Lay, Skilling Convicted in Sweeping Enron Verdict
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RAY SUAREZ: For some further analysis of the trial and its
implications, I’m joined by Samuel Buell. He was a member of the Enron task
force until 2004. He’s now a visiting professor at the University of
Texas-Austin School of Law.
And Jeffrey Sonnenfeld is with us, associate dean of
executive programs at the Yale School of Management.
Professor Buell, you were on the government-created task
force that looked into how the seventh-largest company in the country
collapsed. Do you feel that justice has been done by these verdicts?
SAMUEL BUELL, Former Member of Enron Task Force: Well, Ray,
I think we need to take a step back today from the horserace coverage of this
trial that’s largely dominated the Enron story this year and remember where we
were in the fall of 2001.
The collapse of Enron was really the 9/11 for the financial
markets. And it presented a very serious question for our legal system; that
is, could corporate activity be structured at such a level of arcane complexity
that it was beyond the reach of our legal system to sort it out?
And that was really the question that Enron always
presented, and that’s why it took four years to unravel this case, take it
apart, put it back together again, and figure out a way to simplify it, and
make it clear, and explain it to a jury.
And what we saw today was a resounding answer from this jury
that, yes, our legal system is capable of sorting out even the most complex
activities, and no level of specialization, no level of resources devoted to
complex accounting is going to put a company’s finances beyond the scrutiny of
our legal system.
So I think, in that sense, it’s a tremendous victory for
both our legal system and for investors.
RAY SUAREZ: So if I understand you, you’re saying this
verdict refutes the idea put forward, for instance, by Mr. Skilling that
nothing illegal was going on but it was just so complicated that normal people
couldn’t understand it?
SAMUEL BUELL: Certainly, that’s so. I mean, we’ve heard
comments from the jurors all afternoon that they sifted through the evidence
piece by piece, they took it witness by witness, but ultimately they saw that
this all fed up into a consistent theme, and that is an effort, systematically
across this company, to present one picture when the reality was something very
And, in that sense, at the end of the day, again, you had to
take apart this very complicated machine and put it back together again. But at
the end of the day, when it got down to the question of sort of motive, why
were they doing all of this, it was really quite simple.
Catching the big fish
RAY SUAREZ: Dean Sonnenfeld, you educate executives; youtrain the people who go on to be corporate leaders. What do you make of today'sverdict? Did you see justice done in this guilty on most counts?
JEFFREY SONNENFELD, Associate Dean, Yale School ofManagement: Well, yes, Ray, I agree with what Professor Buell had just said.
As Bethany was saying earlier to Jim, that you never want torejoice in the misery of anybody, and the families certainly are suffering inthe Ken Lay family and Jeff Skilling family, but happily the jury didn't losesight of the suffering of the 20,000 families of Enron employees and thecountless investors who lost those $65 billion of assets and what this meant. Itwas devastating.
But what so often happens, Ray -- I've looked at corporatewhite-collar crime for 30 years -- in fact, as long as I've known JeffSkilling, when he was a student at Harvard and I was a professor back then; Iknew Jeff in that period of time -- I've been studying white-collar crime.
And the big fear so often is that the big fish get throughthe net. And we saw that, of course, with Richard Scrushy, that some perhapscruelly call the corporate O.J., of sorts, in that the HealthSouth prosecutionwasn't able to convict somebody with very strong evidence and was exonerated ina Birminghamjury.
Many were afraid this could happen in Houston. And it was a great, I think, senseof victory that the judicial system works on a national basis.
But corporate America feels quite good aboutthis. It's a chance to get out from under the shadows. The Business Roundtable,many major trade groups were a little bit reluctant to point a finger of shame.Individual CEOs, except for retirees, tended to be reluctant to come on showslike this and condemn what they privately condemned as misconduct.
Ninety-eight percent of our corporate leaders arehardworking, honorable great folks, and yet they were haunted by this. And thishelps, I think, put some closure on that, and it's quite valuable from thatalone.
When Professor Buell says this was kind of a securities9/11, it is interesting that this meltdown was happening around the time of9/11 and, of weird poetic justice, that the actual sentencing will be happeningthis fall on, of all things, 9/11.
So the sense of trust that hopefully is restored by this isterribly important. Unlike past securities violations, say 70 years ago, whenour major securities laws were created, the bad guys in Enron, WorldCom, Tyco,the rest of these similar cases, where people weren't from privileged, NewEngland aristocratic backgrounds, but were upwardly mobile strivers, like bothof our defendants today, and that they made the American dream, sadly, into anightmare.
Setting an example
RAY SUAREZ: Well, Professor Buell, take Dean Sonnenfeld's pointabout Richard Scrushy and HealthSouth and the need to send an unequivocalmessage.
Was that was what was at stake for the federal government? Didthey need a big win today, in part to show both CEOs and small investors thatthe U.S.government took this kind of thing very seriously on the biggest stage of all,the biggest collapse of all?
SAMUEL BUELL: Yes, I mean, Ray, that's clearly theassumption that the government is working on, right?
The government is working on the assumption that we have avery elaborate and state-of-the-art worldwide regulatory system for ourfinancial markets, but it never seems to quite be able to get the job doneentirely. There's always going to be fraud.
No matter how careful we are in rulemaking, no matter howmany resources we put into the SEC, the corporate actor has always got moreresources, more creativity, and there's always a concern that there's going tobe fraud, that we can't catch it all, and that, at some level, what we dependon for the confidence of the average investor that makes our market sosuccessful is being able to cause the executive to pause and reflect at thatcritical moment about right and wrong.
And it's only by getting into the head of the corporateexecutive at that level that we can really count on things being done properly.And so, if you don't get a conviction in a case like Enron, you worry. Youworry that the message is: There is no need to pause and reflect, because youractivity ultimately, whether right or wrong, is going to be beyond scrutiny.
And so, you know, this is something that we can't proveempirically is critical to the effective functioning of markets, but it's abasic assumption. It's the assumption, really, that went into creating theentire securities laws after the stock market crash in the '20s, the assumptionthat investor confidence is critical.
And I think the government always assumed that the Enroncase had some very important part of that story to play, and so the successtoday is an affirmation of the government's efforts in that regard.
Burden on the CEO's shoulders
RAY SUAREZ: Dean Sonnenfeld, does this verdict put a lot ofrisk now into CEOs walking into a court and using the "I just didn'tknow" defense? Ken Lay leaned on it heavily. Jeffrey Skilling, for hispart, insisted that a lot of the things the government was prosecuting weren'teven crimes in the first place, but there were a lot of operations he didn'tknow about, as well.
Does this mean that there is now a changed landscape forCEOs?
JEFFREY SONNENFELD: I think there is a changed landscape,and it did get blurred in the HealthSouth prosecution, where that famous orinfamous Sergeant Schultz defense that "I know nothing, see nothing"defense seemed to work in that case. And that's the rare example.
It's the exemption here, is it seems CEOs are being heldaccountable. And to just demand that red is gray doesn't make it so, and that'swhat the jury heard. They heard an imperial side of Ken Lay come out, perhapsin part due to the absence of Mike Ramsey there, his attorney, to buffer himfrom the anger and imperial side.
People were surprised that Jeff Skilling was as restrainedas he was, but that is a very important message that comes out. CEOs, for themost part, don't act this way, though.
There was a certain frothy period, Ray, and you rememberthat, with the swelling and euphoria of cyberspace and other industries, whereit just seemed that we were looking for ridiculous growth targets, andeverybody was trying to figure out -- not everybody, but many were trying tofigure out how to cheat a little more, this exact cohort of CEOs, in fact, wereactually a group of friends. They called themselves the serial acquirers.
There's a certain brazen, macho side to them, that theyalways figured bigger is better, and they were disdainful of all regulations. Asa student, Skilling was disdainful. He was a laissez-faire type. I never knewhim to be a cheater.
And yet what's a shame is that a certain culture developed,and the culture developed as a very important part of the leader. There's notonly the substantive crimes they create here as there's symbolic roles, a codeof conduct that they're supposed to establish in the firms.
Many lessons learned
JEFFREY SONNENFELD: And these were obviously people who were responsible for aculture of corruption that had set in. They were hiding behind the marqueenames of gilded people on their boards and many of the corporate governanceguidelines that many people celebrate today.
Enron had many of them in place; it wasn't enough to protectthem. The diligence was something more than checklists or famous names andthings, and that's very important lessons here.
The whistle-blowers that suffered were terrible. There was aParibas analyst named Daniel Scotto, whose career was devastated by making theright call in August of 2001.
Sherron Watkins, she comes to our conferences. She'll bewith us next week. We see it happen all the time, is that the CEOs will listento her at our conferences and then, during a break, they'll run from her likethe plague. She's been unemployed since.
RAY SUAREZ: Well, Dean, I'm going to have to jump in there. Dean,Professor, thank you both.
SAMUEL BUELL: Thanks, Ray.