Jury Indicts Lay, Former Head of Enron

The criminal charges, to be unsealed today, relate to the energy trader’s financial scandal, the first in a wave of U.S. corporate misconduct.

July 08, 2004 | David Streitfeld and Dana Calvo | Special to The Times

Kenneth L. Lay, who presided over Enron Corp. as it turned into one of the biggest financial scandals of the era, was indicted Wednesday by a federal grand jury here.

Enron’s former chairman and chief executive said he would surrender to authorities this morning, capping an investigation into the downfall of the energy giant that began more than two years ago.

The criminal charges against Lay are contained in a sealed indictment and will be made public today when he appears before a magistrate to enter a plea. Civil charges are also expected to be filed today by the Securities and Exchange Commission.

“I have done nothing wrong, and the indictment is not justified,” Lay, 62, said in a statement.

Enron’s downfall in late 2001 deprived thousands of employees of their jobs and pensions, destroyed tens of billions of dollars in market value and pulled back the curtain on a dizzyingly complex fraud scheme.

Top executives created phantom partnerships that did secret transactions with the company, enriching themselves while bleeding Enron. Other executives exploited the California energy crisis. Recently released tape recordings captured Enron traders gleefully talking about creating false congestion on electricity transmission lines and circumventing price caps.

Enron’s collapse was the first in a wave of corporate scandals that grew to encompass telecommunications provider WorldCom Inc., cable giant Adelphia Communications Corp. and lifestyle entrepreneur Martha Stewart. But it remains the most wide-ranging and influential.

The Enron affair sank the company’s venerable accounting firm, Arthur Andersen, which was convicted of obstruction for shredding documents. The accountants enabled Enron to hide debt and vastly overstate its earnings through the hidden partnerships.

The Enron meltdown led to a wave of corporate reform and helped put an end to hero worship of executives. Once hailed as a brilliant symbol of innovation, Enron is now regarded as a model of how a corporation can consume itself if left unchecked.

From the start, the case has had political overtones. Lay was close to former President George H.W. Bush and his son, President Bush, who dubbed the executive “Kenny Boy.”

Lay lent Enron’s corporate jet to the younger Bush eight times during the 2000 campaign, was co-chair of a gala tribute to him and was one of his top campaign contributors. Enron was also a major patron of Bush and the Republican Party.

Immediately after the first TV reports of Lay’s indictment, the Democratic National Committee fired off a news release outlining these and other ties between the executive and the president. It was only the first shot in what is likely to be an extended effort.

“The indictment plays right into the Democrats’ populist theme that there are ‘two Americas’ — that middle-class Americans are being left out of the riches of the last four years because of the greed of the people at top,” said Bruce Cain, director of the Institute of Governmental Studies at UC Berkeley.

Reporters asked Bush about the indictment at a campaign appearance in Waterford, Mich., but he walked away without answering, Reuters reported.

Lay has contended that he was detached from Enron at the end, spending much of his time representing the public face of the company rather than actually running it. That job, he has said, fell to others, whom Lay blames for ruining Enron.

Still, Enron wouldn’t have existed without Lay. He shepherded Enron from an obscure pipeline company into an energy trading firm that was once ranked the seventh-largest company in the United States.

It seemed at the time a remarkable achievement, especially for a man who had risen from such humble roots. The son of a Baptist minister, Lay grew up in a house in rural Missouri without indoor plumbing. He earned a doctorate in economics, learned the ways of the government during a spell at the Federal Energy Regulatory Commission and began working in the heavily regulated world of natural gas pipelines.

As the industry deregulated, Lay saw opportunities — and took them.

He was fatherly, charming. “Just about everyone who met Lay for the first time liked him, from world leaders to the ministers from Houston’s poorest neighborhoods,” Enron whistle-blower Sherron S. Watkins wrote in a memoir. “The crowds parted for him with something like awe, and he, in return, shook every hand and knew every name, and business could proceed with a feeling of the very best intentions.”

By all accounts, Lay didn’t like hearing bad news or saying no to people, something the executives he hired realized and took advantage of. While Lay tried to float above the fray, the managers battled with each other.

After Enron’s December 2001 bankruptcy filing, public outcry brought a spate of congressional hearings and government investigations into the cause of the collapse and the company’s role in the California energy crisis of 2000-01.

Prosecutors have secured guilty pleas from 10 top former Enron officials and related parties, including Chief Financial Officer Andrew S. Fastow. More than a dozen others are awaiting trial, including former Chief Executive Jeffrey K. Skilling and former Chief Accounting Officer Richard A. Causey.

Even as these executives were brought up on charges, however, there was widespread speculation that the well-liked Lay wouldn’t be touched. The worst he could be accused of was negligence, his supporters said.

In recent weeks, his attorney, Michael Ramsey, has repeatedly insisted that rumors about a forthcoming indictment were unfounded. Ramsey said federal prosecutors did not have enough evidence to persuade a grand jury to issue an indictment.

Wednesday evening, with that hope in ruins, Lay huddled with Ramsey for several hours.

Former federal prosecutor Christopher J. Bebel said he expected the charges against Lay to come in a revised, or superseding, indictment that would add Lay’s name to those of former subordinates Skilling and Causey. They were indicted in February on charges including conspiracy, fraud and insider trading. Both have pleaded not guilty.

Bebel, now a white-collar defense lawyer with Houston firm Sacks Bebel & Boll, said that wrapping all three former executives into the same case would make it harder for them to blame one another than if they were tried separately.

Lay’s “aloof defense” will only go so far, Bebel said.

“When you look at the extent to which corruption permeated the company, it’s unfathomable that Lay would not have known at least some of what was going on,” he said.

Watkins, the whistle-blower, said federal prosecutors had asked her not to speak directly to the media because she was a potential witness. But Philip Hilder, her lawyer, said Watkins felt vindicated.

“An indictment is not a conviction, but at least it’s indicative that, after a thorough investigation, the government believes a lot of Sherron’s allegations,” Hilder said.

Watkins warned Lay in an August 2001 memo that she was “incredibly nervous” that Enron would “implode in a wave of accounting scandals.”

“The question,” Hilder said, “is what did Mr. Lay then do with that knowledge? Did he conduct an investigation? Did he order a whitewash? Did he encourage the unsuspecting public to buy Enron [stock]? All of that will come out at trial.”

California legislators and officials were quick to welcome the indictment.

At the height of the energy crisis, Atty. Gen. Bill Lockyer commented that “I would love to personally escort Lay to an 8-by-10 cell that he could share with a tattooed dude who says, ‘Hi, my name is Spike, honey.’ “

He used less colorful language Wednesday. “I understand people are innocent until proven guilty in a courtroom,” Lockyer said. “But my opinion was — and is — he’s a crook.”

In a statement, Rep. George Miller (D-Martinez) called the indictment “an important step in driving home the message that top executives will be held accountable for their misconduct.”

Referring to the state’s bid for $8.9 billion in refunds for alleged overcharges during the energy crisis, Sen. Barbara Boxer (D-Calif.) said: “If there is enough evidence to indict Ken Lay, then there is enough evidence to get California our money back.”

Kenneth L. Lay

Age: 62

Occupation: Consultant; founder and former chairman and chief executive of Enron Corp.

Family: Wife, Linda; son, Mark; daughter, Robin, from a previous marriage.

Born: 1942 in Tyrone, Mo. His father, Omer, tried selling farm equipment and working in a feed store, but became a Baptist minister after filing bankruptcy.

Education: Bachelor’s and master’s degrees in economics from the University of Missouri; a doctorate in economics from the University of Houston.

Work history: Senior economist at Humble Oil & Refining Co. in Houston, the predecessor of Exxon. After earning his doctorate, Lay was an economist in the Navy, and in 1971 became undersecretary of energy under Rogers Morton. Envisioning a deregulated natural gas industry in which the market would set gas prices, Lay left government service in 1974 to be an executive of Florida Gas, becoming president of the company by 1981. In 1982, he returned to Houston to run Transco Energy Co., and in 1984 took the helm of Houston Natural Gas. In 1985, HNG merged with Omaha-based InterNorth, and the combined company became Enron with Lay as its CEO. Enron climbed to No. 7 on the Fortune 500 list in 2000 and claimed $101 billion in annual revenue.

Political activity: Nicknamed “Kenny Boy” by President Bush. In Enron’s heyday under Lay’s leadership, Bush received more than $550,000 in contributions from the company, its employees and their relatives during his political career — the most from any source. More than 250 members of Congress from both parties also received Enron contributions, with three-fourths of the $5.77 million given to candidates since 1989 going to Republicans. Vice President Dick Cheney sought Lay’s input on energy policy, and the energy company’s chief routinely spoke publicly on economic and energy policy.

Charitable giving: Before its fall, Enron typically gave about 1% of its pretax earnings to various causes, and Lay gave privately through the Linda and Ken Lay Foundation. Internal Revenue Service records show the foundation took in $14 million in 2000 and donated $2.5 million to charities, museums and other organizations across the country.

Community activism: Lay led efforts to build business support for a new ballpark for the Houston Astros to keep the team from moving elsewhere. In 1999, Enron pledged $100 million over 30 years to plaster the new venue with the company’s name and logo, and Lay threw out the first pitch at the park’s inaugural game in 2000.

Change of plans: Jeffrey K. Skilling, hired by Lay in 1990 to help turn Enron into a trading behemoth, took over as CEO in February 2001. Lay remained chairman. He resumed the CEO job upon Skilling’s abrupt departure in August 2001, and two months later revealed massive third-quarter losses and a $1.2-billion write-down in shareholder equity that sent investors fleeing.

Resignation: Lay resigned as CEO in January 2002 and stepped down as chairman the next month. In February 2002, he invoked his 5th Amendment right not to answer a congressional panel’s questions after stating he was “deeply troubled” over declining to testify because “it may be perceived by some that I have something to hide.”

Quotes:

“I can honestly say that I have never felt better about the company.” — Upon resuming the position of CEO in August 2001.

“I might add that I and Enron’s board of directors continue to have the highest faith and confidence in Andy and believe he is doing an outstanding job as CFO.” — Oct. 23, 2001, the day before former finance chief Andrew Fastow was fired because of revelations that Fastow ran shady partnerships to hide debt, inflate profit and enrich himself.