IE 11 is not supported. For an optimal experience visit our site on another browser.

Prosecutors finally reel in Lay, Skilling

All along there was one company, and two men, that came to symbolize an era of corporate fraud in America. The company was Enron Corp., and the men were Kenneth Lay and Jeffrey Skilling, its former CEOs.
/ Source: The Associated Press

Enron was always the big fish.

Sure, there was Martha Stewart, whose celebrity and pitch-perfect homemaking talents made a public spectacle of her trial and conviction for lying about a curiously timed stock trade.

And there was Bernard Ebbers, the folksy former chief executive of WorldCom Inc., who was convicted of presiding over an $11 billion accounting fraud, the biggest in the scandal-pocked years since the dot-com boom went bust.

But make no mistake: All along there was one company, and two men, that came to symbolize an era of corporate fraud in America. The company was Enron Corp., and the men were Kenneth Lay and Jeffrey Skilling, its former CEOs.

For prosecutors, and perhaps for a public eager for someone to pay the price for the business scandals, Enron and Lay and Skilling loomed over all the rest. And on Thursday, they were snared: Lay and Skilling were convicted of federal fraud and conspiracy charges.

“Obviously, I’m disappointed. But that’s the way the system works,” said Skilling, who was convicted of 19 counts of conspiracy, securities fraud, lying to auditors and insider trading. Lay was convicted of conspiracy, wire fraud, securities fraud, bank fraud and lying to banks.

Enron’s rise was a remarkable story: An edgy energy trading company, the seventh-largest company in the country at one point. A glad-handing CEO pocketing hundreds of millions of dollars who was the toast of Houston and had the ear of President Bush.

Its fall was just as remarkable, too: Thousands of jobs and billions of investor dollars down the tubes.

Implode is precisely what Enron did. And in the age it came to define, Enron had some striking similarities to, and notable differences with, the other white-collar scandals that followed it.

As in the fraud cases involving WorldCom, cable giant Adelphia Communications Corp. and HealthSouth Corp., federal prosecutors worked slowly to wring guilty pleas from lower executives, then used those as leverage to win indictments against the bosses.

All four cases were demonstrations of the significant power prosecutors wield with cooperating witnesses, who must work — sometimes for hundreds of hours — to help the government build its case, or risk far lengthier prison terms.

“They treated this like a mob case, or a drug deal, where they get the captains first,” David Berg, a Houston civil litigator, said in an interview before the jury returned its verdict. “And they did a brilliant job of simplifying this case.”

In the Enron case, eight former executives with government deals testified against Lay and Skilling. Defense lawyers derided them — unsuccessfully, it turned out — as “shellacked” and untrustworthy because of their incentive to help the prosecutors.

‘Sgt. Schultz defense’
Lay and Skilling employed an interesting defense, arguing in the face of widespread public opinion that there was simply no widespread fraud at Enron — only lesser crimes by the former finance chief, bad press and market pressures that took it down.

It was a departure from what has been called the “Sgt. Schultz defense,” after the I-know-nothing character from the 1960s TV show “Hogan’s Heroes.” Other CEOs, most notably Ebbers and ex-HealthSouth chief Richard Scrushy, claimed that while there may have been fraud, they were unaware.

Federal jurors in New York didn’t buy it with Ebbers, who was convicted of fraud and sentenced to 25 years; he is appealing. Alabama federal jurors let Scrushy walk in the government’s highest-profile white-collar defeat.

Ultimately, the jury in Houston was unwilling to believe Lay’s and Skilling’s line of defense that Enron may have failed, but not because of overarching criminal activity.

The Enron trial was also a demonstration of the enormous gamble corporate executives, like all criminal defendants, take when they decide to testify in their own defense.

Ebbers was convicted after he testified he “just didn’t see” documents that raised alarms about WorldCom’s finances. Tyco International Ltd. ex-CEO L. Dennis Kozlowski was convicted in a New York state court after testifying he was “not thinking” when he left a $25 million bonus off his 1999 tax return.

Lay entered the trial with a reputation as the affable CEO, and Skilling as a temperamental manager who was brilliant at building the company but less comfortable running it during the six months he served as CEO in 2001.

On the witness stand, they reversed roles. During cross-examination, Skilling simmered — and Lay boiled over, snarling and quarreling. Asked by a prosecutor whether he had ever engaged in name-calling at Enron, Lay shot back: “Are you considering yourself on that list?”

And now, Lay and Skilling become just the latest high-powered business figures to take the stand and pay for it.

“You never know how that kind of temperament plays with a jury,” said Robert Mintz, a former federal prosecutor now in private practice. He said Lay appeared “to be perhaps too bitter, too out of touch with what was going on at the company.”

Corporate scandals did not begin with Enron’s end, of course. One need only think back to the insider trading and savings-and-loan debacles to of the 1980s to remember that.

And just this week, federal regulators put out a scathing report about mortgage giant Fannie Mae, including charges of lying to investors and shady accounting designed to enrich executives.

As long as there are companies in America, there is likely to be corporate wrongdoing, even if the Enron era — bookended by the company’s bankruptcy in 2001 and the convictions Thursday — is finally over.