty to give the defense information favorable to Skilling “rely on isolated snippets culled from 420 pages of handwritten notes and stripped of their context.”
If “divorced from Skilling’s hyperbolic rhetoric, each portion of the notes on which Skilling relies contains information that Skilling possessed prior to trial or that would have had minimal value” in skewering Fastow’s testimony, the government said.
Minimal value? Since when is the government allowed to make a judgement on the value of the exculpatory evidence, and by the way, is that a concession I hear? Are they saying that yes, there was some that we kept, but no biggie? Sounds like it to me.
Petrocelli tried to obtain the notes before and after Skilling’s trial to track Fastow’s statements over time, but prosecutors objected and U.S. District Judge Sim Lake denied the requests. Prosecutors gave the judge a portion of the notes and summaries in a binder that Lake examined for inconsistencies during Fastow’s testimony. The judge returned the binder to the government without comment.
Petrocelli later asked the 5th Circuit to intervene, and Judge Patrick Higginbotham ordered the government to turn over the notes last November. Petrocelli received the voluminous notes in late December with a requirement that they remain sealed from public view.
In a filing earlier this month, Petrocelli said the notes revealed evidence he called “a sledgehammer that destroys Fastow’s testimony” that infects the government’s entire case against Skilling.
Oh I still love that quote.
Petrocelli cited inconsistencies and contradictions between Fastow’s FBI interviews and his testimony. In the trial, Fastow said that he and Skilling had secret agreements that a Fastow-run partnership wouldn’t lose money if it bought troubled Enron assets to boost the energy company’s earnings.
For example, Petrocelli said Fastow testified that he and Skilling discussed Fastow’s list, nicknamed the Global Galactic, that noted undocumented side deals between Fastow’s partnership and Enron. The FBI notes said Fastow “doesn’t think (he) discussed the list with JS.”
Skilling testified that he knew nothing of the Global Galactic.
The government’s response says Skilling’s lawyers received a summary of FBI interviews with Fastow, and it said Fastow had told investigators that he had not discussed the Global Galactic with Skilling. It said he discussed it with former Chief Accounting Officer Richard Causey, who told him that he had discussed it with Skilling. Neither the government nor the defense called Causey to testify in the trial.
“Fastow never mentioned the list to Skilling and may not have used the phrase Global Galactic when speaking to Skilling,” the government quoted the summary as saying.
Perfect timing. I just got my hands on the brief. More after I read that.
I am on the edge of my seat waiting to see the government’s reply to Jeff Skilling’s Supplemental Brief, which, of course, contained unsealed Fastow Notes excerpts and effectively proved the prosecution to be as corrupt as a Nevada gaming commissioner. Today – Tuesday, March 25 – is the deadline for the government to file. I expect them to minimize every accusation, distort the record, and basically pretend they aren’t in a kamikaze death spiral.
My prediction is that they claim, at least once and probably twenty times, that word omissions, alterations, additions vis a vis the Fastow notes were “not material.” I loved watching them try to bolster Fastow, the admitted liar/wife-imprisoning/money-skimming/Enron screwing/selfish bastard as a reformed good guy on the stand. Now, they have to repeat the act, but this time with their fingerprints all over his corruption. They put him on the stand knowing he was lying (and from the looks of it, actually encouraging it). How on earth will they defend this conviction?
Oh I can’t wait! I must get my hands on it. Hurry hurry hurry, you government bastages, and file the damn thing.
Just as the Task Force gleefully rubbed their hands together and licked their chops in anticipation of bringing down the Enron executives, I am similarly situated, as they say, now that the fallout from the Fastow Notes is being felt in other prosecutions. Do yourself a favor and visit Kirkendall’s site, Houston Clear Thinkers for your very own copy of James Brown’s Motion To Dismiss Indictment For Egregious Prosecutorial Misconduct, Brady Violations and Double Jeopardy. If you’re anything like me, reading this is better than eating a hot fudge sundae while having your feet rubbed, after just having half a dozen orgasms with your soulmate who just got a bonus check for a millon bucks. Oh, it’s still not as good as Jeff Skilling’s supplemental brief, but it’s still pretty darn good.
The list of prosecutorial misconduct allegations is delightful. Of course, it had to be utter hell to live through this, but now that its coming to light, let us enjoy the Enron Task Force’s exposure. From the motion:
*Failed to dismiss indictment even after Fastow and others informed the Task Force that no illegal guarantee had been made.
*Task Force failed to turn over exculpatory evidence, even after repeated requests by the defense.
*Named virtually every business person who touched the Nigerian Barge deal an “unindicted co-conspirator”, thereby silencing and intimidating exculpatory witnesses.
The examples of prosecutorial
misconduct abuse goes on for a page and a half. It’s absolutely riveting, and terrifying.
Something I’ve been thinking about is the endgame. What will the final scorecard look like? I strongly believe that Jeff Skilling’s convictions will be overturned and he will be released in early April. The Nigerian Barge/Merrill Lynch cases can not stand. The Broadband and NatWest Three convictions are tenuous as well. I suspect history will show that in the aftermath of Enron, only those executives who took plea bargains were the ones to serve their full sentences (minus time off for good behavior and the rehab programs that many defendants use to shave time off).
Remember the kerfuffle caused in the middle of the 2004 election when CBS ran a story about the un-verified documents regarding President Bush’s Texas Air National Guard service? The right-wing blogosphere was immediately on mission to investigate and ultimately discredit the documents. The scandal ended with the firing of Mary Mapes, one of the show’s producers, and Dan Rather forced to apologize on the air for running the story.
Though Jeff Skilling’s supplemental brief hasn’t had the same impact (yet), I sense that this story, like TANG, is one that the blogs will own forever more. When the supplemental brief came out on March 14, there was nary a whisper from the New York Times, USAToday, or the LATimes. The Washington Post had a one sentence reference to it at the end of a Nacchio reversal article. The Wall Street Journal printed one story forty-eight hours after the blogs had already been all over it.
If we were discussing, I don’t know, space ship sightings or some local celebrity’s unexpected pregnancy, I could see how it might get overlooked by the big papers. But this is a critical story that is still having fallout today. It impacts business, and a lot of law.
It appears that the story is of interest to other bloggers as well as myself. The fact that its not even on the radar of the big papers is fine with me. It will be when Skilling’s conviction is overturned. Then suddenly the big east coast dailies will have to scurry to catch up. And again, the mainstream media will have to eat crow when they realize they’ve been scooped by the blawgs.
Houston Chroniclereports the unsurprising news that the government’s release of the Fastow Notes to former Enron CEO Jeff Skilling has inspired other defendants in Enron litigation to ask for the Notes.
Three former Merrill Lynch & Co. executives say prosecutors did the same thing to them before, during and after their 2004 trial that centered on an asset sale the government alleged was a disguised loan.
Now the Merrill defendants, who face a possible retrial after most of their convictions were overturned on appeal because of a separate issue, want to bolster their arguments with the same records that an appeals court gave Skilling.
Those records consist of more than 400 pages of notes taken by FBI agents in numerous interviews with former Enron finance chief Andrew Fastow. The notes cover Fastow statements that the Merrill defendants say corroborate their contention that the asset sale was genuine.
Federal law requires prosecutors to give defense lawyers evidence or information deemed favorable to defendants.
In both the Skilling and Merrill cases, defense teams vehemently sought details about Fastow’s statements before the trials, and prosecutors insisted that summaries of FBI notes satisfied the requirement to hand over information that bolstered the defense.
I find it odd that Kristen Hays didn’t use the words “Nigerian” or “Barges” in this report. She only says “an asset”. Farther along in the article, she does call the case by its proper Christian name: The Nigerian Barge Case (or the Nigerian Barge Trial).
Without putting too fine a point on it, the Nigerian Barge case is one of the simplest to understand (because there is no technology and no complicated financial transactions mucking up the waters). It too centers on the “secret side deals” allegation, which the Fastow Notes show in Skilling’s supplemental brief, simply did not exist.
Skilling’s legal team didn’t receive the raw notes from which those summaries were crafted until last December, after the 5th U.S. Circuit Court of Appeals ordered the government to provide them. That order also required that the notes remain sealed — meaning Skilling’s lawyers couldn’t make the notes public or share them with the Merrill defendants.
But last week, the 5th Circuit allowed Skilling to file a public brief alleging that prosecutors engaged in misconduct by hiding information in the notes that contradicted Fastow’s trial testimony against Skilling.
The Merrill defense teams also had sought the notes regarding Fastow’s statements about the deal central to their case — Enron’s sale of barge-mounted power plants to Merrill in late 1999 so the energy company could book critical earnings.
The Skilling brief prompted Fastow’s lawyers to re-urge U.S. District Judge Ewing Werlein in Houston to order the government to give them the notes.
“This evidence is more than five years past due,” Sidney Powell, a lawyer for former Merrill executive James Brown, said in a filing in the barge case this week.
Arnold Spencer, the federal prosecutor now heading the barge case, said in a filing last month that the government would turn over the notes if ordered to do so by Werlein or the 5th Circuit.
During the barge trial, prosecutors insisted that the deal was a sham because Fastow guaranteed in a conference call with one of the Merrill defendants, Daniel Bayly, that Enron would buy back or resell the assets within six months. A Fastow-run partnership bought the barges by that deadline.
Shortly before the trial began, prosecutors alerted the defense teams that Fastow had told investigators that he wasn’t explicit about a buyback and didn’t use the words “promise” or “guarantee.”
Prosecutors didn’t summon Fastow to testify in the barge case. Instead, two of his former subordinates at Enron who did not participate in that conference call — treasurer Ben Glisan and managing director Michael Kopper — testified that Merrill had received a guarantee that Enron would buy back or resell the barges by June 2000.
The Skilling brief filed last week says that the Fastow notes reveal that he told investigators he had lied to subordinates by “telling Enron people this was a guarantee” in order to “motivate” and “light a fire” within Enron to find a third-party buyer for the barges.
Paul Coggins, who represents the third Merrill defendant facing retrial, Robert Furst, said revelations in the Skilling brief show that the Merrill defendants are as entitled to the Fastow notes as Skilling.
“Fastow’s telling the FBI that he misled his own subordinates, that he said there was a guarantee to light a fire under them to remarket the barges. That was never disclosed in the first trial.
“This raises questions as to why the government has fought so hard to keep these notes out of our hands,” Coggins said.
The Justice Department must file a response to the Skilling brief with the 5th Circuit by Tuesday. “We’ll continue to litigate in court, and we’ll have no further comment,” department spokesman Paul Bresson said this week.
Oral arguments in Skilling’s appeal are slated for April 2 in New Orleans. The barge retrials are indefinitely postponed pending the outcome of appeals unrelated to the Fastow notes.
The truth is finally coming to light. With the Fastow Notes now unclassified, I don’t see how any of the prosecutions can continue. Furthermore, I would love to see the Glisan Notes, the Causey Notes, the Watkins Notes, etc.
Incidentally, I am enjoying watching the Enron-bashers marginalize Fastow’s contribution to Skilling’s prosecution and conviction. At the time of Skilling’s trial, one could not open a newspaper without seeing the words “Star Prosecution Witness” preceding the name Andy Fastow. Now they all claim that Fastow wasn’t that important. He was a minor thug in a mix of big thugs and basically his testimony was not that impactful.
What bollocks. Anyone paying even the scantest attention to the Skilling trial would know that the government positively feted Fastow as their star witness. They loved him and lavished him with favors. During Fastow’s sentencing, the government all but kissed his cheek as they told the judge what a magnificent little fella he is.
Indeed Fastow’s cooperation and the resultant Fastow Notes are the hub around which all Enron convictions pivot. Without the belief that there was fraud at Enron, it is unlikely the Nigerian Barge trial, or the ridiculous Broadband trial, or the Natwest Three trial or any of the other actions would have even been noteworthy, much less considered criminal.
While Skilling was considered the face of fraud for a long time, that view seems to be shifting as the truth begins to wind its way upward toward the light of day. He’s no criminal. The face of fraud is not even necessarily Fastow. Fastow was just the person who demanded such a title be invented. Indeed the face of fraud is the Enron Task Force.
If the truth shall make you free, Jeff Skilling will be out of prison in two weeks, and the three Nigerian Barge defendants will have their lives back – though it will take a long time and much effort before they are whole again.
On March 19, 2007, the United States Court of Appeals for the Fifth Circuit issued an important decision in the Enron securities class-action litigation. The court ruled that Enron Corp. shareholders could not proceed with a class-action lawsuit against investment banks for their alleged role in the accounting fraud that led to Enron’s collapse.
Watching the news on that day, I was so excited by the ruling that I jumped off the sofa, grabbed my camera and memorialized the moment (yes, I know I’m a huge dork):
Economist has a wonderful article about Jeff Skilling’s innocence. For the fifteen months he has been in prison (and actually far longer than that), most people have the distorted view that Skilling is the Guiltiest Man In America. Now this uninformed opinion may be reconsidered with the March 14 revelation that the government witheld key exculpatory Brady evidence – that is, evidence that helps bolster the defense’s case. In this instance, it was the Fastow Notes, the raw notes taken by FBI agents during the interrogation of Andy Fastow.
Mr Fastow’s testimony was widely regarded, not least by the prosecution, as crucial to securing Mr Skilling’s conviction: it was the only direct evidence that Mr Skilling actually knew about the various frauds at Enron for which he was found guilty. Yet the new document reveals that, at least in his early interviews with the FBI, Mr Fastow did not appear to implicate Mr Skilling as unequivocally as he did when he testified in court. Indeed, on crucial points, his original answers appear to exonerate Mr Skilling.
Why is this inconsistency only now coming to light? Rather than handing over the original interview notes, the government instead produced a composite summary. This is standard practice, but the summary must accurately reflect what was said. Mr Skilling’s defence team, after eventually persuading the court to order the government to hand over its original notes, makes a strong case that the summary of Mr Fastow’s interview omits details in a way that consistently favours the government.
The Economist is being terribly British about the facts. They’re too polite to say outright that the government knowingly directed Fastow to lie about the “secret side deals” that were the cornerstone of every single count against Jeff Skilling.
Additionally, the “composite” summary given to the defense was not “standard practice.” Standard practice is that summaries for each meeting with such a witness are prepared, which are then (sometimes) turned over. That this very unusual composite was prepared appears to be what convinced the 5th Circuit to give Skilling’s team the notes in the first place. (For a more detailed treatment of this issue, see e.g. pp. 200-202 of the opening brief.)
Many of the allegations of fraud at Enron related to the accounting treatment of off-balance sheets and other transactions. Under accounting rules, Enron’s treatment of these transactions probably would have been acceptable if they involved a genuine transfer of risk to a third party (ie one independent of Enron).
The government argued, and Mr Fastow confirmed, that many of the transactions appeared to involve a risk transfer but in fact did not, as Enron had made secret promises to third parties guaranteeing they would lose no money. Therefore, the accounting was fraudulent.
Mr Skilling insisted there were no secret promises. Mr Fastow testified that there were, and that Mr Skilling was behind them. The composite summary appears to confirm that this was what Mr Fastow told the FBI from the start. Yet the original FBI notes appear to reveal that he initially told them a different story.
Oh really? The man who admits he stole from Enron actually lied about Enron and his boss at the company? How positively unique.
Take, for example, a couple of the alleged frauds that caught the attention of the public (in part because of Enron’s use of “Star Wars”-related names). Mr Fastow testified that he discussed with Mr Skilling a “Global Galactic” list that included details of the secret promises. The original FBI notes record that when first asked about it, Mr Fastow “doesn’t think [he] discussed list w/ JS.”
Likewise, Mr Fastow claimed that Mr Skilling knew of a “quid pro quo” between Enron and off-balance sheet vehicles known as “raptors”, yet the original FBI notes have him saying he was “not sure what Skilling knew”. And so on.
Of course, being interviewed by the FBI can be stressful, and memory can play tricks. Things once forgotten are remembered; further questioning clarifies stories. But Mr Fastow had a powerful incentive to come up with a story that helped the government convict Mr Skilling:by cooperating, and entering a plea bargain, Mr Fastow was sentenced to only six years in jail.
While it can never be said that I support Andy Fastow, for the sake of clarity and honesty, he pled to ten years. But for reasons that have to do with his willingness to be a good prosecution witness, and because he is taking advantage of the drug rehab program in prison (Fastow claims to be addicted to Xanax), and with a haircut for good behavior, Fastow will be out in three and a half years.
It was not known at not known at trial that Fastow would only get a six-year sentence. Indeed, he and the Task Force made a point of having Fastow repeatedly tell the jury he was locked into a 10-year sentence and thus had no incentive to lie. Then at Fastow’s sentencing hearing held well after Jeff’s trial, at which John Hueston of the Task Force praised Fastow’s cooperation, Fastow was given the six-year sentence. This is one of the issues the Skilling defense raised vigorously on appeal. (See, e.g., pp. 196-200 of opening brief.)
That was already known at the trial. What was not known was that Mr Fastow’s recollections over time became more hostile to Mr Skilling and more helpful to the government. The defence surely would have grilled Mr Fastow about his fickle memory.
Mr Skilling’s defence team allege serious prosecutorial misconduct of the sort that ought to result in Mr Skilling’s conviction being overturned, with no possibility of a retrial. Brady v Maryland held that the government had to provide the defence all favourable evidence. That is because the government has “substantial resources and considerable other advantages” over defendants and the “system reposes great trust in the prosecutor to place the ends of justice above the goal of merely securing a conviction.”
The government is expected to argue that the inconsistencies between the FBI notes and the composite are trivial and did not affect the verdicts.
For what it is worth, prosecutors have had a tougher time in the appeals court with Enron-related cases than in the initial jury trials. Convictions have been overturned in a case relating to Nigerian barges that Enron sold to Merrill Lynch. The conviction of the chief financial officer of Enron Broadband has also been vacated, after two trials. So, too, was the decision to convict Enron’s auditor, Arthur Andersen (albeit too late to save the venerable firm from liquidation).
For many people, the mere fact of Enron’s collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between his conviction and sentencing, presided over a fraudulent house of cards. Yet Mr Skilling has always argued that Enron’s collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run. Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy.
Yet recent events in the financial markets add some weight to Mr Skilling’s story—though nobody is (yet) alleging the sort of fraudulent behaviour on Wall Street that apparently took place at Enron. The hastily arranged purchase of Bear Stearns by JP Morgan Chase is the result of exactly such a bank run on the bank, as Bear’s counterparties lost faith in it. This has seen the destruction of most of its roughly $20-billion market capitalisation since January 2007. By comparison, $65 billion was wiped out at Enron, and $190 billion at Citigroup since May 2007, as the credit crunch turned into a crisis in capitalism.
Mr Skilling’s defence team unearthed another apparent inconsistency in Mr Fastow’s testimony that resonates with today’s events. As Enron entered its death spiral, Mr Lay held a meeting to reassure employees that the firm was still in good shape, and that its “liquidity was strong”. The composite suggested that Mr Fastow “felt [Mr Lay’s comment] was an overstatement” stemming from Mr Lay’s need to “increase public confidence” in the firm.
The original FBI notes say that Mr Fastow thought the comment “fair”. The jury found Mr Lay guilty of fraud at least partly because it believed the government’s allegations that Mr Lay knew such bullish statements were false when he made them.
As recently as March 12th, Alan Schwartz, the chief executive of Bear Stearns, issued a statement responding to rumours that it was in trouble, saying that “we don’t see any pressure on our liquidity, let alone a liquidity crisis.” Two days later, only an emergency credit line arranged by the Federal Reserve was keeping the investment bank alive. (Meanwhile, as its share price tumbled on rumours of trouble on March 17th, Lehman Brothers issued a statement confirming that its “liquidity is very strong.”)
Although it can do nothing for Mr Lay, the fate of Bear Stearns illustrates how fast quickly a firm’s prospects can go from promising to non-existent when counterparties lose confidence in it. The rapid loss of market value so soon after a bullish comment from a chief executive may, judging by one reading of Enron’s experience, get prosecutorial juices going, should the financial crisis get so bad that the public demands locking up some prominent Wall Streeters.
Thank you, Economist, for giving this story the attention it richly deserves. Thank you for a generally unbiased report. I do hope that others will begin to take note and understand this isn’t a ‘rich guy is asking for special treatment’ case, which seems to be the misunderstanding of many. It’s a ‘this guy was framed by the government’ case.
Skilling must be exonerated.
Mary Flood and Kristen Hays writing for the Houston Chronicle report that three former Enron broadband unit executives could be headed back to trial on multiple charges after a federal court today denied their appeal.
The 5th U.S. Circuit Court of Appeals ruled that U.S. District Judge Vanessa Gilmore was correct when she refused to dismiss most of the remaining charges against Joseph Hirko and Rex Shelby and all the remaining charges against Scott Yeager.
The court found that just because a 2005 jury acquitted each of the three of some criminal charges, it could not be concluded that the men could not be found guilty of some of the other charges against them.
“The 5th Circuit ruled against us in our effort to narrow the scope or to eliminate a retrial,” said Hirko’s lawyer Per Ramfjord of Portland, Ore. “It is too early to assess what steps we’ll take next.”
Ramfjord said rather than move straight to a decision from the Justice Department on whether the case will be retried, the defendants could still ask the appellate court to rehear the case with all the judges, rather than the three-judge panel that heard this case. And, he said, they could ask the U.S. Supreme Court to consider their arguments.
Tony Canales, Yeager’s lawyer, said he will seek a rehearing and will, if necessary, take the case to the U.S. Supreme Court.
A Justice Department spokesman could not be reached late today.
The defendants — Hirko, former co-CEO of the broadband division; Shelby, senior vice president of engineering and operations; and Yeager, senior vice president of business development — have been in legal limbo since 2005.
The government contended that all three conspired to overstate capabilities of Enron’s broadband network and software to generate enthusiasm on Wall Street and enrich themselves by selling shares inflated by the hype. The defendants each testified that the network and software worked, but was being implemented in phases. The broadband division never made a profit and went bankrupt along with Enron in December 2001.
Originally, all three were charged with conspiracy, wire fraud, securities fraud, insider trading and money laundering. Jurors acquitted Yeager of the conspiracy and fraud counts, but was hung on more than 100 insider trading and money laundering counts. Hirko was acquitted of money laundering and insider trading, while Shelby was acquitted of some insider trading charges.
The government later reindicted all three on fewer charges. Yeager faces 13 counts of insider trading and money laundering, while Hirko and Shelby — in a separate case — were reindicted on the conspiracy, fraud and insider trading counts.
The three men were originally indicted in 2003 along with four others: Kenneth Rice, former co-CEO of the division with Hirko who pleaded guilty to securities fraud and is in prison; former unit chief operating officer Kevin Hannon who pleaded guilty to conspiracy and is in prison; former division finance chief Kevin Howard; and former unit accountant Michael Krautz.
The 2005 jury was hung on all counts against Howard and Krautz, who were retried in 2006. Krautz was acquitted while Howard was convicted of five counts of conspiracy, fraud and falsifying books. Howard’s convictions have since been tossed out and the government is considering whether to try him a third time.
I am torn between wanting to write two different things: (1) I continue to hope these men are strong enough to endure yet another trial, that they have the funds and strength and love and fortitude to continue this path, which may bring them the result they desperately deserve. (2) There is no possible way on God’s green earth that these men will ever get a fair shake. The government is desperate for a taste of victory and they’re going to dig in and prosecute until they get the result they want.
This doesn’t seem like an issue of innocence. It seems like the entire court system is trying to make some huge, cosmic point about Enron – and God help anyone who stands in their way.