By Marisa Taylor | McClatchy Newspapers
WASHINGTON — Almost seven years after the energy giant Enron collapsed, a series of court decisions has opened the door to new trials for some of the convicted corporate executives and threatened to hobble the Justice Department’s efforts to pursue future corporate-fraud cases.
In the wake of the scandal, prosecutors pursued executives for covering up the company’s financial bleeding and unloading millions of dollars in stock. The Bush administration was under pressure to hold the company’s executives accountable for what at the time represented the largest bankruptcy in U.S. history. More than 4,000 Enron employees lost their jobs, and investors lost billions.
However, legal experts said the government’s recent setbacks in court raised troubling questions about how federal prosecutors handled the high-profile cases and suggested that the Justice Department could face serious obstacles in other white-collar investigations:
- In one defeat for the Enron prosecutors, the usually divided Supreme Court in 2005 unanimously overturned the conviction of Enron accounting firm Arthur Andersen after the justices found that the trial judge had instructed the jury improperly.
- In another case, four former executives from Enron’s Internet subsidiary, Enron Broadband Services, are getting another trial after a federal jury acquitted them on some charges and deadlocked on the rest. The group was accused of exaggerating the firm’s technology capabilities in order to inflate stock prices and cash out. One former executive was acquitted in the original trial.
- Three Merrill Lynch executives are being retried after the 5th U.S. Circuit Court of Appeals reversed most of their convictions. They’re accused of helping to inflate Enron’s earnings by arranging a fraudulent sale to their company of three electricity- generating barges off the coast of Nigeria. A jury acquitted a fourth executive, and the conviction of a fifth was thrown out because of a lack of evidence.
- Finally, prosecutors are under fire in the conviction of former Enron Chief Executive Officer Jeffrey Skilling because of allegations that they withheld evidence that could have cleared him. A federal appeals court also tossed out a legal approach that the prosecutors used, giving Skilling and future defendants new ammunition to challenge their convictions.
Prosecutors secured 18 guilty pleas, but the legacy of the entire Enron investigation is at stake in Skilling’s appeal and the 5th Circuit’s ruling in the Merrill Lynch case gives Skilling a realistic shot at overturning at least part of his conviction, experts said.
“Skilling is kind of the linchpin,” said Peter J. Henning, a Wayne State University law professor and a former Securities and Exchange Commission attorney. “If his conviction stands, the Enron prosecutions were a success. If it doesn’t, prosecutors will have a hard time convincing the public that they took the right approach.”
In its 2006 ruling in the Merrill Lynch case, the 5th Circuit struck down the government’s reliance on the so-called “honest services” theory, which allows prosecutors to pursue suspects who enabled fraud but didn’t profit from it directly, a common allegation in corporate scandals.
Prosecutors still rely on the theory despite the ruling, Justice Department spokesman Peter Carr said, “but it’s clear that the law is evolving in this area.”
“Whenever a court rules — as the 5th Circuit did regarding this issue — we listen to that ruling,” he said.
Skilling, who’s serving a 24-year prison sentence, is awaiting the outcome of his appeal before the 5th Circuit. A jury convicted him of 19 counts of conspiracy, insider trading and lying to auditors. Kenneth Lay, Enron’s former chairman of the board, also was convicted, but he died of a heart attack before he could be sentenced.
Defense attorneys contend that prosecutors responded to the public outcry over the Enron scandal by bringing unwarranted charges, taking shortcuts and relying on unorthodox tactics to win convictions.
“I’ve never seen such egregious misconduct by any prosecutor,” said Sidney Powell, a former federal prosecutor who represents one of the defendants. She’s filed a misconduct complaint against Matthew Friedrich, a former Enron prosecutor who now heads the Justice Department’s Criminal Division.
The defense attorneys cite newly released FBI notes of interviews with former Enron Chief Financial Officer Andrew Fastow, a key government witness in the Enron cases.
Prosecutors are required to turn over to the defense FBI summaries of interviews of testifying witnesses such as Fastow. But throughout the Skilling trial, prosecutors declined to hand over the usual FBI summaries of the hundreds of hours of interviews with Fastow. Instead, they provided what defense attorneys called “summaries of summaries.” Agents destroyed the original summaries.
Since the 5th Circuit ordered the Justice Department to turn over the full FBI notes to the defense, Skilling’s lawyers contend that they’ve found dozens of facts in the documents that could have cleared their client.
The Justice Department declined to comment on the allegations of misconduct.
In court papers, department lawyers have said that defense attorneys received all the evidence to which they were entitled. The Justice lawyers called an attempt by several defense attorneys to dismiss charges because of alleged misconduct “stunning” and “an attempt at character assassination” despite “the paucity of evidence to support the claims.” If small details weren’t divulged, the department lawyers said, the new information wasn’t sufficient to clear the defendants.
“To be clear, we vigorously oppose the defendant’s every accusation of prosecutorial misconduct,” the lawyers wrote in response to Powell’s allegations.
Some former prosecutors say that the Enron investigation suffered from a perennial problem at the Justice Department. When regulators fail to detect or prevent corporate malfeasance, prosecutors and investigators find themselves under pressure to pursue rich, powerful and resourceful suspects with complex charges that are difficult to explain to juries. Even if they win convictions, when the crisis blows over they’re on the defensive for lacking sufficient evidence or acting too aggressively.
John Kroger, who oversaw one of the Enron indictments in question, has described a pressure-cooker atmosphere in which the Bush administration “was motivated to get some scalps quickly.”
“The Bush team knew that if it failed to move aggressively on Enron, there would be a huge political price to pay,” he wrote in his new book, “Convictions: A Prosecutor’s Battle Against Mafia Killers, Drug Kingpins and Enron Thieves.”
Defense attorneys have seized on passages in Kroger’s book to support their contentions. For example, unlike in other corporate fraud cases, Kroger wrote, he and other prosecutors didn’t delve into the millions of company documents to prove their cases.
“The Enron business records were so voluminous and hard to decode we thought it could take years to determine what evidence was relevant,” he wrote.
At one point, he calculated that if prosecutors had tried to analyze each of Enron’s 3,500 potentially fraudulent financial transactions, “it would take the six of us more than a decade.”
In an interview with McClatchy, Kroger denied that prosecutors had responded to the pressure by pushing weak cases.
“We tried as hard as we could to do a thoughtful and conscientious job in a very difficult case,” said Kroger, who’s now running as a Democrat for Oregon attorney general.
Several former prosecutors assigned to the task force that oversaw the investigation dismissed the defense lawyers’ criticism as a routine part of the appeals process when defense attorneys try to clear their clients.
And even if defense lawyers convince a court that misconduct occurred, their clients still could be guilty of crimes. In dismissing the charges against the Merrill Lynch executives, the 5th Circuit said that its opinion “should not be read to suggest that no dishonest, fraudulent, wrongful or criminal act has occurred.”
When Justice Department spokesman Peter Carr was asked about the department’s view of the investigation’s success, he replied: “The book is not finished, as many of these issues continue to work their way through the courts.”
There are signs, however, that the Justice Department already is taking a different tack. Prosecutors are relying frequently on deferred prosecutions, which allow corporations to pay fines but avoid indictments.
In a separate development, Attorney General Michael Mukasey announced in June that he wouldn’t create an Enron-like task force to oversee the investigation into the sub-prime mortgage crisis. Although he said he made that decision because he thought that individual
U.S. attorneys could handle the job, some suspect that the Justice Department is trying to avoid a repeat of the sprawling Enron investigation.
“They’re trying to avoid being attacked for what some may call the excesses of the Enron and other earlier corporate-fraud matters,” said Roma Theus, a former federal prosecutor who’s now a defense attorney. “The government was very aggressive, and they may have gone too far in their prosecution theories.”
No matter what the outcome, former Enron prosecutor Kroger predicted, the public would demand the same forceful action after the next “boom and bust cycle.”
“We see this cycle repeated over and over again,” Kroger said. “We regulate very loosely, then we have a crisis and we react strongly. Then, we grow complacent again.”
McClatchy Newspapers 2008