Posted on 7-2-2002
Get
Lay
by Chris Mooney* (photo shows Chris Mooney)
Sometime in mid-January, the worm turned for Enron executives.
You could
see it in the way George W. Bush raced to distance himself from
his friend
Kenneth L. Lay, like Prince Hal denouncing Falstaff: "I know
thee not, old
man. Fall to thy prayers." And it's beginning to look as if
Lay, the
recently resigned chairman and CEO of the energy trading corporation,
may
have need of prayer. Calls for criminal prosecution of Enron
heads have
begun to sound—and remarkably, free-market conservatives, including
one
formerly on the Enron payroll, have been the first to raise
their voices.
"Jail 'em. All the Enron and Arthur Andersen principals and
then some,"
wrote National Review economics columnist Larry Kudlow. "Why?
To save our
system of corporate governance, which used to be the best in
the world."
The fact that Kudlow himself was in the process of disclosing
some $50,000
in consultant's fees from Enron made the denunciation all the
more striking.
The case against Lay and other Enron executives, particularly
former CEO
Jeffrey Skilling and former CFO Andrew Fastow, would likely
center on two
recent revelations. First, there's the matter of document shredding
on the
part of both Arthur Andersen and Enron. Evidence of such activity
could
support an obstruction-of-justice charge. Second, and perhaps
more gravely
for Enron chiefs, an August communiqué from Vice President Sherron
Watkins
reportedly warned Lay that the company might "implode in a wave
of
accounting scandals." Lay dumped some of his own Enron stock
shortly after
receiving that letter—and yet, in a September online chat, he
told
employees that company shares were an "incredible bargain."
If Lay and
other Enron execs had personally acted on the basis of concerns
like
Watkins's but kept them concealed from shareholders (including
employees),
they could be convicted of securities fraud.
Before Watkins's "smoking gun" letter leaked out, it might have
been
possible to believe that Lay was, as he was fond of claiming,
merely a
company figurehead. Sure, he had great political connections;
but of course
he wasn't aware of Enron's dealings through offshore partnerships
like
"Raptor" and "Jedi II." (Andrew Fastow must have liked John
Williams
soundtracks.) Now, this tale really strains credulity. But does
that mean
that Lay and other members of the Enron team can really be brought
up on
charges? Enron's executives cannot be presumed guilty, and we
must remember
that we've only begun to hear their side of the story. The facts
of the
case are not all known; more spill out every day in congressional
and other
investigations. Nor is it possible to predict how federal prosecutors
at
the Department of Justice (to say nothing of investigators at
the
Securities and Exchange Commission) will ultimately decide to
pursue
Enron's principals.
Nevertheless, it's probably safe to assume that there will be
a serious
Enron dragnet and that it will muster politics and outrage in
equal
measure. "It seems to me that letting Lay off with a plea or
an easy
settlement is not as likely as it might be in another case,"
observes
Lawrence Mitchell, a corporate-law professor at George Washington
University and author of the recent book Corporate Irresponsibility.
"Essentially, this is almost the corporate equivalent of the
O.J. trial."
Lay presumably knows that. On the same day that Kudlow was calling
for
incarceration, The New York Times ran a cover story interviewing
Lay's
attorney, Earl J. Silbert, who tried to explain away the appearance
of
wrongdoing on his client's part. When Lay sold Enron shares
late last year,
Silbert explained, he was merely trying to raise cash to pay
off loans from
his own company. In fact, said Silbert, Lay was optimistic about
Enron's
future at the time.
It sure sounds like Silbert wants to head off insider-trading
charges,
which, according to Mitchell, are the "principal way" federal
prosecutors
might hope to nab Lay. Such charges could entail up to 10 years
in prison
and a fine of $1 million; additional civil damages could cost
far more.
About Silbert's spin, Mitchell comments: "Whether or not Lay
was optimistic
about Enron . . . , his team was not. His obligation to the
market was
either to disclose that information or to refrain from trading."
The relevant law here is the 1934 Securities Exchange Act, which
contains
several securities fraud provisions, including a two-pronged
statute that
prohibits both insider trading and misdisclosure (concealing
or
misrepresenting the company's financial status). The two offenses
are
closely linked: Insider trading involves acting on undisclosed
information,
whereas misdisclosure enters the picture when executives mislead
their
shareholders. Because they were trading stock in their own company,
Enron
execs like Lay could be vulnerable on both counts. These are
not easy
charges to prove, however. For a criminal conviction, the prosecutor
has to
establish willful intent (in a civil case, recklessness). The
trouble then
becomes pinning down the defendant's mental state at a given
time, perhaps
even on a given day—the day that Lay received the Watkins memo,
for
instance. "If the executives can demonstrate that they were
out of the loop
or misled by a subordinate such that they honestly believed,
if somewhat
foolishly, that there was nothing bad going on, they may have
a defense,"
says Donald Langevoort, a securities-law expert at the Georgetown
University Law Center.
Still, federal prosecutors have tried-and-true methods for proving
intent.
They can offer immunity to key players—in this case, perhaps
document
shredders or Enron's second tier of corporate management—in
exchange for
their cooperation with the criminal probe. The real fun could
come in when
prosecutors turn to Arthur Andersen's and Enron's underlings
and get them
to rat out higher-ups, resulting in back-stabbing, recriminations,
wire-wearing, and the like. As John Aisenbrey, a former assistant
U.S.
attorney, told the Kansas City Star recently: "If I were prosecuting
this
case, I would use the threat of indicting Arthur Andersen itself
to crack
open the case against the Enron people."
Prosecutors can also throw a wide range of lesser charges at
the little
fish in order to reach the big ones. The obstruction-of-justice
front may
be "spiciest," according to Stanford Law School's white-collar-crime
expert
Robert Weisberg. "The shredding of documents is simply the most
dramatic
fact right now before the public," he says, "and it's the least
legitimately explainable thing that anybody did." Prosecutors
would have to
trace the destruction of files back past the people who actually
did the
dirty work and pin it on those who ordered it.
Other possible charges include catchalls like wire and mail
fraud (which
"just cover an incredible variety of things," says Weisberg).
These could
probably be used against executives or underlings. Prosecutors
could even
invoke the Racketeer Influenced and Corrupt Organization Act
and threaten
Enron peons with severe penalties unless they sing like canaries.
It all
depends on how proactive and dogged prosecutors want to be—and
that's a
political question. "There's a pretty good laundry list to choose
from"
when it comes to criminal charges, notes Lawrence Mitchell.
"And even if
Lay gets away without criminal convictions, I cannot believe
that there
aren't some accountants at Arthur Andersen that wind up in jail."
Is there a chance that Lay will get away without criminal convictions?
If
your vindictive juices are starting to flow, you might want
to take pause.
Langevoort says that he would be "shocked" if we didn't see
criminal
charges against Enron heads, in addition to a wide range of
civil suits;
but he warns that the end result could easily be settlements
all around,
"with self-serving statements by both sides saying that 'we
were confident
that we would win, but we wanted to put this behind us.'" After
all, many
such settlements followed the savings-and-loan scandals of the
1980s. And
we can be sure that Enron will have the best lawyers money can
buy.
Ironically, the main thing blocking such a lukewarm outcome
could be the
Bush administration. The White House just might feel obligated
to convince
us that it was never soft on Enron. (Consider it a sort of Larry
Kudlow
effect writ large.) Letting Lay and his cronies take the fall
might help to
insulate the Republican Party from more sweeping criticism.
There's also
the sheer size of the Department of Justice task force charged
with
pursuing the Enron affair; attorneys from Washington, D.C.,
to San
Francisco, including a Houston-based field office, are already
on the case.
Congress and the SEC have launched their own investigations.
Revelations
from private suits—scores have already been filed—could end
up filtering
into criminal ones. With this many lawyers and investigators
turning the
ground, a lot of evidence will emerge. To what extent it will
bear on Lay
and his cohorts remains a question, of course.
Sure, it's speculative. But the potential drama and magnitude
of Ken Lay's
criminal prosecution inevitably brings another momentous case
to mind: that
of Michael Milken, the so-called junk bond king of Drexel Burnham
Lambert.
Taken down on charges of securities fraud in 1990, Milken served
two years
in jail and paid a $1-billion fine. In a recent op-ed in The
Philadelphia
Inquirer titled "Punish the real Enron villains: The top executives,"
the
University of Pennsylvania corporate-law professor and bankruptcy
expert
David Skeel noted "eerie similarities" between the collapses
of Drexel and
Enron.
As Skeel sees it, "Michael Milken invented the junk bond, and
along with
Drexel rode that to very high highs. And at the point where
the early wave
was cresting, and Drexel was no longer the only game in town,
all the
criminal stuff came up." Likewise with Enron: "Enron pioneered
the idea of
trading energy. It was the only game in town, had enormous early
success;
then encountered competition, had a little more trouble maintaining
its
profit levels"—and started to bend the rules.
The chief difference is that Lay and friends were officers of
the company
whose stock they may have illegally traded; Michael Milken wasn't.
But when
it comes to prosecution, the goal is to connect the dots between
individuals and actual crimes. In that sense, the Enron executives'
proximity to the alleged crime scene probably doesn't hurt.
If anything, it
may make the case against them easier to prove.
* prospect.org/authors/mooney-c.html
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