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?
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