Fraud perpetrators often use a variety of excuses to alleviate the culpability of their mental states because they know they can't be convicted unless prosecutors can prove their criminal acts were accompanied by a guilty state of mind known as mens rea.
At the end of a five-year investigation, the FBI discovered that Enron Corporation — an American energy, commodities and services company based in Houston, Texas — used a variety of deceptive and fraudulent accounting practices to cover its financial reporting fraud. Corporate officers created the illusion that Enron was making profits in the billions, and its stock soared. Between 1996 and 2000, Enron reported an increase in revenue from $13.3 billion to $100.8 billion. However, the company was actually losing money.
Enron executives, who used insider information to trade millions of dollars in Enron stock, knew the company was hiding losses in offshore accounts. Investors were oblivious. CFO Andrew Fastow and some subordinates created off-book companies to manipulate transactions that provided himself with hundreds of millions of dollars in guaranteed revenue — all at the expense of the corporation and its stockholders. As Enron stock climbed, and as Wall Street continued to promote it, a group of 29 Enron executives and directors began to sell their shares. These insiders received $1.1 billion by selling 17.3 million shares from 1999 through mid-2001.
Enron founder, Kenneth Lay, and CEO Jeffrey Skilling also financially benefited from Fastow's fraudulent schemes in the millions of dollars of stock they sold prior to Enron's collapse.
When Lay was indicted for fraud, he conveniently blamed Skilling, Fastow and CAO Richard Causey for Enron's demise and denied he'd known anything about the accounting fraud. Before his trial, he insisted he was a victim in an interview with "60 Minutes," stating: "I don't think I'm a fool, but I think I was fooled … I can't take responsibility for the criminal conduct of someone inside the company." (See
Enron's Ken Lay: I Was Fooled, by Rebecca Leung, "60 Minutes," March 11, 2005.) (Lay died of a heart attack on July 5, 2006, after he was convicted but before he was sentenced.)
Skilling also insisted he was a victim and claimed he didn't know enough about accounting to detect fraud at the company. "I had no idea the company was in anything but excellent shape," he said in
Enron's Many Strands: The Former CEO: Darth Vader. Machiavelli. Skilling Set Intense Pace, by John Schwartz, The New York Times, Feb. 7, 2002.
Houston, April 4: Former Enron chairman Kenneth Lay
during the midday break of his fraud and conspiracy trial
April 4, 2006, in Houston, Texas.
(Photo by Dave Einsel/Getty Images News/Thinkstock)
'GOOD' INTENTIONS AND MENS REA
Fraudsters, like Lay and Skilling, commonly proclaim their innocence by denying a guilty mental state. In a securities fraud case, for example, management will artificially inflate an organization's stock price and then claim it was only a temporary measure to get through a difficult period and not an attempt to deceive anyone. Or in an embezzlement case, the perpetrator will say he never intended to fraudulently take the money because it was only a temporary loan.
High-level executives and CEOs might try to distance themselves from fraudulent behavior by claiming ignorance to demonstrate they didn't know of any organizational fraud to minimize the chances of possible indictment. They'll argue that subordinates who orchestrated the fraud scheme kept them in the dark.
In most criminal trials, prosecutors seeking a conviction must prove that the defendants showed a "guilty or culpable state of mind" — the legal concept of mens rea. Unfortunately for Lay and Skilling, Fastow testified at trial that his superiors encouraged him to make the financial health of the company look as positive as possible and to avoid public disclosure. So, the jury found that Lay and Skilling knew exactly what they were doing.
In this article, we attempt to show how misconceptions about mens rea can affect our professional skepticism in fraud cases. We'll use examples of the different types of a criminal state of mind to show when a fraudster most likely has given thought to his or her scheme.
(Some criminal laws, called strict liability laws, don't require the identification of any guilty state of mind. These laws say that regardless of an offender's state of mind, the act — such as the sale of alcohol to minors — constitutes a crime and deserves criminal punishment.)
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