REVIEW & OUTLOOK
Ken Lay's Bad Day
The 30th Enron indictment may be the hardest to prove.
The federal government's major law enforcers crowded the lectern Thursday to pat themselves on the back for indicting Ken Lay. But all the self-congratulation over the Enron founder and former CEO's perp walk couldn't conceal the sense of anticlimax.
The real cause of Enron's collapse, the shunting of debts off the balance sheet and into special-purpose partnerships, came out years ago. The man at the center of that fraud, former CFO Andrew Fastow, is facing a 10-year sentence. So it's telling that Mr. Lay was arraigned not for directing that fraud, but for misleading investors, bankers and regulators about the true state of his corporation.
The charges are serious, carrying a maximum penalty of 175 years in prison and $5.7 million in fines. But proving criminal intent here won't be easy. Prosecutors have been known to overreach for a famous scalp, and in this case there is also an imperative to get Mr. Lay in order to prevent him from becoming a political liability for the Bush Administration.
Kerry spokeswoman Stephanie Cutter was all too quick to suggest that the friendship between Mr. Lay and President Bush had led to special treatment, calling the indictment "three years too late." As Mr. Lay himself noted, it would have taken more courage for the Justice Department not to indict him.
There is no doubt that Mr. Lay is guilty of bad management. He admitted Thursday that his trust in Mr. Fastow was misplaced, and there must have been other missteps. But Mr. Fastow had plenty of help in covering his tracks, both within Enron and from its outside accountants. In a criminal trial, it is not enough to say that Mr. Lay should have known. No CEO can know all that is going on in a large corporation, and the fraud at Enron was so complex that it took prosecutors more than two years to unravel.
The government's Exhibit A will presumably be a videotape of Mr. Lay's now-famous pep talk to employees in August 2001, telling them Enron was still "doing extremely well" and encouraging them to hold on to their stock. Many followed his advice and ended up losing much of their life savings. That aroused an understandable anger with the CEO, who was paid salary and bonuses in the millions.
But Mr. Lay was also putting his money where his mouth was. During the long slide of Enron's share price, he continued to keep the vast majority of his personal wealth in the stock and even bought more shares, selling only when forced by margin calls. This is not consistent with the theory that he knew the company's true situation and was out to defraud shareholders.
Mr. Lay's co-defendant, former CEO Jeffrey Skilling, claimed that he resigned from the company for personal reasons and allegedly made $89 million in profits from selling Enron stock. By all accounts Mr. Lay came back to the company to replace Mr. Skilling as CEO because of his personal connection to it. He then did what captains are supposed to do, which is go down with his ship.
The record of the past three years is ample proof that Enron's political connections, both to Republicans and Democrats, have not shielded its officers from prosecution. Mr. Lay appealed to Commerce Secretary Don Evans for help when Enron's credit rating was downgraded, but he received no special treatment. Attorney General John Ashcroft recused himself from the case because of past Enron donations to his Senate campaign. Prosecutors issued 29 Enron-related indictments before they got to Mr. Lay.
The Bush Administration's record of cleaning up corporate fraud is on the whole an honorable one, and on Thursday John Rigas and his son Timothy were convicted of conspiracy in the Adelphia fraud. One danger now is that excessive zeal in prosecution will end up punishing executives for poor management rather than criminal acts. Not only is that an injustice, it will deter risk-taking and hurt the economy.
