January 4, 2006
Using Skilling's SEC Testimony Against Him
The Wall Street Journal reports (here) that former Enron CEO Jeffrey Skilling and the prosecutors are fighting over whether the transcript of a deposition of Skilling by the SEC can be introduced at trial to show that Skilling was less than truthful in his answers regarding the reasons for a large sale of Enron stock. On Sept. 17, 2001, Skilling sold 500,000 shares of Enron, which came approximately a month after he resigned from the company and only a few months before it collapsed into bankruptcy. According to the transcript, Skilling testified on Dec. 6, 2001, that "[t]here was no other reason other than September 11th that I sold the stock . . . Oh, I agonized over it, absolutely agonized over it." The government asserts that Skilling did not reveal that on Sept. 6 he had contacted a brokerage firm to inquire about selling 200,000 shares, and that his explanation for the later sale as being solely motivated by Sept. 11 terrorist attacks was not correct because he knew about problems at Enron. While the government has charged Skilling with insider trading for these transactions, including the Sept. 17 sale, the transcript goes to a different issue regarding his truthfulness, and is an attempt by the government to impeach Skilling in its case-in-chief if the evidence is admissible.
The defense has raised an issue regarding parallel proceedings that also cropped up in the trial of former HealthSouth CEO Richard Scrushy. In that case, the government charged Scrushy with perjury based on statements he made at an SEC deposition shortly before the fraud at the company came to light, but during a period when the prosecutors and the SEC's Division of Enforcement were coordinating their investigations. Judge Karon Bowdre ultimately ruled that the failure to warn Scrushy that he was a target of the government's criminal investigation was a violation of his due process rights by departing from the "proper administration of justice," which is the same position being advanced by Skilling to keep the transcript out at his trial. U.S. v. Scrushy, 366 F.Supp.2d 1164 (N.D. Ala. 2005). What makes Skilling's case different is that the SEC deposition appears to have taken place before the formation of the Enron Task Force, and the degree of involvement of the criminal prosecutors in the SEC investigation may be less than in the Scrushy case, in which the prosecutor asked the SEC to move the location of the deposition to make it easier to pursue perjury charges.
The decision in Scrushy may be sui generis, but any time there is a parallel proceeding involving both criminal and civil regulatory investigations, the issue of prosecutorial overreaching will be raised by defendants and the Scrushy opinion cited as precedent. Whether Skilling can succeed in his motion will depend on whether U.S. District Judge Sim Lake views any involvement by prosecutors in the SEC investigation as crossing over into misuse of the civil investigative function to sandbag a witness into testifying.
Does the government's motion show a new direction in the prosecution? It should be noted that the allegation that Skilling did not testify truthfully was made in response to a defense motion filed in December, before former co-defendant Richard Causey entered into a plea agreement. I suspect the government's intention all along has been to use Skilling's testimony, preferably in its case-in-chief, as evidence that he never disclosed his knowledge of problems at the company to show his fraudulent intent in selling the shares based on material nonpublic information. In proving intent, a defendant's own words will be among the best evidence, so it's not surprising that the government views the depositions as important. In that regard, it has now set forth its rationale for using the evidence, and that rationale should not come as a great surprise to the defense.
UPDATE: At a hearing on Jan. 4, U.S. District Judge Sim Lake denied Skilling's motion to prohibit the prosecution from using his SEC deposition at trial. An AP story (here) discusses the hearing. (ph)
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Great site. You have made all of this very clear to someone with no legal background.
Posted by: rob | Jan 4, 2006 3:49:30 PM