Lay, Day Five: It's in the Past. Or Not.
Federal prosecutor John Hueston finished his cross-examination of Enron founder Kenneth L. Lay on Monday afternoon -- a total of a little more than two full days on the stand at the hands of the government, and five days overall, at least so far. Defense lawyer George "Mac" Secrest will probably finish up Lay's redirect examination on Tuesday.
Two themes ran through Lay's time on the stand that inform everything else, at least to my way of thinking:
a) "That's in the past."
b) The difference between the letter and spirit of the law.
The former is the popular refrain sounded by high-profile athletes caught in or accused of committing some indiscretion -- minor to major -- over the last decade or so. When reporters try to ask the athletes about that stabbing in Altanta or the shooting over the ATV or the payoff to the mistress or the marijuana bust or the transfer to four high schools in two semesters or the sexual-assault allegations in college, the answer they get is some variation on: That's in the past. I've moved on. The people who know me believe in me. If you want to talk about [name of sport], fine. But I'm not going to talk about things in the past. I'm focused on the future.
That's the theme Lay kept sounding over the LJMs, the outside-of-Enron partnerships set up to hedge potential losses on the company's investments and that were run by chief financial officer Andrew Fastow -- while Fastow was still CFO of Enron.
Here's a note to everyone who tries that defense: Just becaue you say it's in the past, it ain't necessarily so. There are such things as accountability and judgment and justice to those potentially wronged by your actions.
Lay said one of his first tasks when taking over from Jeffrey K. Skilling when the then-CEO up and quit the company in August 2001 was to "unwind," or liquidate, the LJMs. Even though many in Enron fought to keep them, they just didn't feel right any more to Lay, he testified, and he wanted to "clean house" -- his words -- even though both he and Skilling testified that Enron was in sound shape when Skilling hit the eject button.
So it was of some surprise and no little annoyance when -- eons later, it must have seemed (actually, it was September) -- the Wall Street Journal started asking questions about the LJMs and Fastow.
I couldn't understand why they were of interest, Lay testified. They were in the past. We had taken care of them.
It seems that in Lay's mind, if he's dealt with it, then it's over. And maybe that's a character trait of effective chief executives. It's my company, I know how best to deal with it. Lay has sounded that theme over and over.
But might not the reasonable investor want to know what the company has done in the past -- even if it has stopped the activity -- because it may be an indication of what it may do in the future? And the people who did that thing in the past that the company is no longer doing ... are they still employed at the company that's playing with my retirement fund? Aren't those reasonable questions, even if they concern actions in the past? Lay didn't seem to wrap his mind around the concept. Over. Done. Move on. Subtext: Stop challenging me.
Which leads to the second point: the letter and the spirit of the law.
I don't know how many times Lay said -- it was plenty -- that he fulfilled all SEC and legal requirements when buying and selling stock. The prosecution charges Lay with dumping $70 million worth of Enron stock in 2001 by selling it back to the company instead of through a broker. Why? If it were sold through a broker, the sale would have been reported and available to investors right away. When it was sold back to Enron, Lay didn't have to report the sale until after the end of the year. At the same time, Lay was buying stock, but just a little compared to how much he was selling.
So, the prosecution has pointed out, when trouble started hitting Enron in fall 2001, the reasonable investor would look at the proper forms and read the interviews with Lay and reasonably assume he was a net buyer of stock, when just the opposite was true. If I owned stock in a company and Wall Street was starting to raise questions about it, one of the first things I'd do is look to see if top company officers had been selling stock recently. In poker, you would call that a tell.
So, when Lay repeats that he complied with all SEC regulations and laws on disclosing the stock sale -- that he was doing what all of his accountants and financial experts and staff told him to do -- he is clinging to the letter of the law, but missing the spirit entirely.
This is a man who stepped back into a company that, as soon as he landed, presented him with problems. Then, when the bad PR started and it was clear that 30,000 real people's jobs were on the line, instead of going the extra mile in disclosure, instead of showing every good-faith effort he could when it came to his own significant personal wealth, he toed the line to the letter of the law and called it sufficient.
Lay may not have done anything illegal. The real problem may be with the SEC and its disclosure rules. But if this jury is looking to put some hurt on Lay for what happened to Enron employees and the thousands more who saw their retirement funds evaporate, his "I was just following orders" defense of the past couple days may have given them the truncheon they've been looking for.
By Frank Ahrens |
May 2, 2006; 7:44 AM ET
| Category:
Dispatches
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Posted by: Jack | May 2, 2006 09:45 AM
A disproportionate amount of the prosecution's case consists of showing conduct by Lay and Skilling that, while unsavory, does not constitute a crime. It's not enough to show that the spirit of the law (whatever that means) has been broken or that the defendants aren't nice people. When charged with a federal felony, the prosecutor has the burden to show beyond a reasonable doubt that the *letter* of the law was broken, not just some amorphous "spirit" of the law. Any standard short of this cheapens our freedom.
Posted by: Bill | May 2, 2006 04:33 PM
Gosh, Bill, you're so right. But Lay's behavior cheapens the freedom of Enron's employees, not to mention tens of thousands of Arthur Andersen employees and shareholders in pension plans who had nothing at all to do with LJM, antiquing in Mallorca, or Jus' Stuff.
Posted by: skimble | May 2, 2006 05:22 PM
the withdrawal of the last $1 million of lays credit line shows to the american public the greed and arrogance of the boardrooms and company directors concerning shareholders and employees.Its a typical case of i,m alright jack screw you
Posted by: bobs | May 2, 2006 09:58 PM
Bill, it may be true that a "disproportionate" portion of the gov't's case is devoted to technically non-criminal behavior, but it puts the actual criminality in context and allows people (i.e., the jurors) to believe that Lay would, in fact, have behaved in a criminal manner to feather his own nest. I think the prosecutors have got it about right and that Lay played right into their hands.
Frank, thanks for the coverage. It brings the trial to life as no other coverage that I've read has managed to. Your blog has become a "must" read for me. Keep it up -- here and elsewhere!
Posted by: herbs | May 2, 2006 10:17 PM
You're quite right about the "that's in the past I'm focused on the future" line of defence. Lay, politicians, sports players - they all trot it out in the firm belief that we're not entitled to consider their past behaviour as any indicator of their continuing behaviour. Usually combined with an arrogant lack of shame or apology, it is just another way of saying, "I got caught that time, so what and sod the lot of you!"
Posted by: tony weston | May 3, 2006 03:54 AM
PRESS RELEASE: NEW ENRON BOOK
Behaving Badly: Ethical Lessons from Enron
By Professor Denis Collins, Edgewood College
Published May 22, 2006
Behaving Badly: Ethical Lessons from Enron puts the reader in the shoes of Enron executives through the journey of the once prominent and now infamous company. Enron began as a newly merged firm in 1985 with too much debt, rose on Wall Street during the 1990s, and collapsed in December 2001.
This is the first book to treat Enron's financial problems as complex ethical issues managers may face daily - often without recognizing them as such. Key decisions are presented in real-time from several perspectives, including those of Lay, Skilling, Fastow, board members, auditors, lawyers, and investment bankers.
The seemingly simple question readers are asked to consider is: What would you have done, had you been employed by, or doing business with, Enron? Readers can debate their answers with colleagues.
Award winning business ethics professor Denis Collins also provides advice on creating and sustaining an ethical culture in any company, offering a decision-making tool and framework that managers can use to intentionally steer their company away from the road Enron traveled.
Readers may share answers to decision points at http://business.edgewood.edu/behavingbadly.
Posted by: Denis Collins | May 26, 2006 01:10 AM
The comments to this entry are closed.
I believe that the KEY fact which will cause the jury to convict Lay will be the testimony that just before Enron declared bankruptcy in December 2001, Lay drew out his final $1 million from his $7.5 million company line of credit. As the prosecutor commented to Lay ". . .you saw to it that you were taken care of before the employees were in those competing interests." This fact takes away all sympathy for Lay, especially since at that time he was already worth millions. In my experience as an attorney, if the jury is shown that you beat your dog, then they will believe accusations that you also beat your children.