For Whom Enron Tolls
The biggest corporate fraud case could affect other prosecutions
If the court of public opinion could pass final judgment, former Enron chief executives Kenneth Lay and Jeffrey Skilling would long ago have been strung up like horse thieves or sentenced to life on a chain gang. But last week, the decade's most important corporate fraud case opened in a Houston federal courthouse with a warning against knee-jerk vengeance and a prediction by presiding U.S. District Judge Simeon Lake: The joint fraud trial will be "one of the most interesting and important cases ever tried."
That was one statement that no prosecutor or defense lawyer could contest. Nor were some basic facts in dispute: Lay and Skilling turned an obscure Houston gas pipeline operator into one of the nation's biggest and most admired companies. Each defendant took more than $100 million in pay and stock out of Enron. And in late 2001, Enron collapsed like a spaghetti western movie set in a tornado, wiping out $70 billion in investor equity and thousands of jobs.
But the multimillion-dollar defense team raised questions that have dogged other corporate fraud cases. Couldn't Lay and Skilling's activities have been legal under complex accounting rules? What if an executive is lied to by an underling? Where is the line between selfish stupidity or boosterism and criminality?
Shredding. Investors can be forgiven for thinking these matters have been settled. Tyco CEO Dennis Kozlowski, WorldCom CEO Bernard Ebbers, and Adelphia founder John Rigas have all been found guilty and given stiff sentences. And 17 former Enron officials have either pleaded or been found guilty. But there have been surprising prosecutorial failures. HealthSouth CEO Richard Scrushy won acquittal last June by arguing that he was lied to by five former CFOs who had pleaded guilty to fraud. In May, auditing firm Arthur Andersen's evidence-destruction conviction was unanimously overturned by a Supreme Court concerned that the jury hadn't found that Andersen knew that its Enron document-shredding was illegal. A July trial of five Enron broadband executives charged with misleading investors ended in mistrials after the jury got mired in accounting details.
No wonder, then, that prosecutor John Hueston argued, "This is a simple case. It is not about accounting. It is about lies and choices." Lay and Skilling knew, he said, that the company was having financial difficulties and sold off their shares while hyping the stock to investors. And no wonder that the defense attorneys trotted out the arguments that have worked for other defendants. Daniel Petrocelli insisted that his client, Skilling, believed Enron was in great financial shape. After all, CFO Andrew Fastow, auditing firm Arthur Andersen, and outside lawyers had all vetted financial statements showing booming profits. And Lay's attorney, Mike Ramsey, warned against making crimes of risky business moves. "People will not accept risk if failure means you go to prison. And bankruptcy is not a crime."
The eventual verdict could affect other prosecutions, including those of dozens more Enron managers and Qwest CEO Joseph Nacchio. But the question remains whether the lessons of Enron have been learned by investors. Despite four years of publicity about the losses of Enron employees who had staked their retirement on company stock, nearly 1 in 10 workers with a 401(k) that offers company shares has invested at least 90 percent of his retirement savings in his employer's stock. Maybe this trial will be a reminder that the best revenge against corporate fraudsters is diversifying well.
This story appears in the February 13, 2006 print edition of U.S. News & World Report.
advertisement
