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Skilling and Lay face life in jail after guilty verdict in Enron fraud case

Stephen Foley
Friday 26 May 2006 00:59 BST
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The bosses of Enron, the energy company whose collapse came to define an era of corporate excess, face the rest of their lives behind bars after a jury decided fraud at the company went right to the top.

Kenneth Lay, the former chairman, and Jeffrey Skilling, his chief executive, were found to have perpetrated a lie: that Enron was a healthy, growing company, when in fact it was unravelling and hiding that fact through a web of complex financial deals.

The verdict is the denouement of a corporate scandal that shocked America and changed the way businesses would have to be run.

And it sealed the humiliation of Kenneth Lay, a friend and adviser to the two presidents Bush, who said yesterday he was "shocked" by the jury's decision.

In court he had been told his wife Linda could not stand with him to hear the verdicts read out, but she reached out to comfort him as he was found guilty on six counts of fraud and conspiracy. The couple prayed together immediately after the verdicts. Skilling, whose wife did not reach court in time to be by his side, was convicted on 19 counts of fraud, conspiracy and insider dealing.

The jury decided that Skilling drove his subordinates to commit fraud in order to inflate Enron's profits, while Lay deliberately turned a blind eye. Skilling additionally committed insider dealing when he sold half his stake in Enron 10 weeks before its bankruptcy, at a time when employee shareholders were barred from moving their pensions and savings into other stocks.

Defence lawyers said they would appeal against the verdicts. Daniel Petrocelli, attorney for Skilling, said: "This doesn't change our view of what happened at Enron. We will continue to fight the good fight. We will have a full and vigorous appeal."

Lay said the verdict was a warning to other chief executives that "lawful conduct" could be prosecuted. He and Skilling had claimed that Enron was a basically healthy company until a conspiracy of Wall Street Journal reporters and hedge funds triggered a crisis of confidence, causing a "classic run on the bank". Jurors did not buy it.

Crowds gathered at the courthouse in Houston, Texas, to catch a glimpse of Lay, once one of the city's best-loved grandees reduced to an icon of corporate greed. Defence lawyers had argued the men could not get a fair trial in the city, where thousands of Enron employees lost their livelihoods and their pensions when the company went under in December 2001. In interviews after the verdict, jurors said his arrogant and at times testy demeanour on the stand had made them question his character.

Skilling, by contrast, had put on a humble performance on the witness stand that belied his reputation for arrogance and rage. He was found not guilty on nine minor counts of insider trading but still faces a maximum jail term of 185 years.

Lay was found guilty on all the counts against him, plus a further four decided by the judge, Sim Lake, who decided he had also broken the terms of bank loans in his personal finances. He faces up to 165 years in prison.

Lay's children were required to pledge their homes and savings as part of a $5m bail bond to secure their father's freedom until sentencing. That has been scheduled for 11 September.

Paul McNulty, the assistant attorney general, described the verdict as "a tremendous win" for the Department of Justice. "The message of today is that our criminal laws will be enforced just as vigorously against corporate executives as it is against street criminals."

The result is a vindication for the US government, whose Enron task force has been pursuing fraud at the company for more than four years. It had been accused of bullying lower-ranking Enron officers into guilty pleas, forcing them to choose between years of costly legal battles and agreeing to testify against their bosses.

Andrew Fastow, Enron's former chief financial officer, agreed to a 10-year jail term and told the court how Skilling had told him to "squeeze as much juice as you can" out of the unpublicised side deals that were being used to prop up earnings.

Another star witness for the prosecution was Sherron Watkins, whose memo to Lay had warned him in August 2001 that Enron's accounting practices could be illegal. After the verdict yesterday, she said that if only Lay had taken her allegations seriously, he may have averted not just his own indictment, but perhaps also Enron's collapse.

THE KEY PLAYERS

Kenneth Lay, 64: The Chairman

The ambitious son of a Missouri Baptist minister, he graduated in economics and became one of the US's highest-paid directors at the peak of Enron's power. He had grown the company from a small pipelines business through a series of acquisitions. He was even talked of as a potential energy minister in President George W Bush's cabinet, and Mr Bush would refer to him as "Kenny Boy". His avuncular manner and role as cheerleader for Texan business shielded his reputation initially after Enron's collapse, but his refusal to testify at Senate hearings into the collapse lost him sympathy. Since his indictment, he has maintained a website protesting his innocence, and his lack of contrition and testy manner on the witness stand surprised observers.

Sherron Watkins, 46: The Whistleblower

As a vice-president, working in the finance department under Andrew Fastow, her memo to Lay in August 2001 asked, "Has Enron become a risky place to work?" and warned the company "could implode in a wave of accounting scandals". Because she was the first person to have drawn attention to the shaky financial foundations of Enron, she was named a Time magazine Woman of the Year and has a new career as a writer and speaker on good corporate governance. But it is a role she has taken on reluctantly, and is, she says, a mixed blessing. "With my reputation as a whistleblower, I will never work in corporate America again."

Jeffrey Skilling, 52: The Chief Executive

Characterised as a nerd and a "former loner", Skilling did more than anyone to foster Enron's testosterone-fuelled culture. He gained a reputation for outbursts against subordinates, but also for being incredibly smart - one of "the smartest guys in the room", according to employees. That came with hugearrogance. When asked by a Harvard professor if he was smart enough for a place, he replied: "Yes, I am fucking smart." He got in and was in the top 5 per cent in his year. His resignation in 2001 was the first outward sign that all was not well, but he says he quit for personal reasons.

Andrew Fastow, 44: The Chief Financial Officer

The accounting wizard's plea bargain was the most significant breakthrough for the Justice Department. Fastow masterminded the transactions that kept profits high even when there was little cash coming in, and pocketed $45m (£24m) in the process. Infamous because his schemes and deception meant his wife went to prison for a year because she told the taxman the money was a gift. He agreed to serve 10 years for fraud, but his appearance for the prosecution was judged a risk. However, he implicated his bosses and put on a contrite performance. He says he was greedy and lost his "moral compass" at Enron.

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