Thursday, December 15, 2005

Ken Lay's Defense: It's All Fastow's Fault

Ken Lay's speech at the Houston Forum (here) sets forth his defense to the conspiracy charges, and a featured player will be former Enron CFO Andrew Fastow.  As Ellen Podgor noted in an earlier post (here), defendants in criminal cases usually don't announce so far in advance of trial that they intend to testify, but then this case is not like other ones either. Lay sketched out the basic thrust of his defense here:

In an April 2005 review of Kurt Eichenwald’s book “Conspiracy of Fools”, a former Wall Street analyst concluded that “…it does not seem a stretch to suggest that if someone [other than Andrew Fastow] had been CFO of Enron, the company would probably exist today.  Fastow crossed the line… [allowing him]…to profit at the company’s expense.  Ultimately, it was the crisis of confidence triggered by these transactions…that brought Enron down.”

This reviewer also concluded, “If nothing else, Skilling and Lay installed Fastow as CFO and trusted him—a catastrophic error in judgment (though not itself a crime).”  I agree.  We did trust Andy Fastow and sadly—tragically—that trust turned out to be fatally misplaced.

The amount of money that Fastow and Kopper have admitted they stole from Enron did not bring Enron down.  As despicable and criminal as their deeds were, the amount they stole—tens of millions of dollars—given Enron’s size, was relatively small.  It was the stench of possible misconduct by Fastow—the notion that Enron’s CFO might be involved in shady or even illegal activities that provoked the loss of confidence causing the run on the company’s treasury.  Twenty-twenty hindsight pointed out the downside of becoming so big and so successful in the wholesale business.  This business was dependent on trust—as is true of virtually all financial and trading/intermediation businesses in the world—and the actions of Andrew Fastow and his cohorts irreparably breached that trust.  The result for Enron was catastrophic.

Lay's speech lays much of the blame for his indictment on an overly-aggressive Enron Task Force, and ends with a call for former Enron employees to come forward and testify for the defense at trial -- "a few brave individuals who are willing to stand up and say its time for the truth to come out."  The blame certainly lies elsewhere.

While putting Fastow on trial is nothing new -- the same was done by Bernie Ebbers in trying to undermine the testimony of former CFO Scott Sullivan -- the speech hints as a broader defense: there was no fraud at Enron save for the financially modest self-dealing of Fastow & Co.  This is a riskier strategy because of the negative publicity concerning the company and the extend of its accounting troubles.  Unlike the "honest-but-ignorant CEO" defense used by Ebbers and Richard Scrushy, a denial of any fraud (save for that of subordinate miscreants) may open the defense to credibility problems if the government can link any of the defendants to the decisions or show public statements that were less than truthful.

Another interesting aspect of Lay's decision -- no doubt with his attorney's acquiescence -- to take his defense public in a speech entitled "Guilty, Until Proven Innocent" is whether his co-defendants, Jeffrey Skilling and Richard Causey, are willing to simply follow his lead and offer the same defense.  Skilling appears to have had much more involvement in Enron's day-to-day operations, and Causey was the chief accounting officer so he may not be able to distance himself from the accounting issues.  Then again, if the strategy works, it is a homerun for the defendants: not guilty.  For his co-defendants, at least Lay didn't promise that they would testify, so we'll see if they take an "all-for-one-and-one-for-all" approach and ride on Lay's testimony at trial. (ph)

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