The Enron Case That Almost Wasn't
By ALEXEI BARRIONUEVO and KURT EICHENWALD
Published: June 4, 2006
Judge Simeon T. Lake III's reading of the verdict landed like a bombshell in his federal courtroom in Houston. The first cries came from the second row, where the children of Kenneth L. Lay, the former Enron chairman, lurched forward and began sobbing.
Dressed in a cobalt blue jacket, Linda Lay, Mr. Lay's wife, dropped her head onto his shoulder as the judge continued to read a series of fraud and conspiracy verdicts. Each count was punctuated by one word: ''guilty.''
When the judge finished, Mr. Lay, 64, had been convicted of 10 crimes -- and a man who was once a close ally of President Bush and presided over one of the nation's most influential companies became someone who may spend the rest of his life in prison.
But the journey from the collapse of Enron to Mr. Lay's conviction was anything but predictable. Instead, it was a long and arduous legal journey for federal prosecutors, filled with false leads and evidentiary dry holes. The public widely perceived the criminal case against Mr. Lay to have been a ''can't lose'' proposition, similar to the parallel case assembled against Enron's former chief executive, Jeffrey K. Skilling. But the legal hurdles on the path to Mr. Lay's conviction were so daunting that some prosecutors privately worried that they would never even be able to charge Mr. Lay with any crimes.
Prosecutors eventually defined and pinned down Mr. Lay's misdeeds by focusing on what amounted to the most basic of childhood transgressions. After analyzing millions of pages of documents, deconstructing complex accounting mechanisms, unwinding complex trading transactions and interviewing scores of witnesses, they found a theme that carried the day: Mr. Lay chose to lie -- to his shareholders, his employees and his banks -- and those lies were his crimes.
The process of dissecting Mr. Lay's misdeeds also forced prosecutors to pull apart the strange corporate machinery of Enron itself. There, too, prosecutors discovered, the blindingly complex gave way to the maddeningly simple: Enron was not a delicate, innovative engine of profitability; it was a hodgepodge of often impenetrable activities, some of which were designed so their architects could simply steal money.
''I liken it to being like some strange mechanical device that dropped out of the sky, and a group of engineers who had never seen anything like it had to take it apart and figure out what it was,'' said Samuel W. Buell, who was one of the first prosecutors to investigate Mr. Lay. ''But at the end of the day, the machine just ended up being a coffee maker.''
Even so, the case against Mr. Lay was never clear-cut, prosecutors say. And a review of their efforts to directly link Mr. Lay to crimes at Enron reveals that at times it seemed that their quarry might remain permanently beyond their reach.
SHORTLY after Enron collapsed in December 2001, the Justice Department assembled a special federal task force to delve into the complexities of the company. One fact emerged quickly, task force members said: there was no obvious case to be made against Mr. Lay. Investigators focused on the use of murky partnerships, particularly a vehicle known as LJM, to manipulate Enron's financial performance. But that inquiry unearthed little evidence of crimes involving Mr. Lay.
''There was this public perception of Ken Lay as the mastermind, but that really didn't bear out,'' said Leslie R. Caldwell, who headed the task force in its first two years. ''We realized very fully early on that Lay was not involved in the decision-making day to day and that we weren't going to be able to prove his involvement in the structuring of transactions like LJM.''
Other areas appeared more promising. Corporate filings revealed that Mr. Lay had sold about $100 million worth of his Enron shares, most of them back to the company through a complex transaction involving a corporate line of credit. Almost all of the money from the sales went toward paying down personal bank loans that were secured by the Enron shares. If the task force could prove that Mr. Lay sold the shares because of nonpublic information he had about the company, the theory went, he may have committed insider trading. But it was virtually impossible to prove insider trading for shares sold back to the company, since Enron theoretically had the same information as Mr. Lay.
''The insider-trading characterization of these sales just never seemed sustainable, except on some very broad theory that, when you know things at a company aren't going well, you can't sell,'' Mr. Buell said. ''We needed something more tangible than that.''
So prosecutors developed a new theory about Mr. Lay's trades: that he looted Enron by pulling $100 million out of its coffers even as the company's financial situation was deteriorating. Prosecutors were cagey, never signaling to Mr. Lay's defense team that they had abandoned the insider-trading theory and replaced it with a new allegation.
But the task force ultimately decided it could not even build that case. There was no clear evidence that Mr. Lay had actively tried to deceive Enron's board, and he could contend that he had relied on Enron lawyers to approve all of his trades.