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Crimes of Others
Wrecked Enron, Ex-Chief Says
By KURT EICHENWALD Published: June 27, 2004
HOUSTON, June 22 There was a time when Kenneth L. Lay's close relationship with President Bush brought him power and influence in Washington that was virtually unparalleled among his colleagues in corporate America. Now, Mr. Lay, the former chairman and chief executive of Enron, fears those ties may only serve to bring him criminal charges. "If anything, being friends with the
Bush family, including the president, has made my situation more difficult,"
Mr. Lay said in a recent interview, "because it's probably a tougher decision
not to indict me than to indict me."
Now, on the eve of what may be the government's final decision on whether to charge him with a crime, Mr. Lay is talking for the first time about the company's collapse in 2001 and the scandal that enveloped it. In more than six hours of interviews with The New York Times, Mr. Lay remained steadfast in his expressions of innocence, even as he acknowledged, as head of the company, accountability for the debacle rests rightfully with him. "I take full responsibility for what happened at Enron," said Mr. Lay, 62. "But saying that, I know in my mind that I did nothing criminal." As Mr. Lay describes it, the Enron collapse was the outgrowth of the wrong-headed and criminal acts of the company's finance organization, and specifically its chief financial officer, Andrew S. Fastow. He says that both he and the board were misled by Mr. Fastow about the activities and true nature of a series of off-the-books partnerships that played the decisive role in the company's collapse. Yet, Mr. Lay still argues that some of the company's most controversial decisions including some that set up financial conflicts of interest for Mr. Fastow that could well be unprecedented in corporate America were made for good reasons, and can be seen as mistakes only in hindsight. The interview was conducted in Mr. Lay's office in downtown Houston. There, a picture window frames the old Enron skyscraper across town, a sight he said he rarely contemplates during his days working as a consultant for two start-up companies. The years since the Enron collapse have transformed Mr. Lay. The changes in his financial status are stunning. At the beginning of 2001, Mr. Lay said, he had a net worth in excess of $400 million almost all of it in Enron stock. Today, he says his worth is below $20 million, and his total available cash not earmarked for legal fees or repayment of debt is less than $1 million. But the changes amount to more than just money. A man once celebrated in business and political circles, today he is widely vilified as bearing significant responsibility for Enron's downfall, a debacle that cost thousands of employees their jobs, millions of investors their savings, and, for a time, forced a nation to question the capital markets system. He is often portrayed as a man who bailed out of his company as it was sinking, selling millions of shares even while telling investors and employees that he believed in the company's future. It is a portrait, he insists, that disregards the realities of Enron's last months, a time in which he describes himself as first working hard to improve the company, then struggling desperately to keep it afloat. A Reversal of Fortune Now, according to witnesses who have testified before the grand jury and other people involved in the investigation, prosecutors are focusing almost exclusively on Mr. Lay's actions and statements in the months preceding bankruptcy, in an effort to determine if he deceived investors about the true state of Enron before its demise even as he was selling his own stock. However, a review of Mr. Lay's financial and trading data shows that the facts are much murkier than is generally believed, with the stock sales being forced by lenders as he took numerous actions that are consistent with someone trying to minimize his sales. To date, numerous executives who worked for or advised Enron have pleaded guilty to crimes or been charged with wrongdoing. Virtually the entire senior management has faced legal proceedings: its treasurer, chief financial officer, primary outside accountant, corporate secretary and even a division head have all pleaded guilty to crimes. Others, including Jeffrey K. Skilling, another former chief executive, and Richard A. Causey, the former chief accounting officer, have been charged with fraud. Mr. Lay himself has remained under
investigation that entire time, and - at what he said was his legal team's
insistence - invoked his Fifth Amendment right against self-incrimination
in testifying before Congress.
(Page 2 of 4)
Mr. Lay said that he had remained silent on the advice of lawyers, but is coming forward now to explain his views of a story that he says has become infused with myths. While not saying so explicitly, he suggested that he was motivated by a desire to tell his side both to the prosecutors on the Justice Department's Enron Task Force who have been investigating him and the citizens of Houston who may well sit in judgment on him.
Assigning Blame In the end, Mr. Lay said, the Enron story is one of corrupt executives in a finance organization led by Mr. Fastow, the former chief financial officer, who took advantage of the company for their own personal benefit and ultimately destroyed it. Mr. Fastow has pleaded guilty to fraud and is cooperating with the government. "At our core, regrettably, we had a chief financial officer and a few other people who, in fact, mismanaged the company's balance sheet and finances and enriched themselves in a way that once we got into a stressful environment in the marketplace, the company collapsed," he said. "But by the same token, most, and I mean 98 percent, of the people who worked at Enron were good, honest, hardworking individuals. They were not crooks." Still, Mr. Lay said he clung to a belief that the outcomes of certain corporate decisions that ultimately proved devastating to the company could not have been anticipated. The use of such partnerships was widespread throughout the business world, as corporations attempted to use a technique authorized under the accounting rules to pretty up their reported financial picture. But Enron took those efforts much further, adopting policies that were unheard of, such as allowing Mr. Fastow to operate an off-books investment fund that did business with the company and provided financing for some of the partnerships. Mr. Lay labels criticisms of that set-up as 20-20 hindsight, created only because the world now knows that Mr. Fastow used the vehicles to manipulate Enron's earnings and loot the company, all without his knowledge, Mr. Lay said. "At the time it seemed the appropriate thing to do," he said. "And I had no reason to doubt or distrust Fastow." But legal experts dismiss the entire venture as foolhardy from inception. "It's just not common sense thinking," said John J. Fahy, a former federal prosecutor now with Fahy Choi in Rutherford, N. J. "Your C.F.O. cannot be put in a position where he is in conflict with the company. He is simply too important. The idea is just crazy." While he has been subjected in recent years to withering personal criticism on Capitol Hill, by the media, on late night talk shows and across the Internet, Mr. Lay said that in his hometown many longtime friends and associates remained supportive, and he continued to serve on multiple charitable boards in town. In 'The Twilight Zone' Still, Mr. Lay said, the event took a toll, disheartening him and his wife, Linda. "Linda kind of likened it not too long ago to being in the show, 'The Twilight Zone,' where you live your whole life" trying to be ethical and straightforward, Mr. Lay said, "to almost overnight being referred to in the national media and elsewhere as a kind of pariah on society. And no, that's not any fun." By the summer of 2001, Mr. Lay said, he had turned the chief executive's job over to his hand-picked successor, Mr. Skilling, who built Enron's energy trading business. By the end of that year, Mr. Lay expected to relinquish his title of chairman as well, and take a position with a New York merchant bank. Then, Mr. Skilling told Mr. Lay he
wanted to resign. With no one in the wings, Mr. Lay informed the merchant
bank in August that he could not work there, and returned to Enron as chief
executive. His return was greeted with some employees expressing simmering
concerns about the way the company was running. Mr. Lay commissioned surveys
of employees, and invited them to come speak with him or one of his top
executives about any worries.
(Page 3 of 4)
The appeals brought in responses from throughout the company, pointing up problems that ranged from serious challenges to significant dangers. Sherron Watkins, an executive who had just sent an anonymous letter to Mr. Lay criticizing some of the off-books entities as improper, came forward to meet with him. Other e-mail messages arrived from current and former executives lambasting and praising the company. Some of those e-mails Mr. Lay said he saw; others, he said, were never shown to him.
One of the e-mails questioned by the government, from a senior executive named Steven Kean, said the company was perceived as being involved in aggressive accounting and the hyping of new businesses. But the message simultaneously praised Enron's accounting staff and expressed high expectations for growth. "I looked at that as a very balanced memo," Mr. Lay said. "And when I read that e-mail, I called Steve and told him I didn't disagree with the issues he raised. I thought they were issues that needed to be addressed." Mr. Lay said he was impressed by Ms. Watkins, who criticized certain off-books entities, particularly a quartet of entities known as the Raptors, for utilizing what she said was improper accounting intended to bolster Enron's profits in 1999 and 2000. "I thought she seemed very credible, very smart," he said. But that, he said, did not lead him to believe the company was in dire condition. "You just don't read one letter coming from a person in middle management and decide, 'Well, we have a serious problem here,' " he said. Mr. Lay instructed his legal team to bring in Vinson & Elkins, a Houston law firm to investigate; the lawyers concluded there were no significant problems. However, the firm had done legal work on the entities under investigation, and Mr. Lay has been sharply criticized for seeking advice from a conflicted party. But Mr. Lay said that given the gravity of the accusations, he wanted a fast answer, which he thought the firm could provide because of its familiarity with the issues. Indeed, Mr. Lay said, a subsequent review by independent lawyers and accountants, which found serious flaws in the structures, took three months to conclude. "If we'd started that report back in August," he said, "We would have been bankrupt before we got the report back." But at the same time that negative news was coming in, Mr. Lay was hearing positive information about the company. In a September meeting, Mr. Fastow announced that the company balance sheet was stronger than ever. Ben F. Glisan Jr., the treasurer, said Enron's credit rating was likely to be raised in a matter of months. When criticisms of some accounting approaches were raised at that meeting, Mr. Causey, the chief accounting officer, gave a rousing defense, saying every transaction was vetted by him and by Arthur Andersen, Enron's outside accountants. Along with Mr. Fastow, Mr. Glisan has also pleaded guilty to felonies. Mr. Causey has been indicted on multiple counts of fraud. Meanwhile, Mr. Lay said, reports from his biggest operating divisions were uniformly positive. Personal Stock Sales Other information gave him reason to believe Enron's stock price would recover, Mr. Lay said. For example, in mid-September, Goldman, Sachs informed him that Enron was at risk of a hostile takeover because its stock price had fallen below its true value. Board records show that in the second week of October, Goldman made a full presentation on the dangers from the low stock price, and presented defenses Enron should have at the ready to ward off unwanted suitors. Mr. Lay maintains his heavy stock
sales throughout 2001 were not an effort to bail out of Enron; rather,
he says, he was making every effort to hold on to every share he could.
(Page 4 of 4)
For more than a decade, Mr. Lay kept
almost all of his holdings in Enron stock. Before 2001, his financial advisers
persuaded him to diversify. But he refused to sell his shares to raise
the cash for other investments. So instead, he borrowed about $100 million,
using a large chunk of his Enron stock as collateral. Most of that money
went into hard-to-sell assets, like investment properties and private equity
deals.
Such a strategy would only work, of course, if Enron stock held steady or rose. But Mr. Lay said he did not think the price would fall. "That was not something I thought very hard about in 2000," he said. Once the stock price did start falling, however, Mr. Lay received demands for more cash from the banks. He had few assets he could readily sell to meet those demands, and many of those were disposed of in the face of the financial pressure. In consultation with his financial advisers, Mr. Lay said, he decided to increase his gamble on Enron stock. After alerting the company to his plans, he borrowed money from a corporate line of credit, to the limit of $4 million - and later more than $7 million - and used that to meet his margin calls. Then, he waited, hoping for the price to go up. If another margin call arrived, he repaid the corporate line with Enron shares, and borrowed again to meet the new obligation from the banks. Under the bank contracts, Mr. Lay could not refuse payment. If he failed to meet his margin loans, the banks would sell his shares for him, and had the right to dispose of as much they wanted. "Knowing bankers, I thought if they did that, they would make sure they met the margin call, and maybe sell a little more to build up a cushion," he said. "From my standpoint, I was trying to sell as few shares as I could." There are independent signs that is true. That summer, Mr. Lay converted more than 200,000 options into stock, but did not sell the shares, incurring a tax liability on an investment that proved worthless. More telling, in late September, he received a cash bonus of $10 million for rejoining the company, and used all of it to pay down his bank debt - using cash to forestall the further forced sale of Enron shares. Through August and September of that year, Mr. Lay was forced by margin calls to sell more than 550,000 Enron shares. At the same time, he was awarded or purchased almost 185,000 shares. This has become an area of investigation by prosecutors because, during a September 26 online meeting with employees, Mr. Lay responded to a question by commenting that he had purchased shares. But in the aggregate, he was a net seller. Securities law experts said that because of the difference between forced sales and voluntary purchases, it was difficult to call Mr. Lay's statements a fraud. "You aren't able to aggregate all of the transactions over the prior month, particularly when those are explained by economic necessity rather than volitional decision," said John C. Coffee Jr., a professor with Columbia Law School. "I am dubious that you can call that a fraud." But still, in the interview, Mr. Lay was asked whether he believed he owed employees a fuller response, and an explanation that he was selling shares, forced or not. "Let me put it this way, it just didn't cross my mind," he said. "I was doing my best to hang on to as much as I could because I was convinced that the fundamentals of the company were so strong." Despite the rumblings that criminal charges against him could well be imminent, Mr. Lay says he is sanguine. "I know in my mind I did nothing wrong and nothing criminal," he said. "But I'd say if it does happen, it's a great miscarriage of justice." But, if faced with indictment, would Mr. Lay consider pleading guilty? "Absolutely not."
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