The Supreme Court has agreed to take up the appeal of former Enron CEO Jeffrey Skilling whose company perpetrated one of the largest accounting frauds in history.

Skilling was convicted back in 2006 on 19 counts, including securities fraud and lying to auditors, in a series of activities that led to the 2001 collapse of the energy-trading company. The fallout from the accounting fraud that occurred at Enron and other infamous cases such as WorldCom and Tyco included the demise of onetime Big Five auditing firm Arthur Andersen and the passage of the Sarbanes-Oxley Act of 2002.

Skilling has been pleading for a rehearing ever since in an effort to shorten his 24-year jail term. One of the issues in his case is the federal “honest services” statute, which makes it a crime to deprive investors or the public of “the intangible right to honest services.” Skilling is also claiming that he did not receive a fair trial because of the notoriety of his well-publicized case.

An overturning of Skilling’s conviction could have repercussions in other fraud cases, including that of former Hollinger International chairman Conrad Black, who is serving a six-and-a-half-year sentence for helping himself to millions of dollars from his media company. Politicians such as former Illinois Governor Rod Blagojevich and former Alaska legislator Bruce Weyhrauch have also been convicted under the statute. The Supreme Court has agreed to hear appeals in Black and Weyhrauch’s cases this term.

The connections between the honest services statute and accounting fraud raise questions about related issues such as fiduciary duty and due diligence, questions that accountants often need to wrestle with as they contend with their clients’ financial statements and misstatements.

Some have argued that the honest services statute has been too loosely applied and used to obtain convictions by prosecutors in white collar cases where it might be otherwise difficult to prove criminality. In that way, it can be likened to other controversial charges such as racketeering and conspiracy that have also sometimes been applied rather loosely, at least in the view of those at the defense table.

Justice Antonin Scalia, for one, has complained about the honest services statute, writing in February that it “had been invoked to impose criminal penalties upon a staggeringly broad swath of behavior.” The honest services law could even be applied against an employee who phoned in sick to work and instead went to a ballgame, Scalia claimed.

It remains to be seen whether other pro-business justices such as Samuel Alito will take a similar view. Skilling’s case presents special circumstances. At the time of his conviction, the thirst for retribution against Enron executives such as the late chairman Kenneth Lay, who died before going to prison, led many to cheer Skilling’s come-uppance. Now that we have seen retirement savings vanish for not just former Enron employees, but also many others who saw their 401(k)’s decimated by the financial crisis, there may still be sentiment for keeping Skilling in jail. On the other hand, the case almost seems in the distant past nowadays, even though in many ways it was a harbinger of things to come.


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