Ken Lay Will Get Away with His Real Crimes
By GREG PALAST
Wednesday, May 24, 2006 -- Al Capone cut throats, machine-gunned people to build his gang and went to jail -- for not filing his taxes properly. Likewise, Ken Lay, buccaneer of the power industry, will go down -- if the jury doesn't buy his alibi -- for not filing his SEC forms properly.
And just as Capone went up the river leaving us a permanent legacy of organized crime, so Lay, whether or not he's sent to the slammer, has left us, with the connivance of a few well-placed politicos, an electricity system that is little more than a playground for power-industry predators.
We've been here before. In the 1930s, a character named Samuel Insull created the first giant power holding companies. Insull played fast and loose with his account books, fast and loose with cash for politicians and pocketed millions by gouging electricity customers. Insull was indicted, like Lay, for crimes against his stockholders.
In 1933, President Roosevelt made Insull's power piracy a crime. FDR signed the Public Utility Holding Company Act and laws that capped the profit of electricity monopolies. The act required them to keep lights on by accounting for all maintenance expenses, barred "trading" electricity and, most important, banned donations by the power giants to politicians.
Fast-forward to January 2001. The George W. Bush administration, within 72 hours of his inauguration, issued an executive order lifting the Clinton Energy Department's effective ban on speculative trading in the California power market. The state was still in crisis, facing blackouts and 300 percent increases in power bills, the result of "deregulating" its electric system, as first suggested by Lay.
Instead of a "free" market, California's electricity bidding system became a fixed casino where Lay's operatives and a tight-knit cabal of corporate cronies jacked up prices through such tricks as "death star," "ricochet" and "kilowatt laundering."
In one instance, Enron "sold" the state 500 megawatts of electricity to go over a 15-megawatt line. Enron knew that sending that much power through those wires would have burned them to a crisp. To prevent this Enron-designed blackout, the state scrambled for other sources of electricity, which Enron and friends sold them at a big mark-up.
California's Independent System Operator put the cost to consumers of this "gaming" at $6.3 billion in a six-month period. Under the Roosevelt rules, when utilities were regulated to a fare-thee-well, the gaming rooms would have been busted.
Instead, the games have been institutionalized. For example, TXU, the corporate alias of Texas Utilities, has seen earnings per share rise 500 percent in five years. The reason: So-called deregulation allows the company to sell electricity at a price based on the sky-high cost of oil although much of its power is produced from cheaper coal or uranium. In effect, deregulation has become de-criminalization of price gouging.
Even more sinister than Bush's hasty executive order allowing Enron to resume speculation in the California power market was his appointment of Pat Wood as chairman of the Federal Energy Regulatory Commission, the government's electricity cops. The choice of Wood was suggested, in secret, by Enron.
This put Lay one step ahead of Al Capone who had to buy the cops. Lay just had them appointed.
Wood may have been as honest as the day is long, but on his watch, Enron and the industry treaded through the power market like Godzilla through a kindergarten. And it continues under a new chairman, also suggested by Enron.
What about the $6.3 billion filched from the wallets of California consumers, let alone the larger sums taken in by power profiteers nationwide? The Lay-blessed federal regulators barely batted an eye.
Lay's brainchild of deregulation was coupled with his other grand idea: a massive increase in industry largesse to politicians. By unsubtle, but perfectly legal, means around FDR's prohibition on political donations, Enron PACs and its executives became the top Bush funders.
Capone never lived to see armed robbery made legal. But Lay, even if convicted, can leave the courthouse for the Big House knowing power profiteering is now as legal as prayer. On July 14, 2005, Roosevelt's Public Utility Holding Company Act, bulwark of consumer protection, was repealed by a Congress fattened with utility industry cash.
Former Enron bosses found guilty
Mark Tran and agencies
Thursday May 25, 2006
Enron founder Kenneth Lay flanked by his lawyer George 'Mac' Secrest and his wife Linda at the end of his trial. Photograph: Pat Sullivan/AP
A jury today found Kenneth Lay, the founder of Enron, guilty on all six counts of fraud and conspiracy in one of the biggest financial scandals in US history.
The jury of eight women and four men also found the company's former chief executive, Jeffrey Skilling, guilty of conspiracy to commit securities and wire fraud.
"Obviously, I'm disappointed, but that's the way the system works," Skilling said in a brief comment to reporters.
Enron's collapse came to symbolise the excesses of the dotcom era.
Together with subsequent Wall Street scandals - encompassing the even bigger collapse of WorldCom - the Enron case paved the way for legislation on tighter corporate governance and accounting rules.
However, the Sarbanes-Oxley bill, which followed the scandal, has led to complaints of too much red tape from US companies.
The legislation has been cited as the reason for many foreign companies preferring to list on the London Stock Exchange instead of in New York.
The defendants awaited today's verdict outcome away from the federal courthouse in Houston - Lay at his nearby office and Skilling in his legal team's "war room" across the street.
Both were accused of repeatedly lying to investors and employees about Enron's health before its collapse in December 2001.
Prosecutors said the two knew of the various accounting subterfuges used to mask debts and failing ventures.
The defendants denied any wrongdoing, attributing the company's failure to bad publicity and a loss of market confidence.
Skilling faced 28 counts of fraud, conspiracy, insider trading and lying to auditors, with a maximum sentence of 275 years in prison if convicted on all counts.
Lay faced six counts of fraud and conspiracy, with a combined maximum punishment of 45 years.
During cross-examination, Lay claimed he had done all he could to avoid the company's collapse, which he described as the "most painful thing" in his life.
In the last of a series of bruising exchanges, the federal prosecutor, John Hueston, attacked Lay's refusal during his evidence to accept the blame for what had happened to the company.
"Sir, you have a long list of people to blame for Enron's collapse, and it gets longer and longer as you testify. And your list of people to blame and events to blame did not include yourself, did it, sir?"
Lay responded: "I did everything I could humanly do [at] this time. Did I make mistakes? I'm sure I did ... I had to make real-time decisions based on information I had at the time."
Questioned by the defence lawyer, George McCall Secrest, 64-year-old Lay denied keeping Enron's holding in Wessex Water at a fraudulently high value on the books. He said Enron believed the stake was worth keeping and would provide a return.
Enron began life as a regional natural gas pipeline company, the result of a merger between Houston Natural Gas and InterNorth in 1985. Lay, its former chairman, transformed it into the world's largest energy trading company and the seventh-biggest corporation in the US.
Scandal is an inevitable consequence of a bull market
May 25, 2006
The jury has just thrown the book at the two men who led Enron to its rise and fall. The energy company's founder, Kenneth Lay, and its former chief executive, Jeffrey Skilling, have both been found guilty of fraud and conspiracy. They could spend the rest of their years in prison.
At its zenith, Enron, which began life as a humble regional gas pipeline company, won praise from Wall Street analysts for its "innovative" approach in marrying hi-tech and complex finance to the dull business of supplying energy.
Under Lay, Enron became the world's largest energy company and America's seventh largest corporation. But it was all sleight of hand. The financial wizardry that so bedazzled Wall Street consisted of creating "special entities" to hide the company's huge debts.
When the gig was up, Enron filed for bankruptcy in December 2001, in what was then the biggest financial collapse in US history, a dubious distinction that was subsequently transferred to WorldCom and its cowboy boots-wearing boss Bernie Ebbers.
In the Enron collapse, lots of investors lost their shirts, and many of Enron's 19,000 employees lost their savings because they belonged to retirement plans based on Enron shares.
The consequences of Enron are still with us. Enron, WorldCom and other Wall Street scandals moved Congress to introduce legislation to tighten up corporate governance and accounting rules.
The Sarbanes-Oxley bill, a direct legacy of Enron, is a bane of US companies. They complain about the pendulum going too far the other way to ensure against scandal and about too much red tape. Many foreign companies cite the rigours of Sarbanes-Oxley for their reason to list on the London Stock Exchange rather than New York.
Perhaps America's lawmakers overreacted, but they had to respond to public pressure to clean up Wall Street. In all this, one lesson stands out. Scandal is the inevitable handmaiden of a bull market. In the 1980s, Wall Street also saw shares rise to giddy heights. That bull market also gave us Michael Milken, usually referred to as "the junk bond king". Ken Lay and Jeffrey Skilling now rank alongside Milken and Ebbers in notoriety.
1985 - Houston Natural Gas merges with InterNorth to form Enron.
1986 - Kenneth Lay becomes chief executive of Enron.
1990 - Lay hires former management consultant Jeffrey Skilling to look after the companies energy trading operation. Andrew Fastow, who later becomes the architect of the firm's dubious accounting practices, is one of his first hires.
1997 - Skilling is promoted to be Enron's president and chief operating officer. Fastow creates a series of companies - codenamed Chewco and Jedi - designed to keep debt away from Enron's books while inflating the firm's profits.
1999 - Fastow sets up the first of the LJM partnerships, which generate huge windfalls for him and his associates, while hiding Enron's many poorly performing assets and investments.
2000 - In August Enron shares reach a peak of $90.
2001 - The year of Enron's downfall.
- March - business magazine Fortune first raises the question "How, exactly, does Enron make its money?"
- August - an Enron employee, Sherron Watkins, meets Lay to alert him to her concerns about dodgy finance and accounting practices at the firm..
- October - On 16 October Enron shocks the markets by announcing a $638m loss for the past three month, and write-offs worth $1.2bn; three days later the US stockmarket watchdog launches an inquiry into Enron's finances. A week later Fastow is sacked.
- November - Enron agrees to be bought by rival firm Dynegy. Shortly thereafter Enron announces even further losses and previously not disclosed debt. As Enron's share price falls below $1, Dynegy breaks off the takeover talks.
- December - Enron declares itself bankrupt.
- January - Lay resigns.
- March - Enron's auditor, Arthur Andersen, is indicted over the shredding of tons of Enron-related documents; the multinational company is later fined for its actions and falls apart as customers depart in droves.
- October - Fastow indicted for conspiracy, money laundering, fraud and other chargers
- January - Fastow pleads guilty and agrees to a 10-year prison sentence
- February - Skilling indicted on 30 charges, including conspiracy, fraud and insider trading.
- July - Lay indicted