Convictions of Lay and Skilling High Point for Enron Prosecutors

The court battle rarely stops when a jury renders a verdict.

More than two months after winning convictions against Enron Corp. founder Kenneth L. Lay and former Chief Executive Jeffrey K. Skilling, the Justice Department’s Enron Task Force is smarting from a blow to its trial record dealt by the federal 5th Circuit Court of Appeals.

In a recent 2-1 decision, a panel from the court overturned fraud and conspiracy convictions against four former Merrill Lynch & Co. executives who participated in a sham 1999 deal that allowed Enron to book bogus profit.

Viewed alongside other Enron setbacks, some experts say, the Merrill decision highlights questionable government strategies. But they say bagging the Lay and Skilling convictions probably will define the Justice Department’s performance in ferreting out Enron crimes.

“In a sense, this reversal underscores how the government also fell victim to the Byzantine nature of the Enron fraud,” said Robert Mintz, a former federal prosecutor. “These were unprecedented crimes to which the government responded with some very aggressive and largely untested theories of prosecution.

“In the end, the government got their men in the form of Skilling and Lay. That will likely be what everyone remembers when they think of Enron,” Mintz said.

Enron, once the nation’s seventh-largest company, spiraled into bankruptcy proceedings in December 2001 amid revelations of hidden debt and inflated profit.

The Justice Department formed the task force to launch a sprawling investigation that produced 16 guilty pleas from former Enron executives.

Mintz said that when the government stuck to basics, like testimony in the Lay-Skilling trial from eight of those ex-executives who had pleaded guilty to crimes as well as others who witnessed criminal behavior, prosecutors were successful.

But earlier cases show spotty success. Last year, a flawed jury instruction promoted by prosecutors prompted the U.S. Supreme Court to reverse former Enron accounting firm Arthur Andersen’s 2002 conviction on obstruction of justice.

Although an appellate panel called Andersen a member of Enron’s “supporting cast” for destroying tons of Enron documents in late 2001 as investigators started probing the energy company, the instruction allowed jurors to convict without finding criminal intent.

The 2004 Merrill case involved the brokerage pretending to buy three power plants on barges off the coast of Nigeria from Enron so the energy company could appear to have made earnings targets. Jurors in that case acquitted an in-house accountant, while convicting the four former Merrill executives, who appealed, and a former mid-level Enron finance executive who did not appeal.

The appellate panel ruled that evidence was insufficient to convict one of the Merrill defendants. Regarding the other three, the panel said prosecutors wrongly pursued a theory that these defendants deprived Enron of its right to their honest services because, although the deal may have been a sham, the energy company and its shareholders weren’t robbed of money or property.

Perjury and obstruction convictions of one of those three for lying to a grand jury about the deal were affirmed. “This opinion should not be read to suggest that no dishonest, fraudulent, wrongful or criminal act has occurred,” the ruling said.

The Merrill ruling followed the government’s disappointment last year in the first trial of five former Enron broadband executives. The jury ended the complicated, jargon-filled, three-month trial with a handful of acquittals but was unable to reach verdicts on dozens of other counts. Prosecutors alleged the defendants either lied about the unit’s prospects or manufactured earnings.

In the first broadband do-over involving two of those five defendants this year, the division’s former finance chief was convicted of fraud and conspiracy while an in-house accountant was acquitted.

Retrials of the other three have been indefinitely postponed pending the 5th Circuit’s ruling on their appeals to combine the cases.

“You’re seeing a pattern of juries and appellate judges rejecting the views of the task force,” said Barry Pollack, who represented former broadband unit accountant Michael Krautz in both trials and won his acquittal in the second round.

Lay died of heart disease July 5, just six weeks after he was convicted of 10 counts of fraud, conspiracy and lying to banks. Skilling, who was convicted of 19 counts of fraud, conspiracy, insider trading and lying to auditors, faces decades in prison. He will be sentenced Oct. 23.

Skilling aims to appeal, and it remains to be seen how appellate courts view his case.