The Enron legacy

There can be no debate that the collapse of Enron changed the global corporate governance landscape. This article will examine recent and proposed changes to the UK legal landscape and consider whether the publicity around Enron was a catalyst. There has been a distinct hardening in attitudes to fraud and misconduct since 2001, and this climate has legitimised the debate and introduction of proposals that had existed in similar forms for some years previously.

The sentence of 24 years, four months passed down to Jeffrey Skilling is certainly eye-watering for the UK judiciary, but similar sentences handed down in the US for other high-profile white-collar frauds suggest that this is the norm. The size of sentence available to the US judiciary is perhaps the key difference between our two systems. The maximum sentence available in cases of fraud in the UK is generally 10 years, but this is rarely used to the full: the average custodial sentence in cases brought by the Serious Fraud Office (where, by definition, the value defrauded exceeds £1m) between 2000 and 2005 was only three years.

A major development in the fight against fraud in the UK was the publication of the Fraud Review final report in July 2006 by the legal secretariat to the law officers. This document outlines a national strategy and suggests policy reforms in this area. We discuss some of its findings here, but note that they have been out to consultation (the Government's response is due imminently), and so cannot yet be considered final.

The Fraud Review is proposing an increase in maximum sentence available for these offences to 14 years, to be in line with that available for money laundering. Part of the problem in the UK has been the lack of clarity around the offence of fraud in the past, which has made comparability between sentences difficult. This has been addressed by the Fraud Act 2006, which introduces a specific offence of fraud for the first time in UK law.

Further, the Fraud Review has suggested that the UK's judicial process could benefit from implementing a US-style advisory matrix (an offence has a base
level of points, to which further points are added or deducted for aggravating or mitigating factors respectively, and the final tally then converts to a guideline sentence).

The challenge would be the maintenance of judicial discretion, a key facet of our system. The US judicial process is highly publicised throughout (namely, the 'perp walk'), and this puts a large amount of pressure on investigators, advocates and the defendants to any action. For the investigators, there is pressure to get the action to court quickly, for the advocates, there is pressure to get a result and for the defendants, there is the prospect of a large amount of adverse publicity. Arguably, as a result the US has a successful plea bargaining system. This is currently not allowed in the UK, but the Fraud Review suggests that its introduction would be beneficial. Plea bargaining can lead to defendants admitting their guilt and disclosing information to the courts that they would otherwise contest or withhold. In the actions against the Enron executives, the former chief financial officer, Andrew Fastow, and his wife both accepted a plea arrangement, agreeing to provide testimony against the other Enron officers in return for reduced punishment - a 10-year prison sentence and forfeiture of some $24m (£12.2m) (him) and a five-month prison sentence followed by a year of supervised release (her). In this context, it is notable that Skilling's trial lasted only 56 days.

When set against the US custodial sentences and forfeiture orders, the sanctions available in the UK would seem to provide little deterrent. There is a marked imbalance between the rewards and the attendant risks for the fraudster in the UK. However, perhaps more important is the fact that the current sanctions mean that the UK authorities would be largely powerless to enter into any form of plea bargaining - they have almost no chips to bargain with. The conviction of Skilling, after such a short trial, also throws into sharp relief the procedural issues that have dogged the UK's high-profile fraud trials in the recent past. One of the hot topics of debate to emerge is whether such cases are really suitable for trial before jury (although we note that in England and Wales the vast majority are heard before magistrates). This is in fact an area with quite a history: in 1986, the fraud trials committee report recommended that serious and complex fraud cases be tried by a special fraud trials tribunal consisting of a judge and a small number of specially-qualified lay members, rather than a jury. Those in favour of jury trials defend the notion that the jury is anintegral element of the democratic system, and that getting rid of them in these cases is a matter of expediency and, more dangerously, the thin end of the wedge in the creation of a two-tier justice system. The counterpoint to this argument is that New Zealand has operated a similar system to that proposed for some 20 years now, with no adverse effect on the general availability of jury trials. An interesting subtext to this area is the suggestion that judges gain reputations, and if they were to sit alone, the suggestion might be that 'the judge is a man brought in to do a job by the state'. It is also argued that the presence of a jury ensures that the process is more open to public scrutiny, as the case will be presented in a manner suitable for their understanding. However, a judge sitting without a jury would have to provide a reasoned judgment, thus retaining the possibility of public oversight.

Another key area in the debate is on 'dishonesty', a crucial constituent of these offences. Those in favour of juries argue that this question can only be decided by the judgement of the ordinary and reasonable man. The other side argue (rightly in our view) that these cases have increased in complexity to such an extent that the issue can often be clouded by numerous technical and commercial issues. Other parties argue that the debate on juries is essentially misdirected, with the key obstacles to overcome in fact relating to case management issues, attitude to disclosure and the ability of advocates to focus the attention of the court on the key areas of dishonesty.

John Ellison appeared as an expert witness for the crown in the case of Regina v Rigby and others. The jury demonstrated they clearly understood the issues, by taking notes, by asking questions and by following closely. To assist them, John gave evidence as to the factual business and accountancy background by means of a PowerPoint presentation.Notwithstanding these positives, the jury's task was tough one. They were in court for three months and listened to 60 witnesses. It was a long, drawn-out and expensive process. The debate has recently crystallised in two ways. First, the Fraud (Trials without a Jury) Bill is now before Parliament, which, if enacted, will have the effect of implementing section 43 of the Criminal Justice Act 2003. This enables the prosecution in a complex fraud case to apply to a crown court judge to have the case tried without a jury. The Lord Chief Justice must approve the application before it can proceed. Second, the Fraud Review has proposed a pilot study into the establishment of a Financial Court, to be staffed by judges experienced in such cases, and operated on the model of either the Technology and Construction Court or the Commercial Court. The two proposals are not mutually exclusive, and it will be interesting to see how things play out over the next few months.

As a last word on the subject, we note that Skilling's case was heard before a jury. Where does all this leave the expert? In a sense, nothing has changed: integrity, clarity, simplicity and a rigorous focus on the central issues will remain paramount, whether presenting to a judge or to a jury. There has certainly been a recent flurry of activity around fraud in the UK. This agenda has been driven by the fallout from a number of high-profile British cases but has coincided with the collapse of Enron. One cannot help but compare the way that the process has played out in the two jurisdictions.

While it is undoubtedly too simplistic to conclude that Enron was the catalyst - post-9/11, attitudes to law and order have hardened considerably - history may show that it was a catalyst finally to put into effect reforms that have been debated for a number of years. Fraud does large damage to the economy. Sentences, and the probability of conviction in appropriate cases, must reflect this.

John Ellison is chairman and James Maycock a manager of KPMG Forensic in the UK.