Crime & Federalism

[Editor's note: This is part four of a six part series exploring the criminal counts charged against Ken Lay.  You can read more about the Ken Lay case here, here, here, and here.]

Charges 2 & 3 (Counts 12 & 13; pp. 45-46) against Ken Lay allege violations of the wire fraud statute, 18 U.S.C. 1343, which is set forth in the foonote below (1).  The wire fraud statute can be easily summarized.  "Title 18, United States Code, Section 1343, makes it a crime for anyone to use interstate wire communications facilities in carrying out a scheme to defraud."  Pattern Jury Instruction No. 2.60. See also No. 2.59, Wire Fraud, ("Because the language of the mail fraud and wire fraud statutes are so similar, cases construing one are applicable to the other.")  There are four main elements to the crime of wire fraud. 

First: That the defendant knowingly created a scheme to defraud;

Second: That the defendant acted with an specific intent to defraud;

Third: That the defendant used [or caused someone to use] interstate wire communications facilities for the purpose of carrying out the scheme; and

Fourth: That the scheme to defraud employed false material representations.
Fifth Circuit Pattern Jury Instruction 2.60.

The scheme to defraud.

When one thinks of a "scheme to defraud," he imagines an email from a Nigerian prince who has a once-in-a-lifetime opportunity for you. The Nigerian sent the email to cheat you out of your money. However, the wire fraud statute's scope is much broader.

The scheme to defraud can consist of denying your employer the right to your honest services.  In the Fifth Circuit "'honest services' are services owed to an employer under state law[ ]."  United States v. Caldwell, 302 F.3d 399 (5th Cir. 2002).  See also, United States v. Gray, 96 F.3d 769, 775 (5th Cir. 1996) ("[A] deprivation of an employee's faithful and honest services if a violation of the employee's duty to disclose material information is involved.") Under Texas law (and probably the law of all 50 states), a company's Chief Executive Officer owes fiduciary duties to his employer-company.

The government alleges that Ken Lay breached his fiduciary duty to the company's shareholders, the investing public, and the SEC when he gave two talks (subsequently distributed interstate).  In the first talk - September 26, 2001 - Lay held an on-line forum with Enron employees.  In this forum Lay told Enron employees that Enron was looking strong and was on pace to meet its fourth quarter goals.  Lay also told employees that he would continue to purchase Enron stock.  However, the government says that Lay knew the company was about to amend its filings with the SEC to show a 1.2 billion dollar loss.  In other words, Lay lied to his employees.  He breached his duty and thus is guilty of wire fraud.

The basis for the second count occured on October 23, 2001, when Lay talked again to his employees.  In this talk he praised the liquidity of Enron.  However, he failed to disclose that in order to maintain Enron's liquidity, the company had to drain its line of credit and put down its real and personal property as collateral to obtain a loan.  In other words, Lay did not fully disclose Enron's financial condition. 

I think this element of both counts is subject to several good attacks.  One avenue would be for Lay to assert the business judgment rule. 

The business judgment rule generally applies in the civil context. Often a disgruntled shareholder will bring a derivative lawsuit - sue the company on behalf of the company - challenging some action of the board of directors.  Many courts do not want to interfere with the internal dealings of a corporation.  Courts also recognize the complexity of business decisions.  And so, they dismiss the case on the grounds that the decision of the board of directors fell soundly with the BOD's business judgment.  Ken Lay could very well argue that his decision to selectively disclose facts to Enron's employees rested within his business judgment.

After all, there are a lot of legitimate reasons for not telling your employees that your company is going belly up.  Perhaps Lay thought blue skys were ahead.  Perhaps he thought that fully disclosing Enron's financial condition would only cause more trouble: the stock would plummet and people would quit.  He had a judment call to make.  He might say, "In hindsight, it was the wrong decision.  But I made the best decision I could.  I did the best I could."  In other words, if he really made the best judgment call possible in his mind, then he provided his full "honest and good" services.  The wire fraud does not demand competency: it only demands effort.

Granted, that argument might not persuade the judge to dismiss the two counts of wire fraud as a matter of law. But it damn well might persuade the jury (or enough jurors to hang on those two counts) that it should not engage in Courtroom-CEO'ing.

Specific intent.

There are two types of intent crimes: general intent and specific intent.  One commits a specific intent crime when he does some act solely for the purpose of causing a specific harm.  For example, if I intentionally stuck out my foot and accidentally tripped you, I would not be liable for the specific intent crime of tripping.  But if I stuck my foot out solely to trip you, I would be guilty of tripping.  To convict Lay, the government must prove that when he gave those two talks, he did so in order to defraud investors: in other words, that he cheated them out of his full and honest services.  This element is subject to attack on the same theory discussed above.

Interstate nexus.

The third element is easily met since the talks Lay gave were distributed to employees throughout the country.  The government can easily prove this element.

The wire communications. 
The wire communications were the videos produced on September 26, 2001 and October 23, 2001.  Again, no problems of proof presented for this element.
   
As you can see, Charges 2 & 3 depend soley on whether the government can prove that Lay knew of Enron's financial condition.  This may be very difficult since Lay's defense is that he did not know Enron was in dire straights.  Lay can also assert that when he gave those press conferences, he disclosed everything he thought appropriate and that as a CEO, we should give him some deference.  Besides, trying and failing is different from cheating.

In press conferences, Lay has come off as being very charming.  The government will have a very difficult time convicting on these counts.  I predict an acquittal on these two charges.
    
(1).  Title 18 section 1343 reads: "Fraud by wire, radio, or television"
"Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than five years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both."