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May 26, 2006

Lay-Skilling, Week Seventeen

LaySkilling12J.jpgRemember that point made in the previous week summaries about the predisposition of the leaders on the jury determining the outcome of the trial of the corporate criminal case of the decade?

Well, in a strong indication that this trial was already over after the jury was selected, the jury in the Lay-Skilling trial concluded its relatively short deliberation (less than five days) before the long holiday weekend and returned a verdict of guilty on most counts against the two key former Enron executives. The jury convicted former Enron chairman Ken Lay on all six conspiracy, wire fraud and securities fraud charges, and then U.S. District Judge Sim Lake piled on by finding Lay guilty of four more charges of bank fraud in connection with Lay's bench trial over his self-admitted violation of Regulation U in using bank lines of credit improperly in buying stock in publicly-owned companies. Former Enron CEO Jeff Skilling was convicted on 18 counts of conspiracy and securities fraud, but the jury convicted Skilling on only one of ten counts of insider trading, prompting Larry Ribstein to ask "does this mean that the jury thought he didn't know enough about what was happening to bar him from trading, but that he did know enough to go to jail for fraud?"

Ah, the vicissitudes of criminalizing corporate agency costs.

Most followers of the case agree that the jury's verdict is not particularly surprising. As noted here many times during the trial, the Enron Task Force prosecutors did an effective job of presenting a fundamentally weak case against Lay and Skilling, emphasizing time and time again the real presumption upon which the Task Force's entire legacy case was based -- that Lay and Skilling are rich and Enron collapsed, so they must be guilty of something in connection with Enron's descent into bankruptcy. Despite the transparent nature of that presumption, the harsh reality of defending wealthy business executives is that most jurors are just ordinary folks with nominal experience in complex business matters who readily accept such a presumption. That presumption -- coupled with an overwhelming public bias, particularly in Houston, against anything having to do with Enron -- was in the end simply too much for Lay and Skilling to overcome.

Although I did not attend nearly as much of the trial as many other observors, I read the entire trial transcript, so I have a reasonably good understanding of the testimony and the evidence. It's always a hard call to say when a case as long and arduous as this one may have turned in favor of the prosecution, particularly given the probability that the leaders on the jury were predisposed in favor of the Task Force's case from the beginning. However, my sense is that the Lay-Skilling defense was in reasonably good shape after completion of the Task Force's case-in-chief -- there had been no defining moment during that presentation that would have appeared to compel the jury to convict. Even as late in the trial as completion of Skilling's testimony during presentation of the defense's case, no one incident had occurred that appeared to undermine either side's position in the trial.

However, if there was a defining moment in the trial that sealed the defendants' fate, then it likely came in Week Fourteen during Task Force prosecutor John Hueston's cross-examination of Lay over the use of his company line of credit. Although Lay's line of credit was legal and the company disclosed his use of it in accordance with applicable law, Lay's repayment of the large draws on the line with Enron stock at a time when he was encouraging employees and the market to buy company stock was an apparent contradiction that the jurors could easily grasp.

Similarly, Lay's decision to draw down $1 million on the line five days before Enron's bankruptcy was a disastrous decision for the defense. Although done on advice of counsel, Lay's last-minute draw as the company was sinking into insolvency looked so bad that reference to that testimony by leaders of the jury during deliberations was probably enough to seal any wavering non-leader juror's view on whether to convict. If I'm right on that speculation, then one of the most fascinating "wonder if's" of this trial is whether Skilling would have done better had Lay's motion for a separate trial early in the case been granted rather than denied?

More time for reflection is needed before the true impact of this trial on business interests can be properly assessed, but the initial signs are not good. Beyond the waste involved in such prosecutions, it's hard to fathom how any CEO of a publicly-owned corporation after Lay-Skilling could feel comfortable about doing anything more than making the most banal public statements about the CEO's company. Indeed, little incentive exists for a CEO to say anything publicly about the CEO's company at this point other than "everything you need to know is in our regulatory filings, so go read those." The Lay-Skilling saga will quite likely represent yet another disincentive for business executives running emerging businesses to tap public equity markets, while another quite probable effect is to reduce the supply of innovative business executives who will be willing to take on the increasingly risky CEO position in a publicly-owned company at all. Given that none of that is good for the health of public equity markets, those are decidedly incongruous results for a prosecution that was supposedly premised on protecting investors in those markets.

Even more troubling for business interests is the disingenuous nature of the Task Force's theory of the case against Lay and Skilling. The Task Force pitched the case to the jurors as one in which Lay and Skilling misled unsuspecting investors by touting Enron during a period in which it was a much more troubled than they were really letting on. As Jeff Matthews pointed out during the trial, since when did it become a crime in America for business executives to be overly optimistic about their company?

Any investor who did who did any meaningful investigation of Enron over the final half-decade of its existence easily discovered that the company was a relatively highly-leveraged but innovative business with a low credit rating that was experiencing explosive growth in its trading operation. As such, it was never anything more than a speculative play for investors and, as such, one that should have been hedged. Jim Johnston of the Heartland Institute noted the same thing recently in this post:

[Investors in Enron stock] should have hedged their risk exposure. If they did not, they were like motorists who have accidents while driving without automobile insurance. We generally do not feel sorry for those people. Moreover, not being hedged is an indicator that those folks did not understand Enron’s basic business model and therefore did not deserve the run up in Enron’s stock price in 2000 and 2001. They gambled. For a while they won, but eventually lost. This is hardly any different from going to Las Vegas. Except, the federal government is not being asked to prosecute the casinos for fraud.

Stephen Bainbridge noted a similar dynamic in his initial blog post on the verdict:

One of the curious things about this case is the documented evidence that "a number of people were contradicting Enron's own rosy view of itself long before the middle of 2001." At what point does a lie by top management cease to matter if the market doesn't believe it? Presumably the government convinced the jury that people believed the lies Skilling and Lay told, but did the market really do so?

In short, the Task Force presented the jury with the convenient Enron morality play that has become so engrained in the American psyche over the past five years rather than the more nuanced truth. The morality play is easier to tell and understand, but the truth is much more likely to result in justice.

As far as appeal points go, there are a couple of obvious grounds. The first is Judge Lake's denial of the Lay-Skilling defense team's repeated motions to change the venue of the trial from Houston. Although that issue will be determined on appeal under the formidable abuse-of-discretion standard, the Lay-Skilling team will still be able to mount compelling evidence of five years of relentlessly negative local media reporting on Enron, Lay and Skilling, as well as pre-trial polling showing a jury pool that was overwhelmingly predisposed to believe that Lay and Skilling must have done something wrong. Even during the trial, the Houston Chronicle -- which did a commendable job of blending traditional news reporting with blogs in providing a trendsetting framework for covering an important news event -- featured its lead business columnist on its online Enron news page, who regularly mocked Lay and Skilling in blog posts and columns. If there ever was a case that begged for a change of venue, then this was it.

But the second obvious appeal point is the most troubling aspect of the entire case -- the Task Force's unprecedented designation of over 100 former Enron executives as unindicted co-conspirators with Lay and Skilling. Never before has such a wide-ranging conspiracy been alleged in a federal prosecution, and the transparent Task Force motive for doing so became apparent as the prosecution essentially punted on presenting any meaningful case involving a conspiracy of those unindicted co-conspirators during the trial.

The massive unindicted co-conspirator designation was vitally important to the Task Force's prosecution for two reasons. First, as noted in this post early in the trial, the designation allowed the Task Force to introduce hearsay statements of those unindicted co-conspirators through the testimony of the Task Force's cooperating witnesses. The Task Force elicited such hearsay statements from its cooperating witnesses frequently during the trial.

But even more importantly, the designation of unindicted co-conspirators effectively precluded dozens of former Enron executives with exculpatory testimony for Lay and Skilling from disputing those hearsay statements or even testifying in the trial because of the threat that a waiver of the Fifth Amendment privilege against self-incrimination would likely lead to criminal charges against such a witness if he or she were to testify contrary to the Task Force's theory of the case. As noted in this earlier post, the Task Force has used that dubious tactic in each of its Enron-related prosecutions and -- as with the other cases -- the impact on the Lay-Skilling trial cannot be underestimated.

The Task Force presented the jury with testimony against Lay and Skilling from around 15 or so cooperating witnesses who were former Enron executives. Inasmuch as the Lay-Skilling defense was hamstrung from calling former Enron executives who would have provided exculpatory testimony for the defendants, the jury could have reasonably concluded that the testimony of the former Enron executives who were cooperating with the Task Force was credible because that testimony was not counterbalanced with exculpatory testimony from other Enron executives. For example, what would the impact have been on this jury if several former Enron executives had testified that key Task Force witness Ben Glisan had repeatedly lied during his testimony? At least one juror in post-trial comments noted that the jury relied heavily on Glisan's testimony against Lay and Skilling. Would that reliance have been as great had Glisan's testimony been challenged by not just the defendants, but numerous other -- and potentially more credible -- former Enron executives?

As noted in last week's weekly post, reasonable people can differ over the issue of whether criminalizing corporate agency costs is sound public policy. However, there is simply no serious question that the Task Force’s effective preclusion of exculpatory testimony for Lay and Skilling from this trial is a serious affront to the principles of justice and the rule of law upon which our criminal justice system is based. As Sir Thomas More reminds us, "do you really think you could stand upright in the winds that would blow" if such a prosecution tactic were turned on you?

The parties and their attorneys in this titanic struggle now take a well-deserved breather for a couple of months until the sentencing hearing in early September, a week or so after Labor Day. Prosecutors Sean Berkowitz, Hueston and Kathy Ruemmler all performed effectively during the trial and carved a path for further success within either the Justice Department or a more lucrative job in private practice. On the defense side, lead Skilling attorney Daniel Petrocelli and his entire O'Melveny & Myers team were brilliant in defeat, and Lay attorney Mac Secrest did an admirable job under extremely adverse circumstances in picking up a substantial part of the Lay defense when Mike Ramsey was incapacitated by health problems during the trial. On the bench, Judge Lake was his usual steady presence in handling the unwieldly case and he now becomes the focal point as the case turns to its sentencing phase.

While operating under mandatory sentencing guidelines, Judge Lake was reportedly not pleased with what he considered to be his obligation to sentence former Dynegy mid-level executive Jamie Olis to a draconian 24-year prison sentence. Shortly thereafter, U.S. District Judge Ewing Werlein rejected Task Force calls for severe 15-year sentences against the four Merrill Lynch executives who were convicted in the currently unraveling Nigerian Barge case, and Judge Lake will almost certainly be confronted with Task Force requests for even longer sentences against the 64-year-old Lay and the 52-year-old Skilling. Nevertheless, the sentencing guidelines are no longer mandatory, so Judge Lake will have more flexibility in fashioning punishment for the two men than he previously believed that he had in the Olis case. In thinking about what Judge Lake ought to do in this case, I cannot improve on Larry Ribstein's observation in concluding his post on the Lay-Skilling verdict:

Many people think that there was so much loss associated Enron that the guys at the center of it must have been villains. But they weren't villains. The jury is saying they weren't even insider traders, as if that would have made a difference. They lost as much as anybody, and that's what drove them to lie, if they did lie. This doesn't make them saints, but it should make even the most hardcore antibusiness types queasy with the denouement of this tragedy. Locking these guys up for pretty much the rest of their adult lives for being unable to face the fact that their dream had ended is not the way a civilized society would deal with this case.

Speaking of that supposedly civilized society, amidst the media barrage over the Lay-Skilling verdict, two men and their families in a much different Enron-related case cling to the faint hope that the jury in that case can ignore the rabble and render a fair verdict. A faint hope indeed.

Posted by Tom at May 26, 2006 4:00 AM |


Sean Berkowitz, the lead prosecutor in the Enron case, said Thursday that "The eyes of the world have been upon this Houston courthouse for the last six months. What they have seen is our justice system at work." Well yes, Mr Berkowitz, they have been, and some of us who practice law in other parts of the common law world, like Australia (I am a criminal lawyer in Australia) have not liked what we have seen.

In Australia, and in the UK for that matter, both countries that use the same common law justice system principles as the US, some of the key tactics used by the Enron Taskforce would not have been allowed. In particular, I refer to the practice, used extensively in the case against Mr Lay and Mr Skilling, of cutting deals with key witnesses such as former Enron officers, Andy Fastow and Rick Causey, in which they agreed to give evidence against the defendants in exchange for reduced sentences.

This process, plea bargaining, is offensive because it inevitably taints the evidence given by those who accept the bargain offered by the prosecution. Plea bargaining nearly always leads to witnesses deliberately coloring their evidence to suit the prosecution case. Not only because the prosecution wouldn’t strike a deal with a witness if they didn’t know what they were going to say in evidence, but because the witness themselves is essentially acting under duress. He or she knows that if their evidence doesn’t materially assist the prosecution then the deal they have struck will come undone and they will face the full wrath of the prosecution themselves.

The US justice system can be a fine exemplar of fairness but in the way the Enron Taskforce went about their prosecution of Mr Lay and Mr Skilling, this wasn’t one of those occasions.

Posted by: Greg Barns at May 26, 2006 6:32 AM

"Despite the transparent nature of that presumption, the harsh reality of defending wealthy business executives is that most jurors are just ordinary folks with nominal experience in complex business matters who readily accept such a presumption." Nice. We're all too simpleminded to understand the obvious. Is that your position? Tom, we have disagreed about your take on white collar crime for a long time. I'm guessing you also think Sim Lake is simpleminded and doesn't understand what bank fraud is. At some point "pushing the envelope" becomes "crossing the line." The jury felt these two men clearly crossed the line. You believe the people are too simpleminded to understand the law. The law is not something that is crafted by the intellectual elite and imposed upon the great unwashed masses. The law is of the people, by the people and for the people. In this case, the people have spoken clearly. The intellectual elite may not approve and may still hide behind theories of "agency costs" but as it stands now, the people have spoken.

Posted by: charles at May 26, 2006 9:00 AM

Although I think that Mr. Lay and Mr. Skilling are guilty of bad management and misrepresenting Enron as a logistics and not a trading company, I am disappointed about the verdicts. How can Mr. Skilling be guilty of conspiracy, but not guilty of insider trading? Why didn't Mr. Causey, Mr. Lay, and Mr. Skilling have separate trials like rapists and murderers? And the plea deals?

I read where there was a proposal to compensate people who lost money with Enron. Does that mean if I had a $1000 of my portfolio in Enron stock I get it back?

Where is that CEO- he's next!!

Thank you for your insight and links.

Posted by: Kenneth Stanley at May 26, 2006 9:12 AM

Charles, inasmuch as many of the jurors candidly admitted after the trial that they did not understand many of the complex business matters presented during the trial, your suggestion that my comment was patronizing of the jury is misplaced.

Frankly, I don't know where you are coming from in regard to your comment about Judge Lake. As far as I can see, he simply rejected Lay's defense that he was negligent in violating Reg U. Even Lay did not deny that he intentionally used the lines of credit in excess of the specific terms of the loan agreements regarding purchase of stock.

Finally, your attempt to twist the Lay-Skilling morality play into a struggle between the people and intelligensia borders on the absurd. Indeed, a much better case can be made that your morality play is more harmful to the "unwashed masses" by perpetuating the myth that those folks should be directly investing in companies such as Enron in the first place. Indignant self-righteousness plays well in the media, but doesn't count for much in reasoned discussion.

Posted by: Tom K at May 26, 2006 9:30 AM


You mention the possibility that Week 14 was the turning point because of the cross of Lay vis-a-vis his line of credit.

It seems that many in the media are seizing on some comments by the jury about the damaging testimony of the two defendants.

My question is about defendants'decision to testify. Is there any statistical data that you know of in regard to the decision to put them on the stand? Was it an error to have them testify? I know that in the past the sentencing guidelines essentially eliminated the incentive to testify. But doesn't the jury always suspect wrongdoing when the defendant chooses not to testify?

Posted by: Dan F at May 26, 2006 10:02 AM

Tom, while the educated elite may see their station in society is to craft the laws to hand down to the great unwashed masses in theory the great unwashed masses, via the jury system, are the ones who ultimately decide what is and what is not the law. In this case, the great unwashed masses have spoken. Ken Lay violated Reg.U (as well as a number of other statutes). Judge Lake did not consider the violation of Reg. U as an "agency cost". The Enron Taskforce played hardball simply because they knew the defense would push just as hard to convince the jury that Lay and Skilling were being wrongly persecuted. Sim Lake didn't buy Ken Lay's defense in the bank fraud case and the jury didn't buy the defense claims on the other charges. The one who has to be smiling now is Andy Fastow. He knew from day 1 that a 10 year plea was a bargain, considering what he could have received at trial. While attorneys may scream at the perceived unfairness of this case, the people have spoken. The law is now clear and others who may act as Lay and Skilling should take note. Those who disagree with the law as it now stands have the task of changing the law. Good luck. The problem here is not that the verdict is fundamentally unfair. I think the problem you are having with this verdict is that the people have extended the law past where you (and probably others in the legal community) feel it rightfully should be. I find it somehow satisfying that the legal community is up in arms over the fact that the people have gained control of the legal system. God help us when the educated elite lose their grip on the legal system and the people begin to exercise control. Or maybe not.

Posted by: charles at May 26, 2006 10:10 AM

Dan, the statistical evidence that I've seen on white collar defendants testifying is not particularly persuasive because each case is so different in nature (take, for example, the difference between the Lay-Skilling case and the Ebbers case, and the differences between those cases with that of Tyco).

On a purely anecdotal basis, my experience is that white collar juries generally expect to hear a white collar defendant's story and that it is extremely damaging for such a defendant not to testify. There are obviously exceptions to that general rule, but not many.

The bottom line is that I don't think either Lay or Skilling had any choice but to testify. Perhaps it would have been a closer call if the Enron executives who would have provided exculpatory testimony had testified, but my sense is that they probably would have testified even if that had occurred.

Posted by: Tom K at May 26, 2006 10:14 AM

So, Charles, in your tidy morality play in which the unwashed masses overcome the tyranny of the intelligensia, is it O.K. for the government to prevent the jury from hearing all the relevant testimony, particularly from those who would provide exculpatory testimony for the defendants? Or does the end justify the means?

Posted by: Tom K at May 26, 2006 10:48 AM


You seem to think the convictions will have a negative impact on CEO behavior. I'm curious about three facets of your perspective. First, if Lay and Skilling knew this was a possible outcome what innovations would they have foregone? Second, what innovations are other companies choosing to forego because of a fear of prosecution? Finally, is there anyone who has elected to forego a CEO position because of a risk of prosecution for innovating and creating value?

Thanks for your perspectives.


Posted by: Sander at May 26, 2006 12:22 PM

Sander, with regard to the innovations, Skilling and Lay already admitted during trial that the SPE's were a mistake -- the financial benefits of the SPE's to Enron did not turn out to be commensurate with the disruption that they caused with Enron's management. Those are likely the prime innovations that they would foregone.

In terms of the innovations that other companies have foregone as a result of Enron, the two primary areas that have slowed considerably are structured finance transactions to hedge risk and trading of natural gas and other products that Enron facilitated, although the latter market has made somewhat of a comeback over the past couple of years. These structured finance transactions and trading operations allowed companies to hedge risk in creative ways, and the pullback in those areas since Enron has been quite costly to American business.

Finally, although I don't know anyone offhand who has declined a public company CEO position because of the higher risk involved, I don't think there is any question that it is occurring widely. The enormous growth of privately-owned hedge funds over the past five years is formidable competition for public corporations in regard to executive talent. My anecdotal experience is that the Enron and related scandals are also having a deleterious effect on the number of people who are willing to serve on boards of publicly-owned companies.

Posted by: Tom K at May 26, 2006 1:28 PM

Speaking as a CPA, structured finance accounting can hardly be called innovation. A light-bulb is innovation. The internal combustion engine is an innovation. Integrated circuits are an innovation. The only people who call structured finance innovations are the bankers who make a lot of money on it and the executives who use it to shade the truth when speaking to investors.

CEO's have gone to PE backed companies but not because of fear of being in a public company. They go there because that's where the money is. See the recruiting statistics at the major B-schools. It's also a superior arena for restructing out of the public eye and accomplishing real change.

I'm reticent to believe something is occurring widely if no one can name an example. Aren't you?

Posted by: Sander at May 26, 2006 1:40 PM


In addition to the points you made in response to Sander's question, I would like to add the following:

1) I have read & been told by European business people that SOX & the destruction of Andersen caused companies to decide against listing on NYSE or NASDAQ. Some companies already listed are considering de-listing.

2) I read recently that an unusual number of corporations are planning to go private, rather than deal with the problems of public ownership.

3) SOX has chilled willingness to serve on corporate boards not only in the U.S. but is also a problem in Canada, according to a Canadian securities lawyer of my acquaintance.

4) I have read that CFO positions are considered less desirable, & CEO positiosn to a lesser degree.

5) Many, many CPAs are leaving public accounting and many in public accounting want nothing to do with audits. I know of several CPAs in public accounting who, having been told they will make partner within the year, are wanting to make a career change to avoid the liabilities of being a partner.

6) Just read an article that there is great concern in the EU, Japan, etc. that one of the Final Four international accounting firms might collapse, with huge adverse effects for the business community. All the major firms face huge liabilities for failed audits.

Posted by: Mary Ashby Morrison at May 26, 2006 2:05 PM

Sander, we may be talking about two different things in regard to structured finance. I'm talking about such well-known and legitimate structures as pre-pay forward contracts and other derivative transactions that have been common hedging devices for centuries. You appear to be talking about issues related to accounting for such transactions or perhaps Enron's SPE transactions, which is a different issue. There is no question that the structured finance transactions provide a valuable means by which companies can hedge risk and create more wealth for owners. I'll leave the issues relating to the accounting for such transactions to the experts in that area.

I think your explanation for why the execs are going to PE is the same as mine. PE is generating more money now precisely because public equity is becoming a less attractive alternative. The Lay-Skilling saga is certainly a part of the reason for the elevation of PE over public equity.

Finally, no, I don't think that my inability to name an exec who has passed on a public company job reflects anything other than I'm not in the business of recruiting executives for such positions. I do have several clients and friends who serve or have served on public company boards (given my line of work, I do not accept such offers), and all of them to a person confirm that the board membership is not as attractive as it was when they undertook it. In fact, not one of them at this point is even likely to continue their membership past their current term. The ones whose companies have been involved in executive searches have also commented that the market is tough right now for top-flight executives.

Posted by: Tom K at May 26, 2006 2:36 PM

This may be out of sync with this site, but here’s my take on the Enron story, and I’d be interested in you comments:

The fundamental process is myth. The dynamic is scapegoating and mob violence. To see the collective outpouring of unity and celebration over the verdict is all a grim reminder of how thin is the veneer of civilization.

That jurors could sit for weeks, hearing the "real presumption" of the prosecution, and come away apparently unencumbered with critical thinking speaks directly to the power of myth. Setting aside the virtual impossibility of such a huge conspiracy, abetted by so many people both inside and outside the company, the jurors seemed content with a prosecution that dealt primarily with petty incivilities like Photofete, which cannot conceivably explain the process of Enron crumbling. The Myth has been so oft repeated and so well market tested. Why bother to even argue?

Here is the dynamic, which the Myth obscures and justifies: People experience loss and fear and anger, so they find a scapegoat, most conveniently someone who is lonely, visible, and vulnerable – like a CEO. That Lay and Skilling are greedy and arrogant, like the rest of us, makes the mob (for such it is by now) all the more bloodthirsty. It gets what it wants: a public execution and catharsis. This is not the way a civilized society operates….

This unfolding Myth has become a shame of the nation: from the Senate hearings to the Hollywood story to the Justice Department "victory". It was sobering to realize that anyone could sit and watch the Senate hearings without feeling dirty about our government. As the pins fell, from the destruction of Arthur Anderson on, too much was invested, wasted and destroyed for us as a people to every admit the vacuity of the fundamental premise.

This premise, the conspiracy theory at the root of this myth, belongs in the theater beside the Da Vinci Code, not in our halls of government. Why is our justice system dealing in this tripe? Has it become the fourth estate of media?

Posted by: mwb at May 26, 2006 3:08 PM

MW, yours is an insightful analysis. Thanks. I made a similar comment in this post on Week Thirteen of the Lay-Skilling trial.

Posted by: Tom K at May 26, 2006 3:17 PM


I want to thank you one last time for your courage in speaking out with measure and with reason against the howling mob.

Amid all the repulsive and inhuman (or perhaps all too human) braying yesterday, one man posting to the Wall Street Journal noted that 10% of its readers in an online poll voted that they did not agree with the jury's verdict. Where were their voices, he wondered unselfconsciously? Why had they not agreed with the 90% who did?

For me, it was a reminder that witchhunts happen in part because oppressed minority opinion fails to muster the courage to speak up and defend the indefensible.

Posted by: Ben Edwards at May 26, 2006 4:08 PM

I agree with mwb.

The mob hysteria about the Enron case says far more about America than it does about wrong-doing at Enron.

There is solid proof that Fastow, Kopper & Glisan committed fraud, aided & abetted by some of the world's major banks. The proof was found at the various banks which signed documentation that they were "investing" in Enron's SPEs (none of which were clients of Andersen) when in reality the banks accepted Fastow's oral promises that Enron would repay the banks. The banks booked these same transactions as loans & documented the fact that they knew that the oral side agreements were being hidden from Andersen.

There does not appear to be proof that Lay & Skilling were in on the fraud, although they might have been. Thus the convictions were based solely on the accusations of the Enron Task Force corroberated by Fastow & others who had everything to gain from lying on behalf of the Enron Task Force. The government's witness tampering was also instrumental in the convictions.

None of this is surprising when you consider the Andersen case. Knowing that Andersen was not the auditor of the entities where the frauds were committed, the Department of Justice decided to destroy Andersen anyway. Because it was perfectly legal to shred duplicate copies of old memos, old magazines and requests for charitable contributions (as David Duncan admitted doing) before receipt of a subpoena, the DOJ charged Andersen with "witness tampering" for politely asking employees to follow a routine document retention policy.

The statute re witness tampering requires that the govt. prove "knowingly" "corrupt" persuasion to withhold materials from an "official proceeding". Yet Judge Melissa Harmon (echoing the theory of the prosecution)instructed the jury that "even if Andersen people honestly and sincerely believed that their conduct was lawful, you may find them guilty." Further, the jury was instructed that an "official proceeding" included the performance of "any investigative activity, formal or informal, of any agency, that may be commenced at any future time for any reason, whether or not the actor had any reason to believe that specific agency was contemplated."

If those instructions weren't broad enough to insure conviction, Judge Harmon told the jury that they weren't required to agree that any one individual at Andersen did anything wrong in order to convict Andersen. Plus the jury need not determine guilt beyond a reasonable doubt in order to convict. As in the Lay/Skilling trial, the Enron Task Force threatened Andersen witnesses.

What is surprising is that the rule of law has been abandoned right in front of our faces & yet people applaud. But then the mobs also cheered Christians being thrown to the lions, the Salem witch trials, public executions, etc.

Leaders who abuse power by inciting mob hysteria do so because it suits their purposes -- in this case, hiding the fact that Enron political contributions bought Enron an exemption from investor protection laws. Scapegoating also demonstrates a fundamental lack of respect for those so easily manipulated.

Posted by: Mary Ashby Morrison at May 26, 2006 4:58 PM

The jury system is civilization. Kings' men deciding alone (judges) is not. So this was not some fire-lit business lynching we saw.

The footnote to a court decision that allowed corporations to be treated as living persons was pernicious but no doubt remains ineradicable. If we had 100 years of consistently anti-business court decisions, which under the Bush judiciary we of course will not, that might be enough to restore the balance between serf (citizen) and master (corporation).

The trope of the naked and defenseless CEO being stalked by the slavering and envious mob may play well at Bohemian Grove or in the Petroleum Club, but it's just the classic comic book version.

The Skilliinf/Lay jury was not making a sociological or psychological statement, it was saying, "Yes, there was mismanagement and chaos and normal market volatility, but there was criminal intent to defraud as well." If the jury agrees with the government in a criminal case, why should there be special exemptions for businessmen from odium and contempt?

Fastow was convincing as someone who set up the special entities at the behest of management. That he also stole was their poor oversight, not his motivation. Or so the jury has ruled. And if the loot-em shoot-em style of business innovation exemplified by Enron moves to Germany, I think we can just wish them luck with that rather than trying to keep those folks in business over here.

Incidentally, far too little corporate behavior has been criminalized, from misuse of the bankruptcy laws to various forms of usury. My ultimate wish after I die is to be reincarnated as a human being with all the privilieges of a corporation. (Expensing food, depreciating my sinews, love it!)

Posted by: jamie from st thomas at May 26, 2006 5:51 PM

Ben, thanks for the kind words and for all your guidance over the years. The Enron morality play is firmly engrained now in American culture. As we saw in the Lay-Skilling prosecution, any attempt to challenge the morality play is met with prosecutorial derision and appeals to the festering cauldron of resentment that breeds such myths. That is not an admirable reflection of American culture.

Posted by: Tom K at May 26, 2006 6:05 PM

I dont blame Americans for having "hysteria". I am tired of seeing these so called great businessmen get paid enormous amounts of money while funding their pipe dreams with public money. My illegal landscaper has a better business model than Enron and probably made more money. (He doesnt need Andersen CPA's to advise him either) The bottom line is that again and again we see CEO's blow millions and millions of investor money without anything to show for it. Look at Calpine - another example of a CEO getting paid tons of money for nothing. I agree that CEO's with innovative visions must be able to proceed without fear of prosecution BUT they must shoot straight if they are going to do it with the public's money. AND it is the job of the Auditors to ensure they are shooting straight. If a CEO wants to gamble, lie, and live lavishly on the company's dime - they should do so at a private company.

A last comment regarding Andersen - Mary can preach all day long but Andersen did not do its job at Enron. I dont care which entities it was hired to audit or who's opinions they relied on etc etc. Two of the main pricinples of accounting are 1) Adequate Disclosure and 2)Conservatism - Andersen failed in both and the investing public paid for it. These principles should be applied at all times no matter how important the client. If a much smaller firm had conducted themselves similarly, they would have been slammed without hesitation.

Posted by: Mike at May 26, 2006 6:29 PM

you wrote,

"it's hard to fathom how any CEO of a publicly-owned corporation after Lay-Skilling could feel comfortable about doing anything more than making the most banal public statements about the CEO's company. Indeed, little incentive exists for a CEO to say anything publicly about the CEO's company at this point other than "everything you" need to know is in our regulatory filings, so go read those."

I would have to disagree on two points. First, what Ken Lay and Jeff Skilling were doing wasn't just cheerleading or try to give the most optimistic light to the company's status at the time. They were following a very risky to reckless business model to start with, and their revenue was not what it appears to be in their pitches to investors and in their SEC filings and quarterly reports. I think there is a line between a CEO showing confidence in a company's services or product, and a CEO/COO who shows confidence in a product to service that was either non existent to minimal success. Two examples for products and services, that were far opposite of their public perception Enron Broadband, and Project Braveheart. The other product/service was Enron Online, which was actually a money loser instead of the money maker for the company, no matter the hype and PR stated at the time.

Second, a CEO/COO trying to evade or obscure cash flow reports when reporting earnings, hiding losses when transferring known losses from one division to another like what happened with Enron Energy Services, clearly shows to me at least that fraud was involved with the corporate officers. If Enron was actually showing that its earnings was in some ways in parity to their cash flow, for example revenues from their pipeline network, then I don't think Ken Lay or Jeff Skilling would not be indicted and convicte in a criminal court. I don't have a problem with M2M accounting, or SPEs, but I do find troubling the layers upon layers of deception to hide obvious and serious losses to continue to maintain loans and keep the stock prices rising.

If there is any exculpatory evidence for Ken Lay and Jeff Skilling; I believe it is that the first people they deceived were themselves. I don't think they realize that they cross the line between creative management to fraud and theft. However fraudster don't have to have slickback hair and talk fast, or use a ponzi scam to break the law. A PhD in economics and/or a Harvard MBA does make someone immune to fraud and outright theft. I think CEOs really don't have to worry because they aren't deceiving people in buying a fraudulent products and/or services that Enron was doing since 1997 after the departure of Rich Kinder.

Posted by: Ted W at May 27, 2006 7:15 AM

Tom, great insight.

First I must say that I didn't own any enron stock.

This case, however important, from an unbiased view, must be seen as fixed.

This reminds me of the driver that when driving through a green light is faced with either speeding up to avoid being hit by a driver that missed the red light, or not. Then ending up with a speeding ticket.

Is the driver better off with the ticket?

Probably, it he gets a fail trial.

Who knows. Maybe the case was so stacked that it was intended to make it easier for them to appeal?

Posted by: Kevin at May 27, 2006 9:04 AM


The verdict and its speed in contrast to your daily spin shows how little you understand about morality, crime, criminal law and the criminal justice system, and our society.

Lay and Skilling were arrogant crooks. Please join me in writing to the judge, asking that each gets the maximum sentence allowed by law.


Posted by: Moe Levine at May 27, 2006 9:52 AM

Moe, good to hear from you again.

By the way, your strained declaration regarding the connection between the verdict and my lack of understanding of morality, crime, our system and society reflects that the pot is calling the kettle black in regard to the adjective that you use in your following sentence in characterizing Lay and Skilling as crooks.

Posted by: Tom K at May 27, 2006 11:06 AM

All of the Enron saga from beginning to end is not as complicated as many may believe. It's not a tragedy. It's not a comedy. It's simply life. Not the life we want but, sadly and gladly, the life we get.

We are so feeble and ridiculously pompous when we try to explain how an Enron could have happened. It happened because of many things: mainly the love of greed, lust, power, need, esteem, money, work, friendships, love, etc. In short, all the real reasons behind the public pronouncements of same.

The developed world, at present, rewards the hard-charging person who takes a cue how to act from those he or she considers successful. Sadly, these "mentors" are not wholly good men and women -- they are accomplished, driven, successful (at least monetarily), etc. But, they are also sadly mistaken that they have really and truly amounted to something that will be rightfully hailed as righteous.

One can argue that much good comes from all of this regardless of the short-term consequences. I argue the opposite of this while allowing that capitalism is the only economic structure to use to well run one's economy. Indeed, among the genuis of capitalism is that it is fair but also cruel--for what would Heaven be without hell?

We make our way in this world with the majority only briefly considering the truths of the right way to live. Most all of us are too weak to live the correct way and so live under so-called truths that will be shattered in time. Let's all please remember that all on earth -- ALL ON EARTH, EVERY LIVING THING, EVERY THING WE'VE BUILT -- will one day vanish as meaningless when compared to the eternal truths of Heaven.

Ken Lay, Jeff Skilling and others sadly were imbued with certain skills that enabled to "get ahead" in the world without first having to become real people of worth.

Let's take the cases of Ken Lay and Jeff Skilling. These two guys considered themselves just a bit brighter, just a bit more able, just a bit more "with it" than others. And, over time, both of them felt that they were part of the big-time upper crust of the world. Sadly, they feel they are better than you and me. They feel the "front row", the first-class life, the everything that access, money, fame, power, etc. is rightfully theirs. Why? Because, if not them, then who deserves all this finery the world has to offer?

The sad thing for all the world is that we are so deluded in believing all these things -- money, power, access, fame, etc. -- are indeed what makes for a full life, what makes life worth living are indeed fool's gold and so many lives with bright minds are wasted chasing after these "things" ... playing a game that can only be won by not playing it. For it not in these "things" where a fulfilling and rich life reside.

All of us are at once both ridiculously stupid and wonderfully magnificent -- one being realized daily and the other only residing in potential.

May God bless us and forgive us of not well using our talents for Him alone. We are so crafty that we can't see the forest for the trees. I pray that more good men and women have the courage to live a life worthy of God's praise.

I hope Jeff and Ken and all of us involved in Enron and other scandals, events, happenings, etc. around the world learn from these events and to humbly go about our business serving others and Him as disciples of Christ.

Posted by: Gus Wortham at May 27, 2006 12:26 PM


I used to practice law briefly in the UK before moving to a different occupation in the commercial field (now working in Japan). Hardly a day has passed without me being thankful for no longer being involved in the law (having said that, I have just put the phone down after a call from our lawyer in London, so perhaps I should have said 'directly involved'!).

In common with another poster above, I also wanted to comment on your remark "it's hard to fathom how any CEO of a publicly-owned corporation after Lay-Skilling could feel comfortable about doing anything more than making the most banal public statements about the CEO's company. Indeed, little incentive exists for a CEO to say anything publicly about the CEO's company at this point other than "everything you" need to know is in our regulatory filings, so go read those."

What is wrong, I wonder, with the CEO just telling the truth? His duty to his company is as much to protect existing shareholders as it is to attract potential future ones. He should not varnish or disguise the truth or make the company appear in a better light than it actually is. Sadly, that does not appear to be how big business operates.

Posted by: Foddy Author Profile Page at June 5, 2006 2:03 AM

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