Enron founder verdict erased

July death cancels Lay's conviction

October 18, 2006|By Thomas S. Mulligan | Thomas S. Mulligan,Los Angeles Times

A federal judge wiped out yesterday the criminal conviction of Enron Corp. founder Kenneth L. Lay, ruling that his death July 5 denied him the chance to appeal a Houston jury's fraud and conspiracy verdict.

The ruling in Houston by U.S. District Judge Simeon Lake, who presided over the 16-week trial in the spring, will make it tougher - though not impossible - for prosecutors and private plaintiffs who are trying to recover money from Lay's estate, legal experts said. The government could still pursue its claim in civil court, but it would have to compete with any other litigants pursuing Lay's estate.

Lake ruled that the law allows a court to enter a restitution order only when sentencing a defendant. Because of his death, Lay was never sentenced.

The Justice Department said yesterday that it will continue to pursue restitution of $43.5 million from Lay's estate.

"Today's ruling does not change the fact that Mr. Lay was found guilty after a four-month jury trial and a separate bench trial," Justice Department spokesman Bryan Sierra said. "We will continue to pursue all remedies available for restitution on behalf of the victims of the fraud at Enron."

Lake also dismissed the original indictment under which Lay was brought to trial. In a 13-page ruling, the judge cited a 2004 decision by the 5th U.S. Circuit Court of Appeals vacating the conviction of a defendant who died while his appeal was pending.

The Justice Department's Enron Task Force so feared this outcome that last month it unsuccessfully appealed to Congress to pass a law abolishing the legal doctrine under which Lake threw out Lay's conviction.

The doctrine "unnecessarily harms crime victims," Sean M. Berkowitz, head of the task force, and prosecutor John C. Hueston wrote to Lake in a motion asking him to delay action until Congress had a chance to consider legislation. "It erases the hard-won verdicts against those who have wronged them, verdicts that might aid crime victims in civil litigation."

Congress recessed without considering the legislation, and in any case, it might have been seen as an unconstitutional interference with the courts, said Carl Tobias, law professor at the University of Richmond. "It certainly raises a red flag," he said.

Lay died of a heart attack at age 64 while vacationing with his wife, Linda, near Aspen, Colo.

Along with his protege, former Enron Chief Executive Officer Jeffrey K. Skilling, Lay was convicted of fraud and conspiracy charges arising from the energy-trading company's collapse into bankruptcy in late 2001. Enron's implosion cost thousands of jobs and wiped out more than $60 billion of stock market value and more than $2 billion in pension plans at a company that once had been a darling of Wall Street.

Skilling is scheduled to be sentenced Monday and is expected to receive a prison term of at least 20 years.

Prosecutors are seeking $182 million in restitution and penalties from Skilling at the time of his sentencing. Bloomberg News reported that sum includes $43.5 million initially sought from Lay.

The Justice Department did not say whether it would pursue a separate civil suit. The Securities and Exchange Commission has a civil suit pending against Lay and Skilling.

"On behalf of the Lay estate, we are pleased with the opinion," lawyer Sam Buffone of the firm of Ropes & Gray in Washington said of Lake's decision. Given the legal precedents in the federal 5th Circuit Court of Appeals, which includes Houston, he said, there was "no other outcome possible."

The value of Lay's estate is in dispute. Prosecutors think he transferred tens of millions of dollars to relatives, but Lay testified at his trial that he was nearly broke.

Lay's estate and Skilling still face a large consolidated shareholder lawsuit.

New York-based lawyer Lowell Peterson, who obtained money for former Enron employees who were denied their severance benefits, said civil plaintiffs can still use the extensive evidence generated in the Lay and Skilling trials.

"If I were Lay's estate, I wouldn't take too much comfort in this ruling," Peterson said. "The evidence is still pretty strong."

Moreover, the standard for awarding damages in a civil suit - by a preponderance of the evidence - is lower than the "beyond a reasonable doubt" standard for a criminal conviction.

Thomas S. Mulligan writes for the Los Angeles Times.

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