May 5, 2006
Here Comes an Ostrich (Instruction)
With former Enron CEO Ken Lay having completed eight days of testimony, the Enron conspiracy prosecution is winding down and the case may go to the jury in less than two weeks. It is unlikely, however, that the jury will return a verdict before we can break out our white shoes and straw hats with the arrival of Memorial Day. The defense is finishing up with experts who testified that Enron's accounting for the various transactions was fully proper, and a financial analyst who compared Lay's sales of Enron shares back to the company to meet margin calls as roughly akin to buying additional shares (I'm not very good at math, so I won't try to figure it out). Trial even ended early for the week when Judge Sim Lake ruled that if the defense read a portion of former Arthur Andersen accountant David Duncan's testimony at the Andersen obstruction of justice trial about the propriety of Enron's accounting treatment, then the government could read other parts about the shredding of documents and portions of Duncan's grand jury testimony. At that, the defense dropped its plan and the afternoon was freed up because no other witnesses were available. Interestingly, neither side plans to call former co-defendant Richard Causey, who was Enron's chief accounting officer. A frequent complaint of the defense was the unavailability of senior Enron officials to testify on their behalf, and it does not appear that Causey would have invoked his Fifth Amendment right, so the defense could have called him. Speculation is that both sides viewed him as too great a threat to its position, belying once again the notion of a trial as a search for the truth.
With the trial nearly complete, the next significant issue will be the jury instructions. Judge Lake hopes to charge the jury on May 15, so time will be spent this week preparing (and arguing over) the instructions. Lay's testimony appears to open up a basis for the government to seek a so-called "Ostrich Instruction" that the defendants had sufficient notice of significant problems but deliberately refused to obtain the information necessary regarding the criminal conduct. Sherron Watkins' warning letter and other evidence of problems at Enron may be sufficient to put Lay (and Jeffrey Skilling) on notice to investigate problems further, and Lay testified he was not aware of any significant problems at the company or with its accounting that were abnormal. Indeed, he defended "aggressive accounting" as acceptable, a position the government may use to argue that he ignored the effects of such accounting and may have even encouraged it without learning its effect on Enron when he made public statements about its strength. A jury determination of deliberate ignorance (or willful blindness) by the defendant can be sufficient for the knowledge element of a conspiracy and the intent element for securities fraud, especially in a case in which the underlying claim is based on materially false statements and omissions.
The Ostrich Instruction is a common feature in white collar crime prosecutions. One basis for the appeal by former WorldCom CEO Bernie Ebbers of his conviction was that the instruction should not have been given at his trial. United States v. Jewell, 532 F.2d 697 (9th Cir. 1976), sets forth the classic instruction in this area: “You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear that he would learn, you may conclude that he acted knowingly.” Judge Posner explained how the Ostrich Instruction should be understood, and its limitations, in United States v. Giovannetti, 919 F.2d 1223 (7th Cir. 1990):
The most powerful criticism of the ostrich instruction is, precisely, that its tendency is to allow juries to convict upon a finding of negligence for crimes that require intent . . . The criticism can be deflected by thinking carefully about just what it is that real ostriches do (or at least are popularly supposed to do). They do not just fail to follow through on their suspicions of bad things. They are not merely careless birds. They bury their heads in the sand so that they will not see or hear bad things. They deliberately avoid acquiring unpleasant knowledge. The ostrich instruction is designed for cases in which there is evidence that the defendant, knowing or strongly suspecting that he is involved in shady dealings, takes steps to make sure that he does not acquire full or exact knowledge of the nature and extent of those dealings. A deliberate effort to avoid guilty knowledge is all the guilty knowledge the law requires.
Not surprisingly, the defense usually opposes the instruction because it effectively lowers the intent level for the offense, or at least redirects it toward asking whether the defendant should have done more to avoid the harm or wrongful conduct.
Lay testified, "Rules are important, but you should not be a slave to rules either." (See Houston Chronicle TrialWatch blog here). The government could use that statement to show that Lay was not interested in determining if the rules had been violated. Whatever Lay meant by that assertion, he may well have opened himself up to an Ostrich Instruction if the defense had not done so already. I expect the government to exploit that assertion in a number of ways, including perhaps an argument that a person who says that one "should not be a slave to rules" is a person who made a deliberate choice of avoid guilty knowledge, because adherence to the rules would have resulted in the guilty knowledge. (ph)
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