LONDON, 19 October 2006 — The quashing posthumously on Tuesday of the conviction of disgraced Houston-based Enron Corporation founder and chairman, Kenneth Lay, on five counts of fraud and conspiracy, has raised eyebrows in Britain’s legal and business circles.
The dismissal of the conviction is apparently on a technicality simply because Lay died before he had a chance to appeal against the conviction.
It appears, according to London legal sources, that the judge was following an earlier Appellate Court precedent. In other words he was following US case law. This against the prosecutor’s advice to wait in the event the US Congress decided to change the law in this respect. There have been reports that US lawmakers were thinking of passing legislation which would give courts the powers of confiscation of assets in such cases.
Enron Corporation, which was close to the powers that be in the ruling Republican Party and a regular donor to party funds, rocked the corporate world and energy markets when it filed for bankruptcy in 2001 with an estimated $40 billion in debt hidden through a network of complicated investment strategies obscured in the company’s financial statements.
The corporate bankruptcy, then the largest in US history, rattled the US equity markets and undermined public confidence in the business sector. The Bush administration was forced to boost corporate accountability and governance regulations to pre-empt further Enron scandals.
A top banker from Southeast Asia, on a visit to London and who wished to remain anonymous, said the ruling could send the wrong signals to investors, especially foreign investors, about finding recourse in US law in a corporate bankruptcy situation where fraud was proven in a federal court.
Because there is no precedent in this case where the defendant died before sentence could be meted out or where he could appeal against the conviction, it is not clear whether the judge could have given leave for Lay’s Estate instead to appeal against the conviction.
The more important point, says Louise Delahunty of top international law firm Simmons & Simmons in the City, is that the ruling “potentially closes down the criminal route for recovery or confiscation of assets.”
If Lay had not died, and lost his appeal, there would have been automatic penalties. The unfairness to Enron’s creditors and employees becomes apparent.
For those creditors, both local and international, and some 4,000 Enron employees who lost their jobs and life savings after the US energy giant collapsed and filed for bankruptcy in 2001, the ruling means yet another hurdle to overcome in their quest for justice and compensation. In the Middle East, Saudi Arabia’s Al-Rajhi Bank, for instance, probably had the largest exposure to the Enron collapse, losing an estimated $180 million.
UAE and Lebanese companies and investors also lost money as a result of the Enron bankruptcy.
Lay, who together with his Chief Executive Officer Jeffrey Skilling, became a symbol of corporate malfeasance and corruption in the United States, was convicted of six counts of fraud on May 25, 2006 and was due to be sentenced last month. He faced a prison sentence of anything up to 45 years. But on July 5, 2006, Lay, aged 64, died of a suspected massive heart attack.
Judge Sim Lake, a federal judge in Houston, ruled that since Lay had died before he was sentenced or given the opportunity to appeal, and court precedent does not “allow the court to enter an order of restitution against Lay’s estate,” the conviction must be thrown out.
The decision means Lay’s estate will not have to pay out millions of dollars that the court had determined were fraudulently amassed. The court ruling, as such, will force former Enron employees and creditors to seek recourse in the US civil courts, which, according to corporate lawyers in London, could be a costly and drawn-out affair.
The civil route is a more difficult one. With a criminal conviction, the penalty is automatically enforced. But the civil action, to be brought against the Lay Estate, would require the plaintiffs to prove the case all over again. Although, according to legal sources in London, the prosecution could try to use the conviction of others in the case to prove the charges against Lay again.
Former Enron CEO Skilling, who was found guilty of 19 of 28 counts of fraud and conspiracy and faces a maximum penalty of 185 years in jail, will be sentenced next Monday.
Federal prosecutors had argued in vain against the Lay Estate’s request to “vacate the sentence” on grounds that the Lay Estate should not be unjustly enriched with the proceeds of fraud that would otherwise be subject to forfeiture and distributions to Lay’s victims.
