Smart money is on lost appeals

Published on Sunday 28 May 2006 00:24

THE conviction last week of Kenneth Lay, the former Enron chairman, and Jeffrey Skilling, the company's former president, is likely to stand the test of lengthy appeals.

Lay, 64, was convicted of conspiracy, securities fraud and wire fraud, and will almost certainly go to jail. He faces up to 47 years in prison but it is thought he will be sentenced to between 12 and 24 years.

Skilling, 52, could be sentenced to 185 years after being found guilty of conspiracy, securities fraud, making false statements and insider trading. Realistically, he faces up to 24 years. Both men will be sentenced on September 11 and have until then to appeal their verdicts. Skilling's attorney said immediately after the verdict that his client would file for appeal.

Daniel Petrocelli said: "We have just begun the fight." Lay, who said he was "shocked," has not indicated yet whether he, too, will appeal. One argument for overturning the conviction would be the trial court's refusal to grant a relocation of the trial to a new venue.

The three-month trial was held in federal court in Houston, Texas, where the disgraced and now defunct company had its headquarters. Enron's market value was $68bn (36.2bn), which was wiped out almost overnight when bankruptcy was declared in December 2001, taking with it thousands of Houston jobs and at least $1bn in retirement funds held in Enron shares.

An obvious appellate argument would be that a jury chosen from Houston would be biased against the company.

Soon after Enron's collapse, revelations of elaborate financial schemes, which defrauded investors and customers, began leaking out.

A shady web of partnerships run by Andrew Fastow, chief financial officer, helped the company inflate profits and hide debt. In October 2001, Enron reported a $638m third-quarter loss and a $1.2bn slide in shareholder value. In November, Enron revised financial disclosures for five years, indicating a previously unreported $586m loss.

From a share price of $84.87 in January 2001, Enron shares went for under a dollar by November 28, 2001.

The Justice Department began its probe in January 2002 and Lay resigned as chairman and chief executive on January 23. Fastow agreed to a 10-year sentence in January 2004 in exchange for cooperating with the prosecution.

Skilling was indicted in February and on July 8, 2004, Lay was arrested and indicted.

During their trial, Fastow testified that Lay misled the investing public about the company's financial problems and that Skilling encouraged the 'off-the-balance-sheets' deals.

The jury on Thursday bought this argument. Whether the appellate court would reverse that decision is doubtful.

Another argument for reversal was that Lay had requested to stand trial alone rather than with Skilling, saying his case was prejudiced by lumping it together with Skilling's.

But Judge Simeon Lake, who presided over the trial, has a solid reputation and judges are given wide discretion in deciding such matters. The case may also be appealed on the grounds that Judge Lake instructed the jury to consider "deliberate indifference", allowing it to convict Lay or Skilling for wilfully ignoring criminal conduct.

The defence team said that this was the judge's formulation, as prosecutors never pursued this line of argument. Again judges are often given wide authority in how to run a trial, though the defence will argue that Judge Lake crossed the line.

Yet another argument for appeal is that Judge Lake refused to grant immunity to a number of ex-Enron executives that the defence wanted to put on the stand, depriving the defendants of helpful testimony.

Lay and Skilling's lawyers would be wise not to depend too much on two successful appeals in well-publicised corporate corruption cases. The Supreme Court overturned the 2002 conviction of Arthur Andersen for obstructing justice in the Enron case because the trial judge did not instruct the jury to find that Andersen was aware that shredding documents was illegal in this case. Frank Quattrone, the former Credit Suisse investment banker, had his 2004 conviction for obstruction overturned on the same grounds as the Andersen case. But Judge Lake was careful not to make the same mistake in the Lay and Skilling trial.

The convictions could satisfy an angry public's hunger for senior executives to be punished. Lay and Skilling's conviction joins the sentencing of Bernie Ebbers, former WorldCom CEO, to 25 years in jail last July as the most significant government victories.

Some critics of the verdict complain that the charges did not include supply manipulation of the California and Texas electricity market during a 15-month crisis, and which they say cost consumers $9bn. The trial did not reveal how much Enron made from the alleged manipulation. Half a dozen other energy firms and a dozen Wall Street firms paid fines of $3bn to the government in the case, but escaped criminal conviction.