Enronisms

Diane Francis column for Saturday Post April 29:



This week in a Houston courtroom, it has been entertaining to read how Enron Corp.'s Kenneth Lay blames everyone for his firm's collapse except himself and his former CEO Jeff Skilling.

His defense is straight out of Nuremburg, not Houston.

To hear Mr. Lay tell the tale he was just doing his duty and the whole mess was the result of negative press articles, a crooked CFO, short sellers and pessimism.

Of course, the crooked CFO was the reason behind the negative press articles, the short sellers and the pessimism. And, last time anyone checked, the CFO is a person who is appointed by and reports to the CEO and Chair of a company.

What's going on here is Mr. Lay and Skilling are trying to blame everything on Enron's CFO, Andrew Fastow who has already gone to jail. But Mr. Fastow has testified that Messrs. Lay and Skilling knew about troubles and lied to the public, investors, regulators and employees. The two are charged with fraud.

What is pertinent to remember is that no matter how Mr. Lay recasts the facts, one CFO stealing US$45 million does not a US$25-billion fraud make.

Enron was a rotten culture and didn't suddenly hit trouble. The US$45-million that Mr. Fastow stole was a drop in the bucket compared to the tens of billions that were hidden from balance sheets in offshore entities that Lay and Skilling inked.

Take what Enron whistleblower Sherron Watkins said in an interview with me in Banff in 2004. She has already appeared as a prime witness this month at the Houston trial.

"Enron was different than WorldCom where just a few people decided to cook the books," she said. "This was systemic. Ken Lay made everyone use his sister's travel agency. People were co-opted. I can't tell you how many times I heard the phrase from executives 'it's not exactly legal, but I think it'll stand up in a court of law.'"

(This week, Mr. Lay admitted to another "breach" when the prosecutor asked him about a company that he and Mr. Skilling had privately invested in which was doing lots of business with Enron. Under the rules, the two were supposed to tell the board of directors about such "related party transactions", but Mr. Lay admitted this week they did not.)

Sherron Watkins told me she had doubts about Enron for years, but in 2001 came to understand the byzantine nature of Enron's outside activities. In her case, she found out the portfolio of assets she was in charge of were used to pump up earnings, hide losses and camouflage fraud.

"The chief financial officer had set up a paper company he and others owned, which was funded with Enron stock options, to do business with Enron. In other words, he was doing business with himself," she said. "You can't do this."
In spring 2001, she asked for an audience with Mr. Lay after Enron CEO Jeff Skilling suddenly quit, cashing in US$66-million in options, saying he left because he could not keep the stock rising in value.
"It made a bunch of us angry at Enron. We said he didn't call in sick, he called in rich," she said. "It confirmed my fears that something horrible was facing this company."

As a savvy investment banker and accountant, she realized the company and its investors were being defrauded. In summer 2001, she sent an anonymous letter to Mr. Lay, then followed up by describing in detail all of the accounting irregularities to him in a 30-minute meeting that August.

Things didn't change and the company went into bankruptcy in December that year.

She admitted she was naive to think Mr. Lay would do something. By December 2001, the company admitted its US$13-billion in debts were really US$38-billion. Sherron testified before Congress and ended up on the cover of Time Magazine for her courage.

Despite all the evidence about wrongdoing and billions in hidden debt, Mr. Lay actually told the jury this week that Enron had no underlying business problems that a little public relations couldn't have solved.

He also blamed his accountants (defunct Arthur Andersen) for restatements of earnings, never mind that the restatements were needed because of bad business practices.

As for Sherron Watkins' letter and warnings, his memory was fuzzy but he did recall that his accountants and lawyers dismissed its allegations.