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Skilling Appeal Hinges on Task Force Conduct, 'Honest Services'

The Fifth U.S. Circuit Court of Appeals is considering an appeal by former Enron Corp. CEO Jeffrey Skilling, whose legal team last week argued that "egregious" conduct by the Enron Task Force should force dismissal of the 19 criminal counts against him or allow him a new trial.

Based on evidence that the defense has obtained and on recent appeals court rulings, Skilling may stand a chance to see at least some of his convictions thrown out, legal experts said.

Skilling was tried before a Houston jury with Enron founder Kenneth Lay, and Skilling was convicted in May 2006 on 19 counts of fraud, conspiracy and insider trading (see NGI, May 29, 2006). Lay, who died of heart failure less than two months after the trial ended, also was convicted, but the convictions were vacated following his death (see NGI, Oct. 23, 2006).

Skilling's defense team argued last week before the three-judge panel of the federal appeals court in New Orleans. The appeals court is not expected to render an opinion quickly; in fact, its ruling could take weeks. At the heart of the appeal is the defense's claim that the Enron Task Force, which spent years gathering evidence to prosecute more than 30 ex-Enron officials, hid critical evidence. The evidence in question includes detailed notes based on prosecution interviews with former CFO Andrew Fastow, and the defense claims the prosecution hid key evidence and engaged in misconduct. In counterclaims before the appeals court, the government argues that Skilling received a fair trial and his convictions should be upheld.

Based on documents submitted to the appeals court, a former federal prosecutor in Houston told NGI that all -- or most -- of Skilling's convictions should be upheld. The prosecution relied on "a boat load of witnesses, not just Fastow, and he [Fastow] was not the only reason Skilling is in prison. There was a preponderance of evidence." However, she added that "some of the prosecution team's notes that were turned over to the defense may contain evidence that possibly...could be beneficial for the defense...But on the face of it, [the prosecution] still looks pretty solid."

Skilling began his appeal two years ago (see NGI, Sept. 10, 2007; July 31, 2006), and court filings indicate that his legal team is basing the appeal on the following:

Skilling's appeal may be more powerful now. Lead defense attorney Daniel Petrocelli claims that the task force hid important evidence by not turning over more than 400 pages of notes from FBI interviews with Fastow, who was cooperating with the task force. Fastow was charged in 2004 with 98 criminal counts; he was sentenced in 2006 to six years in prison and two years of community service (see NGI, Oct. 2, 2006).

The prosecution provided summaries of Fastow's notes to the defense team before the trial after Lake, the trial judge, denied requests to turn over the full notes. Those notes were turned over following an appeal to the Fifth Circuit. Petrocelli said the notes contradict Fastow's testimony, which included an oral agreement with Skilling to keep secret some transactions to manipulate Enron's financial statements.

"By withholding this evidence, the Task Force deliberately deprived Skilling of the ability to confront Fastow with his prior statements contradicting crucial testimony against Skilling," the documents claim. The defense claims that Fastow first told the task force that he did not think he and Skilling had discussed secret side transactions that had padded Fastow's personal finances and hid Enron losses from shareholders. Those initial notes, however, were not disclosed to the defense team. When he testified for the prosecution at Skilling's trial, Fastow said Skilling knew about the secret transactions. Because Fastow's initial statements were not disclosed to the defense team, Skilling's lawyers could not effectively cross-examine Fastow, they claim.

"Dismissal with prejudice is necessary to remedy the grave injustice and prejudice to which Skilling has been subjected," Petrocelli wrote in the appeal.

The prosecution disputes the defense claims. In a court filing in March prosecutors wrote, "Skilling's microscopic and misleading dissection of the Fastow notes provides no basis for overturning the jury's verdict."

What may be key is what has worked in several Enron cases that were overturned on appeal. The Enron Task Force claimed that Enron's management team was bound to serve in an "honest capacity" -- to not put self-interests above the company's interests. By failing to do so, management deprived Enron of "honest services." However, the Fifth Circuit Court has overturned several Enron-related convictions based on the honest services theory. The appeals court has ruled that the honest services theory is flawed; executives only performed work that was expected at Enron, and the defendants' actions did not rob Enron of money or property.

Following the appeals court ruling on Enron and an honest services defense, U.S. District Court Judge Vanessa Gilmore in Houston last year also threw out five convictions against Kevin Howard, former vice president of finance for Enron Broadband Services (see NGI, Feb. 5, 2007).

In its appeal, Skilling's defense claims that its client was only performing the work that he was expected to do -- and was following the corporation's goal to enhance the company's share price.

Skilling's appeal also could be tipped by a ruling by Fifth U.S. Circuit Court Judge Patrick E. Higginbotham. When he ordered Skilling to prison in 2006 Higginbotham suggested in a two-page ruling that there were "serious frailties" on several of charges (see NGI, Dec. 18, 2006). However, the judge further noted that "Skilling raises no substantial question that is likely to result in the reversal of his convictions on all of the charged counts."

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