The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (75 page)

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Which leaves, of course, Ken Lay and Jeff Skilling.

On January 23, 2002, Lay had been forced to resign as Enron’s chairman and CEO. He clung to a board seat until early February, when the special board committee issued its report, noting that Lay, as Enron’s CEO, was “in effect, the captain of the ship,” with “ultimate responsibility” for what had happened.

From the very aftermath of Enron’s collapse, Lay had made clear his belief that he too was a victim—a good man who had been taken advantage of by corrupt underlings, and who was being wronged by a vicious media. Though he made virtually no public statements during this period, his surrogates offered up the notion that he had reasonably entrusted Arthur Andersen and Vinson & Elkins to tell him if there were problems, but they never had. Linda Lay appeared on the
Today
show to defend her husband, tearfully telling viewers that the Lay family had “gone down with the ship,” had “lost everything,” and was itself “fighting for liquidity.” (The appearance, filmed while the Lays continued to live in a $7 million Houston penthouse and own more than $20 million in other real estate, generated little sympathy.) As for the Justice Department, Lay showed visitors a sign he kept in his private office: “Cowboy’s logic: Getting up a lynch party is not group therapy.”

And Jeff Skilling? In December 2001, Skilling told the
New York Times
, “I had no idea that the company was in anything but excellent shape,” and he concluded, “After much soul searching, given the information at the time, I would not have done anything different.” In the months to come, Skilling denied knowledge of all sorts of things, from Fastow’s scamming of Enron to issues as basic as the triggers in the Marlin and Osprey debts. He claimed that despite his Harvard MBA, he didn’t know enough about accounting to answer detailed questions; he had counted on those under him to make sure it was all right.

Skilling was the one Enron executive who did not take the Fifth Amendment before Congress, though his lawyer advised him to do so. Instead, he put forth his theory that Enron was brought down by a classic run on the bank. “There was a liquidity problem, and people got scared,” Skilling said. “That’s what caused the problem. All the rest of this is ridiculous.” Acutely aware that federal prosecutors were gunning for him, Skilling railed to friends that the investigation was a “witch hunt” and an “absolute travesty.” It was “inconceivable” to him that the government could come up with a legitimate case against him. “Show me one fucking transaction that the accountants and the attorneys didn’t sign off on,” he told people. “If they concoct some bullshit, they’re going to have a fight on their hands, because it—is—not—there!” He added: “Until the day I die, I’m going to fight this thing.”

Finally, on February 18, 2004, Jeff Skilling got his fight. A grand jury in Houston returned a thirty-five-count indictment against him, alleging conspiracy, fraud, and insider trading (seven counts would be dismissed before trial). The indictment contained damning allegations, claiming that Skilling had played a key part in the decision to bury EES’s losses in the traders’ profits, that he had lied to investors about both California and the state of affairs in broadband, and that he, along with Causey, had a handshake agreement with Fastow that ensured the LJM partnerships would make money on certain deals they did with Enron. The indictment also noted that Skilling had netted more than $89 million from selling Enron stock. Through the picture it painted of the company, the legal filing served as a sweeping indictment of Enron itself, describing a business that was operated to create the illusion of prosperity, not the reality. In other words: a fraud.

Although Enron mania had receded by the time Skilling was charged, the TV cameras and hovering helicopters reappeared in Houston to track his walk into the courthouse. He was handcuffed, and he looked heavier and far less healthy than he had when he testified in front of Congress two years earlier. But there were indications that he was every bit as feisty. “I am not guilty of these charges,” he said firmly in court. He shook his head in amazement as he read a copy of the indictment, and his dream team of defense lawyers—including no fewer than four top attorneys—sounded publicly very much like Skilling had sounded privately. Hired gun Dan Petrocelli, who had won the civil suit against O. J. Simpson on behalf of the Goldman family, waved a copy of the indictment and told reporters dismissively: “Sixty pages of nothing.”

Five months later, on July 7, 2004, it was Ken Lay’s turn. The grand jury indicted him on eleven counts (one would later be dropped), including conspiracy, making misleading statements, wire fraud, securities fraud, and bank fraud. Although Lay was primarily accused of covering up Enron’s problems in the summer and fall of 2001, after he had taken over from Skilling, his charges were added to the existing indictment against Skilling and Causey—meaning that the government planned to try the three men together. Like so many others caught up in the Enron scandal, Lay had to make the humiliating, handcuffed “perp walk” in front of the television cameras. At his arraignment that day, he pled not guilty.

True to form, Ken Lay immediately went on a public relations offensive. Unlike Skilling, who spoke through his lawyers, Lay presided over a packed press conference in which he placed all the blame for Enron’s problems on Andy Fastow and portrayed himself as a CEO who had operated above the fray. But the indictment contradicted that point of view. While prosecutors did not allege that Lay was the man pulling the strings, they did charge that he was well informed of many incriminating details, including the problems at EES, the required write-downs at Azurix, and the meltdown in the Raptors—and that despite his knowledge, he “failed to disclose numerous dire facts about the state of Enron’s business.”

Thus, the battle was joined, setting the stage for what would be billed as the biggest corporate fraud trial ever. Jury selection wouldn’t begin until January 30, 2006—more than eighteen months later. Lay used part of that time to make his case in public, setting up a Web site (kenlayinfo.com), appearing on
Larry King Live
and
60 Minutes
—and even taking public potshots at the Enron Task Force. A month before his trial was to start, Lay shocked a business-lunch crowd at the Houston Forum during a speech by insisting that “Enron was a strong, growing, profitable company even into the fourth quarter of 2001”—and by attacking his government pursuers by name.

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Skilling reacted to his indictment by sinking deeper into a funk, revealing a side of his complex character that most people hadn’t seen before—the side that had more in common with the desperate, distraught man who had spent countless evenings brooding darkly in bars in the months after Cliff Baxter’s suicide. In April 2004, New York City police picked him up at 4:00 a.m. on the streets of Manhattan, believing, according to a wire-service “police source,” that he was an “emotionally disturbed person.” Skilling was heavily intoxicated, and, according to the source, he had accosted people in two bars and on the sidewalk, pulling at their clothes and accusing them of being FBI agents who were following him. (His lawyer said his client had a very different story: A pair of men had attacked Skilling and his wife on the street, pushing them to the ground.) After the incident, Skilling was taken to a hospital for observation before being released. Prosecutors soon after filed court papers accusing Skilling of violating the terms of his $5 million bond, and a judge ordered the former Enron CEO to stop drinking, perform community-service work, and abide by a curfew. Skilling’s lawyers disclosed that he had recently begun treatment for alcohol abuse, and added that he was looking forward to his day in court.

As the January 2006 trial date loomed, Skilling threw himself into his defense. Days before jury selection, he and Petrocelli launched their own PR offensive, granting a string of media interviews during which they led reporters through the suite of offices the defense team had leased across the street from the federal courthouse in downtown Houston. Both men spoke of how the defendant had worked tirelessly for months on trial preparations, even helping build the office shelving with his own hands.

Skilling was bankrolling the biggest piece of a spectacularly expensive defense effort. For more than a year, his lawyers had generated a stream of pretrial motions, including a request for a change of venue (ultimately denied) that included a public-opinion poll of Houston-area residents’ attitudes toward the defendant and Enron (many of them associated Skilling with terms like “pig” and “economic terrorist”); the motion was supported by five separate defense experts. According to Petrocelli, the tab for defending Jeff Skilling would ultimately top $70 million (more than $30 million still unpaid as of September 2006). Ken Lay’s defense, which included one accounting expert whose fees totaled more than $1 million, would reportedly cost another $20 million. A sizable chunk of the costs was covered by Enron’s insurance.

Each man had made an unusual choice to lead his defense. Petrocelli, fifty-three, while an enormously gifted trial lawyer, had never represented a criminal defendant. Lay’s lead attorney was sixty-five-year-old Mike Ramsey, a cantankerous Houston criminal-trial legend better known for defending murderers than for defending CEOs. But he’d won cases that seemed impossible: In 2004, he’d famously helped Robert Durst, a cross-dressing millionaire, walk away free from his Texas murder trial, even though Durst had admitted shooting his elderly neighbor, chopping up the body, and dumping the pieces in Galveston Bay.

Although many legal observers expected Lay and Skilling, who had never really been friends, to turn on each other in court (some experts viewed it as Lay’s best chance of winning acquittal), they would reveal nary a hint of conflict. Skilling faced far more charges, and his massive defense team would do much of the heavy, behind-the-scenes lifting for the joint defense. But because of procedural maneuvering by the defense that had backfired, the government would actually have two separate shots at convicting Lay. After the jury had adjourned to deliberate in their joint trial, U.S. District Judge Simeon Lake, presiding in the case, would conduct a short, separate bench trial on the government charges that Lay had committed four counts of bank fraud by lying to his lenders about how he intended to use the proceeds from multimillion-dollar lines of credit. Appointed by President Ronald Reagan, Lake was highly respected in Houston as a fair, no-nonsense jurist whose rulings were rarely overturned.

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The prosecutors were getting ready too. By then, the Enron Task Force was on its third director, thirty-eight-year-old Sean Berkowitz, an unflappable assistant U.S. attorney from Chicago who had graduated from Harvard Law School. Since joining the task force in late 2003, Berkowitz had focused on the case against Skilling. The new deputy director was Kathy Ruemmler, thirty-four, a Washington, D.C.–based prosecutor who had won convictions in the Nigerian barge case, the task force’s one big trial victory to date. The third key member of the team—and Lay’s personal nemesis—was a federal prosecutor from California named John Hueston, who had never lost a criminal case. After joining the task force in early 2004, Hueston, forty-one, had revitalized the investigation against Lay, then dead in the water—Lay had simply been too distant from most of the fraudulent deals—by refocusing it on Lay’s misleading statements to investors in the second half of 2001.

As they prepared their case, the prosecutors made a critical strategic decision. Wary of getting bogged down in arcane technical details—a huge problem in the broadband trial—they resolved to brutally simplify the story they’d present to the jury. And they took a big step toward doing that on December 28, 2005—just a month before the trial was set to start—by reaching an unexpected plea-bargain agreement with Rick Causey.

Enron’s former chief accounting officer pled to a single count of securities fraud, accepted a sentence of up to seven years, and agreed to cooperate with the government. But in terms of the big trial about to start, it was really a matter of addition by subtraction: While Causey wouldn’t even end up taking the witness stand against Lay or Skilling, his removal from the case eliminated a huge amount of accounting testimony that was likely to confuse the jury; weakened the two ex-CEOs’ ability to defend themselves by saying that they had relied on Causey’s accounting advice; shortened the trial by weeks; and focused attention solely on the two men at the top.

As it turned out, given the event’s billing as the biggest corporate fraud trial ever, both sides were offering the jury—eight women and four men, selected in a single day—a remarkably simple story. Hueston, delivering the government’s opening argument, proclaimed that this was not a case about accounting, but instead about “lies and choices.” Lay and Skilling, he declared over and over, knew about serious problems at Enron—and chose to lie about them to employees, analysts, and investors.

The advocates for Lay and Skilling, for their part, offered an especially audacious argument, echoing the themes the defendants had been offering themselves: Except for the thievery of Fastow and his tiny circle, there was absolutely nothing at all wrong with Enron, Petrocelli declared. “This is not a case of hear no evil, see no evil. This is a case of there
was
no evil.” Enron, he told the jury, was “a wonderful company—a shining star.” Its failure had resulted not from fraud but from an irrational panic (the “run-on-the-bank” theory) triggered by irresponsible media stories (especially those
Wall Street Journal
articles) written by reporters in cahoots with short sellers bent on destroying the company. Refusing to distance his client from Skilling, Ramsey surprisingly insisted that Lay was fully engaged and knew of absolutely no serious problems at Enron because . . . well, because there
were
no problems. As for his client’s surreptitious stock sales in 2001—at a time when he was telling others to buy—Ramsey told the jury that Lay “never sold one share of Enron stock that he wasn’t compelled to sell” because of margin calls on loans he’d taken out to make other investments. “This case will rise or fall on that,” he declared.