The Sky-High Cost of Skilling's Defense
Former Enron Chief Executive Jeffrey Skilling is due to be sentenced on Oct. 23. Judge Simeon Lake III is widely expected to hand down a stiff prison term, 20 years or more for the 19 counts of conspiracy, fraud, filing of false statements, and insider trading on which he was convicted. But there's another decision Judge Lake has to make, one that's been the subject of a bitter battle between the Justice Dept. and Skilling's attorney, Daniel Petrocelli.
Federal prosecutors are demanding that Skilling pay $183 million that they claim he and former Enron Chairman Kenneth Lay earned from their crimes. Petrocelli says that number may be as little as $4 million and in any case he's owed an additional $30 million for Skilling's defense. The fight illustrates a couple of trends percolating through the white-collar crime arena.
Home, Very Sweet Home
One of those trends is federal prosecutors who are getting increasingly aggressive and sophisticated in their hunt for restitution from corporate criminals. The second is the tremendous escalation in the cost of trying the cases. "Before Enron, it was very unusual that every last asset was up for grabs," says John Marquess, president of Legal Cost Control, a consulting firm that audits legal bills.
At the center of the fight is $55 million of Skilling's assets, which the government either froze or forced Skilling to put up as a bond shortly after his indictment. The assets include Skilling's $4.6 million mansion in Houston's tony River Oaks neighborhood, which still serves as his and his wife's primary residence.
It also includes $49 million—most of it in municipal bonds—that Skilling keeps in a Charles Schwab (SCHW) brokerage account. Petrocelli says the frozen assets represent 99% of the former exec's net worth.
Skilling's defense is shaping up to be one of the costliest in history. Before his indictment Skilling had put $23 million into a trust to pay his legal bills. His lawyers also received $17 million from the insurance companies that provided Enron with directors' and officers' liability coverage.
Petrocelli says his Los Angeles-based firm, O'Melveny & Myers, is owed $30 million more, bringing the grand total to $70 million, an amount that leaves other attorneys astonished. "It's magnificent, it's shocking, I'm jealous," says attorney Philip Hilder, who represents Enron whistle-blower Sherron Watkins.
The attorney justifies the expenses saying it took a team of 12 lawyers, 5 paralegals, and a number of temporary staffers to try Skilling's criminal case. Many of them had to be housed in Houston for months. Petrocelli bills his own services at nearly $800 an hour. Some expert witnesses and consultants got fees as high as $600 an hour.
Twelve full-time staffers were devoted just to paperwork, which included more than one billion pages of documents. In addition, Petrocelli notes that he has represented Skilling for five years, including appearances before Congress and the Securities & Exchange Commission as well as work in several civil suits. A case like this, Petrocelli says, "requires a small infrastructure of its own to litigate."
If Judge Lake ultimately denies Petrocelli's request for the additional $30 million, it will not be the first time a court has whittled down the legal fees in a white-collar crime case. In mid-September a judge in Alabama granted only half of the $32 million that former HealthSouth (HLSH) CEO Richard Scrushy claimed he was owed by the company for their defense. Scrushy was acquitted on 36 counts of conspiracy and securities fraud last year.
"There's certainly a philosophy that says you need to ask for every nickel you can justify, because you are going to get cut back," says John Toothman, founder of Devil's Advocate, a legal-bill consulting firm.
In calculating its request for restitution, the Justice Dept. seems to be leaving no money on the table either. The $183 million claim against Skilling includes $43 million in bonuses and stock sales made by Lay, under the theory that he and Lay were co-conspirators. Lay's conviction was dismissed on Oct. 17, as a result of his death from heart failure on July 5. The government could still seek to pursue civil claims against Lay's estate although Lay testified at his trial that he was broke.
In court filings, Petrocelli argues that the government's claims are also overstated because they don't take into account the taxes and costs to exercise the options that Skilling paid. Nor do they take into account the fact that Skilling was acquitted of 9 of the 10 insider trading charges brought against him. "He's convicted on one sale after he left the company," Petrocelli says.
Judge Lake is expected to be extra thorough regarding this sentence because of recent court decisions. Last year, a 24-year prison sentence he gave to former Dynegy (DYN) tax executive Jamie Olis was overturned when an appeals court ruled that Lake had attributed too much of the company's losses to Olis. Lake later reduced the sentence to six years.
Can't Win for Losing
Today's circumstances are a far cry from Petrocelli's previous most high-profile case. In the mid-1990s he represented the family of Ronald Goldman and the estate of Nicole Brown Simpson in the civil suit against O.J. Simpson. To fund that case, Petrocelli raised money from some of his wealthy clients and from a direct-mail campaign that generated $1.2 million.
Petrocelli says the funds covered the cost of trying the case (barely), but not the attorneys' fees chalked up by his firm at the time, Mitchell Silberberg & Knupp. Petrocelli won a $33.5 million judgment against Simpson but he says the recovery that the plaintiffs ultimately got was slim and none of it went to pay legal bills.
Billions from the Banks
Petrocelli's fees in the Skilling case aren't even the biggest haul lawyers are likely to receive as a result of Enron. Attorney William Lerach is representing investors in the company under a sliding scale that reaches 10% of the amounts recovered.
So far, he's gotten settlements in excess of $7 billion from companies that did business with Enron such as Citigroup (C), CIBC (CM), and JPMorgan Chase (JPM). More claims are pending, but a judge may reduce the legal fees when the case is finally wound up. Lerach says he doesn't expect to recover anything from Lay's estate or from Skilling. "We'll get our money from the banks," he says.