Fifth Circuit Enron Opinion--One Prosecution Theory's "Willing Beneficiary" is Another Prosecution Theory's "Victim"

This week, the Fifth Circuit Court of Appeals issued an opinion in United States v. Brown, Case No. 08-20038 (5th Cir. 2009). The defendants in Brown were former Merrill Lynch employees charged with conspiring with employees of failed energy corporation Enron to “park” certain of Enron’s “assets” with Merrill Lynch to artificially enhance Enron’s earnings for 1999. The “assets” involved were power generating barges located off the coast of Nigeria. Pursuant to the scheme, Merrill Lynch would “purchase” the barges from Enron based on a secret side deal that Enron would buy the barges back after six months. Specifically, Merrill agreed to invest $7 million in purchase equity in the barges so that Enron could record $12 million in earnings and meet its forecasts. Enron agreed to repay Merrill its investment with a fixed rate of return, as well as a $250,000 advisory fee, despite the fact that Merrill performed no advisory services (Its sad to say, but much of the story of how the country got in the fix it is in will eventually be laid out in the pages of the Federal Reporter and Federal Supplement.)

The defendants were charged with, and convicted by the jury of, conspiracy and wire fraud with three alleged goals, including defrauding Enron and its shareholders of the “intangible right to honest services.” However, the Fifth Circuit Court of Appeals reversed the defendants’ conviction on the ground that the transactions underlying the case did not fall within “honest services” wire fraud—which was one of the types of fraud charged in the indictment. A panel of the Court recognized that the Enron employees had breached their fiduciary duties in pursuit of earnings goals which Enron itself had imposed and tied to employee compensation. The Court noted that there was “senior executive support” for the barge transaction at Enron. Therefore, the scheme did not resemble the typical kickbacks and self-dealing fraud against an employer which characterizes garden variety honest services fraud.

The government tried to re-try the defendants by redacting the honest services fraud theory from its indictment and alleging that the defendants deprived Enron or its shareholders of “money or property.” The defendants moved to dismiss, which motion was denied by the trial court. The defendants appealed to the Fifth Circuit again. They argued that the government was barred by Double Jeopardy and collateral estoppel from prosecuting them under a money or property theory. The Court noted that Double Jeopardy will bar re-trial where an appellate court reverses a charge based on the fact that the evidence is insufficient, or where a verdict is supportable on one ground but not another, and where it is impossible to determine which ground the jury selected. The Court found that it had not considered whether the defendants might be held liable under a money and property theory in its earlier opinion, or found the evidence insufficient, such as would bar re-trial.

The Court also rejected the defendants’ argument the government could not prove that they defrauded Enron of money or property because the Court had found in its earlier opinion that Enron was a “willing beneficiary” of the scheme. The Fifth Circuit proceeded to assume the wholly contradictory position that it had concluded that Enron was a “willing beneficiary,” and not a victim, for the purposes of honest services wire fraud, but that Enron “was not excluded by [the Court’s earlier decision] as a victim for the purposes [of the money and property wire fraud charges].”