Supreme Court’s Skilling Decision Limits Politically Inspired Prosecutions

Published July 20, 2010

A favorite political sport in recent years has been to use the judicial system to demonize business people for fun and profit at the polls. The treatment of former Enron CEO Jeffrey Skilling is one example.

But in late June the U.S. Supreme Court significantly limited the scope of federal laws prosecutors and plaintiffs’ attorneys had been using to allege theft of honest services. The ruling resulted from the post-Enron case of Skilling vs. U.S. and related cases involving media mogul Conrad Black and Alaska lawmaker Bruce Weyhrauch.

On May 25, 2006 a jury convicted Skilling on 19 counts: one count of conspiracy to commit securities or wire fraud; 12 counts of securities fraud; five counts of making false statements to auditors, and one count of insider trading. The jury acquitted Skilling of nine counts of insider trading.

Two Court Questions
The Supreme Court later granted certiorari to address two sets of questions. One regarded whether the federal “honest services” statute requires the government to prove the defendant’s conduct was intended to achieve “private gain” at the expense of the employer’s interests, and whether the statute is unconstitutionally vague. The second question dealt with jury prejudice. Was the community attitude so hostile to the defendant and the pretrial publicity so inflammatory as to require a change in venue?
The Supreme Court heard oral arguments in March 2010 before ruling the definition of honest services was so broad that, if viewed literally, it would be unconstitutionally vague and provide little guidance to citizens about what conduct is legal or illegal. Rather than invalidate the law outright, though, the Court read it to cover only bribery and kickbacks.

The Court rejected the jury bias argument. However, Justice Sonia Sotomayor observed in dissent, “Perhaps because it had underestimated the public’s antipathy toward Skilling, the District Court’s 5-hour voir dire was manifestly insufficient to identify and remove biased jurors. … I cannot accept the majority’s conclusion that [the five-hour] voir dire gave the District Court ‘a sturdy foundation to assess fitness for jury service.’ … [O]ur system of justice demands trials that are fair in both appearance and fact. Because I do not believe Skilling’s trial met this standard, I would grant him relief.”

Where the Story Began
Enron collapsed near the end of 2001. The year began with failures in two California markets. One was the Regional Clean Air Incentives Market for oxides of nitrogen emissions in the south coast air basin. The other was a pair of electricity markets the California legislature had established without a single nay vote.

Emissions trading began in 1994; electricity trading in 1998. When prices in both markets increased sharply in 2000, the California electric utilities asked regulators to allow them to renege on their contracts. Both markets were suspended in mid-2001. The non-utility electricity suppliers and emissions reducers were denied compensation for the contract abrogations.

Government Banned Risk Hedging
Much of the blame for the high emissions and electricity prices was put on Enron, which, in our opinion, diverted attention from the electric utilities and the government regulators who benefitted from the takings.

One irony is that the natural gas derivatives, pioneered by Enron, could have been used by the California utilities to hedge the electricity price volatility, except legislation prohibited their use. Exchange-traded natural gas contracts continue as one of the most actively traded vehicles for hedging energy price risk and the risk associated with sulfur dioxide and carbon emissions contracts.
Exculpatory Evidence Excluded
In October and November of 2001 the limited partnerships established by Andrew Fastow began to unwind as it was revealed that some Enron people, including Fastow but not Skilling, were diverting money from the partnerships to their personal accounts. On November 8 Enron filed with the Securities and Exchange Commission revised financial statements for the previous five years.

The law requires the off-book limited partnerships to be independent from the parent company. Fastow testified under a plea agreement that Skilling knew of this. However, it was later revealed Fastow told the FBI interrogators Skilling did not know. This potentially exculpatory testimony was kept from the defense until the Fifth Circuit ordered its release, too late to be a part of the original trial.

In a similar case, Republican Sen. Ted Stevens of Alaska was convicted on seven felony counts on October 27, 2008, barely a week before he lost his reelection bid to Democrat Mark Begich, mayor of Anchorage. On April 1, 2009 the conviction was thrown out by Attorney General Eric Holder on the grounds the prosecution withheld statements, which were different from the testimony at the trial, from an interview of the chief witness against Senator Stevens. [The New York Times, August 10, 2010]

Bank Run Claims Derided
Skilling claimed in testimony before Congress and at the trial that the collapse was due to a run on the bank. The contention was widely ridiculed, especially in Houston. However, there was experience with the sudden collapse of Long Term Capital Management and its bailout by the Federal Reserve in 1998. There is also the case of IndyMac Bank in Southern California, which collapsed in 2008 as a result of a $1.3 billion bank run sparked by a letter released to the press by Senator Charles Schumer (D-NY).

The financial crisis of 2008 is another example of a sudden, unexpected collapse and of how some firms get bailed out and others get demonized. Freddie Mac, Fannie Mae, and AIG were at least partially responsible for the financial crisis, yet they were bailed out.
The politically inspired prosecutions would have continued without the Supreme Court weighing in to slow them down. The Skilling decision, although incomplete, is good for justice and economic progress.
Paul Fisher ([email protected]) is partner at the law firm of McGuire Woods. Jim Johnston ([email protected]) is an economist retired from the Amoco Corporation. Both are unpaid directors of The Heartland Institute and have no connection with Jeffrey Skilling or the government prosecutors.