Wednesday, March 16, 2005

Comparing Ebbers and Lay

Bernie Ebbers offered the "honest-but-ignorant CEO" defense, and the jury rejected it.  Ken Lay, former CEO of Enron, has advanced a similar position, asserting his innocence because he did not know about the complex financial chicanery at the company (check his personal website at An interesting post at TalkLeft (here) notes that while the key witnesses in both cases are former CFOs (Scott Sullivan of Worldcom and Andy Fastow of Enron) who have agreed to cooperate with the government in exchange for lower sentences, Fastow may have more credibility problems.  Part of Fastow's deal included delaying his ten-year sentence until his wife could complete her sentence for a tax violation related to Enron, giving him a powerful incentive to seek the best deal for himself by incriminating others.  Of course, a ten-year sentence is substantial, and may bolster the government's contention that Fastow is truthful because he did not receive a "sweetheart" deal.

Lay's "honest-but-ignorant CEO" defense may be stronger than Ebbers' because Lay was less of a hands-on manager, unlike the Ebbers portrayed to the jury as a micromanager who had tap water put into the company's water coolers to save money.  If nothing else, Lay went first-cabin at Enron, and the company did not scrimp on perks.  Lay has a more significant problem, however, arising from his stock sales, including a number of transactions during 2001 -- as the company was collapsing -- in which he sold shares back to Enron to repay a $77 million line of credit from the company.  The SEC's civil complaint (here) summarizes the transactions:

From January 25, 2001 to November 27, 2001, Lay took advances on his line of credit in the total amount of $77,525,000. Thereafter, despite having other assets at his disposal, Lay repaid balances on the line of credit by selling $70,104,762 worth of Enron stock to the company twenty times, at prices he knew did not reflect accurately Enron’s true financial condition. For example, after learning of Enron’s undisclosed plan to hide over $500 million in EES losses in ENA, Lay sold 1,086,571 shares of Enron common stock back to the company, in 11 transactions, for a total of $34,081,558. Following Skilling’s resignation on August 14, 2001, at a point when Lay was learning more about Enron’s deteriorating financial condition, Lay sold 918,104 shares of Enron common stock back to the company, in five transactions, totaling $26,066,474. As Lay learned more negative information following Enron’s third quarter earnings release on October 16, 2001, Lay sold 362,051 shares of Enron stock back to the company, in four transactions, totaling $6,050,232.

While Ebbers never sold his stock, Lay engaged in a number of transactions in Enron shares that were not publicly disclosed until after it filed for bankruptcy.  The focus of the government case is likely to be on the period from Aug. 14, 2001, when Jeff Skilling resigned as CEO and Lay assumed that position again, until the company's collapse in November 2001.  Rather than link Lay to the accounting, which is far more complex than the fraud at WorldCom and more susceptible to a claim of ignorance, the government will use Lay's knowledge of the company's burgeoning problems during the last few months and his stock transactions to overcome a claim of ignorance.  On these issues there is more of a paper trail, including a number of public statements and private meetings which Lay attended.  Fastow remains a key witness, but perhaps more for Skilling and Richard Causey, Enron's former chief accounting officer, than for Lay. (ph)

Enron, Prosecutions, WorldCom | Permalink

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