Enron's Top Executives Are Convicted of Fraud

By Thomas S. Mulligan

May 26, 2006 12 AM PT

Times Staff Writer

HOUSTON — Handing the government its biggest victory in its war on corporate corruption, a federal jury Thursday found former Enron Corp. executives Kenneth L. Lay and Jeffrey K. Skilling guilty of conspiracy and fraud in connection with the 2001 collapse of the onetime energy trading giant.

Jurors said they rejected the defense that there was no crime at Enron -- that Lay and Skilling were unfairly targeted by a government bent on making them the scapegoats for their company’s failure. They said the defendants’ own testimony helped to make up their minds.

“I wanted very, very badly to believe what they were saying,” juror Wendy Vaughan, owner of a roofing business and a fitness company, said at a news conference after the verdict. But “there were places in the testimony where I felt their character was in question,” she added.

In the end, the jury embraced the testimony of a parade of former Enron executives who said that Lay and Skilling had lied publicly about the energy company’s financial health and condoned, if not actively encouraged, the use of accounting tricks to boost reported earnings and to hide debt.

The verdicts came at the end of a four-month trial, on the morning of the sixth day of deliberations by the panel of eight women and four men. The jurors found Lay guilty of conspiracy and five counts of fraud -- all the charges he faced. They convicted Skilling of one count of conspiracy, 12 counts of fraud, five counts of making false statements and one count of insider trading. He was acquitted of nine other insider-trading counts.

In addition, after a separate three-day nonjury trial, U.S. District Judge Sim Lake found Lay guilty of one count of bank fraud and three counts of making false statements to banks while arranging bank lines of credit.

Enron’s implosion was one of the most infamous corporate scandals in U.S. history. The energy company’s failure wiped out more than 4,000 jobs and billions of dollars of stock market value. It also led to sweeping regulations and legislation -- particularly the 2002 Sarbanes-Oxley law -- meant to curb corporate wrongdoing and restore confidence in companies’ financial statements.

Lay and Skilling, Enron’s former chairman and chief executive, respectively, became the headline targets of a massive crackdown on corporate wrongdoing that also resulted in charges against executives of such companies as WorldCom Inc., Adelphia Communications Corp., HealthSouth Corp. and Tyco International Ltd.

Enron’s auditors, then-Big Five accounting giant Arthur Andersen, went out of business after being indicted on an obstruction-of-justice charge in the wake of Enron’s collapse. Testimony showed that Andersen employees shredded mounds of Enron-related documents after the federal probe was launched. The U.S. Supreme Court last year overturned the firm’s 2002 conviction because of faulty jury instructions.

An Oscar-nominated documentary film and a handful of mass-market books were spawned by the scandal. Enron whistle-blower Sherron S. Watkins, in addition to co-authoring a book, launched a second career lecturing on business ethics.

Well before Enron’s bankruptcy, the company was embroiled in controversy during the California energy crisis of 2000 and 2001. Officials accused Enron and other “merchant energy” firms of helping to drive electricity prices through the roof by using a variety of unethical trading ploys to “game” California’s fledgling power market. Judge Lake kept those issues out of the trial.

On Thursday, Lake read the verdicts to a hushed capacity courtroom as Lay and Skilling, their expressions grim, stood with their lawyers. Lay’s wife, Linda, gasped when the first of his six guilty verdicts was pronounced. She sobbed and clung to her husband as the judge completed his reading.

Skilling’s wife, Rebecca, was not in the courtroom. Skilling awaited the verdicts with his brother Mark, a lawyer who had assisted in the defense.

Lake set sentencing for Sept. 11. He ordered Lay to immediately surrender his passport before releasing the men on $5-million bonds. In a brief afternoon hearing, Lay and his family members were required to pledge their own homes as security for his bond. Skilling had already posted his bond.

Lay, 64, and Skilling, 52, theoretically could be sentenced to several decades in prison. Experts noted that, although recent court decisions on sentencing guidelines made it highly unlikely that the sentences would approach those lengths, Lay and Skilling still were looking at the real possibility of considerable prison time.

“They are facing potential sentencing of 25 years, in front of a judge known for harsh sentences,” said John C. Coffee Jr., a securities-law professor at Columbia University.

Leaving the courtroom after the verdict, Skilling was asked for his reaction. He shrugged slightly and stayed silent for a moment, then said softly: “It is what it is.”

Lay remained in the courtroom after the verdict, awaiting the hearing on his bond. He and several family members and a minister joined their hands in prayer. Outside the courthouse later, surrounded by reporters and photographers, Lay again insisted that he was innocent.

The outcome was sweet vindication for the U.S. Justice Department’s Enron Task Force, which conducted a five-year investigation and handled the trial. The defendants and their lawyers attacked the task force head-on during the trial, accusing prosecutors of strong-arming former Enron executives into pleading guilty, becoming government witnesses and shading their testimony in the government’s favor.

During the defense’s closing arguments, Chip B. Lewis, a lawyer for Lay, leaned over a table toward prosecutor John C. Hueston, a Californian, and boomed: “Don’t come to Houston, Texas, and lie to us!”

In the course of its investigation, the government obtained guilty pleas from 16 former Enron employees, including Chief Financial Officer Andrew S. Fastow -- a star witness for the government -- and Chief Accounting Officer Richard A. Causey, who originally was to stand trial with Lay and Skilling but pleaded guilty late last year.

Hueston, in an interview Thursday afternoon, said he felt relief and gratification and looked forward to returning to his wife and children in Corona del Mar after the long siege in Houston.

“We were told these charges shouldn’t be brought, this trial couldn’t be won,” Hueston said. “We were accused of different allegations of misconduct, but we had to put all that aside and just focus on putting on the best case we could.”

Sean M. Berkowitz, head of the Enron Task Force, said in a news conference outside the courthouse that the verdict “sends an unmistakable message to boardrooms across the country: You can’t lie to shareholders and you can’t put your own interests ahead of theirs.”

Several jurors thought Lay’s credibility was severely damaged by evidence that he quietly sold $70 million in Enron stock back to the company in 2001, while telling employees that the company was in fine shape and that the stock was a great buy.

Juror Don Martin, an electrical designer, called the sales “a disgrace.”

“That just defined the word ‘intent’ for many of us,” said Doug Baggett, a legal department manager. He was referring to the judge’s instructions that in order to convict a defendant of fraud, jurors would have to find that he not only took an action in question but also did it with wrongful intent.

Lay and Skilling attempted in vain to have their trial moved to a location less saturated by media coverage of Enron’s crash. Skilling’s chief lawyer, Daniel M. Petrocelli of the Los Angeles firm O’Melveny & Myers, said Thursday that the venue was a big disadvantage.

“There are psychological and personal losses suffered here that simply don’t exist elsewhere,” Petrocelli said. “I think the jury tried its best to listen and to be open and attentive, but Enron’s failure had an indelible imprint on the town’s psyche.”

Petrocelli said he planned to file a series of motions, including one for a new trial, by a June 6 deadline. He and his team of more than a dozen lawyers plus six paralegals and aides will work throughout the summer on an appeal.

Lay and Skilling’s legal troubles extend beyond the criminal case. They still face civil fraud charges brought by the Securities and Exchange Commission, which is seeking disgorgement of ill-gotten gains, fines and a permanent bar against their serving as officers of a publicly traded company. The agency also has accused Lay of insider trading and seeks to recover $90 million that he reaped from stock sales in 2001. The SEC litigation was stayed pending completion of the criminal case.

Private plaintiffs are waiting in the wings as well. Lay and Skilling are defendants in lawsuits brought by Enron shareholders and creditors. Most of those suits have been consolidated into a class-action case that is scheduled to go to trial in October. Lawyers involved in the civil suits were as familiar a sight in the criminal courtroom as news reporters and family members of the two defendants.

Juror Carolyn Kuchera, a payroll manager, spoke of the exhaustion jurors felt in trying to catch up with their jobs and families on nights and weekends during the four-month trial. Sometimes, she said, “we were so tired we did not know who we were.”

She contrasted the jurors’ efforts with those of the top two men at Enron.

“We were responsible,” Kuchera said. “We always found time to go back and tie up those loose ends. I think those employees [at Enron] were entitled to the same thing.”

Times staff writers Joseph Menn in San Francisco, James S. Granelli in Orange County and Lianne Hart in Houston contributed to this report.

(BEGIN TEXT OF INFOBOX)

White-collar cases

Former Enron chiefs Kenneth L. Lay and Jeffrey K. Skilling are the latest high-level executives to be convicted of financial wrongdoing. Here is the status of cases involving other firms.

Arthur Andersen accounting firm

Accused of: Obstructing justice by destroying Enron-related documents

Result: Found guilty in 2002, but conviction overturned by Supreme Court in 2005

Status: Out of business

Martin L. Grass,

Franklin C. Brown,

Franklyn M. Bergonzi

Accused of: Accounting fraud at Rite Aid Corp.

Result: All convicted and sentenced in 2004; Grass ordered to serve eight years in prison, Brown 10 years and Bergonzi 28 months

Status: All in federal prison. A judge shortened Grass’ sentence to seven years.

Frank Quattrone

Accused of: Encouraging his staff at Credit Suisse First Boston to destroy old records when the brokerage was under investigation

Result: Found guilty in 2004, but the conviction was overturned in March of this year

Status: Retrial pending

John J. Rigas,

Timothy J. Rigas

Accused of: Fraud at Adelphia Communications Corp.

Result: Convicted in 2004; John Rigas sentenced to 15 years in prison, Timothy Rigas sentenced to 20 years

Status: Both free pending appeal

Martha Stewart

Accused of: Lying about her sale of ImClone Systems Inc. stock

Result: Convicted in 2004

Status: Served five months in prison and five months of home detention; now free

Bernard J. Ebbers

Accused of: Accounting fraud at WorldCom Inc.

Result: Convicted in 2005 and sentenced to 25 years in prison

Status: Free pending appeal

L. Dennis Kozlowski,

Mark H. Swartz

Accused of: Defrauding Tyco International Ltd. shareholders

Result: Convicted in 2005; both sentenced to eight to 25 years in prison; Kozlowski ordered to pay $167 million in fines and restitution, Swartz ordered to pay $72 million

Status: In New York state prison

Richard M. Scrushy

Accused of: Accounting fraud at HealthSouth Corp.

Result: Acquitted in 2005

Status: On trial on a separate charge that he tried to bribe an Alabama governor

Compiled by Scott J. Wilson

By the numbers

4,000

People who lost their jobs when Enron collapsed

$68 billion

Lost shareholder value

$1.52 billion