Today In Enron History

July 5, 2006, former Enron CEO Dr. Kenneth Lay passed away at his home in Aspen, Colorado. He was 64.

In trying to write about Dr. Lay’s death, it occurred to me that I was using a lot of adjectives, trying to describe what he was like and how he is remembered by friends and loved ones. It sounded very thin and frankly I considered deleting it and not writing a Today In Enron History at all for this day (I’ve never written one for this day because words fail me.) But I have one Ken Lay story that I think it illustrates the kind of man he was much better than just descriptors can.

On the evening of January 20, 2000, I was on a date with a reporter from the Houston Chronicle. My recollection is that we were downtown at the Texas State Bar. The reporter looked up and said, “Holy crap, that’s Scott McNealy!” I looked up and there was the CEO of Sun Microsystems. Then I looked past him and there was Dr. Lay, holding the door open for a stream of people entering the crowded bar. Not one person said thank you. Still, he never stopped smiling. He just held the door open. As the evening progressed, people recognized him; this was Houston, after all, and it was the night of the huge analyst conference so everyone was buzzy and excited and he was the man of the hour. People clamored to introduce themselves to both him and McNealy. I remember his infinite grace. I remember he never stopped smiling and he was polite to everyone who interrupted him to introduce themselves.

That’s the kind of man he was. Approachable. Liked. Gracious beyond reason. It wasn’t a gimmick with him; he was really a kind, Southern gentlemen. His love of people was obvious.

When I heard that he had passed away, I though the world had lost someone truly special, truly kind. I was sad for Dr. Lay’s family and everyone involved in the Enron crisis, particularly Jeff Skilling, but mostly I was sad for the ordinary people who went up to shake his hand that night. I was sad because that was as close as they might ever come to being treated as an equal with someone of Dr. Lay’s stature. He was just a very kind and very good man. He is missed.

The Strange Silence In The Natwest Three Case

[Again, it was written over a year ago.]

During the ordinary course of my Enron googlings, I found this Guardian article about the NatWest Three, dated Monday, August 6, 2007. The NatWest Three – David Bermingham, Giles Darby and Gary Mulgrew – are all former NatWest bankers who have been accused of doing a dirty deal with Enron, and profiting from that deal. In 2006, they were extradited to the US to face trial for illegally profiting to the tune of $7.3M. As usual, no evidence exists to prove that the three did anything wrong at all. And as the Guardian story recounts, the NatWest Three had great difficulty in getting any witnesses to speak on their behalf because the prosecutors were using the exact same strategy against them as they were against Jeff Skilling and Ken Lay. They silenced witnesses with threats of arrest (or indictment). And exactly like in the case of Skilling and Lay, virtually no witnesses were willing to step up and face that kind of pressure to defend their friends and coworkers.

The only defendants who have had any luck in witnesses defying the prosecution are the Broadband executives. In that case, five former executives were fortunate enough to have witnesses come forward, despite being labeled unindicted co-conspirators, and despite repeated threats from prosecutors not to testify on behalf of the five Broadband defendants. Several other also risked themselves, their families and their very freedom to tell the truth about Enron Broadband Services.

But, oddly, that was the only Enron trial where such courage was commonplace.

Again, the obvious question presents itself: is this the best path to justice? Is this a valid way to determine if something untoward or illegal really occurred? Silencing witnesses doesn’t sound like the most noble way of acquiring a conviction. But where Enron is concerned, nothing about the DOJ is noble.

Today In Enron History

August 28, 2001.

Greg Whalley was tapped as president and COO and Mark Frevert was promoted to vice-chairman to help fill the vacancy in leadership created when Jeff Skilling resigned the previous week.

“Greg and Mark bring a wealth of talent and experience to the office of the chairman,” said Dr. Lay in a statement. “In addition to having led Enron Wholesale Services, they have a collective 26 years of extensive experience across Enron’s businesses, and both played key roles in increasing our deliveries of energy and other commodities in North America and Europe.”

By this time, Enron stock had declined 10% since Skilling resigned. When the positions were announced, the stock rose 1.7%, to $38.40.

Andy Fastow had a busy day. Lots of meetings, interrupted at noon for lunch with Lea and his children at the office. After lunch, he had yet more meetings – three with Michael Kopper alone. At the end of the day, he attended Happy Hour for Michael Kopper’s going away. Then he went to a baseball game, Cincinnati Reds Vs. Houston Astros.

Because of the general busy-ness of the day, it is impossible to know if either Dr. Lay or Andy Fastow knew what had been printed that morning in the Wall Street Journal, though we are certain they found out later. It was a small item in the “Heard on the Street” column, written by Rebecca Smith and John Emshwiller. It said that Dr. Lay was promising more transparency to investors and to abandon the in-your-face management style that had become so infamous at Enron. But the real importance of the article was that it was the first time LJM was mentioned in a national newspaper. It revealed that Andy Fastow had sold his interest in them and quoted Lay saying it had become a “lightening rod” inside the company.

Jeff Skilling remained on vacation, rafting with his son.

Today In Enron History

Tuesday, August 21, 2001. Another super-busy day at the world’s leading energy company.

Sherron Watkins’ phone call to Arthur Andersen the previous day set some wheels in motion. David Duncan, the lead partner on the Enron account for Arthur Andersen, meets with three other AA officials to discuss the Watkins call. A memo states they “agreed to consult our firm’s legal adviser about what actions to take.”

Meanwhile, Dr. Lay, unaware of Watkins’ phone calls to Andersen, goes about his duties with familiar expediency. At ten o’clock in the morning, he has a half-hour meeting with Andy Fastow, and then meets with Jeff Donahue, an Enron managing director. While Donahue has been an obscure Enron figure up till this point, he will become critical in the coming months. After his meeting, Dr. Lay sends a company-wide email. He tells the employees that Enron is in good shape and he believes the stock price will increase. He then meets his wife Linda for luncheon and after that, together they depart for Aspen.

After meeting with Dr. Lay, Andy Fastow departs to keep a standing Tuesday afternoon luncheon with his wife, Lea. Andy Fastow is a romantic. He hurries out the door; he doesn’t like to keep her waiting.

Jeff Skilling has found himself in the peculiar situation of not having to use an alarm clock to wake up. He’s been retired for seven days. His brother has come to visit – illustrating his desire to spend more time with family. This morning he takes a phone call with the Federal Reserve, where he was a board member, to discuss the design of the new building. After the phone call, he’s not quite sure what to do with himself. He’s been working since he was fourteen years old. For the first time in his life, there are no demands on his time. It’s a liberating but odd feeling.

Also on this day in 2002, Enron world headquarters at 1400 Smith Street in downtown Houston, Texas was put up for sale.

Today In Enron History

Monday, August 20, 2001.

Fresh from a weekend of contemplation, Sherron Watkins calls her friends at Arthur Andersen and reports her concerns about Enron’s accounting treatment of the raptors.

Meanwhile, Andy Fastow busy with meetings all day. In the morning he met with Ken Lay, Greg Whalley, and Rick Causey. At two o’clock in the afternoon he met with Enron general counsel Jim Derrick. An hour later, he was invited to a Policy Committee Meeting. An hour after that, he met with Mark Metts, Kevin “they’re on to us” Howard, Kristine Mordaunt and a few others about PGE.

Then at the close of business, he called Schuyler Tilney. Schuyler Tilney was the head of Merrill Lynch’s energy group who managed the firm’s relationship with Enron and he was also, personally, an investor in LJM2. He was generally considered a confidant of Fastow. Meanwhile, his wife Elizabeth was an ex-Enron senior vice president and a friend of Ken Lay. When Ken Lay would hear of Sherron Watkins’ concerns about the accounting treatment, he would send her to speak to Elizabeth Tilney, who had worked on the company’s values statement and was presently involved in corporate communications (also, she is the one who introduced the tilted-back E logo in 1996).

But that is all coming in the weeks ahead. It is unknown what Fastow and Tilney spoke about on August 20, 2001.

Also on this day, in 2002, the first federal indictment in the Enron case was handed down. Michael Kopper pleaded guilty to charges of conspiracy to commit wire fraud and money laundering.

Bear Stearns Execs Surrender

Collin Barr of Fortune, writing for CNN has written a piece titled, “Crime and Delusion on Wall Street.” However, the title of the HTML page reads, “Lesson of Bear Funds’ Collapse Went Unheeded.” So you know where this is going already.

Coming soon to a docket near you: The first criminal case of the credit crunch.

Oh snap!

The first two paras are the most relevant to my own post so I’ll paste them and then comment:

Two former Bear Stearns hedge fund managers, Ralph Cioffi and Matthew Tannin, surrendered Thursday to the FBI. The men are expected to face federal charges later Thursday that they intentionally misled investors in two funds that collapsed last summer under the weight of wrong-way bets on mortgage-backed securities.

The case apparently turns on the question of what the men knew when they told investors they were hopeful about the funds’ prospects – at a time when their performance was deteriorating and some investors were trying to withdraw money.

Pardon me for stating the obvy but doesn’t this sound exactly like what was said about Enron when it collapsed? Ask any schmo on the street (not the Street) what execs at Enron did wrong and you’ll hear that they mislead investors and they wouldn’t allow employees to sell their stock (ie, withdraw their savings) from their 401(k) plans.

My issue with the first allegation is that it’s almost impossible to “mislead” investors these days. There are so many financial filings, so much information on the internet, and so many cable news channels that ramble 24/7 about business that only the most clue-free could possibly say they don’t know what’s going on with any company.

Dr. Ken Lay and Jeff Skilling were both accused of lying to investors. Dr. Lay, for instance ,told a room full of employees that “the worst is behind us.” Skilling repeatedly told investors, analysts, employees, Congress, the SEC, and federal prosecutors that Enron was in strong financial shape when he left the company. Both men behaved as if the company was in terrific shape. Neither one ran, destroyed files, told anyone to lie, hid relevant information. Jeff Skilling divested from a ranch he owned in Brazil. Seems to me if you think the ceiling is about to cave in, you’d run as fast as you could to a place like some isolated, fortified ranch in Brazil. But no. Skilling sold his interest.

Furthermore, Skilling did not sell off large portions of his Enron stock. Though it often gets overlooked, there is perhaps no-one who lost as much money as Jeff Skilling and Ken Lay when the company collapsed. Had they known they were lying to investors, and seen the tsunami of trouble coming, perhaps they would have sold a bit more, or told their loved ones to sell. But that never happened. Jeff Skilling said at trial that his brother said, “You never told us to sell.” Since the brothers were close (Skilling mentioned his brother no fewer than eight times while on trial), it seems he’d have at least quietly told him to sell. If you’re going to believe that he is a criminal mastermind, that he sold his own stock on insider information, why not expand that to his family?

But he didn’t tell anybody to sell. He didn’t know the company was about to collapse. Neither did Dr. Lay. There was no exodus of the Lay family from Enron stock. There was nothing that indicated something was wrong.

Thus, when a federal prosecutor says executives were lying, I have to think that it’s their way of prosecuting mistakes – looking backward and saying the executives should have known, not that they did know. It’s a low-hanging fruit.

With Bear Stearns, I don’t know if the same set of circumstances exist. I do know the CEO of Bear Stears was busy with a bridge tournament during his company’s collapse and didn’t find it necessary to actually get involved, but I don’t know what conclusions, if any, one can draw from that.

I don’t know the details of the Bear Stearns collapse, but the language used to vilify the executives seems to lead only to one place: the gallows. With the past as my guide, I have only one piece of advice for the Bear execs who now find themselves ensnared in the prosecutor’s tentacles: gird your loins.