Prior to his employment at Amoco, Mr. Johnston served as an economist with the RAND Corporation, the Institute for Defense Analyses, and the Secretary's Office of the U.S. Treasury. He served on the U.S. delegation to the United Nations Conference on the Law of the Sea.
Mr. Johnston's current research has focused on electric utility deregulation in Illinois and other states; pollution trading under the climate change treaty, Clean Air Act, and the RECLAIM system for the South Coast Air District; and a general theory of regulation, published in the Cato Institute's Regulation magazine.
Latest posts by Jim Johnston (see all)
- Price Controls, Whether For Labor Or Housing, Don’t Work - July 9, 2014
- Adding Economics to the Immigration Debate - May 20, 2014
- Encrypt Everything! - February 3, 2014
The story about the failure of Enron by Phil Rosenthal that appeared in the Chicago Tribune on December 4, 2011 missed out on several interesting points in law and economics.
First and foremost, Jeffrey Skilling and Ken Lay were convicted of wire fraud even though they had no personal gain from the fraud. The Supreme Court later unanimously found the “honest services” version of fraud was too vague and ruled only bribes and kickbacks are illegal.
By contrast, Andrew Fastow, then chief financial officer of Enron, established the off-book entities where much of Enron’s debt was parked. To be legal the off-balance-sheet special-purpose entities were supposed to be independent of Enron. But Fastow did not let this happen. Indeed, he siphoned off tens of millions of dollars to his personal account by virtue of being an officer of both the partnerships and Enron. He was the prosecution’s best witness against Skilling and Lay. But here Fastow’s story was mixed.
Initial FBI interviews of Fastow indicated the lack of independence was not reported to Skilling. Fastow later testified just the opposite. The earlier exculpatory testimony was kept from the defense by both the prosecution and trial Judge Sim Lake. It was only later released by the appellate court, too late to be used during the original trial. For his later testimony, Fastow’s sentence eventually was reduced to just six years and he was released to a halfway house in May 2011. He is now living at home with limited freedom to leave.
Skilling was convicted on only one count of insider trading out of ten charges in the indictment. According to courtroom observers, the prosecution won conviction because the trading occurred after 9/11/2001, and therefore it was “unpatriotic.” Actually, this transaction was one of a long series by Skilling that served to monetize the gain from developing the natural gas futures and options derivatives, now among the nation’s most liquid contracts because they serve to hedge the volatile risk in natural gas and electricity prices.
It is interesting to compare the behavior of Skilling with that of Susan Watkins, considered the whistle-blowing heroine of the Enron case. After uncovering the illegality of Fastow’s special-purpose entities, she sold $47,000 worth of Enron shares. To most this would appear to be a classic case of insider trading. Nevertheless, she was given a walk by prosecutors in exchange for damning testimony against Skilling and Lay.
Perhaps the most egregious error in the Enron case was the denial of a change of venue. Passions in Houston were running high as many of the residents and their friends were personally affected by Enron’s collapse. Supposedly the bias in the jury pool was to be remedied by questioning of the jurors during voir dire. But Judge Sim Lake allowed only five hours of questioning and then he dominated the session.
In the opinion of Supreme Court Justice Sonia Sotomayor, who cannot be considered a conservative, the jury pool was most likely biased: “Taken together, the District Court’s failure to cover certain vital subjects, its superficial coverage of other topics, and its uncritical acceptance of assurances of impartiality leave me doubtful that Skilling’s jury was indeed free from the deep-seated animosity that pervaded the community at large.”
Thus, Jeffrey Skilling was convicted of fraud where he did not benefit personally, by a biased jury (according to one Supreme Court Justice), and of insider trading because he was “unpatriotic” in selling Enron shares after 9/11. Skilling was denied exculpatory testimony by Andrew Fastow and received an extraordinarily long 24-year sentence when a real fraudster received a much lighter sentence and an insider trader was not prosecuted at all.
If the Enron experience is to be used as a guide for financial reform, it is important to get the story straight. Phil Rosenthal did not do this.
Paul Fisher (email@example.com) is an attorney with McGuire Woods in Chicago and Jim Johnston (firstname.lastname@example.org) is an economist, retired from Amoco. Both are directors of The Heartland Institute.