Founder Kenneth Lay Testifies in Enron Case
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RAY SUAREZ: Enron founder Kenneth Lay spent a second day on the witness stand today. He’s been charged with six counts of fraud and conspiracy in connection with the company’s 2001 collapse.
Last week, Lay’s co-defendant, former CEO Jeffrey Skilling, wrapped up two weeks of testimony. For more, we turn to Frank Ahrens, who has been at the courthouse in Houston covering the trial for the Washington Post.
And, Frank, it’s called fraud and conspiracy, but what does the government say Ken Lay did in connection with the collapse of Enron?
FRANK AHRENS, The Washington Post: Hi, Ray. The government has charged that — Ken Lay was the CEO. He was the founder of Enron, and he was the CEO for several years. But the charges focus very narrowly on the last few months of 2001, when Lay took over for Skilling as CEO up until the bankruptcy in December.
And the government says that Ken Lay knew things were going poorly, and yet he kept these losses from investors, and, in fact, lied, saying that the company was in much better shape than it was.
RAY SUAREZ: Well, what story has he told from the stand in the last two days about why the company failed? What’s the Lay version?
FRANK AHRENS: The Lay version is that Enron was a solid company; its fundamentals were good; it was buying and selling plenty of natural gas to wholesale customers.
It was one or two bad apples, specifically Andy Fastow, who was the chief finance officer of the company and who copped a plea to stealing millions of dollars from the company, which Lay said he didn’t know about it. When those revelations started to come out in the press, Lay says it caused skittishness among investors and led to what he calls a classic run on the bank.
RAY SUAREZ: He also laid a lot of blame at the door of the news business, didn’t he?
FRANK AHRENS: Absolutely, specifically the Wall Street Journal. The Wall Street Journal ran three stories in a row, October, I think 17th, 18th, 19th, in that period, that focused on these outside-of-Enron partnerships that Andy Fastow oversaw. Enron used them as a hedge to cover losses. It turned out they made lots of money and Fastow made a lot of money from them.
Well, the news got to the Wall Street Journal, and they did stories about them. Now, Ken Lay, and, in fact, Jeff Skilling, have both essentially maintained: All of you don’t know how Enron works, OK? And when you found these things out, it’s not what you thought they meant.
But they couldn’t control it; the Journal stories ran out; everybody on Wall Street read them. Hence, the run on the bank.
RAY SUAREZ: Well, right now Mr. Lay is being questioned by his own legal team, his defense. What story has he been giving about those off-balance sheet enterprises, those companies within a company that were overseen by Andrew Fastow. Does he say that he didn’t even know they were there?
FRANK AHRENS: What he’s saying is that, when they were set up in the late ’90s, he acknowledges there was a clear conflict of interest to have your chief finance operator running the company and then running these off-balance sheet companies.
But the board approved it. And he thought they had set up enough controls. And he thought they had set up enough Chinese walls, as they called them, between the two.
It turned out that wasn’t the case. And he is now facing this direct testimony, they call it, from his own lawyer trying to explain this.
What’s interesting is that he and Skilling have shown essentially a unified front; they both have kind of the same defense. But Lay has been ever so slightly and subtly distancing himself from Skilling on the stand over yesterday and today.
He’s almost describing a clean-up mission at Enron when he had to come back in, when Skilling abruptly left in August 2001. He was not happy with the way the Fastow partnerships were doing. He was not happy that they were causing bad publicity. He wanted to shut them down.
RAY SUAREZ: I think they also charge him with making specifically statements about the value of the company, the value of the company’s stock. Has his testimony gone there yet, things that were going badly, like the fiber optic business, various overseas ventures that Enron was involved in?
FRANK AHRENS: They’ve touched briefly on that. That was largely the domain of Jeff Skilling. They both acknowledge that, in August 2001, even though the company fundamentals were solid as they maintained, the company had some problems.
It had overseas assets, like some power plants in South America, in Europe, that were not performing so well. They were returning fine, but not Enron-sized rate of return. They wanted to sell them, but if they sold them they would have taken a bath, so they didn’t.
They tried some broadband trading, trading Internet capacity, just like they traded oil, and natural gas, and electricity. That crashed in 2001 with the tech bubble.
So they had a number of things. Also they had big fights with the California electricity regulators over their role in that state’s blackouts.
RAY SUAREZ: Coming right on the heels of Jeff Skilling’s testimony, how is Ken Lay a different performer on the stand?
FRANK AHRENS: This, to me, is the most fascinating part. We were all told and everyone who knew Jeff Skilling and Ken Lay going into this trial had the picture: Jeff Skilling could be difficult to deal with, a little prickly, liked to batter opponents with his superior intellect, wouldn’t suffer fools. People were almost laying odds on how bad he was going to blow up on the stand, especially in cross-examination from the government.
Skilling largely kept his cool. He showed enough anger to what, I think, could be described as passion. He was skillfully handled by his lawyer, Dan Petrocelli, and effectively, I think, most people think — courtroom observers, lawyers — believe that he handled the cross-examination from Sean Berkowitz pretty well.
On the other hand, you have Ken Lay, who I think — there’s a state law that says, if you’re write about Ken Lay, you have to use the word “avuncular.” He was the public face of Enron. He was the philanthropist. You would never see him in public without a smile, without glad-handing, without the two-hand hand clasp.
The past couple of days on the stands, I could count on one hand the number of smiles I’ve seen from Ken Lay. He has been tough. He’s been all business. He has a deeper, louder voice than Skilling.
And there’s another dynamic at work here: He’s not being questioned by his main lawyer. His main lawyer, Michael Ramsey, has been in the hospital following two bouts of surgery with some arterial problems. And he’s getting a number-two lawyer, and he’s shown some almost contempt for his lawyer from the stand.
RAY SUAREZ: And, very quickly, how soon until the prosecution gets a crack at Ken Lay?
FRANK AHRENS: I think Lay will be on the stand tomorrow, and the prosecution should have a shot at him by the end of the week.
RAY SUAREZ: Frank Ahrens of the Washington Post, thanks a lot.
FRANK AHRENS: Thank you, Ray.