Enron’s Lay Faces Capitol Hill Hot Seat

When Kenneth L. Lay appears before Congress on Monday, his interrogators are expected to pursue a familiar theme: What did he know and when did he know it?

Two distinct portraits of Lay have emerged in the wake of Enron’s collapse. One is of a pioneering business genius who created high-flying Enron Corp. and turned it into the darling of Wall Street, his hands firmly on the controls.

The other is of a benign figurehead who was hopelessly out of the loop as greedy minions devised complicated schemes that cloaked the company’s debts and losses.

According to a key advisor, Lay is “ready for the fight” before the Senate Commerce Committee and likely to portray himself as remote from underlings who engineered Enron’s complex financial deals.

“Ken had been trying to step back for a while and do other things with his life,” said Sue Walden, a Houston political consultant who helped prepare Lay for the hearing. “He was out of the mix in a lot of the daily management of the company.”

But that argument was rejected by the special investigation committee appointed by the board of directors, which issued its report Saturday on Enron’s collapse.

“For much of the period in question,” the report said, Lay was the chief executive of Enron and, in effect, the captain of the ship. As chief executive, he had the ultimate responsibility for taking reasonable steps to ensure that the officers reporting to him performed their oversight duties properly.

“He does not appear to have directed their attention, or his own, to the oversight of the . . . partnerships. Ultimately, a large measure of the responsibility rests with the CEO.”

Similar points were being made in Congress even before the report’s release.

“Let me tell you what people back home in Oregon are saying,” said Sen. Ron Wyden (D-Ore.), one of the interrogators on the Commerce Committee. “They’re asking me how can it be that the head of a major corporation, with all these reports about warning signals month after month, how can it that [the leaders] didn’t know anything about it? That’s the issue that needs to be explored.”

Official Warned of Danger Signs

Wyden was referring specifically to a warning in August from Enron Vice President Sherron K. Watkins that the company could “implode in a wave of accounting scandals” centered on a number of off-the-book partnerships created to hide losses. Although Watkins urged hiring an independent law firm to investigate the partnerships, Lay turned to the company’s longtime Houston law firm, Vinson & Elkins, which had earlier approved some of the same questionable partnership agreements.

Lay will lead off the first of several Capitol Hill hearings this week on the largest bankruptcy in U.S. history. Congress is investigating whether investors were deceived by accounting tricks and lax audits and what new laws and regulations are needed to protect investors and employees’ pensions.

As he huddles this weekend with his lawyers, there is still the chance that Lay will not show up. Enron faces a federal grand jury investigation in Houston and a criminal Justice Department probe, and Lay himself is a defendant in several civil class-action lawsuits filed by employees and stockholders. According to sources, Lay’s lawyers have advised him against testifying.

Lay is expected to encounter not only a tough panel of congressional interrogators--at a packed, nationally televised hearing--but also former Enron workers who blame him and other company brass for obliterating their retirement accounts.

Several other key players in the Enron investigation also are expected to testify this week, including Jeffrey K. Skilling, who quit as Enron chief executive in August, and Andrew Fastow, the former chief financial officer who is regarded as the expert on the partnerships.

Taking of Oath Subject of Debate

Congressional investigators say they expect Fastow to invoke his 5th Amendment right against self-incrimination.

Late last week, senators and staffers were still debating whether Lay should be forced to take an oath before his testimony. Some expressed concern that it would be unfair to demand this of Lay, since it is not being required of all witnesses and Lay agreed to testify voluntarily.

Lay, who is represented by Washington attorney Earl J. Silbert, the first Watergate prosecutor, has not sought nor been offered immunity in exchange for his testimony, a congressional staffer said.

Among the questions facing Lay will be management’s decision to set up partnerships that allowed it to move assets off its books, concealing its true debts and liabilities and artificially boosting its credit rating.

He will also be questioned about the company’s retirement plan, which was based on contributions of company stock. The value of those accounts plummeted last year as the stock took a dive.

And, in what could carry the most long-term effects of the Enron hearings, he will be asked about his lobbying for regulatory changes exempting most of Enron’s commodity trading from oversight and restrictions and the role it may have played in Enron’s troubles.

Some of the deregulation rule changes used by Enron were the result of intensive political lobbying by the Houston company, which poured more than $6 million into congressional campaign funds, including those of a number of lawmakers conducting the investigation.

If anything, however, the Enron campaign contributions are likely to intensify the grilling of Lay as senators on both sides of the aisle scramble to demonstrate their independence from their onetime benefactor.

“[Lay] will get the hottest and most hostile reception of any witness in modern memory,” predicted Washington lawyer Stephen M. Ryan, a former general counsel for the Senate Governmental Affairs Committee.

Indeed, Sen. Peter Fitzgerald (R-Ill.), a Commerce Committee member, said that one of his first questions to Lay will be: “Didn’t you ever think that something was wrong when Enron was able to take a business that has no earnings and no revenues and get $110 million for it?”

Democratic lawmakers are expected to home in on contacts between Lay and his representatives with the Bush administration. Several lawmakers promised to press Lay about Enron’s lobbying against price controls when electricity costs soared on the West Coast last year.

Houston political consultant George Strong sees some irony in the lawmakers’ aggressiveness. Strong, who worked as a consultant and lobbyist for Enron and its predecessor company, Houston Natural Gas, for 25 years, remembers a time not long ago when “every U.S. senator who came to Houston wanted to meet with Ken Lay and ask him for money. He was the political go-to guy.” Lay, whose campaign largess favored Republicans but included many Democrats, was also a major benefactor of George W. Bush’s campaigns, both for Texas governor and for president.

Lay and his wife personally contributed $122,000 to Bush’s two gubernatorial campaigns and a total of $245,000 to the national Republican Party, the Bush presidential campaign and the inaugural fund. Although the Lay family was personally closer to the elder George Bush, a longtime Houston resident, Lay was on a nickname basis with George W. Bush, who called him “Kenny Boy.”

In addition to then-Gov. Bush’s appearance with Lay at the 2000 opening day game at Enron Field, home of the Houston Astros, the two men also met on several occasions in Austin during the 1997-98 Texas debate over electricity deregulation.

Since the collapse of Enron, Bush has downplayed the relationship. But Strong, who first met the future Enron chief when Lay was a lobbyist in Washington for Florida Gas, said the relationship was probably somewhat closer than both men let on.

“I don’t think they were really buddy-buddy,” said Strong. “But it is sort of humorous that George W. now says he hardly knew Ken Lay, calling him ‘Mr. Lay.’ I think they had a much better relationship than that.”

According to Walden, the political consultant, one of Lay’s biggest concerns is that the Enron collapse will be used as a political weapon “to hurt the president.”

“He has the greatest respect for the president,” Walden said.

Largely because of his considerable charity and civic activities in Houston, Lay is still viewed there as a much more sympathetic character than other main players in the Enron saga, such as Skilling and Fastow.

But that sympathy appeared to be tested last week, when his wife, Linda, appeared on television shows to assert that the couple is on the verge of economic ruin.

Lays Own 18 Homes and Properties

Among other things, the Lays own 18 homes and properties in Texas and Colorado valued at more than $30 million, including a $7.1-million apartment in Houston.

Under Texas law, a person’s home is protected from bankruptcy action. After Linda Lay’s appearance, reporters at the Houston Press, the city’s alternative newspaper, mockingly suggested mounting a charity drive for canned goods and blankets for the Lays.

“I love the Lays,” said longtime friend and local heiress Joan Schnitzer-Levy, “but Linda’s plea of poverty didn’t sit well with a lot of people here.”

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Tempest reported from Houston, Simon from Washington. Times staff writer Edmund Sanders in Washington contributed to this report.