If there was one case the government had to make to define this as the era of corporate accountability, it was Enron.
But the Enron Corp. tale was complicated, with labyrinthine partnerships and intricate accounting entries, and no documents directly tying the guys at the top to the decisions carried out by others. It was a tough case to be a must win.
When the jury returned its verdicts — guilty on 25 of a combined 34 counts — it was a clear win. Jurors refused to let slide the two former chief executives who had become synonymous with corporate corruption, and who tried to blame underlings, advisers, institutional investors and the media for the Houston energy company's spectacular 2001 collapse.
"The jury says, you're the boss," said white-collar defense attorney Charles A. Stillman.
The convictions of Enron founder Kenneth L. Lay and former chief executive Jeffrey K. Skilling cap the Justice Department's five-year battle to hold top executives responsible for a flood of accounting fraud and corporate failures that undermined investor confidence, put tens of thousands of people out of work and hit the savings of millions of ordinary people.
Enron's 2001 bankruptcy exposed failures across the system of corporate governance, from audit companies that lacked true independence and board members who failed to ask skeptical questions to lawyers and bankers who blessed questionable deals in exchange for whopping fees. It also resulted in major changes to the regulatory system, including a federal law that requires top corporate executives to attest to the accuracy of financial statements.
But none of them equaled the importance of Enron, where it all started and which involved the most complicated financial and legal schemes.
‘Important morality play’
"The ordinary investor uses the word Enron to scare their kids," said University of Texas law professor Henry T.C. Hu. "These convictions are the end of a particularly important morality play. Everyone always thought that the Enron-Skilling-Lay trial would be harder for prosecutors . . . and yet the prosecutors won. That really helps in terms of deterrence."
Although the Enron convictions serve as a high-water mark for the government's efforts to crack down on high-level corporate lawbreaking, legal analysts cautioned that the case does not mark the end of white-collar crime. "Where there's money, there's going to be crime," said former U.S. Attorney David N. Kelley. "You never know what's going to surface."
For corporate executives still under scrutiny, the verdicts yesterday underscored the peril of defendants taking the witness stand in white-collar fraud cases.
As in many of the recent top corporate trials, prosecutors had few documents linking Skilling and Lay to the accounting maneuvers that hid billions of dollars in losses from investors. The case therefore came down to weighing the two men's credibility against that of the other Enron executives, who swore Lay and Skilling were involved.
That made the two men's performances on the stand that much more critical, and both of them fell short. Lay in particular came across as an irritable control freak, while Skilling strained credulity with his complicated explanations and convenient memory lapses, jurors said.
The results mirrored those of other high-profile cases: The jurors who convicted Ebbers also said they didn't believe his testimony that he was unaware of the accounting schemes in that case, and former investment banker Frank P. Quattrone torpedoed his case when he was caught in an apparent misstatement on the stand. Quattrone's obstruction of justice conviction was later reversed, and he is currently negotiating with prosecutors to avoid another trial. Most legal observers credit the lone prominent acquittal, that of Richard M. Scrushy of HealthSouth Corp., to the months he spent cultivating the black and religious communities in Birmingham, where his case was tried.
"It's Shakespearean. The CEOs who have gone down are people who literally lost touch with reality," said Yale University law professor Jonathan Macey. "Ken Lay had so internalized the idea of an imperial CEO that he blamed everyone but himself. He could not conceptualize that he should take responsibility."
‘This was the stock market’s 9/11’
More than any other case, Enron symbolized the collapse of the 1990s stock market bubble and the revelation that many of the nation's highest-flying companies were far less substantial than they seemed. "This was the stock market's 9/11. How could the seventh-largest company collapse?" said Samuel W. Buell, a former federal prosecutor who worked on the early stages of the Enron case. "The knowledge that there is going to be punishment in egregious cases has to restore investor confidence."
"The fact that significant and highly credible companies engaged in misconduct of the rankest sort, pulling the wool over the eyes not just of investors but of analysts, journalists and regulators, is a very sorry chapter in our history, and one that deserves the right type of burial," said Harvey L. Pitt, a former chairman of the Securities and Exchange Commission.
Energized after Enron's December 2001 bankruptcy filing and the fall of WorldCom months later, Congress overwhelmingly passed legislation that forces companies to set up stronger internal controls and holds chief executives, finance chiefs, board members and auditors more responsible for financial reports.
The aftermath of the 2002 Sarbanes-Oxley Act spawned new standards by the major U.S. stock exchanges and prompted courts to review such cases more stringently, experts said.
‘Inadvertent change agents’
"The failure of Enron . . . fundamentally altered the corporate governance movement forever," said University of Delaware professor Charles M. Elson. "It greatly accelerated changes in the form of more responsibility for corporate boards and auditors, and it led to a great skepticism on the part of the investing public as to the business practices in corporate America. Regardless of what happens, they have been inadvertent change agents."
Even now, however, groups including the U.S. Chamber of Commerce are attacking the law in the courts and in the halls of the SEC. Another trade organization, the Free Enterprise Fund, has mounted a legal challenge to the Public Company Accounting Oversight Board as too costly and invasive. The board is a watchdog body created by the Sarbanes-Oxley Act to police the accounting industry. Advocates of increased oversight warn that if that case is successful, the entire law could be thrown out.
But the law's supporters said they hope the string of prosecution victories will give would-be fraudsters pause and remind Americans of the need for corporate accountability.
"Now we have a greater appreciation of the role of watchdogs," said Anthony M. Sabino, a law professor at St. John's University. "Sarbanes-Oxley was a good idea, is a good idea. Leave it alone. We need it to prevent the Enrons of the future."