The Rashomon Option

Could Kennth L. Lay -- and Jeffrey K. Skilling before him -- be telling the truth?

I had a couple of posters recently who have brought up the idea that Lay might very well not have known that some of his key employees were misbehaving.

In Lay's testimony, he has laid much of the blame for Enron's 2001 collapse at the feet of former chief finance officer Andrew S. Fastow, who has copped a plea with the government, turned state's witness and still faces 10 years in the pen. Another of Lay's villains is former accounting chief Richard Causey, who also pleaded guilty to fraud. Fastow oversaw a number of outside-of-Enron partnerships known as the LJMs, which were set up as funds with Enron stock and outside capital to hedge potential losses of Enron investments. Sort of a safety net.

In an admitted conflict of interest -- but one they thought they could control -- Lay and Enron's board said it was okay for Fastow to remain Enron's finance chief and run the LJMs. Turns out, not such a good idea. Fastow siphoned off millions to his own accounts and once the business press strarted dissecting the LJMs' accounting in fall 2001, the end was near for Enron.

Repeatedly in his defense, Lay has said he relied on information given him by Fastow and Causey when representing the health of the company to investors. The government is working to prove that Lay knew everything and is trying to pass the blame to former colleagues who already are admitted criminals, sort of like blaming dead guys.

I got a comment to this blog from someone identifying himself as Harry A. Trueblood Jr., who said he had run several small public companies during his career. A little Googling found a man of that name in Denver, who established a scholarship at the University of Colorado and who "headed up seven publicly owned companies during his career," said the CU Web site. Most recently, he ran a small natural gas company and contributed $200 to President Bush's 2004 campaign.

So I put in a call to a Mr. Harry Trueblood on Saturday afternoon to find out if he was the man who has posted to the blog. He was. I got an 80-year-old wildcatter with plenty to say and a true businessman's perspective on what it's like to deal with regulators, prosecutors and the press -- almost none of whom, he accurately pointed out, have started and run businesses.

In his post, Trueblood wrote: "I always said that if my CFO chose to do so he could completely hide problems from me for at least a full year or more, yet I considered myself fairly informed on accounting issues and definitely was a 'hands on' CEO."

On the phone Saturday, Trueblood said he'd met Lay a few times, and had sold natural gas futures to Enron back in the '90s. Lay had impressed him, but he was "cocky as hell," Trueblood said.

At any rate, Trueblood pointed out that bullying prosecutors sometimes find their story and make the facts fit. And that regulators make it tough for businesses to make money. Pretty much, your basic, laissez-faire businessman. Enough of a businessman to say that he's come out of retirement and is digging wells in Oklahoma to get in on this energy boom. "But I'll damn sure quit if they put in a windfall [profits] tax," he said, referring to rumblings in Congress to tax oil and gas companies on their record profits.

Trueblood may not be the most objective party in this discussion. However, his particular expertise in running energy businesses and dealing with regulators and the government must be acknowledged. His point is worth hashing over here.

Lay and Skilling have maintained that they cannot be held accountable for criminal activity they didn't know about committed by their underlings. The government argues that they did know about it and were active participants in it. But let's for the sake of argument take that off the table. Now, what's on trial is Enron's business activities, and how you view those depends on where you stand.

The government still believes it has a strong case. It believes Enron executives such as Lay and Skilling were using accounting gimmicks to cover real losses. That they knew full well that certain Enron business units -- the broadband buiness, the energy-services business -- were no more than paper fronts that were recording profits they anticipated in years to come. Lay and Skilling maintain those profits would have come if Enron were still in business, if it had not been destroyed by a few bad apples, a know-nothing business press and a Justice Department bent on criminalizing next-gen accounting and finance technologies it doesn't understand.

Which brings us to "Rashomon," Japanese director Akira Kurosawa's 1951 film. It tells the story of a crime as seen through the eyes of several witnesses, each of whom remembers it differently. It comes close to saying there is no objective truth, only subjective views of events. Any cop interviewing witnesses to an accident is familiar with the phenomenon. The film's title has become synonymous for describing such a situation.

Is there a Rashomon happening here? The prosecutors have scored some hits on both Skilling and Lay's credibility over the past three weeks. But Lay and Skilling -- particularly Skilling -- have been steadfast in their assertion that Enron was a real business, simply beyond the comprehension of mere-mortal prosecutors. Might arrogance be their best defense?

By Frank Ahrens |  April 30, 2006; 8:23 AM ET  | Category:  Dispatches
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Rashomon notwithstanding, there are key objective facts in the Enron case. The most important, obviously, is the company's bankruptcy which, despite Lay's attempt to blame it on the media and a "run on the bank," was the result of a hollowed out financial structure about which, according to sworn testimony, internal warnings had been issued directly to Lay and Skilling. Yet even in Enron's last days, Lay was issuing rosy statements about its financial health and future.

By that time, whether or not he knew of the extent of Fastow's self-dealing, he certainly had to know that the basic purpose of the partnership arrangements (aside from Fastow's personal enrichment) was to move millions of dollars in exposure off the company's balance sheet in order to mask Enron's increasingly dire financial problems and protect both its stock price and creditworthiness. It may be true, in the narrowest sense, that the demands of creditors, like a run on the bank, caused the final collapse, but that is true of any Ponzi scheme. This prosection arises out of the largest corporate bankruptcy in US history, one that destroyed the lives of thousands of people. And members of the public have every reason to be skeptical when highly compensated CEO's who happily take credit for their company's triumps feign ignorance of the details the moment things head south.

I don't know whether Lay is guilty, and the government bears a high burden of proof that the jury is bound to respect. But given what we know so far about Enron, from the testimony and the documentary evidence, it is difficult to find either Lay's or Skilling's testimony credible.

Posted by: Meridian | April 30, 2006 09:20 AM

When Sharron Watkins informed these folks what was happening. They decided to maintain plausible deniability by conducting a sham investigation. They know now and they knew then what they were doing. Unfortunately all the money they got will keep most of them from facing time in real jails.

Posted by: Victor Allen | April 30, 2006 09:34 AM

How can a CEO collect millions and millions of dollars in salary and benefits and then claim that they had absolutely no clue as to what was going on in the company???? When Lay and Skilling picked up their paychecks, they were telling the world that it was their brilliance that was making that company what it was.

Posted by: Lilly True | April 30, 2006 12:11 PM

Let me shed another light and I am an admirer of fellow Coloradoan Harry Trueblood, a true oil business "risk taker". My own business history has concentrated in the commodity futures trading and investment areas and here's what I believe:Ken Lay had indeed become that sort of hale fellow, well met, "Babbit" type. He may not have known what was happening. That said, I'm not sure he's worth a damn as a business man and just happened to be in the right place as a stock market boom unfolded and probably needed a plaque I keep on my desk "Don't confuse brains with a bull market". Should he have known? I think I would have; I hope I would have and I bet Harry would have. Now Skilling is another matter. I told a number of people who asked for an opinion on Enron (late 90's)that " a futures trader for the last 30 years the LAST thing I am going to do is give my money to some snot nosed MBA from Harvard with which to trade futures..." At the time I didn't know Skilling's curiculum vitae. I did know how many bleached bones lay out there of third party traders. My guess is that as some of these trades began to go bad and Fastow came up with the "partnerships" idea Skilling said now that is great idea and time will take care of things..lets check it out with the accountants and lawyers... Enron is a great customer ... let's sign off--that will probably fly. So few people involved exhibited any real common sense, most specifically that an illiquid poor investment collateralized with the parent company's treasury stock was obviously a recipe for disaster in a falling stock market. And markets do fall from time to time and usually at the most inconvenient time. For all those credentials Skilling couldn't even see that possibility before it happened?? Smartest guys in the room??? But even a Harvard MBA could see the writing on the wall as the collateral and the assets headed south in 2001. He high tailed it in August and was in such a hurry to sell a slug of Enron stock he couldn't even wait to do the 144 paperwork.. he didn't remember?? Boy that does strain credulity.

Posted by: T W Fowler | April 30, 2006 12:37 PM

Ken Lay and the rest of the board of directors were fully aware of and even approved Fastow's parternerships, and they were also aware of the potential conflict of interest. So why did they not keep closer tabs on Fastow and the partnerships? With the huge potential for abuse, should they not have been at least a tad more diligent than simply taking Fastow's word for it that Enron was the winner in these transactions? Hindsight is 20/20, but still... that's the purpose of the board and their approval.

Also, Lay's argument that "I didn't know" doesn't hold water after Watkin's memo was sent to him (and possibly before that). When issues that serious are raised by an employee, a manager needs to look into things, and not just go through the motions.

In short, if Lay really "didn't know," then to me that suggests negligence (willful or not) on his part. One of the roles of the CEO is to know about his/her company; I'm not saying that was easy in Enron's case, but it's still his job. If the CEO doesn't know what's going on, then who else possibly could? And what does he get paid for?

Posted by: JP | April 30, 2006 01:08 PM

Why should we expect Mr. Lay to know more as a CEO than we expect from our President. It seems these days the CEO position is a reward or some such for keeping a blind eye to and shielding the doings of underlings.

You don't see any of them showing any contrition or apology for their incompetence. They deserve whatever they get fair or not. Fair is not in their vocabulary.

Posted by: Vinson Nash | April 30, 2006 03:35 PM

This blog is typical Post malarchy. Remember it comes from the same newspaper that swallowed lock stock and barrell Bush's justifications for the Iraq war and still think's the paper and Bush were right. Moral relativism seems to be the last refuge of the establishment newspapers that can't see the forest for the trees.

Posted by: Zhenren | April 30, 2006 04:17 PM

Lay was indicted for misrepresenting the financial situation of a public company after he returned as CEO in 2001 - not for the fraud associated with the SPEs (LJM, Raptors, Chewco, etc.). It seems to me that he certainly did that. He did seem to be living in an Alice in Wonderland world much of the time Enron was flying high jetting around with the nation's big wigs and believing all the Enron hype. He was more interested in the upholestry of the new Enron plane in early 2001 as the end was drawing near. He probably did not know about the rot until after Skilling quit, and even then, it's plausible he did not believe it. But he certainly knew that Broadband, the water company, the retail energy business, and the largest international projects were under water, and he blatently lied about it to the shareholders and the regulators in the latter part of 2001 (or maybe he was just expressing an opinion - i.e. despite the fact that our credit is about to be cut, our cash flow is the best it's ever been). If this isn't a lie, then nothing is. In any case, he deserves to pay that his stupidy and self absorption let it happen, and luckily, he probably will because he misrepresented the financial situation as Enron was circling the toilet bowl.

Skilling is probably more guilty of knowing the type of frauds Enron did to show tremendous earnings and that the earnings were in reality ficticious. But he may get off because he appears not to have left any fingerprints at the scene of the crime. I can't believe he did not know the SPEs were designed to hide bad debt, and at the same time raise cash that could be transformed to earnings by buying worthless assets at extremely inflated prices. But these were OKed by Arthur Anderson, and the real crime with these had to do with the way they werre created, which probably only Fastow and Koppers knew about. Beyond that he did not sign off on the SPE deals, maybe out of sloppiness, maybe by design. He should do time as he certainly also knew the water business, their India venture, broadband, and their retail energy business were billions under water but not represented that way to their shareholders. If they can't get him for this, then perhaps we need to re-visit the jury system. It appears to me the prosecutors have "dumbed" down the trial so the jury could understand it. Don't know if this was necessary, but the trial has been like most movies made from books - i.e. the book was much better. In both Bethany McClean's and Kurt Eichenwald's books about Enron, it seems to me that Skilling had to have committed a crime. I know if I had done what he did, I'd be really afraid right now.

Posted by: Paul d | April 30, 2006 07:40 PM

Skilling testified he had no responsibility to review the LJM deals. His signature block on the company's DASH LJM forms would indicate otherwise. Looking at the LJM DASH approval documents on the DOJ website, I see several with Skilling's name in the signature block but, hmmm... most are signed by all signatoriees, sometimes on the same day, but no Skilling signatures on any of them. Either he is negligent, clueless, or in fact knew and approved.

If the LJM deals were truly being performed without his approval, then he could have simply testified that the deal sheets never were approved by him (See? Lack of signature!) and this would be consistent with his "the conspirators did the evil deed" position. However, Skilling also testified as being a "controls freak". He can't very well be this super competent CEO and not have reviewed and signed documents requiring his signature so that doesn't hold together.

To be clueless we must believe we have deal sheets requiring his approval, they aren't signed by him, and yet the "conspirators" signed and did the deals without his signature. If I had been one of those conspirators, doing these deals without Skilling's signature, knowing that if the "controls freak" ever found out I had done a deal he was on record to review without his go-ahead, I would be living in fear of my job. Not just me but everybody on the DASH signature block and everyone I had to coerce into getting the deal done without Skilling's signature. That is preposterous. Lay may have been out of touch during this period but Skilling certainly was not.

Occam's Razor cuts to Skilling knew about the deals, he orally approved them well before the DASH documents ever made it out of the computer, the rest of the team signed a document that described a deal they had already reviewed with Skilling and he had approved, and they then executed the deals.

Posted by: Fried | April 30, 2006 08:18 PM

To Meridian, it is not an objective fact that Enron was a hollowed out shell and a Ponzi scheme. Enron was in fact doing great in terms of profits until a few months before backruptcy.

What is an objective fact is that Enron had signicant debt off balance sheet that could come back to Enron if and as the stock price fell below certain trigger points. By any reasonable thinking, but not by GAAP, that debt should have been on the balance sheet.

A critical question about Enron's downfall, and the consequences of wrongdoing that went on, was whether, with this off balance sheet debt appropriately reported, Enron remained financially viable enough to be trusted as creditworthy by counterparties in its highly profitable commodity businesses.

I think a good case could be made that Skilling and maybe even Lay criminally misled folks about this state of affairs. But the prosecution really hasn't tried, focusing instead on minor issues and character assassination. A cynical view of what they're doing would be that they really don't have the goods on them per this latter score and can't afford to address the most important issues.

Posted by: Breaker | May 1, 2006 01:26 PM

To Breaker:

I said Enron's bankruptcy was an objective fact, but my only reference to a Ponzi scheme was to discount the validity of Lay's "run on the bank" theory. My point there was that Lay's analogy, even if true, proves nothing because it could apply to legitimate and illegitimate businesses alike.

One can only contend that Enron was profitable nearly up to the end if one accepts the accuracy of its financial statements, which have been thoroughly discredited -- irrespective of whether Lay and Skilling turn out to be personally culpable. And don't forget that, aside from the partnerships, those statements were inflated by "wash" trades and other improper activity designed solely to deceive creditors and markets.

My understanding is that even GAAP did require the off-balance sheet debt to be on the balance sheet because the partnerships, in truth, lacked the requisite third-party exposure since Enron guaranteed those third parties against any loss. This was one reason Enron's auditors found themselves in so much trouble and why, when it comes to the partnerships and their impropriety as it relates to Enron, Lay and Skilling, Fastow's self-dealing is a side show (unless, and there is scant evidence for this, Fastow's excessive compensation from them was some kind of quid pro quo for running this scam).

I think we agree, though, about the prosecutors' focus, which has been explained as an effort to simplify the case for the jury. I sympathize to a point -- prosecutors of some earlier white-collar crime cases have been criticized for glazing the jury's eyes with too much arcana. The Scrushy case comes to mind.

Posted by: Meridian | May 1, 2006 01:51 PM


Enron's financial statements have not been discredited so far as I know. They have both the original and restated. Both show significant profits, and so far as I know there's still those alleged hidden profits of which the prosecution has accused Lay and Skilling. Rather the difference between the original and restated is that many of the SPE's were closed out, and consequently debt and losses resulted. That was Enron's effort to clean things up. When this was done, no one at Enron knew of any side agreements except for possibly Fastow and Causey. The existance of the side deals is at this point a he said she said between Fastow and Skilling. The prosecution could call Causey who was according to Fastow the intermediary on the deals, but they haven't choosen to do so at least yet. Why I don't know, although the cynical interpretation would be that Fastow's lying or at least that Causey won't cooroborate him.

You are perfectly correct in your original post, and I agreed with you, that Skilling and Lay's knowledge of the precarious nature of the SPE's and the fact they "solved" problems in an accounting sense but left Enron with dangerous liabilities, is critical to bringing down Enron and the wrong doing. Skilling in his own testimony implicitly indicated he knew the Raptor's were problematic. Lay to my surprise embraced the LJM deals rather than pleading ignorance. It is beyond me why the prosecution didn't go after them on this score rather than spend all that time on Skilling's alleged girlfriend and Lay's son.

Posted by: Breaker | May 2, 2006 05:59 PM

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