Enron Conviction: More End Zone Than Milestone

Dan Ackman, 11.04.04, 9:10 AM ET forbes.com

NEW YORK - A federal jury in Houston yesterday convicted four former Merrill Lynch executives and one former Enron executive for a 1999 fraud that helped Enron improve the earnings picture it presented to investors. It was the first jury trial arising from the fraud that led to Enron's rise--the fraud led to the rise; it was the exposure of that fraud that led to the company's collapse in late 1991.

Prosecutors issued a statement calling the trial "a milestone in bringing both an Enron executive and Merrill Lynch (nyse: MER - news - people ) executives who aided and abetted the fraud at Enron to justice." The case was also said to be a chance for U.S. attorneys to try out evidence and strategies that may be used in later Enron (otc: ENRNQ - news - people ) prosecutions. The verdict may suggest a vote of confidence for the government's presentation of proof of fraud at Enron.

Or maybe none of that is true. Maybe one or two events, or even several, are not proof of a trend. First, the jury deliberated for four days--not an extraordinarily long time, but not a quick verdict either. More telling, after a wave of corporate scandals, the general level of white-collar criminal prosecutions is no higher than it was in 2001, the year the Enron scandal came to light.

The crime in question during the six-week trial in Houston was a relatively minor piece of the Enron puzzle. Essentially, the Merrill executives, in order to curry favor with Enron, entered into a sham transaction in which they appeared to purchase a $7 million stake in three energy-generating barges, but in fact had a secret deal in which an Enron-related entity would reverse the deal with a guaranteed profit to Merrill. (Although Merrill executives were convicted, Merrill was not Enron's lead banker; J.P. Morgan Chase (nyse: JPM - news - people ) and Citigroup (nyse: C - news - people ) were far more crucial to the energy trader.) Although the evidence was complex, press reports from the trial suggest the proceedings were fairly smooth.

Some of the guilty were once high-ranking executives at Merrill. Daniel Bayly, 57, was the former head of global investment banking. James A. Brown, 52, was the former head of the firm's project and lease finance group. Dan Boyle, 48, a former executive in Enron's finance division, was also convicted. An Enron accountant, Sheila Kahanek, 38, was acquitted, apparently on the strength of evidence that she actually questioned the legality of the transaction, only to be ignored. Those convicted yesterday join a growing list of felons from Enron, the others all having waived trial and been convicted on the strength of guilty pleas.

On March 1, jury selection begins in the Enron broadband unit conspiracy trial, which will be followed by the fraud prosecutions of ex-Enron chief executives Jeffrey Skilling and Kenneth Lay, assuming there are no guilty pleas between now and then.

While certain high-profile criminal prosecutions have garnered a lot of attention, and while there has been some change in the laws governing financial disclosure, statistics published by the Administrative Office of U.S. Courts indicate no real change in the criminal prosecution of financial fraud.

For fiscal year 2001, there were 7,677 federal prosecutions for fraud of all types in the U.S. along with 99 prosecutions for securities and exchange fraud, one of the least prosecuted varieties, according to Administrative Office data.

The total fell in 2002 and rose in 2003. But for fiscal year 2004 (ending on March 31), there were 7,770 criminal fraud prosecutions and 97 for securities and exchange violations. At the same time, the total number of federal criminal prosecutions increased from 62,870 to 70,132. (The biggest increase was in immigration and weapons and firearms prosecutions.)

It is, of course, impossible to know the overall level of white-collar or corporate crime, so there is no way to compare the number of prosecutions to the number of offenses. It is also possible that the publicity attached to a few cases will have a large deterrent effect on would-be offenders. But judging from the number of cases actually brought by the Justice Department, there is no more reason to fear criminal charges now than there was three years ago when Enron fell.