Jeff Skilling is innocent

by Kurt Schulzke on March 25, 2008

SkillingWhat do Enron and Bear Stearns have in common? If you’re a Bear Stearns exec, you’d better hope the answer is “not much.” At least you won’t have to litigate in Houston. New York’s a bigger, better melting pot when it comes to judges and juries. Prosecutors and governors? Don’t change the subject!

Today, a colleague wrote: “Do you think Skilling is innocent including of the insider trading charge?” Here’s my relatively off-the-cuff answer, understanding that a few months ago I did a 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. I feel confident, however, that fairness will eventually trump emotion.

For reasons explained in eloquent detail in Skilling’s appellate brief, the whole theory of “honest services fraud” may itself be a fraud.  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 — again as 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 designed to provide political cover to President Bush who, at the time, was looking ahead to the 2004 election. 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.