Disgraced former Enron CEO Kenneth L. Lay is dead and cremated, but prosecutors are still pursuing his assets. His widow is doing her best to fend them off. As of mid-August 2007, the U.S. District Court for the Southern District of Texas had yet to rule on the widow's recent motion to dismiss the United States' action. U.S. v. 2121 Kirby Dr., Unit 33, Houston, Texas, No. 06-3335 (S.D. Tex., filed Oct. 23, 2006).
The energy company Enron Corporation, once the seventh largest corporation in the United States, collapsed in scandal and filed for bankruptcy on Dec. 2, 2001. Five years later, a jury found Ken Lay guilty of six counts of conspiracy and fraud. A separate bench trial found him guilty of four counts of fraud and false statement. Ken was expected to be sentenced to 20 to 30 years in prison. But, just weeks after being convicted, before he could be sentenced or even file an appeal, on July 5, 2006, the 64-year-old Kenneth L. Lay died of a heart attack.
Because Ken died before exhausting his appeals, his conviction was "abated," meaning the law views his indictment and conviction as never having occurred. Imagine the prosectors' frustration.
The Department of Justice immediately issued a statement vowing to pursue "all available legal remedies and to reclaim for victims the proceeds of crimes committed by Ken Lay." And so it did. Prosecutors filed a civil forfeiture action against portions of Ken's estate totaling about $12.7 million, specifically a condominium in Houston, Texas; the assets of a Lay family investment partnership (KLL & LPL Investments, LTD); and a bank account worth $22,680.
The interesting legal questions that remain to this day are: if Ken's conviction was abated, why do prosecutors think they can seize this property from his estate? And, if the government contends Ken gained $99 million from his criminal activity, why is it going after a mere $12.7 million?
For answers, we must know a bit about the law of forfeiture. Government seizure of property connected to illegal activity takes two forms: criminal and civil. Criminal forfeiture functions as a punishment; it is a punitive action by the government against the offender. Thus, criminal forfeiture requires a conviction, and usually occurs as part of a sentence, allowing the seizure of any property involved in the offense or any property traceable to such property.
But civil forfeiture serves a remedial function. The legal fiction is that the property is guilty of violating the law -- no conviction or official criminal charge against the owner is needed, which is very convenient for the government, given the abatement of Ken's conviction.
U.S. Code Title 18, Section 981 creates a framework of offenses and procedures governing civil forfeiture. The idea is that any property is subject to forfeiture if it represents or results from proceeds traceable to a violation or any offense that constitutes "specified unlawful activity." It looks like Lay's activities would be covered, as "specified unlawful activity" includes fraud in the sale of securities, wire fraud and conspiracy to commit securities fraud. Practically speaking, this statute indicates that if a person were to use money from wire fraud to purchase a car, that car would be subject to forfeiture under the civil forfeiture and money laundering statutes.
Once the property is recovered, the U.S. attorney general can keep it, transfer it to a number of government agencies, or turn it over for restorative purposes to any victim of the offense that gave rise to the forfeiture.
Prosecutors contend that Ken's condominium, assets from his family investment partnership, and money in his bank account are properties that result from proceeds from his securities fraud. To support this claim, an affidavit from Chad Nunez, an FBI agent who worked on the Enron case, states that Ken generated about $99 million in criminal proceeds from his fraudulent activities involving Enron, but only $12.7 is traceable to Ken's particular assets.
According to Chad, monies Ken received as a result of his fraudulent activities were used to make mortgage payments (totaling roughly $2.5 million) on his condominium and were deposited in his bank account ($22,680). Chad also claims that the Lay family investment partnership received roughly $10.2 million in criminal proceeds from Ken's activities, including trades of Enron stock and transfers from his employment bonus, as well as transfers from Ken's manipulation of his Enron line of credit.
The rest of the money -- all $86.3 million of it -- has been dispersed and cannot be traced to any specific assets, according to Chad.
In civil forfeiture actions, because the action is against the property, the property owner is put in the position of a third-party claimant. Under Texas law, Ken's widow Linda owns the entire communal interest in the properties subject to the forfeiture action.
Linda argues that the government's suit should be dismissed primarily because the United States allegedly has not complied with certain procedural requirements governing civil forfeiture. In particular, Linda contends that the United States has failed to tie the property to the activities. See Supplemental Rules G(2)(f) and E(2)(a).
Linda asserts that the condominium must be "substantially connected" to a money laundering deal or its full value must be derived from proceeds of a crime. According to Harris County records, her condo is appraised at $6 million. The United States suggests that only $2.5 million can be traced to criminal proceeds and has not demonstrated a substantial connection, she claims. Thus, she says, the condominium should not be forfeited in its entirety.
On the issue of abatement, the United States says that although Ken's conviction disappears, the facts on which his conviction was based do not disappear.
It'll be interesting to see what the federal district court in Texas has to say.