Enron execs were their own worst enemies
If nothing else, it was poetic justice. Ken Lay and Jeffrey Skilling ignored conventional wisdom, scoffed at warnings of failure, and relished the wildly risky business bets that turned their obscure gas pipeline operator into one of the country's biggest, most innovative, and most admired companies. Then the two executives scoffed at critics who wondered if Enron's accounting wasn't too innovative and shrugged off insiders who warned of worsening finances and ethical lapses. Finally, at their fraud trial, Lay and Skilling ignored conventional legal wisdom. They took the stand and swore to the jury that Enron failed not because of any fraud but because attacks by short-sellers and journalists destroyed the faith of banks and investors in the company.
Thursday, the very strategies and character traits that had made Lay and Skilling rich and powerful turned them into felons. They lost the biggest bet of their lives as a Houston federal jury found them guilty of cheating investors. They now face prison sentences that could keep them behind bars for the rest of their lives.
The former Enron CEOs remain free pending probable appeals and say they'll continue to fight. Lay reiterated his claim that one of the most dramatic corporate collapses in American history was nothing more than a simple business failure and shouldn't be misinterpreted as fraud. "I firmly believe I'm innocent of the charges against me," the 64-year-old son of a minister said after he and his family wept and prayed over his conviction.
But even sympathetic observers say that the executives helped pull the cell doors shut on themselves. Sheila Kahanek, a former accountant who is the only former Enron employee of 20 charged so far to win acquittal, says all the Enron defendants have "had an uphill battle all the way." They found it difficult to build their cases because prosecutors had scared off scores of potential defense witnesses. In addition, they've had to face local juries who feel betrayed by the company that has forever linked their hometown with corporate skulduggery. While Kahanek says she hasn't studied the evidence enough to pass judgment on the Lay and Skilling convictions, she says they should have learned at least one thing from her legal victory: When you take the stand in your own defense, "you have got to be humble yet passionate. . . . You have to let your vulnerability come out."
Other defense experts agreed. The stubborn strategy of denying that any crime was committed—despite the testimony of eight former employees who pleaded guilty to fraud—was a long shot from the beginning, says Jim Parkman, the attorney who won acquittal for former HealthSouth CEO Richard Scrushy in his accounting fraud trial. Parkman, who didn't call Scrushy to the stand, argued that Scrushy's underlings hid from their boss their cooking of the books. In addition, Parkman says every defense attorney knows that executives make poor witnesses in their own defense. Executives' egos and arrogance often make them try to take control and assume command of their defense, Parkman says. That can't help but make jurors conclude, he says, "Well, if you are in charge, then you ought to have known."
And that's exactly what happened to Lay and Skilling, according to statements by the Enron jurors. Douglas Baggett, an administrator for a corporate legal department, says he was swayed by prosecution evidence that internal company surveys, E-mails, and insiders' warnings raised "red flags everywhere" for Lay and Skilling in the months before the scandal broke. On the stand, he notes, Lay and Skilling were "even telling their attorneys what to do" and seemed "very controlling people at times," making it impossible for him to believe they had missed the signs of trouble. Skilling's masterful testimony about the company's risks and finances, for example, made Baggett wonder: "For a man that knew every aspect of that business and seemed to know every deal, why didn't he know what was going on?"
The verdict was cheered by the thousands of Americans who felt personally cheated by the executives. Debbie Perrotta, a former senior administrative assistant at Enron who lost her savings when the stock price collapsed in 2001, was riveted to the tv late last week. Although 4 ½ years had passed since Enron's bankruptcy, "I was so thrilled—it was like a burden was lifted off of my shoulders," Perrotta says. "I could close the book on this chapter and go on with my life now. It weighed on you, the thought that they were going to get away with it and were living a great lifestyle. Well, they won't be living a great lifestyle anymore."
And the verdict was hailed as an important milestone in a backlash against corporate fraud that began when Enron collapsed amid charges of phony accounting in late 2001.
The importance of the Enron scandal cannot be overstated, says Gray Davis, the former governor of California. "The collateral damage is almost endless," he says. Indeed, Enron traders manipulated California's energy market to create phony shortages that forced the state to borrow billions to pay off artificially inflated power bills. Fear of similar problems has delayed other efforts to deregulate the energy sector. And Enron had a very personal impact on Davis. California voters were so angry about the rolling brownouts and skyrocketing power bills that they recalled Davis and replaced him with action movie star Arnold Schwarzenegger.
But that was just the beginning. Enron's collapse erased as much as $60 billion worth of investors' stock value and left 5,600 employees jobless and facing penurious retirements.
Coming in the midst of the bursting of the tech bubble, the Enron scandal set off a new skepticism about corporate America and Wall Street that continues to this day. When, a few months later, WorldCom collapsed because of similar accounting shenanigans, Congress responded with the most sweeping securities-law reform in decades. The 2002 Sarbanes-Oxley Act, which toughened penalties for white-collar crime and requires companies to vet their finances more rigorously, remains hotly controversial. Some credit it with restoring faith and rising values to America's stock markets. Others blame it for an exodus of capital and companies to countries with less onerous requirements.
Of course, investors around the world are hoping that the convictions of the two men who've become the living symbols of corporate fraud help persuade executives everywhere to keep their hands out of the company till. "This trial sends a very clear message to executives who deceive investors that they will be held accountable and pay a high price for doing so," says Lynn Turner, a former chief accountant at the Securities and Exchange Commission.
Yet the tough new rules and dozens of other CEO convictions in the past few years—from WorldCom's Bernie Ebbers to decorating diva Martha Stewart—haven't exactly cured white-collar greed and corruption. Just this month, regulators and prosecutors launched an inquiry into allegations that UnitedHealth Group CEO William McGuire backdated his stock options to build a $1.6 billion personal fortune.
Will the lessons of Enron ever be truly learned? That jury, unfortunately, is still out.