Fraud Files: Enron's Jeffrey Skilling Says We Shouldn't Expect Honest Execs

Last week, the poster boy for executives committing fraud, Jeffrey Skilling, had his appeal of his criminal conviction heard before the U.S. Supreme Court. Skilling was convicted in 2006 on 19 counts of conspiracy, fraud, false statements and insider trading related to his work as the CEO of failed energy concern Enron. But even at sentencing, Skilling claimed he was innocent of all charges and Enron collapsed because of outside forces. (That still gives me a chuckle each time I read it.)

He'll be locked up for the next couple of decades and probably has nothing better to do than think about all the ways he can get out of prison early. And really, what does he have to lose by coming up with creative arguments to reduce his punishment?

Part of the argument his attorneys made in his appeal revolved around the inclusion of a juror who said she had lost $50,000 to $60,000 because of Enron's collapse. Can a juror who is essentially a victim of the crime Skilling is accused of committing be impartial? The defense tried to strike that juror, but she remained on the panel, raising questions about the impartiality of the jury.

Is Dishonesty at Work A Crime?

The more interesting issue that was raised, however, was the use of a law that makes it a crime to deprive someone of the right to honest services. Skilling's lawyers say this is unconstitutionally vague as it could literally turn any dishonesty at work into a federal crime. Yet such a law is important if prosecutors can't prove actual theft or other crimes, but can prove some sort of corruption or dishonesty in connection with the jobs of the accused.

Apparently Skilling isn't the only executive convicted of crimes who thinks it shouldn't be a crime to be a dishonest executive. Late last year, media mogul Conrad Black and Alaska legislator Bruce Weyhrauch appealed their criminal convictions, saying that the law making it illegal to deprive an employer of the right to honest services was "inherently vague."

It is hard to feel much pity for Skilling. Law enforcement and the courts use broad laws all the time to convict people of crimes. Consider someone believed to be involved in drug dealing. It's not always possible to prove that crime, so the Feds resort to using laws regarding tax evasion to convict them of felonies and get them off the streets. No one seems to mind broad laws in those cases, as sometimes they're the only way to stop the specific criminal acts, which are known but unable to be proven in court.

Wholesale Financial Statement Fraud

Skilling's main attorney, Daniel Petrocelli, wrote in his Supreme Court brief that the law has been used for "opportunistic and arbitrary prosecutions." Maybe that argument could go somewhere if Skilling hadn't been so dishonest and hadn't profited so handsomely from his frauds at Enron.

We're not talking about a guy who might have been involved in a little dishonesty as an executive at Enron. Skilling and the executive team engaged in wholesale financial statement fraud that propped up the company's stock price substantially. What's more, Skilling personally profited by unloading his stock while the company was still flying high and the fraud was undiscovered.

While I'm intrigued by the whole "don't expect me to be honest when our whole company is dishonest" defense, and it makes for good blog fodder, it's really all just crap.

Sarbanes-Oxley Hasn't Been Very Effective

This whole issue sounds silly to me. How can a criminal conviction for blatant dishonesty that created massive personal profits for Skilling (while simultaneously creating massive personal losses for thousands of others) be unfair to him? Yet it is not out of the realm of possibility that the Supreme Court could rule in his favor on this issue.

I don't believe that fraud can be legislated away. Executives behave honestly because it is demanded of them by the corporate culture and the owners of a company. Regulations like Sarbanes-Oxley are intended to reduce fraud, but haven't really been proven effective in doing so. Probably the biggest tangible benefit of Sarbanes-Oxley has been shining a bright light on the issue of fraud.

However, that doesn't mean that strong laws against dishonesty by executives shouldn't exist. Those deceiving and manipulating our financial markets must be penalized. If no other law fits the bill, I'm more than happy to have lying executives nailed to the wall for not providing their employers -- and all the stakeholders -- with honest services.

Tracy L. Coenen, CPA, MBA, CFE, CFF is a fraud examiner and forensic accountant who investigates corporate fraud and consumers scams, and is the author of Essentials of Corporate Fraud and Expert Fraud Investigation: A Step-by-Step Guide.