In Norse mythology, Valhalla is the hall where slain heroes spend eternity. For Kenneth Lay, Valhalla was the small town near New York City where the newly minted chief of the newly created Enron got his first test in corporate ethics — and failed.
Lay, 64, died early Wednesday morning of a heart attack at his vacation home in Aspen, Colo. His death came a little more than a month after he and former Enron Chief Executive Jeffrey Skilling were convicted of fraud linked to the collapse of the Houston energy company in 2001. Lay faced up to 45 years in prison, most likely a life sentence.
Enron's fall was shocking but not a complete surprise to former employees and other longtime observers of the company Lay founded through the merger of two gas pipeline concerns in 1985.
Less than two years after Enron was formed, a trader in the company's Valhalla office lost hundreds of millions of dollars betting the wrong way on crude oil. The company, at Lay's bidding, hid the damage from investors until executives had worked it down to a more manageable $85 million.
It was an early — disturbingly early — sign that Lay was willing to do almost anything to protect his company from disclosures that could tank its stock price. As Enron grew into a trading firm under the intellectual leadership of Skilling, a former McKinsey & Co. consultant, faith in the company's finances was critical to maintaining the thousands of transactions with counterparties that fueled increases in revenue and earnings.
But despite Enron's public-relations prowess, signs of Lay's leadership flaws continued. In May 1993, Forbes writer Toni Mack wrote a story questioning Enron's switch to "mark-to-market" accounting for its energy contracts. The move, disclosed in a footnote to the company's 1992 annual report, meant Enron could enter into a long-term agreement — say, to buy gas from a producer in South Texas — and assign a value immediately to the profitability of that deal.
Since there was no objective way to predict the profits in year six on a prearranged price for gas negotiated in year one, Enron's reported earnings easily could be manipulated. Moreover, the company had launched itself on a treadmill where it needed to do more deals each year to show growth, since the previous year's contracts were reported as revenue and earnings the instant they were signed.
Lay was furious at Mack's story, and Skilling even prodded his alma mater, Harvard Business School, to produce a case study refuting the idea that such accounting was risky. It was a classic example of Lay's response to a threat to Enron's image: Go for the jugular.
By the late 1990s, Enron's stock was soaring, and Lay had crafted an image of as an elder statesman of energy policy. President George W. Bush called him "Kenny Boy," and Lay contributed hundreds of thousands of dollars to the Bush campaign.
The whispering continued, however. Why did Lay's president and second-in-command, billionaire Richard Kinder, quit in 1996? Friends since they attended the University of Missouri together in the 1960s, Kinder and Lay split after Lay apparently reneged on a deal to hand over control to Kinder and renewed his five-year contract as chief executive. (Kinder refuses to talk about Enron).
The ultimate sign of Lay's willingness to hide the truth came after Skilling abruptly resigned as chief executive in August 2001, six months after taking the job. To many observers in Houston, Skilling's resignation signaled that the company's growing problems might have crossed the line from mere civil liability to criminal. Yet Lay announced the next day: "Our business is extremely strong, and our growth prospects have never been better."
Perhaps it was excusable bravado, designed to prevent a run on the bank that would destroy Enron's ability to trade. But a Houston jury in May decided that Lay was lying when he made such comments, and when an executive of a public company lies to shareholders, it is a crime. He was convicted on ten counts, and he likely would have spent the rest of his life in jail had he not died, unexpectedly, in Colorado — a sad end, but one that was foreshadowed by the ethical missteps that were apparent as long ago as Valhalla.
The Associated Press contributed to this story.