Monday, April 10, 2006

It is All Skilling

The white collar crime entries across blogsphere and the press have one thing in common - they are all about Skilling. (See Wall Street Journal here; Houston Chronicle here; New York Times here; Washington Post here; Atlanta Jrl Constitution here)  Everyone is describing the testimony, offering commentary and analyzing whether this learned and skillful description of the workings of the company will in the long-run backfire. Cases often turn on how well a person holds up on cross-examination, so much is yet to come.  A key factor may rest on whether Skilling will be able to explain why he sold stock when he did?

(esp) 

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» Was Enron a Ponzi Scheme? from Psychology of Compliance & Due Diligence Law
Jeffrey Skilling has testified that he did nothing wrong at Enron and committed no criminal acts. A number of commentators have suggested that this will... [Read More]

Tracked on Apr 12, 2006 5:00:42 AM

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Jeffrey Skilling has testified that he did nothing wrong at Enron and committed no criminal acts. A number of commentators have suggested that this will come down to a credibility test: who do you believe Mr. Fastow or Mr. Skilling?

If I were prosecuting this case, I would not want the jury to decide the trial by deciding that question. I would try to establish with the the jury the following facts:

1. a) Skilling and Lay pushed the SEC to allow Enron use "make to market" accounting for its trade deals. I would explain this concept with simple examples. If I have a contract with you which calls for you to buy an apple a day from me for a year, at the price of $1.00, then what are my earnings and what is my cash? Make to market accounting means I record earnings of $365, on day 1, but I only have $1 cash. On day 2, if I have no more contracts, I have no earnings, but $2 in cash. In order to just maintain the earnings, I have to find another contract and I have to husband my cash because I don't have any.

1. b) Skilling and Lay did not want Enron to be valued on cash flow basis, but on a earnings basis.

2. Skilling and Lay knew that Enron was bleeding cash.

3. Skilling and Lay knew that money losing ventures could not be reported to the public because the disparity between cash and reported earnings would push the company to be traded on cash flow basis, like any other trading company.

4. Skilling and Lay decided not to tell the public that Enron was bleeding cash. End of story. How the retained earnings fiction was maintained, using the limited partnerships, is interesting but it is not the story. The story is that much like those vaunted illiquid postal coupons Mr. Charles Ponzi had in small quantities, Enron had no cash and only "believers" in its securities. Religion ran out in both cases.

Posted by: Michael Webster | Apr 12, 2006 5:09:41 AM

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