May 08, 2013
Skilling to Reach Deal on Resentencing
Posted by Christine Hurt

Doesn't the fall of Enron (Fall of 2001) seem like a long time ago?  Jeff Skilling, after being sentenced to 24 years in prison in October 2006, has served six years of that sentence, much of that watching the legal wheels turn very slowly.  For those of you keeping score at home, Skilling appealed his conviction to the Fifth Circuit, which affirmed the lower court (Southern District of Texas, Judge Sim Lake) as to the conviction, but vacated the sentence based on a sentence enhancement error.  Skilling then appealed that decision to the Supreme Court, arguing that he should have been granted a request for a change of venue due to pretrial publicity and that the theft-of-honest-services statute underlying part of his conviction was unconstitutionally vague.  In 2010, the U.S. Supreme Court agreed as to the theft-of-honest-services statute, not the venue question, and remanded to the Fifth Circuit to determine whether a finding of violation of that statute was necessary for the conspiracy finding.  Because the jury could have found evidence of various conspiracies, the Fifth Circuit affirmed the conviction (again) and remanded for resentencing (again) in 2011. 

Now, in 2013, the WSJ is reporting that the prosecution is likely to reach an agreement with Skilling that Skilling drop all further legal proceedings in return for a reduced sentence of 14-17 years.  On my first reading of this, I didn't see a great benefit.  Yes, 14 is less than 24, but it still means almost 8 more years.  But, Skilling is 59; being freed at 67 is probably a great deal better than 77.  But having the Supreme Court and the Fifth Circuit say that the sentence was wrong seems like at least a 50% discount should be in order, right?  But this report, linked to by the Houston Chronicle, quotes Skilling's attorney Dan Petrocelli as saying that with various other good behavior discounts, Skilling could be released in "four or five years."

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October 22, 2012
PCAOB Considers Mandatory Auditor Rotation
Posted by Erik Gerding

On Thursday, I travelled to Houston and gave a statement before the Public Company Accounting Oversight Board in a roundtable hearing, as the PCAOB considers whether to impose a mandatory auditor rotation rule. In using its new inspection powers, the PCAOB has found worrying evidence of auditors compromising their independence, objectivity, and professional skepticism (see the PCAOB’s concept release soliciting public feedback).

This problem and whether mandatory auditor rotation is an appropriate solution present a bramble bush of questions that have solicited a great deal of comments (you can see the statements at the Houston roundtable (including my own) here); the PCAOB also held roundtables previously in Washington, D.C. and San Francisco).

For me, the roundtable represented an opportunity to revisit some of the legal scholarship on audit failure that deserves renewed attention, even as public attention has shifted from Enron/SOX to “Subprime”/Dodd-Frank. Let me highlight the works of two scholars in particular.

First, Sean O’Connor (Univ. of Washington) authored a great series of articles that examined “the creation” of the problem of auditor independence. In one work, O’Connor looks at how certain accountants pushed for, and Congress created, requirements for mandatory “independent” auditing of issuer financial statements in public offerings (the ’33 Act) and in periodic reporting (the ’34 Act). Professor O’Connor looks at how the New Deal Congress imported much of these requirements from provisions in Britain’s Companies Act but without considering key differences in status and governance between chartered accountants in Britain versus the accounting industry in the United States. Moreover, Congress failed to spell out what makes auditors “independent.” This omission left the job to the SEC and resulted in Boards and not shareholders selecting and paying auditors. In a later work, O’Connor looks at how these legal requirements and the “issuer pays” model mean that true auditor independence will always be elusive. His work parallels work in other scholarship on gatekeepers (for example, Frank Partnoy’s theory of how “regulatory licenses” endow credit rating agencies with government-granted oligopoly power that undermines their effective gatekeeping). O’Connor presents a fairly radical set of solutions, including ending the ’34 Act (but not the ’33 Act) statutory requirements for independent audits and giving shareholders control of auditor selection.

Bill Bratton (Penn) had a second and different spin on the problem of auditor independence. He agrees that the issuer-pays model fundamentally compromises auditor independence. But, he argues that making auditors responsive to shareholders is problematic, as different groups of shareholders have radically different investing interests and time horizons. This article represents part of a series of articles by Bratton on the “dark side” of shareholder value and the downsides of shareholder primacy. Instead of making auditors beholden to shareholder, Bratton recommends strengthening the fidelity of auditors to accounting rules. Less radical than O’Connor’s suggestions, Bratton’s proposal raises a number of questions, including whether fidelity to rules can provide adequate discipline of audit firms without a third-party strenuously enforcing those rules on behalf of shareholders, whether professional and social norms provide a meaningful disciplining device for auditors, and, most vexing, how effective can rules be when industry wields a powerful hand in writing them.

Both sets of works deserve renewed scrutiny as the problems of auditor independence persist.

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September 07, 2012
Weekend Reading: A Transactional Genealogy of Scandal
Posted by Erik Gerding

As in a bad horror movie (or a great Rolling Stones song), observers of the current crisis may have been disquieted that one of the central characters in this disaster also played a central role in the Enron era. Is it coincidence that special purpose entities (SPEs) were at the core of both the Enron transactions and many of the structured finance deals that fell part in the Panic of 2007-2008?

Bill Bratton (Penn) and Adam Levitin (Georgetown) think not. Bratton and Levin have a really fine new paper out, A Transactional Genealogy of Scandal, that not only draws deep connections between these two episodes, but also traces back the lineage of collateralized debt obligations (CDOs) back to Michael Millken. The paper provides a masterful guided tour of the history of CDOs from the S&L/junk bond era to the innovations of J.P. Morgan through to the Goldman ABACUS deals and the freeze of the asset-backed commercial paper market .

Their account argues that the development of the SPE is the apotheosis of the firm as “nexus of contracts.” These shell companies, after all, are nothing but contracts. This feature, according to Bratton & Levin, allows SPEs to become ideal tools either for deceiving investors or arbitraging financial regulations.

Here is their abstract:

Three scandals have fundamentally reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “Abacus” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together — a deal structure known as the synthetic collateralized debt obligation (“CDO”) involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit.

The SPE remains mysterious and poorly understood, despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through pre-set instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality.

When coupled with financial disaster, the use of an SPE alter ego can turn even a minor compliance problem into scandal because of the mismatch between the traditional legal model of the firm and the SPE’s economic reality. The standard legal model looks to equity ownership to determine the boundaries of the firm: equity is inside the firm, while contract is outside. Regulatory regimes make inter-firm connections by tracking equity ownership. SPEs escape regulation by funneling inter-firm connections through contracts, rather than equity ownership.

The integration of SPEs into regulatory systems requires a ground-up rethinking of traditional legal models of the firm. A theory is emerging, not from corporate law or financial economics but from accounting principles. Accounting has responded to these scandals by abandoning the equity touchstone in favor of an analysis in which contractual allocations of risk, reward, and control operate as functional equivalents of equity ownership, and approach that redraws the boundaries of the firm. Transaction engineers need to come to terms with this new functional model as it could herald unexpected liability, as Goldman Sachs learned with its Abacus CDO.

The paper should be on the reading list of scholars in securities and financial institution regulation. The historical account also provides a rich source of material for corporate law scholars engaged in the Theory of the Firm literature.

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December 14, 2011
Does a Corporation Have a Conscience and Can It Tempt Ethical People to Do Bad Things?
Posted by Marcia Narine

Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.

But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?

In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.

Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that  people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others). 

She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:

 “Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:

(1)         instructions from authority

(2)         beliefs about others’ prosocial behavior; and

(3)         the magnitude of the benefits to others.

Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”

While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.

Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”

In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.  

She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.

Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.

Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.

Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.

 

 

 

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October 17, 2011
Enron: Ten Years Later
Posted by Usha Rodrigues

Our own Erik Gerding was quoted in today's WSJ on Jeff Skilling:

Erik Gerding, a law professor at the University of Colorado in Boulder, says last year's Supreme Court ruling "sharply limits the types of cases that can be brought" and "takes away a pretty important tool for prosecutors."

 

"A statute that had been used to cast a wide enforcement net now captures only bribes and kickbacks," Mr. Gerding adds.

Go Erik! 

Enron's been on my mind, too, since our Business Ethics Seminar discussed The Smartest Guys in the Room two weeks ago.  10 years later, one of the things that struck me is how little today's law students know about Enron.  They know it was bad, they know there was fraud, but they don't know much more.

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April 25, 2011
Halliburton Roundtable: Class Certification v. Motion to Dismiss
Posted by Christine Hurt

My post may be a bit late in the day, but to me this case is also a few years late.  The parties, counsel and amicii trace the Fifth Circuit's stance back to Oscar, but to me this all goes back to another little Houston firm called Enron.  In 2007, a few months before Oscar, the Fifth Circuit de-certified an Enron shareholder class action suit against four banks who were involved in the Nigerian Barge transaction, alleging a violation of 10b-5 (Regents of the U. of Calif. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007).  The suit, even in a post-Central Bank world, had survived a motion to dismiss based on the theory that the banks were secondary actors, not primary violators.  Both the denial of the MTD and the certification of the class were appealed from the Southern District of Texas to the Fifth Circuit.  The Fifth Circuit issued an opinion on the class certification first, stopping the lawsuit in its tracks.

What was interesting to me, being a measly corporate law scholar and no civil procedure expert, was that the Fifth Circuit said that certification was not possible because the banks were secondary actors.  OK, which part of Rule 23 is that?  Well, eerily similar to Oscar and Halliburton, the court held that certification of the class depended on whether the presumption of reliance found in Basic applied.  In order for Basic to apply, the plaintiff must show that the defendant made public, material misrepresentations, the defendant's shares were traded in an "efficient market" and the plaintiff traded shares at the relevant time.  Here, the Fifth Circuit said that Basic didn't apply because as secondary actors, the banks made no public statements, merely aided and abetted Enron's public misstatements.  At the time, my question was Why here?  Why not reverse the MTD denial?  The case was appealed to the Supreme Court, was told to wait until Stoneridge, then was forgotten forever as just another secondary actor case.

In light of that history, the Fifth Circuit seems to be waging a war on securities fraud class actions by introducing various elements of 10b-5 at the class certification stage, even though those issues are ones in which common issues predominate -- whether someone is a secondary actor or primary actor and loss causation.  And, the method to the madness is shoehorning these elements into the Basic/reliance inquiry.  In the Enron case, the secondary actor issue was used to defeat one prong of reliance, but in the Halliburton case it is the second prong -- whether the market is efficient.  According to the Fifth Circuit, plaintiffs have to prove loss causation in order to prove that the market is efficient (or else the price would not go up and down with disclosures).  My former boss David Sterling of Baker Botts rephrases this as "price impact," but it's hard to prove a price impact but not loss causation or vice versa.  Now of course, the rather convoluted first part of the SCOTUS hearing proves how circular securities fraud elements are -- materiality can hinge on a price drop, as does loss causation, as does whether the market is efficient. 

So, my question still is Why here?  Why not just dismiss the same case for failure to prove loss causation?  The justices seem to be asking Mr. Sterling whether wouldn't it be better to explore merits questions with full discovery at the MSJ stage.  But wouldn't all this be decided at the MTD stage during the discovery stay anyway?  Are we really saving this cases by getting all this stuff out of class certification or just merely making the two inquiries cleaner and neater, even if at the end of the day the outcome will be the same?

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November 02, 2010
"Honest Services" Back to the Circuits: Skilling Hearing in Fifth Circuit This Morning
Posted by Christine Hurt

We remember last year's Supreme Court term, which gave us Skilling v. U.S., where the court said that the federal crime of theft of honest services was being applied too broadly and was not supposed to reach to such defendants as Conrad Black and Jeffrey Skilling.  Black had two of his four counts thrown out last week.  Yesterday, hearings were held in the Fifth Circuit as to what to do with the rest of Skilling's case.  Tom Kirkendall has the news on the ground in Houston here.  The recording of the hearing is available here.

Remember that the the opinion in Skilling ended thus:  "[w]hether potential reversal on the conspiracy count touches any of Skilling's other convictions is also an open question.  All of his convictions, Skilling contends, hinged ont he conspiracy count and, like dominoes, must fall if it falls.  The District Court. . .found this argument dubious. . .but the Fifth Circuit had no occasion to rule on it.  The court may do so on remand."

In the Houston Chronicle, Peter Henning lays out the arguments.  In a nutshell, Skilling is arguing that the conspiracy count, with honest services as the object of the conspiracy, must be thrown out.  If the conspiracy is thrown out, then the securities fraud counts, which were tainted by the conspiracy finding, must be retried.  This is the final showdown for the Enron Task Force.  Whether the prosecutors will be able to hang on to any Enron victory here is questionable.

I'm listening to the hearing now.

UPDATE:  I'd love to hear others' takes on the hearing.  I am not an appellate lawyer, but it seems unlikely that all counts will be thrown out.  Dan Petrocelli, arguing for Skilling, was interrupted often and questioned pointedly.  On the other hand, Doug Wilson, an assistant U.S. Attorney on the Task Force, was given a lot of room to methodically go through each count in factual detail and make the argument that these counts and the evidence they were based on were separate from and not tainted by the honest services count.  The court did call him for saying the honest services count was "incidental," but for the most part they just let him go.  He eventually ended his own time because there were no more questions.  The panel (Smith, Prado & Ludlum) asked each side if remand wouldn't be better to decide whether these counts were too interrelated, but neither side seemed to want that.  I'm wondering if that was a good strategy on Petrocelli's part or not.  Stay tuned.

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September 17, 2010
The End of the Enron Nigerian Barge Case
Posted by Christine Hurt

However poor an investment the Nigerian barges (floating power plants) were for Enron, I would like to compare the loss with the taxpayer money wasted on the Nigerian barge prosecution.  Now, six years after it began, all charges against all defendants have been either overturned, vacated or dropped.  And, in return for the prosecutors' overreaching, the only thing society has to show for it is that several individuals spent months in jail awaiting trial and appeal.  Nice. (WSJ blog story here.)

A sample of earlier posts on Nigerian barge prosecution here (April 2007) and here (April 2006).

And for those of you who like to rail against frivolous securities fraud lawsuits or tort suits in general, note that any civil litigation was thrown out half a decade before the criminal train finally came to an end.

UPDATED:  I'd missed my colleague Larry Ribstein's post and his link to local blogger Tom Kirkendall.

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June 25, 2010
Perhaps The Supreme Court Doesn't Read the Houston Chronicle
Posted by Christine Hurt

Yesterday, the Court in ruling that pretrial publicity and community prejudice did not prevent Skilling from obtaining a fair trial, the Court specifically mentioned how "over four years elapsed between Enron's bankruptcy and Skilling's trial."

Today, almost nine years after the Enron bankruptcy, the Houston Chronicle reporters reveal continuing scorn for the Enron executive.  See Former Enron Workers' Emotions Still Raw and a Loren Steffy editorial in which he refers to the overruling of the honest services count as "a frustrating non-resolution to a case for which this city, Enron's former employees and other victims have long sought closure."  Apparently, one cannot assume that the passage of time will cause all memories to fade.

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June 24, 2010
Skilling v. United States: Theft of Honest Services
Posted by Christine Hurt

The aspect of the Skilling case most interesting to us business law types was the reach of 18 U.S.C. 1346, or the theft of honest-services statute, which allows the mail and wire fraud statutes to be used when there is a scheme or artifice to defraud another of the intanglible right of honest services.  As readers of this blog and followers of the actions of the Enron Task Force well know, this statute was a favorite weapon of the Enron Task Force and a favorite grounds for vacating convictions by the Fifth Circuit.  To me, today's routing of the use of this statute in corporate fraud is a symbolic reversal of the body of Enron Task Force prosecutions.  (Opinion here.)

The Court ably explains the development of the honest services doctrine, then statute, in terms of its original application:  bribes and kickback schemes involving an actor, a constituency to which the actor owes its services, and a third party who induces the actor in the actor's provision of services.  This bribe may not negatively impact the constituency, but it violates the statute nevertheless.  However, the Court notes that the statute has been used in recent years to cover a multitude of situations, particularly employer-employee situations otherwise characterized as involving a conflict of interest or other breach of a fiduciary duty.  Skilling argued that the statute was unconstitutionally void for vagueness; the prosecution argued that it could be constitutionally applied to the narrow realm of cases involving "the taking of official action by the employee that furthers his own undisclosed financial interests while purporting to act in the interests of those to whom he owes a fiduciary duty."  The Court came down somewhere in the middle.

The Court does not agree with the prosecution:

If Congress were to take up the enterprise of criminalizing "undisclosed self-dealing by a public official or private employee," it would have to employ standards of sufficient definiteness and specificity to overcome due process concerns. The Government proposes a standard that prohibits the "taking of official action by the employee that furthers his own undisclosed financial interests while purporting to act in the interests of those to whom he owes a fiduciary duty," so long as the employee acts with a specific intent to deceive and the undisclosed conduct could influence the victim to change its behavior. That formulation, however, leaves many questions unanswered. How direct or significant does the conflicting financial interest have to be? To what extent does the offical action have to further that interest in order to amount to fraud? To whome should the disclosure be made and what information should it convey? These questions and others call for particular care in attempting to formulate an adequate criminal prohibition in this context.
However, the Court does not hold the statute unconstitutionally void, protesting that its job is to "avoid constitutional difficulties by [adopting a limiting interpretation] if such a construction is fairly possible." The Court reasons that citizens have at least always been on notice that section 1346 criminalizes bribery and kickback schemes, so it therefore holds that the statute stands, but criminalizes only bribery and kickback schemes. Good news for Skilling, though, as he did not participate in any bribery or kickback scheme. So, Skilling did not violate section 1346. Justice Scalia, joined by Thomas, argues for holding the statute unconstitutionally vague, though the result would be the same for Skilling. Scalia argues that it would be even more of an improperly legislative role for the Court to rewrite the statute than to strike it. So, what's the result for Skilling? Skilling was found guilty on multiple counts, including conspiracy to commit mail/wire fraud, securities fraud and honest services fraud. Now, the Court has left it to the Fifth Circuit to determine whether the inclusion of an improper statute nullifies the conspiracy conviction. Then, the Court has also left it to the Fifth Circuit to determine whether the inclusion of an improper count colors the entire conviction. This is definitely a victory, but perhaps not a complete one. However, it is a victory for the law, as upholding loose applications of a criminal statute to matters best left to employers with the power to terminate employment and shareholders with the power to bring fiduciary duty civil suits would have cemented in place a decade of the overcriminalization of corporate law. My colleague Larry Ribstein has his own take at TOTM.

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Skilling v. United States: Change of Venue and Pre-Trial Publicity
Posted by Christine Hurt

First, the easy issue.  Was there a presumption of juror prejudice in Houston at the time of Jeffrey Skilling's trial, and if so, was that prejudice eliminate by an effective voir dire?  The Court seems to say "no" and in any event, "yes."

This is obviously not my area, but I can only surmise that the Supreme Court is saying that this issue is extremely hard to win.

Our decisions have rightly set a high bar for allegations of juror prejudice due to pretrial publicity. . . .News coverage of civil and criminal trials of public interest conveys to society at large how our justice system operates. And it is a premise of that system that jurors will set aside their preconceptions when they enter the ocurtroom and decide cases based on the evidence presented. Trial judges generally take care so as to instruct jurors, and the District Court did just that in this case.

Justice Sotomayor, dissenting, argues that the pre-trial sentiment in Houston against Enron, and Skilling, in particular, was as virulent as the types the Court has held warranted transfer: Rideau v. Louisiana (1963); Sheppard v. Maxwell (1966) and Estes v. Texas (1965). The majority disagrees.

I think there are at least two ways to interpret what is going on here.  One is that doctrinally, a jury pool is not prejudiced merely by massive, negative media reporting.  However, a jury pool may be prejudiced if that reporting is somehow improper, over-agressive or disruptive.  For example, if the reporting turns the actual trial into a "kangaroo court."  (But how would one know this at the time of the motion for change of venue?)  Or, if what is reported would not be allowed in court because it is constitutionally inadmissible or overly prejudicial.  (Inadmissibel forced confession televised repeatedly.)  But legitimate news coverage, particularly in a large city, particularly in the 21st century and not in a 1960s small town, will not poison the jury pool.  The Internet ensures a large marketplace of ideas, and the very existence of the internet, cable, satellite television, etc. makes it harder to assume that a transfer to a different part of the state will cure any pre-trial publicity problems.  (Earlier blog post on these points here.)

I also can see this another way.  The other cases that stand for the proposition that venue must be transferred under certain pre-trial publicity conditions are murder cases.  (One robbery case is mentioned, but only to distinguish it from the improper denial cases, which were murder cases).  Because murder inflames passions, particularly violent or gruesome murders.  This wasn't murder, it was financial fraud.   The Court just doesn't seem to think that media coverage of financial ruin is so inflammatory it can't be cured on voir dire.  And even if Juror 20 acknowledges losing tens of thousands of dollars from her 401(k) due to the collapse of Enron, she can't be so upset about it that we would discredit her later statements on voir dire that she did not "personally blame" Skilling.

However, I have been writing for awhile now on the emergence of financial fraud as the new home invasion.  In our safe world of gated communities and security systems, we aren't worried about In Cold Blood scenarios as much as we are someone raiding our financial nest egg and leaving us penniless.  (See Of Breaches of the Peace, Home Invasions and Securities Fraud).  In researching a soon-to-be-published piece on the Madoff victims, I can tell you that I would have been interested to see the venue fight there.  Was Madoff as reviled in Manhattan as Skilling was in Houston?  Or more?

It may be that in today's Internet age of information, transfers of venue will be rare.  We are bombarded with so much information, we can assume jurors aren't poisoned by one type of coverage and we can also doubt that a transfer would cure such a poison.  But, if transfers of venues are still alive and well, we should recognize that the public can pre-hate Skillings, Madoffs, and Ebbers as much as Bundys, Dahmers, and McVeighs.

Final note:  This case was argued for the United States by Michael R. Drebeen, although earlier accounts assumed that Elena Kagan would argue the case.

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Skilling v. United States: Supreme Court Rules Against Broad Use of Honest Services Statute; Does Not Grant New Trial on Pre-Trial Publicity Grounds
Posted by Christine Hurt

So, I'm sure we'll all have a lot more to say here, but the opinion in Skilling v. United States has been released.  For the corporate law folks among us, the Court seems to have narrowed the theft of honest services statute to activity such as bribery and kickbacks, and says Skilling did not violate the statute.  However, the Court did not reverse and remand on all counts, leaving to lower courts to decide whether that count unfairly colored the any or all of the other counts in his conviction. 

Skilling was also hoping for a new trial on the grounds of pretrial publicity, but the court did not agree either that the venue was unfairly prejudicial or that voir dire did not ensure a non-prejudiced jury.

This is all from the quick read.  More later.


UPDATE:  Forgot to link to the opinion.  I deprived you of some honest services there, but hey, it's not a federal crime.

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May 06, 2010
Enron: The Musical
Posted by Tamara Piety

Isn't this just a weird idea? Not only was the Enron debacle a personal tragedy for a lot of the people involved, it was pretty bad for investors and employees as well. Somehow that just doesn't seem to me like excellent material for musical comedy.  However, audiences loved it in London where it was launched but critical reaction here has been mixed, (see this Broadway round-up), although one of the most important critics, Ben Brantley at The New York Times, didn't seem to care for it.

His review had this to say:  "In Lucy Prebble’s 'Enron,' the flashy but labored economics lesson that opened on Tuesday night at the Broadhurst Theater, money doesn’t just talk. It sings. It dances. It puts on funny animal costumes. And of course it blows bubbles." But ultimately he seemed to feel it was "all show (or show and tell) and little substance."  Read the rest here and see a teeny, eetnsy clip from the show with a voice over from the director here and judge for yourself how gripping this looks. To me not so much. 

However, I was just in New York City and resolved, since I was blogging for The Conglomerate, to try to see the show and report back. Alas! The per person ticket price I was quoted, $176 (after broker's fees - how ironic is that?) caused me to balk. I wasn't that convinced it would be good in the first place, but I drew the line at plunking down that sort of change just so I could say I'd seen it and report back. But I would love to know if anyone has seen it and what you thought about it 

And then there is this even stranger postscript. It turns out that Enron employees made tons of spoof skits themselves (remember the "mark to market" accounting skit from "Enron: The Smartest Guys in the Room"?) that eerily prefigured the real musical.  Read this I think I'd rather watch those clips than the musical currently on Broadway.

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October 19, 2009
Skilling Case to go to the U.S. Supreme Court -- Does it Prove the Enron Task Force was a Failure or that Pricey Defense Teams Have the Advantage?
Posted by Christine Hurt

Last week, the Supreme Court granted certiorari to hear the U.S. v. Skilling appeal on two grounds.  First, whether the denial of a motion for a change of venue was proper, given the amount of pre-trial publicity in Houston and the intense public outcry of Houstonians that focused on Enron at the time.  I will leave the civil procedure folks to sort that one out, but it seems if ever there was a case that needed a change in venue, this case seemed to fit the bill.  (If you're going to have a rule that allows defendants to get a change in venue. . . . .)

The Court also granted cert. on another issue in the case -- the use of a violation of the "honest services" statute as a count in the indictment.  This statute, and the misuses of the statute, has taken on a life of its own and seems to be a part of three cases in front of the Supreme Court right now, including the Conrad Black appeal.  Again, I'll leave to the appellate pros on why the Court took another "honest services" case when it seems to have several on its plate right now.

The Houston Chronicle, which may feel some need to defend itself as the cheerleader of the Enron Task Force, responds to this turn of events by asking whether this latest (and third) Supreme Court case examining a prosecution brought by the Task Force reflects more on the Task Force or on criminal defense abilities.  Specifically, the article asks experts whether the Task Force has an awful appeal record because it overreached or because the Enron defendants had fancy schmancy attorneys that have some unfair advantage because they are so clever.  I understand the arguments of these experts about the "legal defense machines," but it's sort of interesting that none of these resources helped at trial, but they do seem to have won on appeal.  Yes, good trial lawyers can preserve error, but can't they also win trials?  I'm just not sure that if these were cases that the prosecution should have won and kept on appeal, but for the expensive defense attorneys, that they would only lose on appeal, not at trial.

My favorite quote is from Houstonian Philip Hilder, "who represented Enron witnesses (i.e., unindicted persons who agreed to testify) and a former prosecutor":

This [the fact that 3 Enron-related cases have been appealed to the Supreme Court] underscores the difficulty of prosecuting a white-collar case where the defendant is well-funded, putting them on par with the government

Yes, the system falls apart when the defendant's resources are "on par" with the government's resources. Then justice will never prevail.

Permalink | Enron | Comments (0) | TrackBack (1) | Bookmark

June 19, 2009
Another Blow to the now Historic Enron Task Force: Supreme Court Holds Double Jeopardy Applies
Posted by Christine Hurt

I am on vacation here in Colonial Williamsburg (where I fittingly can't get any "bars" for my phone, but I have wifi!) so I can't give this post the proper respect (or the properly punny "Jeopardy" title).  But, note that the Supreme Court has said that Scott Yeager, one of the "Enron Broadband" defendants, cannot be retried, ending a half-decade of uncertainty for the defendant.  However, the Supreme Court left the door open for the Fifth Circuit to re-determine whether the facts that the jury believed deserved acquittal where the same facts that the counts to be retried would have to depend on, as well.  This is also probably good news for one of his co-defendants, whose writ of cert was not granted, but not especially good news for his co-defendant that plead guilty a few months ago.  (Glom posts on this saga here and here)  So, I don't have time to recreate the Enron scorecard now, but it's definite that the Task Force had great success getting guilty pleas, but little success getting guilty verdicts, much less guilty verdicts that withstood appeal.  The last piece of this puzzle will be to see how much Jeff Skilling's lengthy sentence, the only "success" of the Task Force, will survive appeal, if his conviction remains at all.  When it's all said and done, the only bigger (and more expensive) organizational failure than Enron may be the Enron Task Force.

I hate to just post and run, because I know that many criminal law experts were watching the case because of its potential importance to wacky double jeopardy jurisprudence.  Hopefully, some of our readers can fill us in!

Permalink | Enron| Supreme Court| White Collar Crime | Comments (2) | TrackBack (0) | Bookmark

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