The most often-cited definition of chutzpah is the story of the man who kills both his parents and then begs for mercy because he is an orphan. Jeff Skilling, former CEO of former Enron (no ticker, alas) has filed an appeal with the U.S. Supreme Court that calls into question the fairness of the trial that resulted in Skilling getting sent to the slammer for more than 20 years.
One part of Skilling’s appeal is related to the inclusion on the jury of a person who had lost around $50,000 when Enron collapsed. That is arguable, certainly, and Skilling might get a new trial for this reason alone.
The second part of the appeal is related to federal fraud law which makes it a crime to deprive people of what the calls “the intangible right to honest services.” Supreme Court Justice Antonin Scalia commented during oral arguments that the honest services law means “its a crime to do any bad thing.”
The chief argument against the honest services law is that it is vague, which is enough to make the law itself illegal. Skilling’s lawyers have argued that the law can be used to chase “opportunistic and arbitrary prosecutions.”
Justice Scalia’s comment is itself vague though. Does he mean that it is impossible ever to determine when a bad thing is a crime? That doesn’t really hold water because juries decide that all the time. It’s what juries are for: Is it more important that the defendant is an orphan or that he murdered his parents?
Regardless of what Justice Scalia really meant, it does seem that Skilling’s actions are a textbook example of fraud. He was convicted of selling about half a million shares of Enron stock and profiting to the tune of $15 million while telling (lying to) shareholders about the health of the company, which went bankrupt a few months later.
In a nutshell, Skilling is arguing that company managers are under no obligation to be honest. He wants to make the US safe for liars and cheats.
If Skilling wins his appeal on this issue, it will be a big step backwards for US business. Following the collapse of Enron, Worldcom, and Tyco, the US Congress passed the Sarbanes-Oxley Act to try to get to the root of problematic accounting. A challenge to that law is now being decided in the Supreme Court (Free Enterprise Fund v. PCAOB (08-861).
But Sarbanes-Oxley has proven to add value to US business. Investors like the transparency and governance rules of Sarbanes-Oxley. The fear that the US would lose IPOs to London or elsewhere has not proven out.
But accounting transparency is not absolutely equal to management honesty. If Skilling’s argument against honest services wins, and that is combined with a retreat on Sarbanes Oxley in the Free Enterprise Fund appeal, US corporate regulation could fall back once more into the weeds of obfuscation and delusion. It is difficult to see how that would be a good thing.