These are surely not the last words on Enron, but I wanted to share a few thoughts on the conclusion of Conglomerate Forum: Enron.
First, many of the commentators have discussed the deterrent effect of criminal law on corporate executives. As Nancy Rapoport's post from downtown Houston illustrates, however, this case was not about deterrence for most people. This was about punishment. And, in some cases, a felt need for revenge.
Second, several commenters, including most recently John Kroger, have expressed shock that some of the participants have reservations about the guilty verdicts. Yes, Enron was a colossal fraud. But the pre-trial narratives were mixed about Lay's and Skilling's roles in that fraud. Even though I followed the trial closely, and I thought the prosecutors did an excellent job, I find it hard to shake the notion that the real villain in Enron was Andy Fastow.
Third, this brings us to Lay's and Skilling's defense. Why did they believe that they could convince a jury that nothing untoward was happening at Enron? Why didn't they go with the pre-trial narratives that portrayed Lay as clueless and Skilling as distracted and emotionally troubled? Would that have made a difference?
Finally, I want to thank all of the participants and commenters in the Forum. I have very much enjoyed reading the posts and comments. I feel like I have learned a lot.
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1. Posted by Max on June 3, 2006 @ 11:21 | Permalink
I am not a lawyer so I will give you a "regular" person's view of the defense's strategy. In one word, it was ridiculous. When I heard the opening statements by Daniel Petrocelli and Mike Ramsey where they said that Enron was a strong company right up until the end and that Enron was brought down by a couple of "bad apples", some short sellers, some "bad" articles by the Wall Street Journal and finally, the granddaddy of them all, a "run on the bank", I knew immediately that the defense was in big, big trouble.
A jury of twelve common sense people is not going to accept a theory that the country's seventh largest company collapsed in a matter of about seven weeks and that it was "strong" right up until the end; and that same jury is going to find it very hard to believe that the two people right at the top of the company were clueless about the disastrous condition of the company right up until the very end.
Even if Lay and Skilling actually believed this theory, their team of high powered attorneys should have advised them that it would be almost impossible to get an acquittal on all charges. As it turned out, the only acquittal's related to "personal" insider trading charges of Jeff Skilling which had nothing to do with the overall "run on the bank" theory.
It appears that the smartest of the last three guys in the room was former Lay/Skilling co-defendant Richard Causey, who pled guilty and who I would guess will receive a sentence of around 8 - 10 years, as compared to Lay and Skilling who will probably receive sentences which in reality may turn out to be "life sentences" since they may die in prison while serving their terms.
Do any of the learned attorneys here actually believe that the "run on the bank" theory was a "good" defense and that it had a better than about a 20% chance of being successful.
2. Posted by TomJoo on June 4, 2006 @ 0:01 | Permalink
I agree with you and Max that it was pretty dumb to think that you could convince a jury of the run-on-the bank story. But I think the know-nothing defense was also risky: it is much more realistic factually, but accountability of top execs has been a theme in the post-Enron popular culture. And they would have gotten fried on cross examination with all their claims of being brilliant hands-on managers. So perhaps they figured the only way to avoid accountability was to deny that there was anything to be accountable for.
Another factor might have been the vanity of the defendants, who probably could not bear to mount a defense that turned on asserting their own ignorance.
3. Posted by Ryan P. Haas on June 7, 2006 @ 8:56 | Permalink
I saw Jack Welch on MSNBC two nights ago discussing the Skilling and Lay verdicts; he raised an interesting point: the convictions secured in the Enron case (obviously Skilling and Lay, but the numerous others as well) all happened without the aid of Sarbanes-Oxley. I remember one of the selling points of S-O, aside from the restoration of investor confidence, was that it was necessary to help convict corrupt executives. That may well be true, although the convictions out of Enron, Worldcom, et al., seem to offer strong evidence that the tried-and-true prosecutorial tactic of granting the little fish immunity or a reduced sentence in exchange for testimony against the big fish works just fine. I suppose we'll have to wait for the next big corporate scandal (post Sarbanes) to see if it really is any easier to nab the wayward execs.
I acknowledge Jack's bias in making his observation and also note the potential irony in receiving his commentary on the subject of corporate shenanigans (did G.E. ever miss a quarterly earnings estimate under his watch?). Nonetheless, I think he raises an intersting thought.
4. Posted by Christine on June 7, 2006 @ 9:08 | Permalink
Ryan, I've heard a lot of other people besides Jack Welch say the same thing, and I think there is a lot of irony there. The verdicts were based on crimes we've had for awhile. Specifically, the provision in SOX requiring the CEO to sign off on financials was meant to ensure that CEO's couldn't use the "head in the sand" defense, but that defense didn't prove viable anyway.
5. Posted by Ryan P. Haas on June 7, 2006 @ 9:59 | Permalink
Christine: I am an ex-public accountant who worked in the Sox 404 trenches so I'm familiar with the executive sign-off procedure. I have to say, I'm not entirely convinced the sign-off requirement is that meaningful in the context of prosecutions. Before I explain further, I would note that based on my somewhat limited observations, I did perceive the sign-off provision as inducing management to take a harder look at reported numbers. This clearly is a positive side-effect of the legislation, but an unintended one it seems to me. Back to the prosecutions. What I understand about the provision is that it would essentially create a strict liability offense. If an executive certifies fraudulent financial statements, they are deemed complicit in the fraud. Now, as my familiarity with Sox 404 was relegated entirely to the accounting aspects, you undoubtedly could educate me on the legal implications. However, intuitively, I presume execs facing prosecution under this section would use the same defenses they currently use--I was a victim of the fraud too, I relied on the accountants/lawyers, etc. As you point out, this strategy did not work for the Enron defendants, but there were a lot of other issues present in that case. Considering how truly difficult it is to discover a well-orchestrated fraud, I'm not sure these defenses couldn't work in a less extreme case.