Jeff Skilling, Duke Lacrosse and Rule of Law

Jeff Skilling — now cooling his heels in federal prison — may seem like an odd topic in a presidential election year, but his sad tale should be front and center in the minds of U.S. voters come November. Of everything the United States has to offer the world, our greatest gift may be our historical allegiance to the rule of law. The fact that Skilling ever ended up behind bars calls that allegiance into question.

Those who participated in putting Skilling in the pen — politicians, pundits, prosecutors, big pension funds and an off-the reservation federal judge — allowed Houston mobocracy and Washington politics to trump the rule of law. This year, the temptation will be overpowering to repeat the excesses of the Enron investigation and trial as payback for the subprime mortgage mess.

Several days ago, a colleague (actually a former SEC chief accountant) wrote to ask me: “Do you think Skilling is innocent including of the insider trading charge?”

A few months ago I did a professional presentation on the subject of “honest services fraud,” the legal theory on which Skilling was presumably sent to jail. For some accounting professionals and jilted investors — who want to believe that there’s only one true “net income” for any company in a given year and that someone must be at fault any time a stock “goes south” — this won’t go down easy. Jeff Skilling, in my view, is a completely innocent man, a fall guy primarily for President Bush who — in 2001 — was looking nervously ahead to midterm 2002 elections and beyond when he promised to pursue wrongdoing at Enron. Politics and justice are an explosive mix, as vividly illustrated by the now notorious Duke lacrosse case.

For reasons explained in eloquent detail in Skilling’s appellate brief, the whole theory of “honest services fraud” is highly questionable. But even assuming that HSF is a valid concept, in light of the 5th Circuit’s reversal of HSF-based counts in U.S. v. Brown, there’s really no fair or logical way to deny Skilling’s appeal of his conviction for HSF. You can’t exonerate Brown and convict Skilling.

As to insider trading, Skilling’s actual behavior — also thoroughly documented in his appellate brief — was 180 degrees from what you’d expect of an inside-trader. He sacrificed himself for the company and hung on to stock when he didn’t have to do so. Further, the only inside information the prosecution claimed he had access to was his knowledge of the illusory HSF “conspiracy”. Nonsense.

In terms of substance, the case against Skilling is a house of cards — a miscarriage of justice. Somebody at Enron had to fall hard. Skilling was just too dedicated to the company and came back to help out at the wrong time.

And that’s before we talk procedural errors like the obviously tainted Houston jury pool, the ridiculously short jury selection time period and clear evidence of gross prosecutorial misconduct in the form of witness intimidation. Shameful. The audacity of the judge in the case was astonishing. Maybe he was afraid for his life there in Houston. Don’t know. But this was not a well-run case.

Bear Stearns may turn out to be similar for some poor exec. What the market needs to learn is that just because a stock falls doesn’t necessarily mean that someone has misbehaved. My compliments, by the way, to Skilling’s appellate team. They wrote a masterful brief. In all fairness, it should win Mr. Skilling reversals on all counts.

I’ve attached a short ppt (flash version) that I used for a presentation on the HSF topic. So there you have it. If Jeff Skilling is guilty, half of corporate America should be conducting business behind bars. Maybe some of them should move to North Carolina and take up lacrosse.