Lay, Skilling Convicted in Sweeping Enron Verdict

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 different.

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.

RAY SUAREZ: Dean Sonnenfeld, you educate executives; you train the people who go on to be corporate leaders. What do you make of today's verdict? Did you see justice done in this guilty on most counts?

JEFFREY SONNENFELD, Associate Dean, Yale School of Management: Well, yes, Ray, I agree with what Professor Buell had just said.

As Bethany was saying earlier to Jim, that you never want to rejoice in the misery of anybody, and the families certainly are suffering in the Ken Lay family and Jeff Skilling family, but happily the jury didn't lose sight of the suffering of the 20,000 families of Enron employees and the countless investors who lost those $65 billion of assets and what this meant. It was devastating.

But what so often happens, Ray -- I've looked at corporate white-collar crime for 30 years -- in fact, as long as I've known Jeff Skilling, when he was a student at Harvard and I was a professor back then; I knew 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 through the net. And we saw that, of course, with Richard Scrushy, that some perhaps cruelly call the corporate O.J., of sorts, in that the HealthSouth prosecution wasn't able to convict somebody with very strong evidence and was exonerated in a Birmingham jury.

Many were afraid this could happen in Houston. And it was a great, I think, sense of victory that the judicial system works on a national basis.

But corporate America feels quite good about this. 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 shows like this and condemn what they privately condemned as misconduct.

Ninety-eight percent of our corporate leaders are hardworking, honorable great folks, and yet they were haunted by this. And this helps, I think, put some closure on that, and it's quite valuable from that alone.

When Professor Buell says this was kind of a securities 9/11, it is interesting that this meltdown was happening around the time of 9/11 and, of weird poetic justice, that the actual sentencing will be happening this fall on, of all things, 9/11.

So the sense of trust that hopefully is restored by this is terribly important. Unlike past securities violations, say 70 years ago, when our major securities laws were created, the bad guys in Enron, WorldCom, Tyco, the rest of these similar cases, where people weren't from privileged, New England aristocratic backgrounds, but were upwardly mobile strivers, like both of our defendants today, and that they made the American dream, sadly, into a nightmare.

RAY SUAREZ: Well, Professor Buell, take Dean Sonnenfeld's point about Richard Scrushy and HealthSouth and the need to send an unequivocal message.

Was that was what was at stake for the federal government? Did they need a big win today, in part to show both CEOs and small investors that the 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 the assumption that the government is working on, right?

The government is working on the assumption that we have a very elaborate and state-of-the-art worldwide regulatory system for our financial markets, but it never seems to quite be able to get the job done entirely. There's always going to be fraud.

No matter how careful we are in rulemaking, no matter how many resources we put into the SEC, the corporate actor has always got more resources, more creativity, and there's always a concern that there's going to be fraud, that we can't catch it all, and that, at some level, what we depend on for the confidence of the average investor that makes our market so successful is being able to cause the executive to pause and reflect at that critical moment about right and wrong.

And it's only by getting into the head of the corporate executive 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. You worry that the message is: There is no need to pause and reflect, because your activity ultimately, whether right or wrong, is going to be beyond scrutiny.

And so, you know, this is something that we can't prove empirically is critical to the effective functioning of markets, but it's a basic assumption. It's the assumption, really, that went into creating the entire securities laws after the stock market crash in the '20s, the assumption that investor confidence is critical.

And I think the government always assumed that the Enron case had some very important part of that story to play, and so the success today is an affirmation of the government's efforts in that regard.

RAY SUAREZ: Dean Sonnenfeld, does this verdict put a lot of risk now into CEOs walking into a court and using the "I just didn't know" defense? Ken Lay leaned on it heavily. Jeffrey Skilling, for his part, insisted that a lot of the things the government was prosecuting weren't even crimes in the first place, but there were a lot of operations he didn't know about, as well.

Does this mean that there is now a changed landscape for CEOs?

JEFFREY SONNENFELD: I think there is a changed landscape, and it did get blurred in the HealthSouth prosecution, where that famous or infamous 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 held accountable. And to just demand that red is gray doesn't make it so, and that's what the jury heard. They heard an imperial side of Ken Lay come out, perhaps in part due to the absence of Mike Ramsey there, his attorney, to buffer him from the anger and imperial side.

People were surprised that Jeff Skilling was as restrained as he was, but that is a very important message that comes out. CEOs, for the most part, don't act this way, though.

There was a certain frothy period, Ray, and you remember that, with the swelling and euphoria of cyberspace and other industries, where it just seemed that we were looking for ridiculous growth targets, and everybody was trying to figure out -- not everybody, but many were trying to figure out how to cheat a little more, this exact cohort of CEOs, in fact, were actually a group of friends. They called themselves the serial acquirers.

There's a certain brazen, macho side to them, that they always figured bigger is better, and they were disdainful of all regulations. As a student, Skilling was disdainful. He was a laissez-faire type. I never knew him 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 not only the substantive crimes they create here as there's symbolic roles, a code of conduct that they're supposed to establish in the firms.

JEFFREY SONNENFELD: And these were obviously people who were responsible for a culture of corruption that had set in. They were hiding behind the marquee names of gilded people on their boards and many of the corporate governance guidelines that many people celebrate today.

Enron had many of them in place; it wasn't enough to protect them. The diligence was something more than checklists or famous names and things, and that's very important lessons here.

The whistle-blowers that suffered were terrible. There was a Paribas analyst named Daniel Scotto, whose career was devastated by making the right call in August of 2001.

Sherron Watkins, she comes to our conferences. She'll be with us next week. We see it happen all the time, is that the CEOs will listen to her at our conferences and then, during a break, they'll run from her like the 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.