The convictions last week of Enron Corp. founder Kenneth Lay and his right hand man, former Enron CEO Jeffery Skilling are the Justice Department’s crowning achievement in a five-year battle against an era of corporate corruption and fraud that the Enron case, more than any other, came to symbolize.

A host of other Enron officials already have been convicted and are serving time. A Big Three accounting firm, Arthur Andersen, was brought down, and a number of top U.S. banks have either made multi-billion dollar settlements or are continuing in court over their part in the Enron saga.

Lay, 64, and Skilling, 52, were found guilty on 25 out of a combined 34 counts. Lay was found guilty of all of the charges against him, including one count of conspiracy, three counts of securities fraud and two counts of wire fraud. U.S. District Court Judge Sim Lake, who presided over a bench trial against Lay that focused on four personal banking charges, also found him guilty of three counts of making false statements to banks and one count of bank fraud.

Skilling faced 28 criminal counts and was found guilty on 19 charges, including one count of conspiracy (a joint count with Lay), 12 counts of securities fraud, one count of insider trading and five counts of making false statements to auditors and Enron shareholders. He was acquitted on nine counts of insider trading. Both men are expected to appeal and maintain their innocence. Sentencing for Lay and Skilling is set for Sept. 11, and both men could spend the rest of their lives in prison.

The verdict came 16 weeks after the trial began, four and a half years after Enron collapsed into bankruptcy and 21 years after Lay engineered the merger of two pipelines, Houston Natural Gas and InterNorth to form Enron in 1985. The fall of the company was just as spectacular as its rise. Its bankruptcy in December 2001 was described as the largest in corporate history, and it had an inestimable effect not only on Houston, where it was headquartered, but the repercussions were felt worldwide on a corporate, governmental and individual level (see NGI, Dec. 10, 2001; Dec. 3, 2001).

When it collapsed, Enron boasted of 21,000 employees worldwide. But before its spectacular tumble, it was a company to behold. Enron at one time owned some of the largest natural gas pipelines in the United States. Internationally, it owned power plants and water assets. And it was far-and-away the leading natural gas marketer in North America, transforming the energy merchant industry with its remarkable online trading platform EnronOnline that was quickly duplicated but never matched. The Commodity Futures Trading Commission later found out that EnronOnline was being used as a tool to manipulate the natural gas market (see NGI, March, 17, 2003; Oct. 2, 2000; Nov. 22, 1999).

“It’s an almost unbelievable story. Hindsight and the government investigation over the last few years has filled in the background. It’s a tale of rags to riches and then rags again, of ambition run amuck, of the Pied Piper and the Flim-Flam man. It affected so many people; It will go into the history books,” said one industry observer.

The prison sentence imposed on Lay and Skilling will depend on how much of Enron’s lost monetary value is put on their shoulders by the court. Besides the financial collapse and job losses, pension holders lost millions — some their entire life savings. It was a bitter pill to swallow when testimony by Lay revealed that he sold his Enron shares throughout 2001 even while he encouraged employees to not only hold their shares but to buy more. And activity in the employees pension funds was blocked during the critical period of Enron’s decline. There were few ex-employees, retirees or shareholders who were unhappy with Thursday’s verdict.

Besides Lay, Skilling and a host of other Enron executives, there are others that were hit — and continue to be damaged — by the Enron scandal: outside bankers, auditors, trading partners also were tainted. Some banks already have signed multibillion dollar settlements, including a $6.6 billion settlement last week (see related story); other cases are pending (see NGI, Feb. 27). A trial involving wrongdoing against former Enron Broadband Services executives was continuing last week in Houston.

Enron’s collapse and revelations of fraud took down many companies, perhaps none as large as Big Three accounting firm Arthur Andersen. It had been Enron’s auditor and was been implicated in the company’s fraudulent financial schemes (see NGI, Oct. 21, 2002). The Enron debacle also created a crisis of confidence, causing a domino effect that tumbled other large natural gas and power marketers, as underfunded companies either collapsed or closed down trading operations, top executives resigned, and investigations of market and price manipulation began. Corporate America, and specifically the energy merchant industry, has never been the same.

The undoing of Enron was a strong motivation for Congress to pass the Sarbanes Oxley Act in July 2002. The act imposes specific criminal felonies for securities fraud violations, and it enhanced penalties for mail and wire fraud violations to 20-year felonies from five-year felonies. The law also requires CEOs and CFOs to certify financial statements, and it makes it a felony to obstruct justice in corporate fraud investigations by prohibiting anyone from altering, destroying or otherwise impeding a federal law enforcement or regulatory investigation.

As of late last year, the government had charged 34 individuals with Enron-related crimes, including 21 former executives. More than $227 million in cash and assets have been seized from individuals who pleaded guilty. Lay and Skilling took their chances and lost in court. Most of their former top lieutenants did not go to court. Ex-Chief Accounting Officer Richard Causey, who had originally been indicted with the two men, pleaded guilty last December (see NGI, Jan. 9). Ex-CFO Andrew Fastow pleaded guilty in January 2004 (see NGI, Jan. 19, 2004). The list goes on.

Following the verdict on Thursday, Judge Sim Lake ordered Lay to immediately surrender his passport. He also asked Lay for a $5 million bond co-signed by his children. Skilling had already surrendered his passport and filed a $5 million bond. Lake allowed both men to remain free pending their sentencing and refused a prosecution request to require them to be confined to their Houston homes.

The verdict was announced about 11 a.m. Thursday, following less than six full days of deliberation by an eight-woman, four-man panel. As Lake read through the jury’s decisions, Skilling showed barely any emotion, standing with his arms crossed and looking straight ahead. Lay’s wife Linda, who was allowed to sit with her husband in the front row of the spectator section of the courtroom, kept her arm around him as Lake read the verdicts, and she began crying as she held her husband. Most of Lay’s family was in the courtroom, and his daughter, who also had served on his legal team, sobbed when her father’s verdict was read.

Lay and his family stayed in the courtroom following the verdict, wrapped in a circle with some of his lawyers and one of his pastors, and they were said to have prayed. After he appeared outside the courtroom with his wife, Lay continued to maintain his innocence.

“Certainly we’re surprised, more appropriately to say we’re shocked,” he told reporters. “I firmly believe I’m innocent of the charges against me.” Lay said he was still “blessed” because of his family and friends. “We believe God is in fact in control and indeed he does work all things for good for those who love the Lord.”

Skilling and his lawyer Daniel Petrocelli also spoke with reporters.

“I’d like to thank Dan, and I’d like to thank my family,” Skilling said, naming his wife and children among those who had continued to support him. “We fought the good fight. Some things work and some things don’t…Obviously I’m disappointed…that’s the way the system works.”

Petrocelli said he and his legal team would “sit down and look at everything hard. We litigated hard, and we lost on some of the issues.” He said it was “too early” to comment on what will happen next but added, “We will have a full and vigorous appeal.”

The government’s legal team, which has pursued indictments against Enron’s management team for five years, was understandably jubilant. Flanked by his team of prosecutors and federal agents outside of the downtown courthouse in Houston, Sean Berkowitz, the Enron Task Force director, said, “The eyes of the world have been upon this Houston courthouse for the last six months. What they have seen is our justice system at work. The jury has spoken, and they have sent an unmistakable message to boardrooms across the country: you can’t lie to shareholders. You can’t put yourself in front of your employees’ interests. No matter how rich and powerful you are, you have to play by the rules.”

Prosecutor John Hueston, who had cross-examined Lay to devastating effect, told reporters, “Lay had a golden opportunity to save Enron.” Instead, Lay decided “time and time again to put himself before the investors.”

According to legal experts, there are at least four possible appeal issues for Lay and Skilling. Over an objection by the defense, Lake included a “deliberate indifference” instruction, which allowed the jury to find either Lay or Skilling guilty for ignoring possible criminal conduct that otherwise would have been obvious. The defense argued that the instruction was not relevant to the theory of the case.

Another appeal issue could be the venue. Before the trial began, Lake denied a request by the defense to move the trial out of Houston, where Enron had been headquartered. The defense had argued that Enron’s bankruptcy had hurt the defendants’ ability to have a fair trial. Lake also denied a request by Lay to try his case separately, which could cause Lay’s attorneys to argue on appeal that jurors were prejudiced against him by the joint trial.

Finally, the government declined to grant immunity to several former Enron executives who might otherwise have testified for the defense, and Lake supported the move. The absence of these potential witnesses may have deprived Lay and Skilling of having testimony in their favor.

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