Lay Hears Federal Charges in Court
Kenneth L. Lay, who built Enron Corp. into the world’s largest energy trader, was at the center of a monumental criminal conspiracy to hide the company’s deteriorating condition as it sped toward bankruptcy, government prosecutors said Thursday.
The man who was Enron’s chairman and chief executive for 15 years manipulated earnings, backdated documents, disguised debt, over-valued assets and lied to employees and securities analysts, the government charged in a 65-page indictment.
Lay, 62, surrendered to authorities early Thursday morning and went to face a judge wearing a suit, tie and handcuffs. Shortly before noon he declared his innocence in a packed courtroom. Then he declared it again, at much greater length, in the ballroom of a nearby hotel.
“I continue to grieve, as does my family, over the loss of the company, my failure to be able to save it and the tremendous hardship that it caused so many employees and retirees and others,” Lay said. “But failure does not equate to a crime.”
With his lawyers hovering in the background, Lay took questions from the dozens of reporters in attendance. It was a highly unusual move for someone just charged with serious crimes, and one full of potential peril. Anything he said could later be thrown back at him in court.
“It defies all convention, but it means he has an unwavering confidence in the positions he took today,” said former SEC lawyer Jacob Frenkel.
Lay may have been hoping to influence potential jurors or provide ammunition to argue that his case is too well-known to receive a fair hearing in Houston. But the risky news conference also underlined the former power broker’s difficult situation.
“This man has everything to lose -- his net worth, his reputation and his liberty,” said Marc Powers, chairman of the securities litigation practice at Baker & Hostetler in New York. “When it’s a high-stakes game, one needs to engage in high-stakes tactics.”
The indictment draws a picture of a company thoroughly permeated by fraud, where management was bent to one goal: telling whatever untruths were necessary to keep the stock price up.
It’s the exact opposite of the Enron that was believed to exist three years ago, when it was a much-admired and apparently very successful company. The genial chairman was reportedly hoping for a post with the new administration in Washington, whose election he and Enron had worked so enthusiastically to bring about.
Lay contends that his friendship with President Bush means that prosecutors had to prove their independence by indicting him.
“Being strong supporters and being closely associated with the Bush family ... certainly hasn’t helped,” he said at the news conference.
Andrew Weissman, the head of the Justice Department’s Enron Task Force, told reporters outside the courthouse that the case was not pursued for political reasons.
“Criminal cases are not brought solely to send messages,” Weissman said. “They are brought to bring individuals to account for their criminal acts.”
Lay was at the FBI office here before dawn for his prearranged surrender. By sunup, a U.S. marshal had driven him to the federal courthouse. Lay went in through a back door, his blue blazer riding up against a pair of handcuffs with each step. Marshals took his fingerprints and a mug shot.
He entered the courtroom at 11:30 a.m. and immediately looked to his wife, Linda, who sat in the front row wearing a pink sweater set. She blew him a kiss and mouthed, “I love you.”
U.S. Magistrate Judge Mary Milloy asked Lay whether he had been given a copy of the indictment.
In a response that echoed his primary defense that he delegated much of the responsibility of running Enron to others, Lay said that he had “not physically” read the charges but had been briefed by his lawyers.
He’s charged with four counts of securities fraud, three counts of making false statements to banks, two counts of wire fraud and one count each of bank fraud and conspiracy to commit securities and wire fraud.
If convicted on all counts, Lay would face a maximum 175 years in prison and $5.75 million in fines, according to the Justice Department.
In a related action, the Securities and Exchange Commission filed civil charges against Lay, accusing him of insider trading and fraud. In 2001, the SEC said, Lay made $90 million in insider-trading profit. The SEC wants to get that money back, plus civil penalties, and to bar Lay from serving as a director or officer of a publicly held company.
There was a fleeting moment of levity when Milloy asked Lay to confirm that he had hired criminal defense attorney Michael Ramsey to represent him.
“I think his billing would indicate I have hired Mr. Ramsey,” Lay said as the courtroom erupted in laughter.
Prosecutor John Hueston asked that bond for Lay be set at $6 million, saying the government was not confident it had been provided a full picture of Lay’s personal fortune. But Milloy let Lay go on an unsecured bond of $500,000. She also instructed him to hand over the three shotguns he has at his home.
Lay is the 31st defendant to be charged as a result of the work of the Enron Task Force. Eleven have been convicted by plea or by a jury, and the rest are waiting for trial. In an investigation reminiscent of the government’s classic Mafia-busting techniques, the Justice Department and the FBI built their case from the bottom up. Prosecutors leveled charges against low-ranking executives in hopes of gaining their cooperation in going after high-ups.
Among those awaiting trial are Jeffrey K. Skilling, who was briefly chief executive in 2001 but who essentially ran the company for many years before that, and former Chief Accounting Officer Richard A. Causey. Lay’s indictment was made part of a revised case against Skilling and Causey, yoking all three together in one case.
These executives, Deputy Atty. Gen. James Comey said at a Washington news conference, “oversaw a massive conspiracy to cook the books of that company and to create the illusion that it was a robust, growing company with limitless potential, when in truth, as we all know now, and as the indictment alleges they knew then, Enron was an increasingly troubled business kept afloat only by a series of deceptions.”
Much of the indictment as it relates to Lay focuses on the period immediately after Aug. 14, 2001, when Skilling abruptly resigned as CEO after only a few months in the position. Lay took on the job again -- and took charge of the conspiracy, the government said.
In an online forum with employees on Sept. 26, Lay said, “The third quarter is looking great.” Actually, the indictment charges, he knew the company was falling apart and was hiding more than $7 billion in losses.
Lay also told the employees that Enron stock was “an incredible bargain at current prices” and said he had been buying it himself. In fact, the indictment said, though he had bought $4 million worth of shares, he had sold $24 million worth.
As the company’s woes worsened, this alleged pattern of deceit continued. “We’re not trying to conceal anything. We’re not hiding anything,” Lay said in an Oct. 23 conference call with analysts. Again, this was untrue, the indictment said.
Another alleged fraud involved the hidden erosion of Enron’s business of selling electricity directly to companies and homeowners in California and other states that had opened their power industry to competition, the government said. That operation, Enron Energy Services, was a cornerstone of Lay’s devotion to deregulated markets.
EES was suffering “massive losses” by January 2001, the SEC and the Justice Department said. With Lay’s approval, the agencies said, Enron hid EES’ failure from the public by moving portions of the business into the booming wholesale trading arm, which was reaping huge profit from electricity trading in California and elsewhere.
Two top Enron traders have pleaded guilty to fraud charges and a third awaits trial on accusations of manipulating California’s power markets.
The point of Lay’s many alleged machinations, the government said, was to spruce up Enron’s profit and balance sheet, thereby propping up Enron’s stock price. The stock, which closed at $90 at its peak on Aug. 23, 2000, was worth only pennies after Enron’s bankruptcy filing in December 2001.
Several lawyers and law professors who have followed the Enron developments said that Lay probably would be tough to convict.
Sean F. O’Shea, a former prosecutor now in private securities-law practice in New York, said that although the top executives are nearly always the most attractive targets in a major corporate fraud case, “it’s usually easier to get the people in the middle. Sometimes the CEO is just a bridge too far.”
Other legal experts said the government might have a strong case against Lay.
“You have to show criminal intent to succeed before a jury, no question, but what people forget is these standards are broad principles and subject to interpretation,” said Linnea Bernard McCord, an associate professor of business law at Pepperdine University. “Many commentators said Martha Stewart wasn’t going to be convicted either.”
The lifestyle entrepreneur was found guilty in March of three counts of conspiracy and obstruction of justice in a stock-trading case.
If Lay’s trial is held in Houston, jury members may recall his news conference. He was dapper, with a red power tie, looking almost as if he were running for office.
Although Lay’s fellow defendant Skilling did appear on Larry King’s TV show, high-profile defendants have traditionally let their lawyers do all the talking.
Lay didn’t appear to say anything that will haunt him at trial. He pinned the downfall of Enron on former Chief Financial Officer Andrew S. Fastow, who has pleaded guilty and is awaiting sentencing.
Running a company with 30,000 employees in 30 subsidiaries involved a lot of trust, Lay said. Fastow “betrayed that trust and betrayed it very, very badly.... It is amazing the amount of damage that can be done by very few people that are doing things that tend to enrich them but also create chaos,” Lay said.
A spokesman for Fastow declined to comment.
Whether the news conference changed anyone’s minds in Houston was doubtful. Some remember Lay’s extensive philanthropy, but many others recall the thousands of unemployed, their corporate savings plans -- all in Enron stock -- annihilated.
“People here are either passionately pro-Ken Lay or violently anti-Ken Lay,” said the Rev. Bill Lawson of Wheeler Avenue Baptist Church in Houston, a family friend.
“There’s almost no one in the middle.”
Times correspondent Calvo reported from Houston and staff writer Streitfeld from San Francisco. Staff writer Thomas S. Mulligan in New York contributed to this report.
