December 17, 2005
Living in the Enron Dream World
By JOSEPH NOCERA, NY TIMES
LINKTHIS past Tuesday, Kenneth L. Lay, the disgraced former chairman of Enron, gave a remarkable speech before a hometown crowd in Houston. It's not every day that a prominent white-collar defendant makes an impassioned public defense barely a month before his criminal trial is set to start. That sort of thing tends to tick off prosecutors, not to mention judges.
Then there was the matter of the speech's content. Aggressively self-pitying would sum up the tone of Mr. Lay's remarks. "Of anything and everything that I could imagine might happen to me in my lifetime," Mr. Lay said, according to a text of his speech posted on his Web site, "the one thing I would have never even remotely speculated about was that some day I would become entangled in our country's criminal justice system."
He then went on to lay out his belief that a huge miscarriage of justice had taken place, largely because the "political and public hysteria" over Enron's failure had prompted the Justice Department's Enron Task Force to search for scalps among victimized Enron executives like, well, himself.
"Contrary to popular belief today," he said, "I firmly believe that Enron was a great company. Although, like most companies, it was not without some problems, Enron was a strong, profitable, growing company even into the fourth quarter of 2001."
As he has done consistently since Enron's downfall, Mr. Lay assigned none of the blame for what happened to himself, pointing his finger instead at Enron's former chief financial officer, Andrew S. Fastow, whose secret partnerships and pocket-lining side deals, according to Mr. Lay, caused the banks to lose confidence in the company once they were exposed, after which it lost its access to the capital markets and was doomed.
"The Enron Task Force investigation," Mr. Lay said, "is largely a case about normal business activities typically engaged in on a daily basis by corporate officers of publicly held companies throughout the country." The task force, he added, was trying to "criminalize these very same business activities."
He concluded by asking former Enron employees - the same people who lost everything when the company crashed to earth - to stand alongside him and proclaim "the truth": that Enron was "a real company, a substantial company, an honest company, a company that had a vision and values, a company that changed industries and markets for the better, a company that we were all proud to work for."
"A great company?" "A strong, growing, profitable company?" "A real company, a substantial company, an honest company?" Who is he trying to kid?
Actually, I know who he's trying to kid: himself. He's been kidding himself ever since Enron began its downward spiral in the summer of 2001. Indeed, it was precisely Mr. Lay's inability to look the thing straight in the eye and admit what Enron really was - a corporate version of three-card monte - that has gotten him in so much trouble.
Let's skip over the single stupidest thing Mr. Lay did during all the years he ran Enron, for which he can blame no one but himself. With the board's backing, Mr. Lay granted Mr. Fastow's request that he be exempt from the company's conflict of interest rules so that he could manage - and profit from - a series of partnerships that existed solely to conduct transactions with Enron. Even a saint shouldn't be put in the position of negotiating on both sides of a deal, and Mr. Fastow was hardly a saint.
Let's also skip over the reason Mr. Fastow set up the partnerships, which seems to have escaped Mr. Lay. They were vehicles that Enron absolutely had to have to disguise its true financial condition. With the help of the Fastow partnerships - and Mr. Fastow's willing accomplices on Wall Street - Enron hid billions of dollars in debt, created illusory cash flow, and ginned up profits that never really existed.
An argument can be made, certainly, that this or that transaction amounted to "normal business activity," but taken together, their fundamental purpose was to paper over the fact that more cash was going out the door than was coming in. Far from tearing down Enron, Mr. Fastow was actually propping it up. Sure, he was skimming a little off the top for himself, but that was hardly the central problem.
Finally, let's take Mr. Lay at his word that he was clueless about the shell game that was going on just outside his door. After all, the Justice Department appears to have accepted Mr. Lay's argument that he was merely asleep at the switch, as opposed to criminally negligent, for the great bulk of Enron's sordid history.
But in the months before Enron went bankrupt, everything changed for Mr. Lay - and it is his actions during that narrow time frame that got him indicted. Before that time, Mr. Lay could fuss over fabric swatches for the new company airplane while Mr. Skilling ran the show, an anecdote recounted in "The Smartest Guys in the Room" (a book, it should be noted, that I played a role in creating, and in which I have a financial interest).
But from August to December 2001, all of Enron's problems were put right under Mr. Lay's nose. He couldn't avoid them. And given the choice between telling the truth to investors or continuing to pretend that Enron was a "strong, growing, profitable company," Mr. Lay opted for the latter. Let me put it another way. He lied through his teeth.
You remember those final months of the Enron debacle, don't you? Mr. Skilling, who, after years as the company's president, had assumed the title of chief executive just that February, suddenly quit late in the summer of 2001. As the stock swooned, and Wall Street began to ask tough questions about the company's condition, Mr. Lay assumed the chief executive position. He seemed to believe that his mere return as C.E.O. would be all it took to get the ship back on course.
But he was badly mistaken. By then, he company's water business had collapsed. Its broadband business was on life support. Sherron Watkins had written her infamous memo, outlining the accounting scams that had gone on under Mr. Fastow, and the likelihood that they would soon unravel. One such scam, called the Raptors, was already coming apart, which meant the company was going to have to take a huge hit to its earnings, possibly even a restatement. Arthur Andersen, Enron's craven accountants, had found a $1.2 billion mistake on the company's balance sheet. And on, and on.
And in the face of all those problems - problems that were being explained to him, in detail, by underlings; problems that were surely going to require the company to take an enormous loss in the next quarter - Mr. Lay told the world that everything was just fine. "My personal belief is that Enron stock is an incredible bargain at current prices," he told employees on Sept. 26. The third quarter, he added, "is looking great; we're going to hit our numbers."
Repeatedly in those final months, Mr. Lay took the same message to Wall Street. Never once that entire time - not after the disastrous third quarter, not after Mr. Fastow's partnerships were exposed, not after Mr. Fastow himself was finally fired, not even in the final days before the bankruptcy filing - did Mr. Lay try to tell the truth about Enron. He's right to say that the banks had lost confidence in the company. But it wasn't only because of the revelations about Mr. Fastow's partnerships. It was also because the banks stopped believing Mr. Lay.
To my mind, the reason Mr. Lay couldn't admit the truth was because he has always taken the view that perception is reality. If he could convince people that Enron was the greatest company ever, then it surely was - and never mind that its profits were largely fiction. Mr. Lay's belief in the power of public relations is the reason he gave a news conference the day after he was indicted. And it's the reason he made that speech in Houston this week. He seems to believe that if he says something often enough, and loudly enough, it will become true.
Does Mr. Lay know, in his heart of hearts, that he lied about Enron in those final months? I don't know. As the saying goes, a good con man always believes his own con. In any case, that's what the Enron trial will try to ascertain.
I do know this, though. Once the trial starts next month, Mr. Lay will finally have to leave the public relations dream world he's existed in for so long. No more hometown audiences applauding politely at his spin. Instead, he will face hostile questions from prosecutors, he'll be shown hard evidence of the Enron fraud, and he'll hear the testimony of former executives who will testify against him - starting with Mr. Fastow. He won't like that reality one bit. But then, reality has never been Mr. Lay's strong suit.
December 14, 2005
Enron's Chief Offers His Case By SIMON ROMERO
HOUSTON, Dec. 13 - The well known and the powerful often appear before the Houston Forum, one of the city's elite spots for speakers. Senator John McCain, Republican of Arizona, gave a recent talk, as did Michael Chertoff, the homeland security secretary.
But the speaker who stirred up the greatest interest was one of Houston's own: Kenneth L. Lay, the former chairman of Enron, who spoke on Tuesday.
It was a rare appearance for Mr. Lay, and particularly noteworthy because he goes on trial next month in Houston on criminal charges that could send him to prison for decades. He used the opportunity to make his case before the crowd of well-heeled Houstonians, forcefully proclaiming his innocence and contending he was the victim of a "wave of terror," in a speech invoking Scripture and the wisdom of Winston Churchill.
"We must create our own 'wave of truth,' " said Mr. Lay, 63. "I believe the return to sanity has begun."
He also said he planned to testify at his trial, even while acknowledging that the tactic was risky. "Others will be viewed more objective, more credible than I will be," he said.
Mr. Lay accepted an invitation in late November to appear before the Houston Forum. Standing between large Texas and United States flags, he assigned the blame for Enron's collapse four years ago to Andrew S. Fastow, then Enron's chief financial officer. Mr. Fastow has pleaded guilty to fraud, has agreed to cooperate with the government and faces 10 years in prison.
Mr. Lay's decision to go public runs counter to the advice of many criminal defense lawyers, who generally prefer to have clients remain silent until a trial starts. Not so in the case of Mr. Lay, who is represented by one of Houston's most aggressive lawyers, Michael W. Ramsey. Mr. Ramsey arrived at the ballroom of the Marriott Hotel in the upscale Galleria shopping district clad in a pinstripe suit and cowboy boots.
"We got an opportunity to talk in a rather dignified setting, a place with some gravitas," said Mr. Ramsey, 65. "Of course, until you put the ax to the wood you don't know what you're going to get."
Mr. Lay faces charges that he engaged in a conspiracy to deceive investors and employees about Enron's financial troubles just before it collapsed. He will stand trial with Jeffrey K. Skilling, Enron's former chief executive, and Richard A. Causey, a former chief accounting officer; both face additional counts, including lying to auditors and insider trading.
The move by Mr. Lay to criticize Mr. Fastow and the Enron Task Force of the Justice Department takes a page from the playbook of another embattled former chief executive, Richard M. Scrushy, onetime leader of the HealthSouth Corporation in Birmingham, Ala.
Mr. Scrushy rarely missed an opportunity to declare his innocence publicly before and during his trial, joining a large church in Birmingham and appearing in an evangelical Christian television program in Alabama. A jury acquitted Mr. Scrushy in June, though he has since been indicted on separate charges in a political corruption case.
Unlike Mr. Scrushy's fiery style, however, Mr. Lay's polished delivery of his speech was reminiscent of the days when he was Houston's most prominent business leader, frequently speaking before business, political and religious groups. Mr. Lay and his wife, Linda, have still made occasional appearances at charitable events in Houston.
"It's definitely in Ken Lay's interest to maintain a relationship with his community," said Charles A. Russell, the crisis communications consultant who represents Mr. Scrushy. "It is an essential step toward humanizing someone who has been demonized in the public eye."
Mr. Lay is taking a chance with his re-entry into the public eye in Houston, given the emotions associated with his leadership of Enron. More than 4,000 employees lost their jobs as a result of the company's demise, and the city has yet to find another hometown company with similar flash and prominence.
Still, the reception for Mr. Lay, who told the audience that his 12th grandchild was born Tuesday morning, was anything but chilly. The capacity crowd of about 250 politely applauded him at the beginning and end of his speech, and a representative of the Houston Forum gave him a copy of "1776," the book by the historian David McCullough, which Mr. Lay said reminded him of the "importance of faith and God in the founding of this country."
The speech was not the first time Mr. Lay has publicly proclaimed his innocence. Hours after he was arrested and led handcuffed into a courthouse here in June 2004, Mr. Lay held a news conference in a hotel banquet room in which he blamed Mr. Fastow for hidden fraudulent activity that weakened investor confidence in Enron.
Mr. Ramsey, Mr. Lay's lawyer, said his client had written his own speech except for "a couple of small editing touches here and there." Mr. Lay told the audience that he had intended to call the speech, "Living in the Cross Hairs of the U.S. Criminal Justice System," but instead opted for "Guilty, Until Proven Innocent."
Mr. Lay used most of the speech to assail the actions of the Justice Department. Kathryn Ruemmler, deputy director of the Enron Task Force in Houston, did not respond to a request for comment.
"Let me cut to the chase," he said. "In this trial - apparently unlike most criminal defense cases - defendants are trying to get the truth in, and the prosecutors, the Enron Task Force, are trying to keep it out."
The audience submitted written questions to him afterward. One asked if it was the duty of a chief executive to be accountable for a company's activities. Mr. Lay responded that he could not be held accountable for illegal activities he was not aware of. Mr. Lay also appealed to former Enron employees to "prove that Enron was a real company."
Also on Tuesday, a bankruptcy judge here ordered about 40 former traders at Enron to return $20 million in bonuses they received shortly before the company went bankrupt, with the money to go to employees who lost jobs around the same time. Enron paid about $105 million in bonuses to people in its trading operations in the days before it filed for bankruptcy protection in December 2001.
SUNDAYBUSINESS MUTUAL FUNDS REPORT: ESSAY; Never Mind Justice. How About Just Deserts? By JOHN SCHWARTZ (NYT) 986 words
Published: April 10, 2005
LINKIN a world where executive perp walks have lost their novelty, where's the justice? Investors who have seen executives drive their companies off a cliff don't necessarily gain succor from such parades, or from the dry sentences and fines that may be doled out by a jury. They crave that deeper, more satisfying sense of justice that comes from seeing somebody get what they think he truly deserves.
The difference between court justice and what I'd like to call 'sublime justice' is not a difficult concept. But it's a bit nuanced, so here's an example. It seems that Kenneth L. Lay, the former Enron chairman who faces trial next January on fraud charges, has paid Google, the online search service, to place ads next to or above searches about Enron and related topics and direct people to a site that gives his side of the story. (According to this Web site, he's not a crook.)
The links also appear in searches involving the bylines of some reporters, like Mary Flood of The Houston Chronicle and Kurt Eichenwald of The New York Times. A quick check of the Google 'AdWords' site suggests that Mr. Lay pays about $25 a day for linking ads to the searches. Every time someone uses Google to search for sites about 'Ken Lay' or 'Enron,' among other terms, and then clicks on the link to the kenlayinfo.com site, that click costs Mr. Lay a little less than a dime. His case hasn't yet gone to trial, but he's trying to score points in the court of public opinion, and he's willing to pay for it.
Here's where the concept of sublime justice comes in. For some former Enron workers, who had nothing to do with the shenanigans at the top but who saw their nest egg of company stock destroyed, the invitation to make Mr. Lay pay, even a little, was too good to pass up. A former executive of the company acknowledges that when he first heard about the AdWords arrangement, 'I just clicked three or four times, you know; Ka-ching! Ka-ching! Ka-ching!'
This form of revenge is small and nattering: it literally nickels-and-dimes Mr. Lay. But how perfect is that, the former employees argue, since Mr. Lay's wife complained on national television that they were being pauperized by the fall of Enron and would have to sell some of their houses? 'It's kind of like making a prank phone call,' the former executive said. 'It just had that old sophomoric, feel-good mischievousness about it.'
It's click revenge, and investors can try it, too, by going to google.com and searching for information on Ken Lay -- solely, of course, to explore Mr. Lay's point of view. Click on the ad on the screen, the one that says, 'Learn the Truth About Ken Lay.'
Go ahead, I'll wait.
Welcome back.
It's the kind of justice that Gilbert and Sullivan talked about in 'The Mikado,' where big bores would be sentenced to sit through hours-long sermons, and billiard sharps would have to play 'on a cloth untrue/With a twisted cue/And elliptical billiard balls.' The chorus goes on to say:
My object all sublime
I shall achieve in time --
To let the punishment fit the crime,
The punishment fit the crime;
And make each prisoner pent
Unwillingly represent
A source of innocent merriment,
Of innocent merriment!
This idea of sublime justice needs to get around. The lovely thing about it is that it doesn't depend on the criminal justice system, which can be so slow and unsatisfying. It doesn't even require a finding in a court of law that someone has committed a crime. They can just be guilty of overweening greed, stupidity or arrogance.
These chief executives reveled in being the symbols of their company when times were good; they shouldn't be able to escape the hot lights when things turn around. For mutual fund investors who saw their own investments shrink after having watched these chief executives strut on the media stage and wallow in their fame and wealth, a little sublime justice might be just the thing.
Let's see. Start with L. Dennis Kozlowski of Tyco International, whose high living was symbolized by the birthday bacchanal for his wife that included an ice sculpture of Michelangelo's David that dispensed vodka in a manner that suggested urination. Perhaps he should have to drink from similar statues for ever more, to remind him of those former excesses. The statues could dispense discolored water and cheap, warm beer.
Derek V. Smith, the chief executive of ChoicePoint, gathered billions of bits of data on millions of Americans -- and then the company sold the information on some 150,000 Americans to identity thieves who posed as legitimate customers; the stock tumbled. Mr. Smith says that databases can make us safer and more secure, and argued the case in his book, titled -- wait for it -- 'Risk Revolution: The Threats Facing America and Technology's Promise for a Safer Tomorrow.' Sublime justice for his company having exposed so many people to risk? Maybe he should have to walk up Wall Street in the emperor's new clothes.
But maybe the best sublime justice should be doled out to Bernard J. Ebbers, convicted last month of looting WorldCom. Once hailed as a brilliant captain of industry, he had to plead stupidity and incompetence in hopes of escaping a guilty verdict. He was convicted anyway.
Maybe Mr. Ebbers should also be sentenced to keep a phone to his ear, even surgically attached. And every few seconds, a burned investor could ring him up, simply to shout, 'Can you hear me now?'
ENRON's Code of Ethics (Smoking Gun free pdf file)
