July 8, 2004
Enron Ex-Chief Indicted by U.S. in Fraud Case
By KURT EICHENWALD
In a culmination of almost three years of
investigation, Kenneth L. Lay, the former chairman and chief executive
was charged yesterday in a sealed indictment by a federal grand jury
examining the financial fraud that led to the collapse of the onetime
The indictment was delivered by prosecutors to a federal magistrate,
and is expected to be unsealed today, when the specific charges will
In charging Mr. Lay, the Justice Department's Enron Task Force has
reached the top of the corporate hierarchy at the company, which has
been under broad investigation since it was forced into bankruptcy in
December 2001, costing investors tens of billions of dollars and
putting thousands of employees out of work. So far, criminal charges
have been filed against some 30 people, including former executives and
advisers who have been charged with aiding Enron in its deceit.
Throughout the inquiry, separate teams of prosecutors have pored over
Mr. Lay's finances and actions throughout the final years of Enron,
seeking to determine what role he may have played in the events that
led to its downfall. The Enron investigations have picked apart an
array of complex and fraudulent financial machinations at the company,
but since last fall prosecutors investigating Mr. Lay have focused
instead on a narrow series of his actions and statements in the few
months before the company collapsed.
The majority of the charges against Mr. Lay are said to center on a
series of what the government believes are false statements he made to
investors, employees and accountants that painted a positive picture of
the company's finances at a time when he was selling Enron stock. Mr.
Lay is also expected to face civil charges for securities law
violations brought by the Securities and Exchange Commission, which has
been conducting its own inquiry.
Andrew Weissmann, the head of the Enron Task Force, declined to
comment, as did Bruce Collins, a lawyer for Mr. Lay.
In a statement yesterday, Mr. Lay said he had been advised of the
indictment, and planned to surrender himself to federal law enforcement
authorities this morning. In the statement, he called the indictment
In an interview last month with The New
York Times, Mr. Lay said he had engaged in no wrongdoing while at
Enron, and was unaware of certain illegalities that took place at the
"I didn't commit any crime," Mr. Lay, 62, said in the interview. "Based
on all the information I had at the time, I don't know of a single
statement I made, either publicly or internally, that didn't conform
with what I thought the facts to be."
The indictment opens the latest chapter in what had once been a
rags-to-riches story. Mr. Lay, the son of a poor Missouri farm family,
worked his way up the corporate ladder in a series of smaller gas
pipeline companies, until taking the helm of Houston Natural Gas, the
predecessor to Enron, in 1984. Along the way, Mr. Lay secured enormous
political influence in Washington, forging strong links with the
administration of President Bush, including ties to the president
With the indictment of Mr. Lay, the top three executives of Enron in
the period leading up to its failure have been charged. Jeffrey K.
Skilling, who succeeded Mr. Lay as chief executive and who was widely
credited with transforming Enron from a staid pipeline business to an
energy trading powerhouse, is facing criminal fraud charges. Andrew S.
Fastow, the former chief financial officer, is the highest-ranking
official to admit to participating in crimes at the company.
While the structure of the indictment of Mr. Lay is not clear, lawyers
involved in the case said that they expected prosecutors to add Mr. Lay
as a defendant to an existing fraud indictment against Mr. Skilling and
Richard A. Causey, Enron's former chief accounting officer. That, the
lawyers said, would allow prosecutors to portray the actions of all
three men as part of one continuous criminal conspiracy to deceive
investors about the true state of Enron's finances. It would also allow
a jury to hear the full context of the charges against Mr. Lay.
The centerpiece of the Enron investigations has been the company's
complex off-the-books partnerships, which were used to prop up earnings
and disguise its growing debt. Those entities, championed by Mr.
Fastow, allowed Enron to appear healthy even as its financial condition
was deteriorating rapidly. Mr. Fastow has since pleaded guilty to fraud
and has been sentenced to 10 years in prison. Mr. Fastow's wife, Lea, a
former assistant treasurer at Enron, has also admitted to helping her
husband hide ill-gotten income from some of his myriad financial
schemes and has been sentenced to the maximum of one year in prison.
When the full scope of Enron's use of those partnerships started to
emerge, companies that traded with its wholesale energy division
started cutting off their business, and jittery banks and financial
markets also pulled away from the company. The result was a cash
squeeze that crippled the company in a matter of weeks.
The crucial question about Mr. Lay has always been whether he knew the
scope of what was taking place with the partnerships. The government
increased the possibility of answering that question when it secured
Mr. Fastow's plea and he began to cooperate with the criminal inquiry.
Indeed, if any charges linking Mr. Lay directly to the partnership
fraud are brought in the indictment, they would be the most
devastating, both in terms of their potential courtroom impact and of
defining the scope of what happened at Enron.
The charges against Mr. Lay, however, appear to focus primarily on
issues unrelated to the partnerships, according to people involved in
the case, who spoke on the condition of anonymity. Instead, these
people said, prosecutors have been expending most of their efforts in
recent months examining Mr. Lay's actions and statements after his
return to Enron as chief executive in August 2001, after the
resignation of Mr. Skilling. Mr. Lay had remained chairman after
stepping down as chief executive in February 2001.
The decision to examine closely the events after Mr. Lay returned as
chief executive came in October of last year, almost two years after
Enron filed for bankruptcy protection. Until then, prosecutors had been
unable to find enough information against Mr. Lay to sustain a criminal
indictment, people involved in the case said.
The prosecutors have been pursuing one significant accounting
allegation, which has some indirect ties with Mr. Fastow, these people
said. By October 2001, Enron was preparing for some revisions in the
accounting rules, which would require the company to decrease its
reported income based on the value of certain intangible assets, known
as good will, that were obtained in a corporate acquisition.
On Oct. 12 of that year, Mr. Lay met with Mr. Causey, his chief
accounting officer, and David Duncan, the top Arthur Andersen partner
handling the Enron account. The three men discussed the effect of the
rule on Wessex Water, a company owned by Enron's water division, Azurix.
Prosecutors are said to believe that either at that meeting or at some
other points, Mr. Lay misled Andersen about Enron's intent to retain
Wessex and invest money in the company. If it did so, the charge
against income would not have to be taken; prosecutors say they believe
that Enron never intended to make those investments.
Mr. Fastow could play a role in that element of the case because,
beginning the previous summer, he led the effort to sell Enron's
assets, meaning he would be intimately familiar with the company's
plans for Wessex.
However, bringing a charge based on the accounting for Wessex will not
be easy. Enron never recognized any of the write-downs of good will,
because they were not supposed to be reported until after the company
filed for bankruptcy. The company did, however, provide investors with
projections of what it expected the total write-downs would be.
There are other elements of the expected case that would be less
complex. In questioning witnesses before the grand jury, prosecutors
have been focusing on a series of events involving Mr. Lay during the
period preceding the bankruptcy filing. Primarily, they have been
examining a group of three independent written communications that Mr.
Lay received from different Enron employees that raised concerns about
problems at the company. Among those communications was a letter
written by Sherron Watkins, an Enron employee, questioning the
propriety of certain transactions.
The issue, repeatedly raised by Congressional committees and pursued by
the prosecution, is whether those communications, and other information
Mr. Lay received in the weeks after he returned to the company, gave
him enough knowledge of problems at Enron before he made a series of
positive statements about the company's prospects.
At the same time, Mr. Lay was engaged in a series of huge sales of his
Enron shares, which financial records show were compelled by his need
to pay off bank loans. Mr. Lay had borrowed as much as $100 million for
the purpose of diversifying his investments, and had secured the loans
with Enron stock. As Enron stock price fell throughout 2001, the banks
sought more cash; Mr. Lay borrowed from the company to meet their
demands, then used the stock to repay the corporate loans. During
August, Mr. Lay also exercised stock options to purchase more Enron
Those separate transactions led prosecutors to focus on another issue:
a statement Mr. Lay made to employees during an online meeting on Sept.
26, 2001. Questioned about stock purchased by senior officers, Mr. Lay
commented that he was among those buying shares. But prosecutors are
said to have questioned witnesses about the sum total of Mr. Lay's
transactions, which resulted in more shares being sold than were
purchased. The question was whether Mr. Lay deceived shareholders by
saying he was purchasing stock.
People involved in the case said that prosecutors also investigated a
final transaction in which Mr. Lay borrowed money from the company.
Prosecutors are said to believe that Mr. Lay secured a loan of $7.5
million from Enron shortly before its bankruptcy filing, never
intending to pay it back.
However, if prosecutors choose to bring charges based on these events,
they will have to confront certain factual issues. For example, the
loan does not come due until next year, and creditors have not sued Mr.
Lay to recover it.
When questioned about the loan in the interview with The Times, Mr. Lay
stated that he had, through his lawyers, contacted the creditors twice
asking to meet with them to establish a procedure for paying off the
"Certainly my intent is to pay it in full, with interest," he said,
"And we're going to do that."
Once worth some $400 million, Mr. Lay says that he lost most of his
wealth in the Enron debacle. In The Times interview, he said his worth
was below $20 million, and available cash not earmarked for legal fees
or repayment of debt was less than $1 million.
No Blood For Oil