Lay has been testifying for the past couple of days. On his first day, he was apparently folksy and pleasant, but he got testier on the stand yesterday. He's been shoving all of the blame on Enron's failure onto the shoulders of Andy Fastow, the CFO who pled out to 10 years a while back. Now, while Fastow was unquestionably the worst of the bunch (the fact that he only got 10 years is disgraceful), Lay demonstrated yesterday why he doesn't deserve much sympathy from the public. In other words, Enron was basically doing okay (except for the fact that they had $36 billion--yes, billion--in debts, a third of which were due in the year that they finally went down . . . and for the fact that no bank would loan them money anymore, not even for a day . . . and for the fact that, as it became clear when they were going down, nobody had been bothering to keep track of how much cash they had on hand--they literally didn't know because they weren't keeping track of it!) . . . Enron would have done okay, if not for those meddling kids at the Wall Street Journal. This, however, I thought was kind of funny:
There's much better stuff than that, although it hasn't come out in the trial. My favorite was Lay's reaction to the news that an Enron entity was technically independent because it was owned by Kopper's (a Fastow toady) gay lover. Incidentally, while I do think Lay and Skilling badly mismanaged Enron, I don't think they did much wrong in a legal sense - they were just awful businessmen. Fastow, on the other hand, should spend more time in jail than he will, but he wised up and copped a plea first. Hell, even the Merrill Lynch bankers will spend time in jail due to the Nigerian power barge scandals.
Wasn't it something along the lines of "Wait--it's owned by his gay lover!?!?!?" Yep, Fastow and Kopper were, without question, the worst of the bunch. Skilling may be in worse trouble than Lay, because (IIRC) several people repeatedly tried to point out to Skilling how Fastow's schemes didn't work, how Fastow was milking ridiculous "fees" from the company for selling bits of Enron to, well, Enron, and how Fastow bullied banks into sinking money into the off-books deals by threatening to take Enron business elsewhere. Are Lay's biggest legal troubles related to stock sales? I don't know much about what happened with regard to his sales of Enron stock. What was ML's role in the Nigerian power barge scandal again? Was that the infamous loan-that-wasn't-a-loan?
Well, I will defer to the experts in corporate law on whether Lay and Skilling are guilty of violating the law. But the fact is they signed off on public financial statements that were blatantly false, particularly their cash flow statements, which were more fictional than Lord of the Rings. Jail time may not be justifiable legally, but certainly morally.
Or "Kopper ********ing gay lover?!?!?!" after a long pause. But yeah. For the most part. He was CEO, not President, during most of the crisis, and thus wasn't on the ground floor managing the place, so to speak. However, he was insanely stupid enough to borrow money with his Enron stock as collateral and then sink it into risky investments. When those went sour, calls came in as Enron's stock tumbled, and he had to liquidate the stock in order to pay the creditors back, but of course the stock kept going lower. He was effectively going broke as Enron was crashing down around him. Now, here's the thing - if he KNEW that Enron was going down, and therefore no one should invest money into it - yeah, he might well be guilty of market manipulation. Why else do you think he keeps saying it was a "run on the bank" issue? Did he actually do anything illegal there? Tough to say. I recall there are some mitigating details and that its murky anyway. ML had a side letter with Enron allowing ML to sell the barges back after quarter end. Which means its wasn't a true sale, meaning it couldn't come off Enron's books.
Here's the thing though - there's no real evidence that Skilling swindled anything. He's going to lose most of his money one way or another.
Skilling I'm not so sure about. Form what I've read and heard from people, he was just an idea guy who was a horrible manager and was convinced of his own genius. Not all failures are crooks, even if their subordinates are. I can't imagine he knew about Belden's activities in the Northwest, for example. As for whether or not they're guilty - this is a criminal case, and it requires mens rea, as far as I know. Proving that Lay and (especially) Skilling knowingly committed securities fraud is going to be rather difficult, and unlike Fastow, who CLEARLY knew what he was doing was illegal (Kopper kept a "secret" double ledger), there's no evidence that Skilling did.
I recall that one of the people in the room tried to convince Lay that the deal was kosher because "homosexuality is illegal in Texas" (this was before the anti-sodomy law had been overturned by SCOTUS), as if the distinction between a married partner and an unmarried partner were important on this point. Oh yeah, now I remember. Do you think the attempted whistle-blowing will be used to nail Skilling? Fastow's role at the company was, to say the least, controversial, and there was no shortage of people who tried to convince Skilling that Fastow's transactions were troubling. I also wonder how important it will be that they exempted Fastow from their conflict-of-interest policy and basically obscured his role as the manager of the off-books projects. One of my favorite moments in Conspiracy of Fools is when Jeff McMahon takes over as CFO and holds an emergency meeting with the treasurer and others. First, he learns that nobody has bothered to keep track of the cash flow, because the exciting young managers in that department felt that such boring number-crunching was beneath them. Then, he asks the treasurer how much debt they've got, and the treasurer responds that he'll "look into it." McMahon sits stunned, thinking, "You're the treasurer and you don't know how much debt we've got?!?"
Well, that was the whole point - its technically correct. Kopper eventually left Enron to take over the second fund because Skilling finally told Fastow he couldn't run it and be CFO. But Skilling didn't benefit financially from Fastow's dealings and he believed that Fastow was good for the company (or so he says). Its a stupid decision, but the board went along with him. It wasn't until Fastow finally agreed to tell Enron what his compensation was that the shit hit the fan. As for the whistle blowing............Fastow got Skilling his numbers, he'd been named CFO of they year (or something like that) and he had the ear of the banks. Hard to say "you should have known" in a criminal case. In a civil case, he's going to get reamed. The more interesting thing to me is that Skilling spoke at an investor presentation for Fastow's second fund. That Prospectus (for the fund) promised ungodly returns for its investors. If he'd looked at that, he'd have known the jig is up. But it doesn't seem he did. McMahon's not exactly a saint himself - I think he comes off better in that book than he perhaps should. But yeah, that's symptomatic of Enron. I prefer the other moment where they realize they've set a downgrade trigger one notch above non-investment grade, which is a really, really dumb thing to do, especially if you don't keep track of it.
Judging from the article in the Times, this still seems to irk Lay more than some of the other problems in the company. Then again, Fastow assured them repeatedly that Enron was his primary source of compensation, so I can't blame them for fuming once they learned that he made more than $45 million in the off-books work. Obviously, I know nothing about criminal law. Is it necessary for Lay and Skilling to have enriched themselves for them to be found guilty of fraud? It would seem to me that their salaries and bonuses would count as a kind of illegitimate personal enrichment, being that they were paid on the basis of results that had been faked. Yep. Kurt Eichenwald has noted that even the whistleblower, Sherron Watkins, wasn't totally clean. I haven't read yet about the downgrade.
The whole argument, I think, is that the CEO of a corporation that makes 19 million a year can't claim that he "didn't know what was going on." I mean, gross incompetence at this scale should be illegal. Specifically, giving out reports stating that the company is doing fine, cash flow is great, and debt is under control while not actually knowing what any of these numbers were seems to be a classic case of fraudulent reporting.
That was officially, and only in what, two years? Fastow made more - he took Kopper's house for his shares in his first fund, iirc. No. Well, yes, but they were paid by stock price. That's not fake - that's traded on the NYSE. You'd need to get a claim that they manipulated Enron's stock price to get paid (which is the charge). However, you need mens rea. Being a bad businessman and having usncrupulous toadies weaving insanely complicated structured finance webs doesn't mean you intended to defraud people. Lay barely knew what was going on at that time - hard to say just how conspiratorial he was. However, they all figured out something wasn't kosher with that compensation package. None of them were. It may not be in that particular book.
Perhaps, but its not. Its not fraudulent if you don't know its fraudulent. If I tell you in 1917 that Russian government bonds are a great investment, am I defrauding you if I didn't know about the Bolsheviks? No, - its just stupid.
So, the defense for giving out information that suggested everything was going great, even when it might have not been, is that they didn't actually bother to find out how things were going? That's brilliant! Although the whole "giving positive outlooks while unloading all their stock" thing might *suggest* that they knew more than they were letting on.
Two years sounds right, maybe three. And you're right about the take being larger--IIRC, $45 million was what Fastow reported, but there was likely at least another $15 million elsewhere. It was pretty cheeky of him to suggest that he was "being reasonable" by asking for only $5 million in the severence package. Interesting. The more I learn about this case, the more incredulous I feel about Fastow's wrist-slap. I still have about 75 pages left, so the downgrade is likely coming soon. Concerns among the brass about what would happen were Enron's stock to be downgraded to junk status have already been noted.
Judging by what I've read and by what Nicephoras has had to say, it's not merely a defense. Lay and possibly Skilling really appear to have been merely incompetent. Their hubris, combined with their aversion to any kind of bad news (which, in Enron's case, means a realistic assessment), did them in. The question for the jury is whether that incompetence was criminal.
No, not really. Its that they didn't understand it. Look, I'm not defending Skilling and Lay as people, but in speaking to those who're working on the case and reading a lot on it (Fastow was doing what I effectively do for a living), its not as cut and dry as you suggest. Its really freaking hard to unravel just what Fastow was doing. The Raptors were byzantine, and if your CFO tells you that you have X amount of money on your books, what are you supposed to think? The problem is that Skilling was a very smart consultant (he was a parter at McKinsey before joining Enron) but knew very little about the nuts and bolts of accounting. Oh, he knew enough to push for mark to market accounting, but once he did that, he wasn't the man to read his company's balance sheet to figure out exactly what was going on. Fastow had loaded the company with so much debt propped up by shoestrings that it was just begging to collapse. (The money Fastow made for himself wasn't really that big a deal in the grand scheme of things.) Should Skilling have asked to occasionally see information on the company's debt levels and repayment schedules? I don't know - maybe. But this was his FIRST management position. And until McMahon, Enron had, in its stupidity, absolutely no one who knew how to operate a balance sheet in the treasury department. Fastow had never been a treasurer - he was a deal guy. He kept putting things off balance sheet and not telling anyone. If your CFO and his employees aren't giving you the accurate state of the company, what are you supposed to do? Skilling's real crime were stupendously bad ideas and awful management skills. Trading broadband and building Enron's own broadband network was monunmentally stupid. And Rice was telling him that everything was hunky dory, even though after spending a billion they hadn't a clue what they were supposed to do or had done. Skilling told his people his profit estimates, and they met them. He didn't know nearly enough about the broadband market to actually say "wait, how's this working"? He just assumed that his great ideas would win out, even though the business was radically different. The realities didn't match the theory. Enron had a pattern for doing this sort of thing - they did the same thing with Azurix, by assuming they could trade/deliver water in Buenos Aires, which was a monumental failure. They didn't understand the business, they just had an idea. "Conspiracy of Fools" is a perfect title for it. There were way too many people obsessed with their intelligence in that company and not nearly enough self-examination. That's the thing though - not all of them were. Lay had to walk away from a $50M(!!!!!) severance payment, and given how he tied his loans to the price of Enron shares, why in the world would he have expected the company to tank? Besides, selling high is normal, and Enron's stock was really, really high. Lay's a different story, in general, but as the CEO, you only make the really big decisions. For a company as complicated as Enron, there's no way board members can know what's going on if their financial people are lying to them. Lay, by the end of his Enron career, was essentially a dilletante at large.
Yeah, well, cheeky is Fastow. His "foundation" which employed his parents and his wife's friends was great. I guess. He's a total shit, but he didn't bring the company down with his thieving - he was incompetent too. Except at enriching himself. Enron had too many bad business ideas for one CFO alone to bring them down. Stock's not rated - debt is. You're referring to the downgrading of Enron itself, which means that their unsecured (and perhaps their secured) debt would be downgraded below junk level. If you have a lot of structured deals, which have provisions for calls if you reach junk rating, its a death knell. Especially when you keep in mind that Enron's main source of revenue was trading energy. If you no one trusts that you'll repay your debts, who in the world would trade with you? That's why there was so much fuss recently when AIG was downgraded by just one notch (and they're not even close to junk). Companies that do a lot of hedge/swap transactions need to have the highest ratings possible, since often you pay them an up front fee for potential payments in the future.
What sort of jail time are the Gramma Millie douchebags going to get? Or is being a douchebag no longer a crime in this country?
True, but my post had the implication that SOX had not yet been adopted. After all, it was adopted in reaction to Enron. I know, I've drafted the stupid forms that CEOs and Presidents have to sign regarding compliance with accounting standards/rules. EDIT: Even then, this seems to be more of an issue of total incompetence as well.
Tar. Feathers, Rails. Torches. Mobs. Lampposts. Field telephone generators. Aligator Clips. Pillories. Bull whips. and last but not least The Anal Pear
The list of terrible business ideas that happened at Enron is almost too long for one person to write: the shift to mark-to-market accounting, bonuses that were pegged to the size of a particular project and not to its quality, the energy plant in India, the whole water business (frankly, anything and everything with Rebecca Mark's fingerprints), the broadband trading, the direct-video deal with Blockbuster . . . . . . really, pretty much everything but Enron's original business--the pipelines.
Speaking of which, one thing I didn't see mentioned in the recent accounts of Lay's testimony was anything about the energy trades in California. I wonder how much he knew about those. (Unless this is the Northwest stuff you mentioned above.)