Crime & Federalism

[Editor's note: This is the third of a six part series discussing the criminal charges against Ken Lay.  You can read other posts discussing the Ken Lay prosecution here (Introduction) and here (the Indictment).  The next three parts will address the wire fraud, securities fraud, and Reg-U charges, respectively.]

Charge1 (which Count 1 of the Indictment) alleges that Lay, Skilling, and Causey conspired to commit securities and wire fraud in violation of 18 U.S.C. 371. 

Conspiracy is perhaps the easiest crime to understand.  Criminal liability attaches under the conspiracy statute if two or more people agree to commit a crime and one person takes an act in furtherance of the agreement.  18 U.S.C. 371 ("If any two or more persons conspire [to commit a federal crime], and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.")  The conspiracy statute, in other words, punishes the agreement to commit a future crime.  Fifth Circuit Pattern Jury Instruction 2.20 ("A 'conspiracy' is an agreement between two or more persons to join together to accomplish some unlawful purpose. It is a kind of 'partnership in crime' in which each member becomes the agent of every other member.")

A conspiracy count is considered typical in any federal prosecution.  "Conspiracy has been called the darling of prosecutors."  McCart v. State, 765 So.2d 21, 34 (Ala. Crim. App. 1999).  See also Interview with Robert F. Clark, ("Conspiracy is ... the darling of the prosecutor. You don't have to catch people. You can sit in your office and say, 'We have a conspiracy.'")  Generous liability rules is one reason prosecutors love conspiracy.

Under Pinkerton v. United States, 328 U.S. 640 (1946), a conspirator is liable for the reasonably forseeable acts of his co-conspirators done in furtherance of the conspiracy.  The Fifth Circuit Pattern Jury Instruction 2.22 (2001) phrases the Pinkerton rule as follows: "A conspirator is responsible for offenses committed by other conspirators if the conspirator was a member of the conspiracy when the offense was committed and if the offense was committed in furtherance of, or as a foreseeable consequence of, the conspiracy."  This rule applies even if the co-conspirator may not have assented to the comission of some crime.  Consent to each act done by a co-conspirator is not required: the touchstone is whether the acts were forseeable.  Thus, the District Court intructs the jury as follows:   

Therefore, if you have first found the defendant guilty of the conspiracy charged in Count___ and if you find beyond a reasonable doubt that during the time the defendant was a member of that conspiracy, other conspirators committed the offenses in Count[s] ___ in furtherance of or as a foreseeable consequence of that conspiracy, then you may find the defendant guilty of Count[s] ___, even though the defendant may not have participated in any of the acts which constitute the offense[s] described in Count[s] ___. Id.

Do note there is an exception to the Pinkerton rule.  Lay is not liable for Skilling's and Causey's acts if Lay affirmately pleads that he withdrew from the conspiracy.  United States v. Schorovsky, 202 F.3d 727, 729 (5th Cir. 2000) ("[W]e believe it is logical to infer that the conduct of conspirators after a defendant withdraws from the conspiracy likewise is excluded from the defendant's relevant conduct for sentencing purposes."); Jury Instruction No. 2.23.  ("[T]he defendant must demonstrate some type of affirmative action which disavowed or defeated the purpose of the conspiracy. This would include, for example, voluntarily going to the police or other law enforcement officials and telling them about the plan[].")  Of course, since Lay has not admitted that a conspiracy existed, by definition there would have been nothing for him to withdraw from. 

Thus, Lay's being charged with conspiracy is unremarkable, though something about Count 1 is quite remarkable. 

What is Not Charged.

You can see that the Indictment charges, in total, 18 counts of securities fraud and 6 counts of wire fraud.  However, Lay is only charged with 4 counts and 2 counts, respectively.  This could become very significant.   

If Lay agreed with Skilling and Causey to commit wire and securities fraud, then Lay is liable for Skilling's and Causey's wire and securites fraud.  That Lay is not charged with more counts may be an indication that the prosecution can not prove that Lay, Skilling, and Causey agreed to commit any crime.  Of course, the prosecution could merely be waiting to see what evidence develops at trial.

If there was a conspiracy to commit wire fraud, and indeed Skilling and Causey committed wire fraud, then why isn't Lay charged with more counts of wire fraud? Indeed, this is more interesting since on page 39 of the Indictment, prosecutors allege that Lay's committed the following overt acts in furthernace of the conspiracy:

[1] [He] "spoke to a representative of a national credit reporting agency," para. 88p; [2]  [He] "conducted a quarterly conference call," para. 88r; [3] 
[He] made another "conference call," para. 88s. 

These three acts serve as the basis for three counts of securities fraud against Lay.  However, Skilling is not charged for any of these three acts, and Causey is only charged in connection with two of these acts. 

Also note that the prosecution hasn't charged Skilling and Causey with the wire fraud Lay allegedly committed. [We will be discussing wire fraud in a later post.]  So, why is it that Lay's wire fraud counts are inapposite Skilling's and Causey's?  Could it be that no agreement between Lay, Skilling, and Causey can be proven?

Perhaps Lay's knowledge of Skilling's and Causey's actions can not be proven.  If so, then Charge 1 is out the door.  Also, if the prosecution can not establish a broad conspiracy between Lay, Skilling, and Causey, it may have a harder time proving that Lay knew about the company's financial situation since it was Skilling and Causey who filed the 10-K and 10-Q forms with the SEC.  Forms 10-K and 10-Q are mandated by the SEC and require a company to fully disclose its financial condition.  If Lay was not privy to the information in these documents, then he has a strong claim that he really did not know that Enron was in poor financial condition.  As such, he was not acting in a conspiracy with Skilling and Causey when he told analysts that Enron was doing well.

[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."

[Ed's note: Originally posted 7.19.2004]

As you all know, there is a sword of Damocles hanging over Ken Lay's head.  Well, maybe 11 swords. Although no evidence has been presented, although no witnesses have been cross-examined, Ken Lay has been convicted.  That upsets me.  And so...

Welcome to a new feature.  This week will be Ken Lay week.  It will be Ken Lay every day.  Why?

Well, I became very interested in this case after watching the prosecution's and defense's press conferences.  It was almost unprecedented for a criminal defendant to discuss the case against him on live television.  That took guts.  His lawyer, a home-spun Texan who embodies the ideal of the Southern Gentleman, was ready to fight.  Forget delays, we are ready for trial. Forget discovery, we do not care what documents the prosecution has.  We have some documents, too.  And guess what?  You won't see them until trial.   

When I heard Ramsey speak, my heart rate increased.  Here is a lawyer to admire.  Here is a lawyer with guts.   

Then there was the government's lawyer.  The assistant united states attorney (AUSA) seemed smug and self-assured.  He seemed more concerned with sucking in the limelight than with justice.  I do not believe that the prosecutorial sword should be used to collect trophies.  Martha's head was enough. 

I predicted - without having seen the Indictment - that Lay would walk.  He has credibility, as does his attorney.  I also didn't think a Texas jury would be keen on the DOJ folks from D.C. waltzing into their Texas courtroom spouting off fancy language.  I said that if Lay is convicted at all, it will be on something insignificant (compared to the awful things the media has already tried and convicted him of).  Yet this was a foolish prediction given that the legal counts against Lay were unknown to me.  Not one to play the fool, I sought to learn more.

Unfortunately, I learned that the press accounts are garbage.  The "legal commentary" has mostly consisted of pop culture slogans and references to acts not charged in the Indictment.  "He ruined the company and must pay," for example.  Well, unless there is a federal crime for "ruining a company," and unless this crime is charged, such lines do not belong in any discussion of the Ken Lay case.  We will have none of that here.  My discussion will be based exclusively on the law and facts of the case.  I hope you enjoy this feature. 

I plowed through this 65-page monster so you do not have to.  Most of the Indictment deals with Ken Lay's alleged co-conspirators, Richard A. Causey and Jeffrey K. Skilling.  This post will only focus the counts alleged against Ken Lay. 

Unfortunately, I can't create a table using my current Blogger features, though the charges against him are organized.   The Key to the text is as follows.  First, I replaced "Charge" for "Count" because we are only worried about the case against Ken Lay here.  The "p." or "pp." symbol refers to the page number of the Indictment.  The "Count" notation in parenthesis refers to the Count charged in the Indictment.  (The Indictment charges 53 counts.  We only care about Lay's 11.)   When I say, Ken Lay did such-and-such, I refer to the government's allegations. 

The text flows more smoothly when I do not constantly say "allege," "theorize," "contend," etc.  If anyone finds this confusing, please let me know.  

Charge 1 - Conspiracy to Commit Securities and Wire Fraud (p. 36-39; Count 1).  Lay agreed with Skilling and Causey to lie (or not tell the whole truth) to the Securities and Exchange Commission (SEC) and the investing public.  The three of them also agreed to use the mail, phone, fax, or video to lie to others outside of Texas.  They told these lies in order to steal. 

Charges 2 & 3 - Wire Fraud: False and Misleading Statements in Employee Meetings (pp.45-46; Counts 12 & 13). Ken Lay lied to his shareholders when he said on two videos (that were later broadcast outside of Texas) that Enron was fiscally sound.  His lied to steal in two ways.  First, by not telling the truth, he deprived shareholders, the investing public, and the SEC of his "good and honest" services.  As the Chief Executive Officer of Enron, he owed the shareholder a fiduciary duty.  He breached his fiduciary duty by not fully disclosing the state of affairs at Enron.  Second, Lay lied in order to induce members of the investing public to give money to Enron, i.e., purchase stock. NOTE:  There are a lot of holes in these and the other charges.  I will deal with these holes and provide substantive legal analysis later on.  Remember, it's Ken Lay week.

Charges 4-7 - Securities Fraud (pp. 48-49; 27-30). Ken Lay lied (or failed to tell the whole truth) to members of the investing public or the SEC about Enron's financial condition.     

Charge 8 - Bank Fraud (p. 53-57; Count 38). Ken Lay lied in a loan application about what he was going to do with the money he borrowed from Bank of America.  Hence he obtained loans from Bank of American fraudently.  Regulation U prohibits a person from using loan money to purchase or carry margin stock.  Yet Ken Lay used money he borrowed from Bank of America to purchase or carry margin stock.  

Charges 9-11 - False Statements to Bank (pp. 57-58; Counts 39-41).  Ken Lay lied on bank forms.  Somewhere on the forms (in very large print I'm sure) it said, "You can't use this money we are lending you to buy or carry margin stock."  Yet Lay used the loan money to borrow margin stock.  See Charge 8, above. Some initial thoughts... The prosecution's case against Ken Lay has more holes than the moon has cheese.  A specially created task force, after 28 months of investigation, could only come up with 11 charges against Lay.  And as you can see, almost 30% of the case against him has absolutely nothing to do with the collapse of Enron.  I wonder if you read the fine print before signing a loan application.      Students of the world take note!  If you use your student loan money to take a someone out on a date, you may have comitted a federal crime.  How is that for overcriminalization?

From Law.com comes this article on the latest drama in the Ken Lay saga.

Enron founder Kenneth Lay doesn't want to go to trial alongside his one-time protege, former CEO Jeffrey Skilling. The feeling is mutual. Both argue in court filings -- Skilling in papers filed Friday, Lay earlier this month -- that the allegations against them thinly overlap if at all, so they should be tried separately.

The government wants to try them and the third co-defendant in their pending indictment, former Enron chief accounting officer Richard Causey, together in March next year. Lay wants a trial as soon as possible, and Skilling and Causey want another year and a half to prepare.

Lay's legal team asked that he be tried alone, and said he would forego his right to face a jury and leave his fate in a judge's hands if that would get a speedy trial. 

U.S. District Judge Sim Lake said he would rule on all the separate trial requests by early October.

It would seem more than a little unfair - and indeed, constitutionally suspect - for Judge Sim to deny severance on the usual grounds of judicial economy when Lay is asserting that severance is required in order for him to obtain his constitutional right to a speedy trial.