Can Lay and Skilling Win on Appeal?

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Enron founder Ken Lay was convicted on all charges in both his fraud and conspiracy and bank fraud trials in Houston Thursday.

Ken Lay took the news of his guilt on all six counts of fraud and conspiracy stoically Thursday, sitting with his family, not with his attorneys. His wife, Linda, dabbed her eyes and hugged her husband while daughter Elizabeth Vittor, an attorney herself, sobbed so much her body shook. All the emotion of the moment was understandable. The 64-year-old founder of Enron, the high-flying energy company that once fancied itself as a trader of everything from water to wine, now faces the prospect of 45 years in prison — in other words, the rest of his life. Before leaving the U.S. District Courthouse after the verdict, he had to surrender his passport and his children had to sign a bond waiving rights to their property.

Outside the courtroom, there was little sympathy for the son of a Baptist preacher who created a business dynamo that crashed in late 2001, or for his protege, Jeffrey Skilling, 52, who himself faces 185 years for his 19 out of 28 guilty counts — including conspiracy, securities and wire fraud. “It was a moral victory. Now we hope to get them an economic victory,” said Steve Berman, one of the attorneys representing pensioners ruined by Enron’s demise. In addition to $7.2 billion wrung out of banks like JPMorgan Chase and Citigroup in securities fraud litigation, employees are still waiting to get $260 million for lost benefits.

But if you thought the nearly five-year Enron saga has now come to an end, with both men set for sentencing on Sept. 11, you may be as off base as the company's financial statements. Attorneys for Lay and Skilling vow to appeal, and there is precedent — all the way to the Supreme Court — to attack a white-collar fraud conviction based on the fine points of the kind of jury instructions given by Judge Simeon Lake. "A 'willful blindness' instruction is a very good ground [for appeal]," says Houston defense attorney Joel Androphy. Willful blindness, which Judge Lake specifically cited in the jury instructions as a valid factor in finding guilt, means a jury can find a corporate executive guilty if he personally did not cook the books, but was suspicious or knowledgeable of the goings on in his company and made no attempt to find out about or correct it.

Enron's former accounting firm, Arthur Andersen, as well as former Wall Street trader Frank Quattrone, have successfully appealed jury instructions based on the notion of willful blindness. When Quattrone's conviction was overturned two months ago, Skilling attorney Daniel Petrocelli told TIME, "I think it's a reminder of how dangerous it is that prosecutors can overreact in putting businesses on trial." In Andersen's case, the U.S. Supreme Court voided a witness-tampering conviction of the accounting firm by ruling that the trial's jury was wrongly told it could convict the firm for shredding documents during the government's investigation of Enron even if Andersen employees believed they were not actually breaking the law. Former WorldCom CEO Bernie Ebbers is basing his appeal on overly broad jury instructions as well.

Many legal experts say that Skilling actually has a better chance than Lay for a successful appeal on the issue of willful blindness. The government never argued that Skilling made a conscious decision to ignore wrongdoing at Enron; Lay, on the other hand, had been warned by whistleblower Sherron Watkins of problems in the firm's accounting. The jurors apparently felt that Lay did not respond sufficiently to Watkins memo. "If he had done it, he would have walked today," Androphy says.

For such an incredibly complex case of fraud, it was notable how quickly the jury reached a verdict — on only the sixth day of deliberations. Strangely enough, one member of the jury teared up after the verdict was announced. No wonder defense attorney Androphy worries that the verdict was more “spontaneous” than “intelligent.” “I don't think the jury necessarily identified any financial issues, accounting issues,” he said. “There's no way in just a couple days they could fully comprehend the law and at the end of day apply the law to the facts and come up with an intelligent verdict." Indeed, David Berg, a Houston attorney and author of The Trial Lawyer: What it Takes to Win, contends that Lay “was convicted on all counts because he was so obnoxious on the stand."

Through 16 weeks of testimony, the government argued that the Enron case was about the lies Lay and Skilling told and the choices they made. Defense attorneys countered that neither executive did anything wrong or illegal: their company failed, they insisted, but failure is not a crime. Defense attorney Petrocelli argued that the proceedings felt more like a civil case, with the standards being used to warrant a guilty verdict lower than they are in a criminal trial. The jurors, eight women and four men, clearly disagreed. "It's a tremendous victory for the government — justice is served," says former federal prosecutor, Michael Wynne. "It was very telling that the defendants weren't able to recall several, significant events and conversations."

Juror Doug Baggett said both sides made such passionate arguments that he changed his opinion almost daily. "You felt like a ping-pong ball," said the manager for a legal department. In the end, jurors didn't believe the hands-on executives were unaware of any wrongdoing at the company. One juror, Freddy Delgado, an elementary school principal, pointed out that he's responsible for what happens inside classrooms — even when he's in his office or off campus. "I'm still responsible if a child gets lost," he said. Fellow juror and business owner Wendy Vaughn said it was the duty of Skilling and Lay to know what was going on. "In the very beginning of the trial, I actually admired both men," she said. "I wanted very badly to believe what they were saying." She said the case was like a puzzle “with 25,000 pieces dumped on the table.” To show his appreciation, Judge Lake commissioned the courtroom sketch artist to draw a portrait of the jurors. He gave a copy to each after the verdict, along with a certificate of appreciation.

In Houston, there is relief that the trial was over. “Right up to the end, people were concerned they might get away with it,” said Robin Harrison, a Houston attorney representing the pensioners in their benefits case. “It seems the jury was pretty cohesive. They just flat didn’t believe the testimony of the two men.” As Berg puts it, "The defense — that there was nothing wrong at Enron — was a demonstration of the kind of arrogance that brought them down.”

—With reporting by Greg Fulton and Wendy Grossman