Enron Chiefs Guilty of Fraud and Conspiracy

By ALEXEI BARRIONUEVO and VIKAS BAJAJ

 

May 25, 2006

 

New York Times

 

http://www.nytimes.com/2006/05/25/business/25cnd-enron.html?hp&ex=1148616000&en=7b5839ed0afd26ec&ei=5094&partner=homepage

 

 

HOUSTON, May 25 Kenneth L. Lay and Jeffrey K. Skilling, the chief executives who guided Enron through its spectacular rise and even more stunning fall, were found guilty today of fraud and conspiracy in a case that led the parade of corporate scandals in recent years that emerged from the get-rich-quick stock market excesses of the 1990's.

 

The eight women and four men on the jury reached the verdicts after more than six days of deliberations. Mr. Skilling was convicted of 18 counts of fraud and conspiracy and one count of insider trading. He was acquitted on nine counts of insider trading. Mr. Lay was found guilty on six counts of fraud and conspiracy and four counts of bank fraud.

 

The conspiracy and fraud convictions each carry a sentence of 5 to 10 years in prison. The insider trading charge against Mr. Skilling carries a maximum of 10 years.

"Obviously, I'm disappointed," Mr. Skilling said as he left the courthouse, "but that's the way the system works."

 

For a company that once seemed so complex that almost no one could understand its arcane accounting or how it actually made its money, the cases ended up being nearly as simple as could be. Mr. Lay and Mr. Skilling were found guilty of lying lying to investors, to employees and to government regulators in an effort to disguise the crumbling fortunes of their energy empire.

 

In a brief appearance after the verdicts were announced, Paul McNulty, a deputy attorney general, appeared emboldened by the jury's decision. "No one, even heads of Fortune 500 companies, is above the law," he said in a televised statement. "We will continue to pursue relentlessly this type of corruption."

 

For Mr. Lay and Mr. Skilling, the convictions represent a legal judgment about what went wrong with their transformation of a once-sleepy natural gas pipeline company into an energy-trading dynamo that at one point achieved the status of the nation's seventh-largest corporation.

 

For years, Enron's gravity-defying stock price made it a Wall Street darling and an icon of the "New Economy" of the 1990's. But its sudden collapse at the end of 2001 and revelation as little more than a house of cards left Enron and its crooked E as the premier public symbol of corporate ignominy.

 

At Enron, Mr. Skilling was the visionary from the world of management consulting who spearheaded the company's rapid ascent by fastening on new ways to turn commodities, like natural gas and electricity, into complex, lucrative financial instruments.

 

Mr. Lay, the company's founder, was the public face of Enron. Known for his close ties to President Bush's family, he built Enron into a symbol of civic pride and envy here in its Houston hometown and throughout the financial world.

 

The verdicts represent a long-awaited vindication for federal prosecutors, who had produced mixed results from their four-year investigation into wrongdoing at the company. The investigation resulted in 16 guilty pleas by Enron executives, and convictions in a case involving the bogus sale of Nigerian barges to Merrill Lynch.

Last year, however, the United States Supreme Court overturned the obstruction of justice verdict that killed off the accounting firm Arthur Andersen, Enron's outside auditor, blaming flawed instructions to the jurors. And a jury either acquitted or failed to agree on charges in the fraud trial of former managers of Enron's failed broadband division. Five executives are being retried in three separate trials over the next few months.

 

During the 56-day trial, defense lawyers repeatedly criticized prosecutors for bringing criminal charges against Mr. Skilling and Mr. Lay, saying the government had set out to punish the company's top officers regardless of what the facts might be. The lawyers said the government was criminalizing normal business practices and accused prosecutors of pressuring key witnesses to plead guilty to crimes they did not commit.

 

The defense lawyers also complained about a lack of access to witnesses who they contended could have corroborated their clients' versions of events.

The Enron trial, more than any other, punctuates the era of corporate excess and corruption defined by the failure of WorldCom, the telecommunications giant whose bankruptcy following revelations of accounting fraud even exceeded Enron's in size; the prosecutions of Martha Stewart and Frank Quattrone, the technology industry banker; and executive suite scandals at Tyco, Adelphia Communications and HealthSouth.

 

"Trials like this are ultimately cathartic and they often end up marking the end of eras," said Mitchell Zuckoff, the author of "Ponzi's Scheme," a history of the salesman who was found guilty of defrauding investors after World War I. Just like Mr. Ponzi, Mr. Zuckoff said, the Enron defendants "blazed a path by using accounting tricks, their own charm and complex financial measures to create the appearance of something where there was nothing." Mr. Lay, 64, and Mr. Skilling, 52, are the most prominent executives to be convicted in a recent corporate fraud case. Last year Bernard J. Ebbers, WorldCom's former chief executive, was found guilty of orchestrating an $11 billion fraud at that company.

 

Today's verdicts add a somber chapter to the larger-than-life stories of the only two chief executives in Enron's 16-year history. From a dirt-poor background as the son of a minister in rural Missouri, Mr. Lay led a successful career in government in Washington before creating Enron out of two pipeline companies in Houston and Omaha.

In 1990 he hired Mr. Skilling, then a star consultant at McKinsey & Company. He transformed the company with his idea for a "gas bank," which, in its ultimate form, revolutionized the way natural gas was bought and sold in America.

 

Sentencing for Mr. Skilling and Mr. Lay will be at least several months away. Until then, they will be free on bail.

 

Simeon T. Lake III, the judge in the case, will have broad discretion in determining their sentences. Federal judges have imposed harsher sentences on white-collar executives in recent years. Mr. Ebbers was sentenced to 25 years, and John J. Rigas of the cable operator Adelphia Communications was sentenced to 15 years.

Judge Lake is not known for his leniency. Two years ago he sentenced Jamie Olis, a former midlevel executive at Dynegy, to 24 years for his role in a scheme to disguise the company's finances. An appeals court last year ordered the judge to revise the sentence.

 

The guilty verdicts could have limited impact on a spate of civil cases. "Everyone knows that most of their assets have been burned up in legal fees and the like," said William S. Lerach, the plaintiff's lawyer who is leading the charge in the largest civil case, which is scheduled to go to trial in October. "They are not the ones who are going to pay the billions of dollars in additional recoveries that we hope to obtain on top of the $7.2 billion we already have from banks in our previous settlements."

Mr. Lerach added that the civil lawyers will go beyond the "very narrow case" that prosecutors presented in the criminal trial and seek to prove the misdeeds that occurred around "the big multibillion-dollar, multiyear scheme" involving Enron's banks, auditors and law firms.

 

From the beginning, the trial was not what many people expected after revelations of secret off-the-books schemes that earned a small fortune for Andrew S. Fastow, Enron's former chief financial officer, and his cadre of co-conspirators in the finance division. Those transactions were used to artificially prop up the company's profits, but prosecutors never seriously attempted to prove that Mr. Lay and Mr. Skilling were responsible for them.

 

Instead, rather than delve into whether those intricate accounting structures were legitimate or not, prosecutors focused almost exclusively on what they cited as the false statements Mr. Skilling and Mr. Lay made to employees and outside investors.

 

The "lies and choices" theme transformed the case into a test of credibility between the more than half a dozen witnesses from inside Enron who testified for the government and the former chief executives, who argued on the stand that Enron's bankruptcy was not due to criminal behavior but to a collapse of confidence caused by a conspiracy of outside investors aided by the press and determined to profit from the decline of Enron's stock.

 

During the trial, the government called 25 witnesses and the defense called 31, including Mr. Skilling and Mr. Lay. Government witnesses, including the heads of investor relations, Mr. Fastow and former treasurer Ben Glisan Jr., testified that the executives had sanctioned or encouraged manipulative accounting practices and then crossed the line from corporate cheerleading into outright misrepresentations of Enron's financial performance.

 

The lies, witnesses said, were particularly focused on two shaky divisions that were deemed to be the future of the company the retail Energy Services unit that was selling power to large industrial customers, and the Internet broadband division.

 

Mr. Fastow's emotional turn on the stand offered some of the most devastating evidence against Mr. Skilling, and to a lesser extent, Mr. Lay. He said he had struck "bear hug" side deals with Mr. Skilling guaranteeing that his off-the-books partnership LJM would not lose money in its dealings with Enron. Mr. Fastow also described how Mr. Skilling had bought into the idea of using LJM to gin up more earnings to meet quarterly targets.

 

"Give me as much of that juice as you can," Mr. Fastow testified, recounting Mr. Skilling's words.

 

But Mr. Fastow's own admitted history of extensive crimes at Enron was brutally dissected by Daniel Petrocelli, Mr. Skilling's lead lawyer.

 

Ultimately, it was the surprise testimony of David W. Delainey, the former chief executive of Energy Services, that probably paved the way for Mr. Skilling's conviction. Mr. Delainey, who pleaded guilty to fraud, said that Mr. Skilling participated in a decision to shift some $200 million in losses from Energy Services to the more profitable wholesale energy division to avoid having to admit to investors that Energy Services was failing.

 

On the stand, Mr. Skilling offered differing and confusing explanations for the shift. He proved evasive and sometimes forgetful, and he revealed an emotional immaturity that led some to question whether he should ever have been leading such a large company.

 

His abrupt resignation in August 2001, after only six months as chief executive, led to a bout of heavy drinking as a depressed Mr. Skilling watched in horror as the company he helped build edged ever closer to the brink.

 

Mr. Skilling was also undone by his own desperate desire to explain himself to Congress, to the Securities and Exchange Commission, even to CNN's Larry King in the weeks and months following Enron's bankruptcy declaration. His explanation to the S.E.C. in late 2001 for his sale of some 500,000 shares of Enron stock on Sept. 17 that the Sept. 11 terrorist attacks would cause a stock market crash gave him no other avenue of defense. And he told jurors that he simply forgot he had tried to sell 200,000 shares on Sept. 6, despite a tape recording of the attempted order.

 

For Mr. Lay, a key turning point came when Sherron S. Watkins, the former Enron vice president, took the stand, and described how she confronted him with concerns about Enron's accounting. Ms. Watkins said the subsequent investigation Mr. Lay ordered, done by Enron's in-house law firm, Vinson & Elkins, was intentionally limited in scope to conclude that there were no problems.

 

Other issues plagued Mr. Lay's defense, most notably his own testiness on the stand and the sudden illness of his lead lawyer, Mr. Ramsey, a well-regarded criminal defense attorney who was forced to miss more than a month of the trial because of coronary disease that required two operations. Mr. Lay, in part because of his own strained finances, decided to carry on without Mr. Ramsey rather than seek to delay the trial and fight another day.