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Enron's Jeff Skilling doesn't deserve a break

The man behind the firm's massive collapse is seeking to shave as much as 10 years from his prison term. That would perpetuate a culture of fraud in the boardroom.

Michael Hiltzik

10:20 PM EDT, May 17, 2013

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As if you didn't know this already, we're coddling criminals in America.

By that I don't mean the petty drug dealers, three-strikes necklace-snatchers and other mooks filling up our state prisons; many of them are doing hard time. I'm talking about people like Jeff Skilling.

Skilling, you may recall, was a key architect of the rise and fall of the energy and commodities trading firm Enron, which around the beginning of the last decade claimed the trophy for the biggest securities fraud of all time.

That was in the quaint period when top-level white-collar criminals still faced jail. In May 2006, Skilling was convicted by a federal jury on 19 counts of conspiracy, securities fraud and insider trading. He was sentenced to more than 24 years in prison and ordered to pay $45 million in restitution to victims of the Enron collapse.

Now he's made a deal with federal prosecutors that could cut his sentence to as little as 14 years. Throw in credit for exemplary conduct behind bars, and he could walk out a free man as soon as 2017. In return for the reduced sentence, he's agreed to stop fighting his conviction and to allow more than $40 million in personal funds to be distributed to former shareholders.

The deal must still be approved by U.S. District Judge Sim Lake in Houston, who will hear from victims at a June 21 hearing before making his decision. But the received wisdom in the white-collar defense community is that the judge will accept the agreement.

Skilling's legal battle speaks volumes about justice in our great nation. What it says is that, given enough money, you can get away with a fraction of the penalties you should be facing. Steal little, and you can rot in jail. Steal big, and you can extort a deal from the feds.

"This is a prime example of a structural bias in the law that favors powerful defendants with massive amounts of legal resources," Henry Pontell, a white-collar crime expert at UC Irvine, told me last week.

What's most unfortunate about the Skilling deal is that it comes at a time when the government's efforts to punish white-collar fraud have lost all credibility. How many top banking and Wall Street executives even have been indicted for their role in crashing the world financial system and fomenting a three-year downturn? If you guessed none, you're right. Not even Countrywide Financial's chairman, Angelo Mozilo, the very face of the mortgage industry excesses that fueled the housing bubble, faced criminal charges; he got away with settling a civil lawsuit for $67.5 million, two-thirds of which was covered by corporate insurance and Countrywide's new owner, Bank of America.

Federal officials point proudly to their anti-fraud strategy of extracting multibillion-dollar settlements from corporations for misdeeds, as if that's an adequate substitute for indicting the human beings who commit those misdeeds. By allowing individual executives to skate blithely away, prosecutors perpetuate rather than eradicate a culture of fraud in the boardroom.

So Skilling represents a rare species, the executive brought to book. It's proper to revisit briefly what the case against him was all about.

Enron's 2001 bankruptcy cost shareholders an estimated $45 billion. Many of them were employees who had been incited to buy the stock by executives who convinced them they were onto the greatest thing ever; they lost their jobs and their retirement nest eggs in one blow. About $7 billion was eventually recovered for a restitution fund, mostly through a settlement with major banks that had been sued for their role in Enron's fraud.

There's no minimizing the scale of the catastrophe. Skilling's lawyers were not above citing it when it served their purpose, as when they applied for a change of trial venue by citing opinion polls showing that 1 in 3 residents of Houston knew someone harmed by Enron's collapse. (Their motion was denied.) Judge Lake has asked that victims who wish to speak at the June 21 hearing let him know by June 7, in case he has to find "adequate seating" for them all. One might suggest the Houston Astrodome.

Skilling joined Enron in 1990 and by 1997 was the right-hand man to the company's smooth-talking chairman, Ken Lay. He became CEO in February 2001. According to the federal case against him, Skilling lied copiously to hide Enron's multitude of financial irregularities and business problems — to securities analysts, investors and the public. With other executives, he manipulated earnings reports, touted the success of Enron subsidiaries that were in fact cataclysmic flops and concealed mounting losses. His principal goal was to prop up the price of the stock, of which he owned hundreds of thousands of shares. (Lay, who was convicted with Skilling, died in July 2006 before he could appeal his verdict.) Weeks after Skilling resigned as CEO in August 2001, but before the scale of the firm's problems were known, he unloaded 500,000 shares for $15 million.

Californians should take a special interest in the Skilling case; one of the businesses that appeared to thrive on his watch — but was quietly losing money — was its electricity trading unit, which eventually was shown to have mercilessly manipulated the state's electric power market during the deregulation fiasco of 2000-01.

Skilling projected the image of a hard-charging, visionary, entrepreneurial executive with a talon-like grip on all facets of the company. That lends irony to his defense to the federal charges, which is to point the finger at his own lieutenant, former Chief Financial Officer Andrew Fastow, who pleaded guilty to various offenses in federal court and accepted a 10-year sentence. Skilling has maintained that Fastow was a master manipulator who snookered him as well as the whole company. "Enron was the victim," says Skilling's lawyer, Daniel Petrocelli.

You can believe that if you wish, but Skilling's jury sure didn't. Nor do attorneys who represented Enron's ruined shareholders. "I never had one iota of doubt that Mr. Skilling was cognizant of everything that was going on at Enron," says Byron Georgiou, a Nevada shareholder attorney who later served on the government commission investigating the 2008 financial meltdown. "He represented himself as the kind of manager who would know."

Skilling has spent tens of millions to overturn his 2006 conviction. Both a federal appeals court in Houston and the Supreme Court upheld the verdict, but they threw out his sentence for a variety of technical reasons. That provides the backdrop for the resentencing deal he cut with prosecutors. Under federal sentencing guidelines, the higher-court rulings would reduce his maximum sentence to 191/2 years. But his proposed agreement would reduce the maximum by an additional two years.

In a certain sense, Skilling has forced the deal by holding a gun to the government's head. Without the deal, according to the agreement proposal filed with Judge Lake, there will be "substantial ongoing litigation" — in other words, Skilling will keep fighting his conviction. He has threatened to challenge his $45-million forfeiture, which could mean years of delay in getting that money to his victims. The agreement points out that the government "has invested extraordinary resources into this case." Cut a few more years off his term, Skilling suggests, and the exhausted prosecutors can walk away and declare victory.

But what does that say for the principle of holding corporate executives to account? Is a 14-year prison term sufficient punishment for Skilling's role in a $45-billion disaster? Given that to this day he blames Enron's fall on other people, plainly he doesn't show even the modicum of remorse that's expected of a common jailbird at a parole hearing.

There's something unsavory about the government agreeing to a deal with a white-collar criminal just to avoid "further litigation," especially when the defendant already lost an appeal all the way to the Supreme Court. That's especially true when he's one of the precious few executives whom the justice system succeeded in making into an example.

Petrocelli told me that the virtue of the sentencing deal is that it "brings certainty and finality to this long, painful process, and gives Jeff the chance to get back a meaningful part of his life."

Should we care, as long as there are Enron investors alive who haven't recovered, and may never recover, from the results of Skilling's machinations?

Skilling has maintained he was unaware of any subterfuges "to conceal liabilities or overstate earnings." But he was a top dog at Enron, the company's CEO. If he didn't know, he should have known; that's what it means to be the person in charge and to be held responsible. If there's a white-collar defendant in the U.S. today less deserving of even a small break, it's him.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.