The Enron/Arthur Andersen affair was perhaps the worst business and accounting scandal in the history of the United States. Indeed, Enron was engaging in a massive amount of malfeasance at all levels of the organization while Arthur Andersen, who was supposed to be an ethical and impartial third party, was at least partially in on the fraud. The circumstances were major as the power brokers for both firms paid dearly and many of the top Enron executives were convicted of crimes for their part in the fraud. Kenneth Lay only escaped sentencing because he died before the sentence could be announced. This report shall focus on some of the legal cases that happened in the aftermath of Enron including the obstruction of justice charges against Arthur Andersen and an appeal by Jeffrey Skilling, one of the convicted Enron executives. While the overall guilt of the parties involved were not in question, the legal cases that arose after the Enron scandal dust settled are still intriguing and are worth of review.
One of the legal cases that shall be reviewed is the overturning of the obstruction of justice conviction that was levied against Arthur Andersen. As came to pass in May 2005, the United States Supreme Court came to the unanimous decision that the procedures used in the case were faulty. Chief Justice William Rehnquist was quite frank when he said “jury instructions at issue simply failed to convey the requisite consciousness of wrong-doing” (Mears). He went o to say that “it is striking how little culpability the instructions required” (Mears). At issue was that Andersen officials were convicted in 2002 of obstruction of justice. This centered on the alleged practice of Arthur Anderson shredding documents so as to avoid culpability and fault when it came to the Enron white collar crime spree. While the optics of those actions were terribly bad, the government made a fairly egregious error when it meted out jury instructions. To be specific, the attorneys for Andersen asserted that the jury was improperly instructed prior to deliberations. The crux of the supposed problem with the instructions was the definition of “corruptly persuading” as contained in the relevant statutes. It was presumed that this referred to “having an improper purpose … to subvert, undermine or impede.” The turning point of the appeal is whether the Andersen employees were acting with “criminal intent” (Mears). Ultimately, the Supreme Court of the United States decided that the prosecutors were negligent and incorrect in their interpretation and usage of the statute and thus the resulting conviction of the Andersen executives was improper. As such, the case was kicked back to the lower court for them to decide whether to retry the defendants, presumably with the proper statues and related instructions used (Mears).
The United States government prosecutors ran into a similar problem with Skilling. In a nutshell, Skilling was not convicted of causing Enron’s bankruptcy nor was he convicted of the Enron employees losing their retirement savings. However, he was sentenced as if he did both and the courts found fault in that. He was originally sentenced to twenty-four years in jail. However, that was reduced to fourteen years. Originally, Skilling was convicted in 2006 on a grand total of nineteen counts. Of those counts, twelve were for securities fraud and another was for insider trading. Under the federal sentencing guidelines, his offenses were for a total of thirty-six points. This would mean a sentence of 188 to 235 months, or 15-19 years. However, a federal judged added a four point “enhancement” due to the jeopardizing of the financial safety and soundness of the firm. This sharply spiked the prison time Skilling faced, raising it to 24 to 30 years in jail. Indeed, Skilling got more prison time than notorious crime boss Al Capone (Carney).
Skilling and his attorneys appeal the sentence and it eventually made it to the Fifth Circuit. Upon reaching that court, the sentence was overturned. Subsequent to that, the United States Supreme Court held that Skilling “did not violate a federal law making it a crime to deprive another person of ‘honest services'” (Carney). However, they decided not to overturn Skilling’s conviction and a federal appeals court later came to the conclusion that the confiction would stand. Ultimately, this led to a point being shaved off of the aforementioned total when it came to sentencing and this is what led to his sentence being reduced. Just as with the Arthur Andersen obstruction of justice case, the prosecutors and/or judges misread and/or misapplied the law as it was written and they got their hand slapped for it in both cases (Carney).
The other major issue with Skilling was the rather gross disparity between what happened to him sentence-wise and what happened to his alleged co-conspirators. As noted before, Kenneth Law was convicted but died before sentencing. Thus, his convictions were vacated. Skilling, even with the victorious appeal, ultimately served fourteen years. This stands in stark contrast to Chief Financial Officer Andrew Fastow only serving six years and Richard Causey (chief accountant) getting five years. The United States Supreme Court noted that Skilling basically got hosed and his only real “sin” as compared to his fellow co-conspirators is that he insisted on a jury trial while the others pled out while agreeing to testify against Skilling. Indeed, the Supreme Court decision, as authored by Justice Sotomayor, noted that the “once in a generation” gravity of the Enron situation basically made it impossible for Skilling to get a fair shake at trial (Carney).
As for the ethics involved, there are so many directions that could be traveled in but the author of this report will focus on only a few. As for Skilling, the author of this report does not believe for a minute that Skilling was an unknowing victim of what was going on at Enron. Even if he was not actively involved (which is a rather dubious thing to believe), he certainly knew about it going on. If he did not know what was going on, he should have. As for Arthur Andersen, their little “shred party” may not have met the legal standard for criminal intent and criminal convictions, but it should have. Unless they have a legitimate and legal reason to be shredding the documents that they were destroying, they had a duty to retain and keep the documents on hand. Indeed, there are many laws and regulations that require retention and storing of relevant documents and the accounting industry is full of such rules (Abelson).
As for the government itself, they made so many mistakes and it really makes them look inept and ineffectual. Beyond that, the laws that they did or tried to pass post-Enron were an overcorrection and actually end up punishing a lot of people and businesses that have never and would never engage in malfeasance. The jury instruction miscue was a clear gaffe and little mistakes like that need to be avoided at all costs. The people that prosecute these cases and instruct the jury need to know the rules and regulations to the letter. The reason why was proven by the vacating of the Arthur conviction because wrongly instructing the jury can lead to a conviction that will become null and void later on. As for the Skilling situation, this is another example of a judge or a prosecutor making a big mistake. Wanting to throw the book at the scandal of a generation (if not a century) is all well and good but the judges and the prosecutors have to operate within the law. If the law is deemed to be flawed, that is up for the legislature to update and fix. Judges and prosecutors are not allowed (nor should they be) to make things up as they go along and/or apply rules and statutes that do not apply to a given situation (Grissom). The latter is precisely what happened with Skilling and his sentence was reduced as a result. Further, the other co-conspirators getting such light sentences as compared to Skilling is a joke. It would have been interesting to see, however, what Lay would have gotten. However, the CFO (at a minimum) should have been hit harder, plea deal or not (Woolner).
Last up is the propensity for legislatures and other politicians trying to make an example or over-correct when it comes to creating or changing laws when scandals happen. Indeed, it would seem that tragic or substantial events give legislators an easy excuse to “drop the hammer” and more heavily regulate businesses and their behavior. Updating the statute so as to make what Skilling did the crime that it was (ruining the company and bankrupting people’s retirement accounts) would be fair. Updating the statute to refine or even broaden the rules regarding destruction of potential evidence (as Arthur Andersen did) would be a good idea. However, the creation of Sarbanes-Oxley was a huge over-reach and is not working as designed (Reutter). It increased the compliance costs for a great many companies that were operating completely fine and above-board under the prior system. As Justice Sotomayor suggested, the Enron mess was a perfect storm of white collar crime and the entire private sector, or at least most of it, should be punished for such a rare occurrence. If a single C-Level executive at Enron or a single power-broker with Arthur Andersen had said “enough is enough,” Enron would have been minimized or even prevented. Instead, both companies were destroyed because the people that knew what was going on wouldn’t do the right thing (SDSU).
The truth, at least according to the author of this report, is that Skilling, Fastow and Lay (had he lived) should all have served double-digit sentences — at a minimum. They quite literally ruined a company and ruined the retirement for a lot of people. They should be the ones to suffer for that — not the private sector. Instead, government regulators did a power-grab because that is what they like to do. It is the same reason the IRS tax code becomes more complex by the day.
Abelson, Floyd. ‘ENRON’s COLLAPSE: THE AUDITOR; Audit Papers Usually Held For Years, Accountants Say’. Nytimes.com. N.p., 2015. Web. 21 Sept. 2015.
Carney, John. ‘Why Jeff Skilling’s Jail Sentence Got Downsized’. CNBC. N.p., 2013. Web. 21 Sept. 2015.
Grissom, Brandi. ‘Errors In Judgment: The Consequences Of Prosecutorial Mistakes — The Texas Tribune’. The Texas Tribune. N.p., 2015. Web. 21 Sept. 2015.
Mears, Bill. ‘CNN.Com – Arthur Andersen Conviction Overturned – May 31, 2005’. Cnn.com. N.p., 2015. Web. 21 Sept. 2015.
Reutter, Mark. ‘News Bureau — ILLINOIS’. News.illinois.edu. N.p., 2015. Web. 21 Sept. 2015.
SDSU. Www-rohan.sdsu.edu. N.p., 2015. Web. 21 Sept. 2015.
Woolner, Ann. ‘Skilling Sentence Shows Enron Changed Everything: Ann Woolner – Bloomberg’. Bloomberg.com. N.p., 2015. Web. 21 Sept. 2015.
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