John Emshwiller of the Wall Street Journal ($) weighs in today on the defense strategy of former Enron key executives Ken Lay and Jeff Skilling for their upcoming criminal trial, and he is surprised to find that Lay and Skilling are not conceding the government’s theory that the former executives covered up a financial house of cards at Enron:
Four years of investigations and intense news coverage have made Enron a synonym for fraud and sleaze. But when the trial of former top executives Jeffrey Skilling and Kenneth Lay begins Jan. 30, defense lawyers will make a bold argument: Everything their company did was legal.
That approach stands in stark contrast to some other big-name corporate defendants in recent history. Lawyers for former WorldCom Inc. Chief Executive Bernard Ebbers and former HealthSouth Corp. chief Richard Scrushy didn’t dispute that large-scale financial shenanigans had occurred at the companies. They simply argued that their clients didn’t know about the wrongdoing. . .
The government wants to persuade jurors that the case is simply about two rich and powerful men lying to protect their troubled business empire. [Skilling lawyer Daniel] Petrocelli’s task is to show that it wasn’t so simple. The matters at the heart of the government’s indictment involve sophisticated accounting and financial decisions that were fully vetted by Enron’s outside lawyers and auditors, says Mr. Petrocelli.
Read the entire article, which is really one of the best articles about the defense strategy in the case that has appeared in a major newspaper to date. But it’s an interesting dynamic that Mr. Emshwiller — who has covered the Enron scandal from the beginning — thinks that Lay and Skilling’s defense is “audacious.” In point of fact, there is nothing in his article about the Lay-Skilling defense strategy that has not already appeared in the many previous posts about the Enron case on this blog, although I must concede that the WSJ’s readership is a tad larger than that of this modest forum. ;^)
Nevertheless, Emshwiller’s surprise over the defense strategy reinforces just how the conventional Enron story — i.e., that the company was merely a house of cards and that the company’s intrinsic instability was hidden from the investing public by a greedy and deceitful management team — has become engrained in the psyche of American society.
Indeed, as reflected by this discussion over the injustice of what happened to the Merrill Lynch executives in the Nigerian Barge case, many otherwise thoughtful and intelligent people believe that they understand the Enron morality play so thoroughly that they seemingly lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at Enron.
It’s better late than never that Emshwiller is providing a fair piece on Lay and Skilling’s story about what happened at Enron. But the shattered lives and companies that result from the witch-hunt mentality of cases such as Enron and Michael Milken is a stark reminder of the enormous societal cost of criminalizing corporate agency costs rather than allowing responsibility for alleged wrongdoing in such cases to be sorted out in a civil context.
Update: Don’t miss Larry Ribstein’s typically insightful comment on the Emshwiller article, which includes the following foreboding observation for the next executives who are subjected to prosecution in the criminalization-of-agency-cost lottery:
But it’s worth noting that future Skillings may not even have the opportunity to mount a defense like this. The CEO of the next Enron that goes down will be criminally prosecuted under SOX section 906 for signing off on financials when they knew, at least in hindsight, there were defective internal controls, whatever that means. I guess after the next $40 million defense (and God knows how much taxpayer money for the prosecution) we’ll find out.
Tom,
Did he read Ken Lay’s speech last month at the Houston Forum? I guess it’s not news until the journalist writes about it under his byline.
peter h
TK,
I am confused, for I recall exactly the truth of what really happened at Enron. The company went bankrupt as soon as the truth about its false accounting emerged and everyone realized it hadn’t made money (profits) in years. Compare TYCO.
The defense strategy is simply to exhaust the jury. I suspect that every day will be 100s of motions, objections, red herrings. Once the gov’t rests, we will get the kitchen defense–every janitor up will be called as a witness, anyone outside with some limited knowledge will be called, “experts” who would shame the worst PI lawyer in Texas will be called, but Lay and Skilling will never testify. Instead, there will be a constant propaganda campaign to justify their failure to recall their right to testify.
This doesn’t bother me, except as a taxpayer. As I have written before, this all comes about because the governments misconduct in not charging everyone who aided and abetted or who joined the conspiracy.
The government hides the ball from the public viz the truth breadth of its criminal laws by only going after the top dogs. The lack of intellectual honesty in this approach means that the cases have “design flaws” that can be exploited, mostly through propaganda before, during, and after trial. The Internet is a great tool for doing such.
During trial, one follows the sage counsel of Percy Foreman (“try anyone but the Defendant”).
Skilling’s defense
The WSJ makes an eye-popping revelation today ñ Skilling will claim in his defense that ìeverything their company did was legalî — not just that he didnít know what was going on, as discussed here. As Tom Kirkendall, who has
I just watched Enron: The Smartest Guys in the Room. I highly recommend it. It does a great job uncovering the depth of the fraud. http://www.enronmovie.com
That’s interesting. I thought it was shallow and misleading. As a work of fiction, the movie is mildly entertaining. However, it’s factual inaccuracies and misleading statements make it a very poor documentary.
Tom,
Can you elaborate, or point me to a previous blog, that shows that Smartest Guys in the Room was substantially untrue (i.e. a piece of fiction)?
JT:
I saw the documentary, and though I would not go as far as Tom to say it was fiction, I found it very misleading. The movie gave a very shallow presentation of the facts, which in turn will lead the average person, not extensively schooled in finance or accounting, to incorrect or misleading conclusions. Let me give you a couple examples.
For instance, the movie claims that
Enron was able to inflate profits with mark-to-market accounting. This is true, but the movie fails to explain how, and even fails to explain even what mark-to-market accounting (henceforth “M2M”) is. An average person may come away believing that M2M accounting is inherently shady or dishonest, when in fact it’s not.
All M2M means is that the value of an asset recorded on the balance sheet is it’s market price, and any changes in price get counted as profits or losses. There’s nothing wrong with this for liquid assets that have a clear, easily obtainable market prices (i.e. stocks, pork bellies, oil, gold, etc) and the trading of which is part of the company’s core business. All securities and commodity trading frims use M2M. And in fact, for many of the energy futures Enron was trading, it was perfectly appropriate. The problem was that Enron was also using it for highly illiquid assets for which there was no easily verifiable objective value. If there is no objective, easily verifiable market price, the company can practically pull a price out of thin air and claim any appreciation as profit, which is exactly what Enron did.
As another example, the movie blames deregulation for the California power crises without explaining how it facilitated Enron’s rape of the state. This will lead people to the erroneous conclusion that deregulation is inherently bad, when in fact, smart deregualtion has led to benefits in other states.
California’s problem stemmed from the fact that the wholesale price of power was deregulated, but the retail price was not and wholesale buyers of power (i.e. utilities) were prohibited from siging long-term contracts with power generators. Thus utilities were forced to buy power on the spot market, which in turn made it possible for Enron to profit from temporary manipulated power shortages that inflated the spot price.
If the utilites had signed long-term supply agreements (as they wanted to but were not allowed to), Enron would not have been able to profit from short-term spot-price manipulation, and the whole California power crises would never had happened.
One final thing that made me upset. The movie tries to pass off Gray Davis as an innocent victim in all this, but in fact he was one of the people behind prohibiting utilities from signing long-term power supply contracts.