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The Enron Case

Charges Against Former Chairman

Bethany McLean
Fortune Staff Writer and Author
Friday, July 9, 2004; 1:00 PM

Former Enron Corp. chief executive Kenneth L. Lay pleaded not guilty to criminal charges including securities and wire fraud and false and misleading statements about his knowledge of the company failing while selling company stock shares.

Fortune staff writer Bethany McLean, author of "Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron," was online Friday, July 9, at 1 p.m. ET to discuss the indictment.

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Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.


New York, NY: Why did this indictment take so long?

Bethany McLean: Mainly because the Enron case is so very complicated. Enron didn't smash the rules; rather, it twisted them and subverted them at every point. That makes criminal intent difficult to prove.


Cleveland, Ohio: Hi,
Other than Lay, Skilling, and Fastow, I'm wondering if you think that the directors will be prosecuted in this case? Is there a precendent for or against this?


Bethany McLean: I don't think the directors will be prosecuted. They've already been dismissed from much of the civil complaint, and there was never really any serious consideration of prosecuting them criminally. Directors are pretty insulated from charges of criminal wrongdoing. And the main problem with Enron's directors was that they failed to ask enough questions of its executives. They were lazy and greedy, but fortunately or unfortunately, that's not criminal!


Latrobe, Pa.: Would the prosecution be more vigorous under another attorney general?

Bethany McLean: I don't think so. I think the prosecution was actually pretty vigorous. The Enron case was extremely complex, and it just didn't make sense for prosecutors to bring a case against Lay that wouldn't hold up. instead, they took their time and brought the strongest case they could.


Takoma Park, Md.: I read a few different places that either the defense or the prosecution might subpoena the famous Energy Task Force records, which would have to be released according to the recent Supreme Court decision, which held that in a criminal case, the secrecy standard would not be met.

As a rabid Bush-hater, this made me all melty inside, and I ran off to tell my friends. But one smart one had the nerve to ask what possible relevance those documents could have to the Lay prosecution. I had to admit I had no idea.

So I'm asking you, is there any chance these docs could be subpoenaed in this case, and if so, why?


Bethany McLean: Honestly, I don't know. I'm not a lawyer, so I don't understand the limits of subpoena power in this case. But in any event, I really doubt they'd make much difference to the criminal case against Lay - although they might embarrass Bush!


Greenbelt, Md.: Why so little in the press about Kenny Boy's close relationship with Bush?

Free Enron plane travel during the 2000 campaign, a half million in campaign contributions, leading the still-secret Cheney energy commission, early choice for a Cabinet position, etc? I mean, wow. Why even bother putting out a paper or program if you don't care about the facts?

Bethany McLean: I disagree with you. I think there's been a lot in the press about Lay's relationship with Bush - how do you know all those facts that you just cited if not for the press? In the end, I think if the relationship had been that close, we wouldn't even know the name "Enron" because the Bush government would have stepped in to bail the company out before it went bankrupt.


Rochester, N.Y.: I'm wondering if you think there's more to come about Vice President Cheney's energy meetings with people like Lay?

I well remember reading (in the Post I think) how Enron's DC lobbyist bragged about their ties with the new administration and told a federal regulator who was critical of Enron's business model that he'd be losing his job.

Thanks very much.

Bethany McLean: Hmmmm - not sure I remember the article you cite. There's still an ongoing argument about making Cheney's dealings with people like Lay public, and I don't know how it will end up. I wish it would all be public - but I don't think it will have much bearing on the criminal case against Lay.


Belle, W. Va.: Ms. McLean;

Thank you for taking readers' questions. The case outlined against Mr. Lay by the Justice Department seems rather weak. Prosecutors allege Mr. Lay sold more Enron shares than he bought while telling others to buy. Mr. Lay insists that he sold his shares to meet margin calls as the price declined. To paraphrase President Bush, "Is this the best they've got?"

Bethany McLean: I agree with you that the case is really tricky. But two things. One, it doesn't rest solely on lay's stock sales. There are a lot of examples in the indictment of Lay publicly proclaiming Enron's health to investors and employees when he knew that reality was far less favorable. Two, I'm not a lawyer, so I don't know how the case will hold up. But a few things are clear. Enron was a fraud, and Ken lay was the company's CEO for almost all of its history. I think it would be a travesty if he could just proclaim his cluelessness and walk away, leaving junior people to bear the consequences of a culture he created.


Bowie, Md.: Is Lay being charged with his most serious and most provable offenses; or with the charges that a jury will find easiest to understand most likely to get angry about.

The incident about which we read most often in the newspapers is how he talked the stock up while privately selling his own shares. That's not terribly uncommon behavior for a corporate higher-up who gets a lot of his compensation in stock or options and needs to convert some of it into cash on a regular basis.

The LMJ partnerships, Death Star trading strategy in California, and the use of company stock to improve their balance sheet are much more serious offenses. Are they too hard to explain to a jury or to show Lay was personally involved?

Bethany McLean: I think it's the former, but the charges are much broader than his stock sales. While prosecutors couldn't tie Lay directly to some of the things you cite - Death Star, etc - they do allege that he knew about a number of the problems at Enron (such as the Raptors, which are the use of company stock that you cite) and lied to both investors and employees about Enron's health.


Washington, D.C.: Do Skilling and Fastow need to go to trial first to gather evidence on Lay?

Bethany McLean: No - Fastow has already pled guilty, so the government knows what he knows. Right now, the case against Lay is tied to that against Skilling, meaning that they'd be tried together. Lay's lawyers are trying to separate it in order to get his trial done more quickly. Personally, I think it'll be more fun if they're together. Fireworks!


Austin, Tex.: Are the prosecutors reeling in the money and property that fled overseas when the "evil doers" at ENRON were originally rounded up and branded? Or did these Republican stalwarts manage to stash their loot out of the reach of the law?


Bethany McLean: There really wasn't any money or property left. Enron's creditors are getting about 20 cents on the dollar; stock holders were left with nothing. the only people who made money were the execs who sold stock and the wall street firms who made millions in fees from enron.


Washington, DC: You know, you raise an interesting point just now, that maybe is a little too nuanced for this format, but I'm giving it a shot. I hear the term "bailout" and I think of low-interest loans to airlines, car manufacturers, etc. These companies sometimes fall upon hard times and have to be "bailed out."

But these companies and Enron have some key differences. Car companies make cars. Airlines fly people around, and their luggage too, often to the same place. Helpful stuff. They go bankrupt because of bad decisions, market slumps, etc.

Enron went under because a large part of their business model was, fundamentally, a scam. Once it started going under, is there anything the White House realistically could have done to stop that? If not, do they really deserve credit for not stepping in?

Bethany McLean: that's a really good question, and your point about enron's business is exactly right. enron wasn't a good company brought down by andy fastow; it was a bad company - one with a business model that didn't work - that was propped up for a long time by fastow. could the government have saved it by, say, forcing through a merger with another company? I don't know. but at the time of enron's bankruptcy, I don't think anyone knew the extent of the company's problems. it's taken years for all of that to come out. so...the government could have tried. that said, my earlier answer was probably a little too flip. the fact that the government didn't step in isn't the only reason that I don't think enron was a political scandal. while enron got some favors in washington, they got a lot less than many companies (think big pharma), and the thing they wanted most - retail energy deregulation - they didn't get.


New York, NY: If Clinton were still President, and HE was the one who was friends with Ken Lay, the outrage coming from Congress would be crazy!; Investigations, special prosecutors, you name it. Yet, we haven't heard a peep out of Republicans about their connections. Do you think their relationship (Bush and Lay) is something the media should be paying more attention to? Thanks

Bethany McLean: Honestly, I don't (and believe me, it's not because I have any fondness for the Bush administration!) I think the media has paid a lot of attention to the relationship, especially in the months following enron's bankruptcy. e veryone in the press was desperate to make it a political scandal. there just isn't a lot there. the ethos in dc was all about deregulation, and that benefitted enron immensely. but it benefited a lot of other companies too. and (at least to date) no one has found any particularly shocking favors that bush did for enron.


Dallas, Tex.: Any evidence that ENRON execs bought off government regulators - SEC, justice, FBI, FERC, others - or that the prosecution will wander into the White House itself? After all, Kenny Boy didn't give money for nothing.

Someone had to run interference for their illegal and immoral activities. This magnitude of scandal doesn't just arise out of the vapors!

Bethany McLean: no...I don't think any of those agencies did their jobs during the 1990s, but remember, they didn't just miss enron. they missed tyco, worldcom, adelphia, etc. I think it was more incompetence and overwork than any payoff.


Anchorage, Alaska: Will the shareholders be forced to settle with these criminals who looted the company, California, their creditors, their customers, their suppliers, et al?

Or will the shareholders be allowed to pursue the money unto the ends of the earth? That is, does American law allow claimants to seek treasure stowed away in foreign banks and private accounts in undisclosed locations?

If it were me, I'd pursue these guys into Hell itself.

Bethany McLean: yeah, it's really frustrating. the problem is that there isn't much money left. both the bankruptcy examiner, creditors, etc have traced every little bit of money left from enron, and it looks like creditors will get about 20 cents on the dollar. I say it's frustrating because at least some victims deserve compensation, but where is it going to come from? certainly, if these guys are found guilty they'll be forced to turn over most of the money they made from stock sales. (enron guys who have pled guilty have already given up tens of millions.) and there's a huge civil suit against all the wall street firms - the real deep pockets - who aided and abetted enron. I think they're some of the true evildoers here.


Houston Tex.: So how come the directors aren't legally responsible and subject to civil and criminal sanctions? They're fiduciaries. They earn the free money and gourmet lunches. They must do something for it - like stand the watch when the ship goes down!

Maybe the prosecutors ought to seek a new precedent.

Bethany McLean: maybe so!


Los Angeles, Calif.: While the arrest of Lay is indeed a step in the right direction, it is only a reflection of a symptom rather than the disease which is destroying this country.

The disease of greed, or the 'race to the bottom' mentality which has infected Corporate America whereby the organization takes all precedence over human beings, will eventually demolish the middle class in America. This is the real issue which needs to be addressed.

This is not to say business shouldn't be for profit, but at what cost? If to satisfy Wall Street, corporations like Wal-Mart fail to provide real wages or benefits to their employees, or worse, hire illegal aliens, is it better that the shareholders gain while our nation as a whole loses? As a consumer of IT products, who hasn't experienced the "service" of Indian call centers? Sacrificing this nations customers and employees on the idol of "free markets", the god of our business leaders, we all lose.

Unfortunately, there really is no solution other than an ascent up the ladder of morality and ethics for those who run this nations corporations. Let's not hold our breath.

Bethany McLean: I couldn't agree with you more. The whole notion of "shareholder value" has been completely corrupted. It's used to justify huge payoffs to executives for short term financial results, not long term value creation - and certainly not the creation of anything more important (ie community, employees lives, etc.) than bottom line earnings.


Timbuktu, Mali: I knew Andy Fastow as a teenager and was very impressed with him, but I recently read that he used his smile to get him what he wanted. Is it possible, as Sherron Watkins thinks, that Ken Lay knew nothing? Thanks for uncovering the ENRON story.

Bethany McLean: Interesting. I used to think that it was possible that Ken Lay was truly clueless. Of course, even that in my mind doesn't excuse him. For a CEO to take hundreds of millions of dollars in compensation and then say he didn't understand the company's finances? That's insane. But in its indictment, the government alleges that Lay knew a lot - and chose not to tell the truth about enron's financial condition to employees and investors.


Chicago, Illinois: In the research for your book, did you get a sense of how
prevalent such illegal activities are in other major
corporations? Given that executives will sometimes move
from one company to another, it seems that such behavoir
should be widespread.

Also, do you think the Enron scandal will have any impact
on the never-ending escalation of CEO salaries and
bonuses? If not, what can be done to bring these salaries
down to acceptable levels?

Bethany McLean: In response to your first question, I think the behavior at enron is very prevalent in other companies. unfortunately, american business is all about meeting quarterly earnings targets, and that's the obsession that brought enron down. but I don't think other companies take it to the extreme that enron did. at enron, most of its business was manufacturing earnings. maybe that's 10% of the business of most other companies!

unfortunately, it doesn't look like anything is going to stop the escalation of ceo salaries. honestly, I don't understand it. I don't understand how boards can let it go, and I don't understand how ceos can possibly take the money without feeling like thieves. I guess I'm still too much of a midwestern at heart!


Omaha, NE: Hi Bethany,
What do you think Enron's implosion means for the
cause of industry deregulation? Do you think
deregulation will lose its lustre in the eyes of

Bethany McLean: I think energy deregulation has definitely lost some of its luster! just look at california. as for other forms of deregulation, I don't think they've lost their luster. unfortunately, no one has rescinded glass steagall yet!


Richmond, Va.: You say Bush didn't do Enron any "particularly shocking" favors, but didn't Bush appoint Ken Lay's first choice to the Federal Energy Regulatory Commission? I guess I'm easily shocked, but isn't it at least a little unseemly that the guy Bush chose to police wrongdoing among energy firms turned out to be a personal favorite of the biggest corporate criminal in the energy industry's history?

Bethany McLean: yes, he did. and you're right - it is unseemly. but no more so than a lot of the lobbying/political favoritism that happens in dc every single day. I don't think it rises to the level of shocking. shocking would be if bush knew the extent of enron's problems and did something to try to help enron conceal them, or to try to aid lay in getting away with millions.


Washington, D.C.: How much was lost in the Enron scandal and where did the money go? Was there embezzlement of actual funds and wrongful payouts, or was it just a stock scam where investors were misled into buying and holding worthless shares?

Bethany McLean: the latter. at its height, enron had a market value of $70 billion. it had about $38 billion in debt when it went bankrupt. most of that has been lost - I think creditors are going to get about 20 cents on the dollar. some people like executives who sold early have walked away with money, but that's it.


Vienna, Va.: How do you think this trial will set the impact of criminal/corporate responsibilities of CEOs? According to the Post, the indictment of Ken Lay tops the list of corporate scandals including Martha Stewart, Adelphia, MCI, etc.

washingtonpost.com: No Safety at the Top For Corporate Leaders (Post, July 9)

Bethany McLean: I tend to think that markets swing between extremes of fear and greed, and that only fear stands in the way of greed. hopefully, the next ceo who wants to mislead investors for personal gain will remember ken lay.


Washington, D.C.: How is Mr. Lay, who was the CEO for a long time at Enron, any more guilty of self promoting a company that he believes in, then lets say the Lakers were right before thier last game of the championship(where Dallas killed them)? Don't most CEO's have high opionions of their companies potential?

Bethany McLean: you raise a really interesting point. and you're right: a lot of what happened at enron was self delusion. I guess it's a question of the fine line between understandable self delusion and criminal self delusion. (I know that's not a legal term, but I think you'll get the point!) I happen to believe lay crossed that line when he continued to insist to the outside world that everything was fine at enron. not to be too philosophical, but do you remember hannah arendt's writing? sometimes the people who believe are the most evil of all.


Harrisburg, Pa.: What happened to the planned oil pipeline that Enron and others were building through Afghanistan? Did that project stop or is it continuing? I presume the anticipated revenues were not enough to allow Enron to borrow against projected revenues?

Bethany McLean: honestly, I don't know. I don't think it ever got off the drawing board before enron's bankruptcy.


Washington, D.C.: It seems like the last few comments have forgotten a huge part of the issue when tring to blame the Bush Administration. That is that Enron was set up with scams, they did not become ill run when the President steped into office, it was only then expossed, correct?

Bethany McLean: If I understand your point correctly, I agree with you. Enron was doing bad things dating all the way back to the early 1990s. Enron did bad things throughout the Clinton administration. Yes, Enron went bankrupt in the Bush administration, but Enron wasn't the Bush administration's creation.


Corpus Christi, Tex.: Is the amount of money, dates, receivers, etc. that ENRON and its fiduciaries contributed to presidential and congressional races of interest to the prosecutors and relevant to trial? After all, folks in power who took their money could be corruption enablers if not outright conspirators. Yes?

Will more attention be paid to any connection between money paid and favors rendered in both the press and at trial?

Bethany McLean: I don't think it's relevant to the criminal trial. If the folks who took enron's money were still enablers, there wouldn't even be a trial to look forward to!


Waco TX: The new ENRON? What's its name? And what does it have for assets?

Are these ex-execs and employees or someone else?

Is it still playing in Houston and what are its prospects?

It didn't get to keep title to the name ENRON did it?

Bethany McLean: the new enron is split into a pipeline company called crosscountry energy and an international assets company called prisma energy. I think crosscountry has already been sold to a consortium including citigroup - sort of ironic given the role citi played in enron's downfall. prisma, I think, is still supposed to be a standalone company.


Laredo, Tex.: Who were the members of the board that supervised this debauchery of American business laws? What are they doing and who is hiring them now?

Good session today.

Bethany McLean: lots of luminaries in american business. pug winokur, robert jaedicke (former dean of stanford gsb), wendy gramm, etc. we all should hope that they don't find themselves on any more boards!


Laurel, Md.: If Lay only sold shares to meet margin calls while touting the stock to others, doesn't that mean he still held a lot of his shares as they sharply declined? Did Lay LOSE a lot of money by holding Enron stock? That, it seems, would imply plenty as to his guilt or innocence.

Bethany McLean: that's lay's argument - that he held onto enough stock to show his faith in the company, and only sold what he had to to meet margin calls. I understand his argument, but I think the issue is more complicated than that. he continued to tell investors and employees that enron's business was in much better shape than it was throughout the final months of enron's life. are those the actions of a truly honorable man, or of a guy who is trying to save himself? I'm not entirely convinced of lay's criminal guilt. but I'm very convinced of his moral guilt.


Brownsville, Tex.: What was that phrase that ENRON boosters use to use, something like: You just don't get it? What was that all about?

Was it something about how clueless the rest of us were to value businesses the good old Benjamin Graham fundamental way? And that ENRON had a new model that was going to take us all to the stars? Something like that? Please explain.

By the way, what happened to all those sky pilots? Selling ENRON coffee cups at Star Trek conventions?

Bethany McLean: jeff skilling always used to characterize people as "getting it" or "not getting it." "getting it" was supposed to be good. but I think those who didn't "get it" did better in the long run!


Bethany McLean: Thanks so much, everyone. Hope you all enjoy your weekends.


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