Just over four years after Enron Corp. collapsed in a multibillion-dollar heap, a detailed post-mortem is unfolding in the Houston federal courtroom where its top two captains are on trial. A jury is hearing testimony alleging fraud and conspiracy by former chairman Kenneth Lay and retired chief executive officer Jeffrey Skilling. Barring a plea bargain, jurors will decide whether they were out-and-out crooks or incredibly unlucky and incompetent managers who drove a $101 billion-a-year darling of Wall Street over a fiscal cliff.
From a high of $90 a share in August 2000, Enron’s stock plunged to 36 cents a share before the Houston-based company filed bankruptcy in December 2001, wiping out more than $60 billion in shareholder value and the jobs and retirement savings of thousands of Enron employees.
Enron’s implosion also took down the Arthur Andersen accounting firm, shaking shareholders’ faith in its oversight of other companies’ financial reports.
Sixteen former Enron executives already have pleaded guilty, including investor relations chief Mark Koenig, the first witness, who gave extensive testimony last week. Koenig described a corporate culture obsessed with boosting Enron’s stock price no matter what – even to the point of “adjusting” 1999 fourth-quarter earnings per share upward by a penny to match analysts’ projections.
“The tone we would have set by missing earnings would have been very negative,” Koenig testified. (Though surely not as negative as the bankruptcy that followed.)
Juggling the facts was standard operating procedure, according to Loren Fox, author of “Enron: The Rise and Fall,” who wrote that losses were sloughed off to specially created corporations to keep them off Enron’s books. Created by the 1985 acquisition of Houston Natural Gas by Omaha-based InterNorth, Enron expanded beyond its core natural-gas pipeline and energy business into new areas such as metals, paper, financial contracts and even bandwidth trading.
Annual revenues rose from $4.6 billion in the 1990s to $101 billion just before the collapse. The perception of Enron’s growth potential was bolstered by glowing public statements Skilling made to analysts. Lay is accused of continuing the ruse after Skilling resigned.
“We think the company’s on solid footing,” Lay told analysts in August 2001 in a tape played in court. Meanwhile, top Enron execs had been unloading their shares for tens of millions of dollars.
White-collar cases are inherently difficult, more so if prosecution witnesses, including Koenig and former finance chief Andrew Fastow, are convicted felons. Also, the evidence is sure to get complicated and tedious.
“The longer (the trial) the better, generally, for the defendant,” says Steve Peters, a former assistant U.S. attorney for the District of Colorado.
“You can really bore a jury to death by throwing 40,000 documents at them and failing to follow the ‘Keep It Simple, Stupid,’ rule,” said Richard Stacy, former U.S. attorney for Wyoming. “Keep it simple, not too complex, not too many counts.” (Lay faces 11 counts and Skilling 35.)
Nonetheless, Stacy noted, “It’ll be hard for Skilling and Lay to convince a jury of ordinary people with common sense that they were who they are and didn’t know what was going on.” Peters pointed out that “juries have to feel that something was morally wrong. Juries are not always persuaded that bad business is criminal.”
Mere bad business, though, is seldom as catastrophic as the Enron debacle. The trial will be a test of the government’s ability to hold corporate executives accountable.
