Lessons From Enron 15 Years Later: The Greatest Fraud Trial Ever | Opinion

Well, that was an interesting week. After four years, things seemed somewhat normal again post-inauguration. The markets were up and down, as usual. Bank earnings were pretty good. There were daily briefings in the White House press room without rancor. Dr. Anthony Fauci was unchained. There was a president dealing with the reality of a pandemic and aggressively launching a plan to fix what's broke. Of course, Texas Senator Ted Cruz, as usual, was whining about something. (No one cared.) But everything isn't hunky dory. Economic worries remain, the COVID vaccine distribution is a mess, and millions of people are out of work. More Capitol invaders need to be rounded up. To state the obvious, which I often do, the new president, Joe Biden, has a big job ahead of him.

But I'm going to leave the commentary on all that to others for the time being. Going to do something a little different in this week's column. A tribute of sorts.

Last Wednesday—January 20—marked the 15th anniversary of jury selection in the 2006 trial of former Enron chairman Kenneth Lay and ex-CEO Jeffrey Skilling. The two men, at the end of the 56-day trial, were convicted on multiple counts of fraud, conspiracy and bank fraud as a result of the collapse of Enron. The company, for the uninitiated, was a once under-the-radar, and boring, pipeline operator. But it emerged in the '90s as an innovative energy company that, or so it seemed, changed the way electricity and natural gas were peddled. The only trouble: its problems were hidden by an elaborate web of accounting schemes. The New York Times said it well: "It was only a matter of time before the company would be revealed as a house of cards and Enron's crooked E logo would become a symbol of corporate shame."

And so it was. As a result of all the wrongdoing, Skilling was sentenced to 24 years; he served a dozen. (He was released almost two years ago and was reportedly raising money for another energy-related venture.) Lay died shortly after the verdict, and his conviction, by law, was vacated.

To me, and perhaps only me I admit, the trial proved a couple of things. One: that juries with the right prosecutors in charge, can understand complex business and financial cases. So there's no excuse for not bringing corporate chicanery cases to trial. Two: the Enron investigation and trial also proved that company executives can actually be held responsible for doing illegal things. In age where companies are more often punished via fines, and executives go their merry way, that's worth noting.

It also is a cautionary tale for business journalists like me. Enron, a rock star of the late '90s, was as famous as companies like Tesla, Facebook and Google are today. There wasn't a business magazine that didn't want the Enron guys on their cover.

Enron stayed famous into the new century, for another reason. In early 2001, Fortune magazine writer Bethany McLean was among the first to question Enron's financial underpinnings. Less than a year later, the company was in Chapter 11—one of the biggest collapses ever. Enron executives such CFO Andrew Fastow eventually copped pleas and agreed to testify against their old bosses Lay and Skilling. (Even Enron's auditor/accounting firm, Arthur Andersen, closed its doors after, in 2002, it was convicted of crimes relate to the energy company's debacle.)

Meanwhile journalist McLean, now a Vanity Fair contributing editor, and Peter Elkind, currently a senior reporter at ProPublica, authored in 2003 the definitive book on the collapse of Enron, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. (Edited by another Fortune great, Joe Nocera.) It was followed by an award-winning documentary by Alex Gibney,with help from McClean and Elkind. It debuted in 2005, only six months before jury selection in Houston.

Elkind and McLean soon after covered the Skilling-Lay trial for Fortune magazine where I was an editor many years. I asked them recently to look back at the extraordinary trial, a rare, personal accounting for corporate wrongdoers. The following are edited excerpts.

Q: Before you headed to the trial, what did you think were the prospects for conviction? Did you think the jurors would be able to grasp such a complex case?

McLean: I didn't believe Skilling or Lay would be convicted, no. The main issue for me wasn't that I thought the issues were too complex. Rather, it's that much of what happened at Enron was what I now like to call "legal fraud"—they abused the rules, but didn't necessarily break them. Many of the financial structures that most appalled the public, like (CFO) Fastow's partnerships, were legal and had been approved by the board.

Elkind: I thought there was a good chance the two men would be convicted. The array of charges against Skilling was vast, offering an array of ways to find him guilty. Lay actually faced two rounds of criminal proceedings—in addition to the main set of charges considered by the jury, a bench trial on claims of bank fraud. There was plenty of complexity around Enron's collapse, but the charges against both men revealed heavy doses of both their personal greed and proclivity to mislead investors, the public, and their own employees—behavior a jury could readily find repugnant.

Plus: there was a long lineup of high-ranking Enron executives who had pled guilty to crimes, and were prepared to testify against the two men. It would be hard for a jury to believe they'd all made it all up. Finally, as a backdrop, Lay and Skilling also began the trial in Houston as the living embodiments of a landmark scandal that had shamed the city on a national and international scale. The company's bankruptcy was so sudden and dramatic, it would be hard for any defendant to escape the visceral sense that something crooked had taken place.

Q: Why did you think Skilling and Lay decided to fight and not plea bargain? Were they so confident that they could confuse the jurors?

McLean: I think on some level, they both believed—and Skilling still believes— they were innocent. The rationalizations and self-delusion are part of every story of business gone wrong. Skilling and Lay were no exception.

Elkind: Skilling was a man who was able, and inclined, to bend conventional notions of reality to his liking, in ways ranging from accounting treatments to notions of right and wrong. "Sometimes wrong, never in doubt," was the tag given to him early on. And that carried over into the trial. I think Lay rationalized all his behavior as well. Until Enron's collapse, he'd always managed to charm his way to the top, and into everyone's good graces. He'd worked hard to cultivate his image as an upstanding corporate leader—even while willfully looking away, or doing the wrong thing, time and again. I think Lay felt he stood apart and above any misdeeds that had taken place. And yes, both men suffered from fatal arrogance.

Q: One account I read said the prosecutor's opening statement drew from the opening scene of the Alex Gibney's documentary, Enron: The Smartest Guys in the Room, which you both participated in. True story?

Elkind: True. John Hueston, one of the senior prosecutors, had just watched the film, and embraced its opening device as a provocative hook, displaying a picture of the gleaming Enron headquarters tower, and posing the question (as did the film): "What's going on in there?" He then worked that structure as a tale of deceit: one story, full of lies, told to people on the outside, very much at odds with the criminal reality of what was going on inside the building.

McLean: I'm not sure I noticed it! I'd never sat through a trial before, and I was struck by the realization that trying a case isn't so different from making a film or writing a book. We're all trying to tell stories.

Q: Prosecutors managed to humanize a complex story. Was storytelling the key to convincing the jury of Skilling's and Lay's guilt? Was having folks who lost savings testify a key?

McLean: Keeping it simple was one key. Instead of getting lost in all the intensely complicated financial shenanigans, which would have gotten drowned in arguments as to their legality, prosecutors focused on clear, simple examples of where the law was broken—such as when Skilling told investors on a call that broadband was doing great right after he'd told employees the business was in trouble.

I also think it was important that the prosecutors didn't overreach and paint Skilling and Lay as evil-doers who intended to bankrupt Enron for their own benefit. Rather, they painted Skilling and Lay as executives who began to lie to save their own pocketbooks, but also out of the misguided belief that if they lied, they could save the company. It was much more human and much more believable.

Elkind: I think Bethany described it well. I've covered a number of trials, and it's clear: the more complex the story, the more important it is to keep the narrative manageable, compelling and understandable. Prosecutors worked hard to do that, even dropping chief accounting officer Rick Causey—and charges involving him—from the Lay-Skilling trial altogether to simplify things. The trial wasn't short, but the prosecutors worked hard to keep from burying the jury in complexity, and to highlight especially memorable events and anecdotes.

Another valuable prosecution storytelling move: In a white-collar crime case, they made a point of presenting the jury with victims—longtime pipeline and utility workers who had lost their life's savings because of Enron's collapse, and thus the Lay-Skilling crimes. This underscored the impact of the fraud. It didn't just bring down a corporate entity; it financially wrecked hardworking, average people.

Q: What was the turning point in the trial?

McLean: It came when the prosecution played a tape of Skilling attempting to sell his Enron stock—he was caught in a lie about it. He'd previously testified to the SEC that his sale, which happened, I think, on the 14th of September, 2001, was only made then because of September 11 terrorist attack. The tape revealed that in fact, he'd tried to sell on September 7th, but the broker told him it would have to be disclosed because he was still an Enron executive. Skilling responded that he'd get paperwork to show he was no longer an Enron executive. By the time he got the paperwork together, the market had closed (on Sept. 11.)

The trade obviously wasn't executed on the 11th. It wasn't clear why he sold the stock and why he bothered to lie about it. When he was asked (later) why he was caught lying about 9/11, he said he didn't remember the sale. I guess the obvious interpretation was that Skilling knew Enron was going down the tubes, and he wanted to salvage some of his own fortune.

But It was this shocking moment, because the jurors had started to like Skilling. He's extremely compelling when he goes into expository mode. All of a sudden, they saw that he was capable of lying. He never recovered from that. For Lay, it came when the prosecutors were walking through his stock sales. Lay finally got extremely frustrated, took off his glasses, and said, "when you live a lifestyle like mine, it's not easy to turn off the spigot."

Elkind: Not sure whether it's what moved the jury, but Lay's testimony truly was a disaster. He was short-tempered and testy, even with his own lawyer—completely the opposite of what everyone expected. Skilling, by contrast, was a better witness for himself—generally keeping his cool—but faced an avalanche of ugly facts and testimony from others. Just far too much incoming. In questioning both men, prosecutors scored their most points by revealing lies about their personal behavior and greed. It served to broadly undermine their credibility across the board.

Q: Did the defense make a mistake by calling Lay and Skilling to the stand?

McLean: If the defense hadn't called Skilling, I'm not sure if that transcript of him selling stock would have been admissible. On the other hand, until that moment, he was a powerful advocate for his own innocence. I think they did make a mistake calling Lay, who was horribly sanctimonious. See the previous comment!

Elkind: In hindsight, Lay really did hurt himself, both with his pious tone and with the hollowness of his rationalizations under tough questioning. Skilling was a better advocate for himself, but prosecutor Sean Berkowitz did an excellent job of skewering his claims.

Q: Who were the best witnesses for the prosecution? Andrew Fastow, the ex-CFO? The Enron accountant?

McLean: I think it was the accumulated weight of all the witnesses, not one in particular.

Elkind: Many strong witnesses. Not sure Fastow came across that well; he was so deeply engaged in dubious practices, his testimony inevitably had the feeling of a very guilty witness who had cut a deal. Other executives, who got drawn into Enron's misconduct but were less the architects of it, were more compelling.

Q: Were you surprised by the verdict? If not, why not. If so, why?

McLean: No, not after the Skilling and Lay testimony.

Elkind: No. You never know what a jury will do. But the overall picture presented to the jury was quite compelling.

What surprised you most, if anything, about the trial?

McLean: That a trial is mostly monotony punctuated by moments of "I can't believe this just happened."

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On the Street Jukebox: What else but "When I'm President" by the Ian Hunter and the Rant Band? Listen right here...Many thanks to Bethany and Peter, and see you back next week.