Tuesday, November 13, 2007
Federal prosecutors filed their brief in the appeal by former Enron CEO Jeffrey Skilling challenging his convictions on conspiracy, securities fraud, and false statement to the SEC charges. Skilling is currently serving a 24+ year sentence in the Waseca, Minn., federal correctional institution. The brief (available below) is a hefty 218 pages, nearly matching Skilling's 230+ page brief filed in early September (see earlier post here). The Fifth Circuit allowed the extensive briefing in light of the number and complexity of the issues in the case.
The key issue in the case remains the effect of the Fifth Circuit's decision in U.S. v. Brown that limited the "right of honest services" theory when the defendant believes he or she is acting in the corporation's best interest as defined by management. The government included this theory in its broad conspiracy count, and the Brown decision overturning convictions for the use of honest services fraud in the Enron Nigerian Barge trial came out about three months after the jury returned its verdict convicting Skilling and Ken Lay -- too late for prosecutors to remove it. The government argues that Brown does not apply because it is limited to lower-level employees and not a CEO who it describes as the leader of the fraud. The problem with that argument, however, is that Brown does not seem to create a "CEO exception" to its analysis of the applicability of honest services fraud theory in a private setting in which the company is the victim of the fraud.
The greater problem for the government is not so much the application of Brown to the conspiracy count -- which I suspect they will lose -- but whether the use of a Pinkerton instruction for Skilling's liability means other counts will also fall. Pinkerton allows a jury to find a defendant guilty of an offense if any other member of the conspiracy committed a crime, and charging the honest services fraud theory as one basis for the conspiracy may taint counts in which the jury could have found Skilling liable based on what other conspirators did. The Pinkerton instruction can be very powerful for the government, but when there is a flaw in the conspiracy count it could result in reversal of the substantive counts tied in with the conspiracy because the jury only returns a general verdict and does not outline the basis for its decision to convict. That could put some of Skilling's securities fraud convictions in jeopardy, although I suspect the insider trading and false statement charges are less likely to be affected by any problem from Brown.
The government argues that the Pinkerton theory of liability was unlikely to have affected the verdicts, and the Fifth Circuit could apply a harmless error analysis to find that the jury likely did not base its decision on that theory. Whether the appellate court goes along with that suggestion remains to be seen, but the Fifth Circuit could cut back on Brown a little bit by refining the standard for when a defendant's intent to benefit the company will preclude a conviction for honest services fraud.
Among the other issues argued in the brief are the jury instructions, including the willful blindness/ostrich instruction, venue, hindering Skilling's access to witnesses, and the reasonableness of the sentence. I suspect these are weaker arguments for Skilling, particularly the venue and witness access issues, which are very difficult for defendants to prevail on. The real action is going to be figuring out how Brown will be applied to the case, which raises interesting issues about how far-reaching that decision will be in the Enron prosecutions, and even beyond when the next wave of scandals hits. (ph)