The verdict in the Enron trial may give a glimmer of hope to executives who face insider trading charges.
Jeffrey Skilling and Kenneth Lay, both former chief executives of the defunct energy trading company, were convicted Thursday on 25 of 34 counts of wire fraud, securities fraud, conspiracy and making false statements. But Skilling escaped with just one conviction for insider trading, which brings with it a possible ten year sentence. He was acquitted on nine other such charges.
Legal experts said it's tough to make insider trading charges stick when the transactions aren't focused on a single event but rather occur over a period of time. Part of the problem is standard executive compensation practice.
"So much executive compensation is in the form of stock and stock options that insiders are always trading in their own stocks," said Stephen Bainbridge, a law professor at the University of California at Los Angeles. "The executive can almost always say they possessed knowledge but didn't trade on the basis of it."
The Enron jurors appear to have bought Skilling's testimony that he was selling some $40 million of stock from April 2000 to November 2000 to achieve better diversification in his personal portfolio.
That may be heartening for Joseph Nacchio, the former chief executive of Qwest Communications, who faces 42 counts of insider trading in a Denver federal court after a four-year investigation into accounting fraud at the telecommunications firm. Nacchio's transactions are said to have spanned five months in 2001. He was driven out of the company in 2002 after the stock had plummeted from a high of $64.50 in March 2000 to a low of $1.11 in August 2002. He has denied any wrongdoing.
Prosecutors rarely bring executive insider trading cases to trial precisely because it's so hard to get jurors into the minds of the accused to see what their intent was in selling, Bainbridge said. In the cases prosecutors are able to win, the accused are most often company outsiders who come across undisclosed material information and use it to their advantage.
Ken Lay, who sold shares of Enron back to the company in the months leading up to its bankruptcy filing, was not even charged with insider trading, perhaps because the nature of his transactions would have made it too difficult for the prosecution to prove the charge, lawyers said. Because of how they were structured, his sales weren't technically sales, according to lawyers.
Usually, a smoking gun is the only way to win. "A creeping buildup of bad information isn't helpful" in getting convictions, said Peter Henning, a white-collar-crime legal scholar at Wayne State University. "It's appealing to have that one event."
The poster child for the single-event transaction would be former ImClone Systems chief Samuel Waksal, who pleaded guilty in 2003 and was sentenced to seven years and three months for insider trading and fraud (the same scandal that ensnared Martha Stewart). Waksal sold his ImClone holdings after finding out the government was going to reject an application for a new cancer drug being developed by his company.
Skilling sold $62 million of Enron stock in more than nine transactions from April 2000 to September 2001, according to prosecutors. But he was only convicted for the trade made on Sept. 17, 2001. That was the sale of 500,000 shares of Enron, which netted Skilling $15.6 million.
Skilling had testified that he made the sale on that day — the first day the stock markets were open following the Sept. 11, 2001, terrorist attacks — out of concern about the market's reaction. Skilling testified he "forgot" that he tried to set up a sale of 200,000 shares a week earlier, even though his voice is on a taped recording to his broker to arrange that sale.
But the sale came about a month after Skilling abruptly quit as chief executive of Enron and just weeks before a ratings agency downgrade and bad third-quarter report that sparked the implosion of Enron in late 2001.
It wasn't even a clever trade. Shares of Enron touched a high of $90 in August 2000, right before Skilling started to make some of the sales that didn't get him in trouble. By the time Sept. 17, 2001, rolled around, Enron shares were trading at $32, having lost two-thirds of their value.