Wednesday, March 19, 2008
Is it possible that Jeff Skilling is innocent?
Regular readers know that we are corporate tools around here, and this blogger in particular tends to project his own good faith on others. That said, this is probably a bad week -- but perversely appropriate -- to point out that former Enron CEO Jeff Skilling may not be as guilty as previously advertised. The sober and august Economist has picked up the story that blogger Tom Kirkendall has been following for more than a year:
THERE may be a glimmer of hope for Jeffrey Skilling, the former chief executive of Enron who is now serving a 24-year jail sentence for his part in the his company’s collapse. On March 14th, evidence emerged that government prosecutors may have misled the court and Mr Skilling’s defence team about the content of interviews with key witnesses, including Andrew Fastow, Enron’s former chief financial officer.
Mr Fastow’s testimony was widely regarded, not least by the prosecution, as crucial to securing Mr Skilling’s conviction: it was the only direct evidence that Mr Skilling actually knew about the various frauds at Enron for which he was found guilty. Yet the new document reveals that, at least in his early interviews with the FBI, Mr Fastow did not appear to implicate Mr Skilling as unequivocally as he did when he testified in court. Indeed, on crucial points, his original answers appear to exonerate Mr Skilling.
Why is this inconsistency only now coming to light? Rather than handing over the original interview notes, the government instead produced a composite summary. This is standard practice, but the summary must accurately reflect what was said. Mr Skilling’s defence team, after eventually persuading the court to order the government to hand over its original notes, makes a strong case that the summary of Mr Fastow's interview omits details in a way that consistently favours the government.
Read the whole thing, and pay particular attention to this bit:
For many people, the mere fact of Enron’s collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between his conviction and sentencing, presided over a fraudulent house of cards. Yet Mr Skilling has always argued that Enron’s collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run. Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy.
Yet recent events in the financial markets add some weight to Mr Skilling’s story—though today's credit crunch creates a far more hostile environment that the one Enron faced and nobody is (yet) alleging the sort of fraudulent behaviour on Wall Street that apparently took place at Enron. The hastily arranged purchase of Bear Stearns by JP Morgan Chase is the result of exactly such a bank run on the bank, as Bear’s counterparties lost faith in it. This has seen the destruction of most of its roughly $20-billion market capitalisation since January 2007. By comparison, $65 billion was wiped out at Enron, and $190 billion at Citigroup since May 2007, as the credit crunch turned into a crisis in capitalism.
Note, as well, that the government can actually cause a figurative "run" on a business that requires the trust or faith of its counterparties or clients. See, e.g., the destruction of public auditing firm Arthur Andersen after its indictment following the collapse of Enron. If it should come to pass that prosecutors secured their convictions of Skilling and Lay through misconduct, how will all those former Andersen employees and partners react (not to mention all of us who pay much higher auditing fees today because there are four big firms rather than five)?
15 Comments:
By 
, at
Wed Mar 19, 03:43:00 PM:
Having been loosely following this story for some time I'm absolutely astounded over the government providing only the "summary" document as discussed above. The Economist is great to get on this story.
Having said that I never bought the "run on the bank" theory, primarily becasue of the deceptive and soemtimes unreported use of off-balance sheet investment vehicles owned by favored individuals to house bad corporate assets, but providing rates of return to the owners guaranteed by Enron.
By 
Escort81, at
Wed Mar 19, 04:47:00 PM:
I am satisfied that there were more than a few instances of fraud at Enron, and that its balance sheet was significantly overstated as a result of that fraud. That the fraudulent transactions were small in notional value relative to the amount of equity that was erased is kind of besides the point -- of course your business is going to deteriorate badly and quickly once a few instances of fraud are made public and confirmed, especially if you are in a business with nimble financial counterparties. How are the counterparties to know whether they are unwittingly in one of the fraudulent transactions? They are going to head for the exits faster than an audience at a Sean Penn film (though I actually liked Mystic River).
I have direct experience in the 1990s as a client with the Houston office of Andersen, and did not think highly of its level of competence.
As to whether it was Fastow alone, or Fastow with Skilling's participation and/or knowledge that committed the fraud, I guess in part that goes to the question of whether Skilling should have strictly civil liability attach to a lack of oversight, or should also have criminal liability and do time, as he is doing. I kind of like the old Swiss sytem, which, as I understand it, puts you in the hokey if you walk on your debt, regardless of whether there was fraud!
Is there some suggestion that the government went Nifong here and actually withheld exculpatory evidence, or is this a matter of slightly inaccurate or shaded summarizations which preceded testimony and cross-examination? In there enough here for a new trial and/or sanctions against the original prosecutors?
By , at
Wed Mar 19, 05:26:00 PM:
Oh, I think the implication is very much that federal prosecutors went Nifong on Skilling. As the post said, they really only had Fastow's testimony and Fastow was saying Skilling wasn't guilty. As time went by, Fastow's testimony seems to have become far more definite and pointed, at least as far as Skilling's involvement in the fraud goes. Then, in discovery, the earlier (exculpatory) notes were lost and only the summary stuff was produced. Yuck.
By Larry Sheldon, at
Wed Mar 19, 05:45:00 PM:
While we are worrying about the injustices to the C-level, and the poor AA folks, could we just shed one tear for the folks here in Omaha that saw their lives and their properties, not to mention their hopes, plans and aspirations evaporate?
That was before my time here, but the scars and festering wounds are still visible, if not always recognized or understood.
What happens to the big city folks probably won't make any difference here, one way or the other.
But I wish somebody would note that a lot of people were destroyed, and most of them have no way to be heard.
By Escort81, at
Wed Mar 19, 06:16:00 PM:
Larry -
For a second, I thought you were talking about the storms today in Missouri, and that there had been additional casualties in Nebraska, but you make a good point that the fallout from the fraud in Houston spread far and wide to lots and lots of people, and has had deep and long-lasting ramifications. Big bankruptcies do that, and it sucks, and to the extent that there was fraud preceding a bankruptcy, individuals should absolutely be held accountable.
By OmegaPaladin, at
Wed Mar 19, 06:48:00 PM:
I guess it was a good thing the government didn't listen to my suggested sentence. I wanted to hang the two of them inside of the NYSE trading floor without providing food or water until began to decompose.
By Christopher Chambers, at
Wed Mar 19, 07:05:00 PM:
It figures you'd give space to this (and that The Economist would as well). Screw 'em. There are 19 year old pot dealers rotting in prison for less than this...and the world isn't too much better if or when they get out. Oh well, W will likely commute the sentences anyway, so take heart ;-)
By , at
Wed Mar 19, 07:53:00 PM:
The pot dealer, if guilty, is subject to punishment under the law. Likewise, Skilling, if guilty.
If either are innocent, they deserve justice and their freedom.
By TigerHawk, at
Wed Mar 19, 09:43:00 PM:
Chris knows, I might add, that I do not think that 19 year old pot dealers should rot in jail, either. Stupid stuff, in my opinion. But it is unfair to tag Bush with "likely" pardoning these guys. He has pardoned incredibly few people, and it is highly unlikely that he will pull a Clinton in his final days.
By , at
Wed Mar 19, 10:13:00 PM:
After being hired by one of the "Big Four" directly out of college after the AA collapse as an auditor, I have no sorrow for former AA partners who suffered because as I see it now at work, they aren't suffering that much, as most are currently employed at the remaining 4 (the partner in charge at my office is former AA). I know what I get charged out at and I don't see a 6th of that. BTW I should get combat pay for dealing with some of the clients that I have to deal with.
By Andrewdb, at
Wed Mar 19, 10:59:00 PM:
TH -
your e-mail on the right of this page was bouncing today - I tried to send you the article on Hillary as Corporate Lawyer from the American Lawyer. Interesting. I think you would have a good take on it.
By TigerHawk, at
Wed Mar 19, 11:49:00 PM:
Andrewdb, thanks for the heads up. The email address was actually wrong. What I cannot figure out is whether it changed at some point when I cleaned up the sidebar, or whether it has been wrong a long time. Anyway, it is fixed now.
By , at
Thu Mar 20, 08:33:00 AM:
What everyone should focus on is in the integrity of the prosecution -- and who polices the police, regardless of whether the case involves the 19 year-old pot dealer or Enron executives. So let's be totally clear on the point -- the prosecution has to prove its case and play within the rules. If it doesn't, then convictions must be reviewed to determine whether the malfeasance helped cause a wrongful conviction. If it did, the conviction should be overturned, and the prosecutors should be investigated. And if the prosecutors transgressed materially, they should be prosecuted. Having the badge of a policeman or prosecutor doesn't justify anyone to take an "end justifies the means" approach. That's what we all must focus on -- whether we like Enron and Ken Lay or not. Personal preferences must not play a role here at all -- the integrity of the system is key.
The Centrist
By , at
Fri Jun 13, 09:14:00 PM:
I have but just a thought on Jeff Skilling , but before let me state that I am not taking his side in this
just raising a simple question or two ! Yes Enron had a tragic ending one of my thoughts on Jeffery Skilling
were ...does anyone believe that Jeffery was way to smart to let know this was happening, and actually let it
continue, knowing that it would crush
Enron ? Come on people, I too wanted to see people get sent to prison forever but Jeffery Skilling was way to smart to allow this to happen ! Remember the CFO had so many ways of hiding all his fake business's. To this day I truly believe that He Jeffery Skilling just may have not known !
By Unknown, at
Wed Oct 01, 01:40:00 AM:
Jeff Skilling is a victim....Media MAKES people panic, which just happened. Let this smart man out, or for God's sake, give him a computer. He can help dig the US out of this rush happening in the US now.
Why don't you Democrats check out the CFOs? Bunch of stupid idiots. The Smartest Man In The Room may be the smartest man to save this country....and screw Texas. Hopefully someone will show his smarts and do what America needs NOW.
