Good Afternoon. I was pleased to receive the invitation to speak to the Houston Forum.
Of anything and everything that I could imagine might happen to me in my lifetime, the one thing I would have never even remotely speculated about was that some day I would become entangled in our country’s criminal justice system. Yet, that is exactly what has happened and I might add, has happened in a very extraordinary way.
I originally entitled my speech “Living in the Crosshairs of the U.S. Criminal Justice System”, which is where I believe I have been for the last four years. However, once indicted, on July 8, 2004, a more appropriate title is “Guilty, Until Proven Innocent”, which is where I believe I am today.
Contrary to popular belief today, I firmly believe that Enron was a great company. Although, like most companies, it was not without some problems, Enron was a strong, profitable, growing company even into the fourth quarter of 2001. Moreover, except for the illegal conduct of less than a handful of employees, I am convinced Enron would not have had to seek protection under the U.S. Bankruptcy Code in 2001 and would still be a great and growing company today.
Under a different corporate name, Enron was founded in 1930 to build and operate a large natural gas pipeline from West Texas to the upper Midwest. In 1985 that company purchased Houston Natural Gas, a company of which I was Chairman and CEO at the time. The new company became the largest natural gas company in the U.S. and a leader in the deregulation of wholesale natural gas and electricity markets in the U.S., as well as in many countries around the world.
By the late-1990’s, Enron’s wholesale business (involving the production, buying, selling, delivering, financing, hedging, and other services relating to natural gas, electricity, coal, and other commodities) became its largest, fastest growing and most profitable business. In the third-quarter of 2001, with the company’s sales and deliveries growing robustly, Enron’s physical volumes in its wholesale business—which had been a strong indicator of profitability for over ten years—were the energy equivalent of about one-fourth of all the oil consumed in the world—every day.
During the same quarter, Enron Online—the company’s worldwide internet trading platform—completed on average over 5,000 transactions per day, buying and selling over 1,800 separate products online that generated over $2.5 billion in business every day. Enron was clearly the market maker in natural gas worldwide and a market leader in many other energy commodities.
For the third-quarter 2001, Enron’s wholesale business generated $754 million of earnings (before interest and taxes), an increase of 35% from the previous year. This represented over 80% of Enron’s worldwide earnings. Even the Enron Task Force agrees that Enron’s wholesale business was highly profitable. Indeed, it maintains it was so profitable in the year 2000 that Enron attempted to hide some of the profits by inappropriately adding to reserves. The Enron Task Force is right about increasing reserves in 2000, but it is wrong about the reasons. It is this type of technical accounting detail that makes up a lot of the “criminal” charges in this case.
With Enron’s rapid growth, we were able to attract some of the smartest, most creative and hardest working employees in corporate America. Indeed, our major competitors for talent were companies such as General Electric, Goldman Sachs, McKinsey, JPMorgan Chase, as well as high tech companies in Silicon Valley and elsewhere. In 1999, Enron was selected as one of the 100 Best Companies to Work For in America by Fortune magazine and in 2001 we ranked 22nd on that list.
Enron recruited the best and brightest from our nation’s top universities. And, even though we relied heavily on our outside legal and accounting experts, Vinson Elkins and Arthur Anderson, we also recruited the best and brightest from local and national accounting, law, consulting, engineering, and other professional firms. I remain convinced that Enron was so successful for so many years because it had the best people, as continues to be demonstrated by the success of Enron alumni in business and industry around the world today.
In February 2001, I stepped down as CEO of Enron, having served in that position for over 15 years. I was confident that Enron was financially strong, highly profitable, growing rapidly, and had a “sustainable”—or as I referred to it, an “unassailable”—advantage over its competitors. Along with what was referred to as “old economy” assets (its extensive domestic and international pipelines, power plants, liquid plants) with Enron Online, the company had become one of the largest e-commerce or “new economy” companies in the world. (Indeed, Enron had become the Google for the energy business before most people even knew what Google was.) Enron had widened its already very substantial lead in the wholesale energy business, from being twice as big as its nearest competitors in the late 1990’s to being almost four times as big as these competitors by the second-half of 2001. In the trading/intermediation business, scale is critical because of market liquidity, market intelligence, and other competitive advantages.
Yet, in less than 10 months, on December 2, 2001, Enron would be forced to file for bankruptcy protection. This would result in thousands of employees being laid off, most of whom lived in Houston, loss of retirement benefits and savings for thousands more, substantial losses for shareholders, creditors, and suppliers, numerous other tremendous hardships and indeed, personal and business disasters.
Tragically, large numbers of employees saw their dreams evaporate—dreams about retirement, a child’s education, a new home, keeping one’s home, caring for parents, and so many other things.
Having always put a high priority on valuing and honoring my employees over a 35-year business and government career, the negative effects of the bankruptcy and scandal that the Enron employees and retirees have had to endure is the most devastating and heartbreaking tragedy of my life, and will most assuredly continue to haunt me until my death.
With lightening speed, the events preceding the bankruptcy and the bankruptcy itself would not only become the biggest business story in America, but also the biggest overall story in America. Not surprisingly, this ignited strong interest in our nation’s capitol. Congressional hearings were announced almost before the ink on the bankruptcy papers was dry and, once started, continued for months. In the name of fact finding as to why Enron failed, Republicans and Democrats attempted to one-up each other with their vivid, memorable and very negative portrayals of Enron.
Most of what was and is still being said, heard or read, was and still is either grossly exaggerated, distorted, or just flat out false. But a time of political and public hysteria is not a ripe environment for truth. Those with a public voice were telling the stories they wanted to tell and the people were reading and hearing the stories that they wanted to hear—stories of powerful, greedy and soulless executives eager to trample on anyone and everyone to achieve their ruthless aims and immoral goals. Regrettably, Enron and its former employees have had no voice and no defender since late January 2002, in part because the “turnaround” specialists brought in to run Enron chose not to speak out or defend either Enron or its former employees.
Why did Enron have to file for bankruptcy protection? When our trial begins in January, we will be presenting in considerable detail, along with documentation and testimony, the chronology, events and causes that forced Enron to file for bankruptcy. Obviously, I am unable to do that here today.
Let me just summarize by saying that although a lot of events contributed to the decline in Enron’s stock price in 2001—including the bursting of what is now referred to as the stock market “bubble”, the California Energy Crisis, the meltdown of the global telecommunication and broadband business, India’s refusal to honor its contract or guarantees on a large Enron power plant and LNG facility in that country, and other things—the actual triggering event for Enron’s bankruptcy was the loss of confidence by the financial community and by Enron’s trading counter parties that began a collapse by early November 2001 that ultimately could not be arrested or reversed.
Media articles began in late October 2001, raising questions about Enron’s Chief Financial Officer, Andrew Fastow, his personal involvement in—and possible self-enrichment from—certain Enron financial transactions. In response to the mention of one transaction called “Chewco”, Enron’s internal accounting staff and Arthur Andersen discovered a mistake in the financial structure of this 1997 transaction that required Enron to take a $400 million income restatement and various other adjustments for the period 1997-2001. These and other adjustments, publicly announced on November 8, 2001, accelerated the drain on Enron’s liquidity—a real-time “run on the bank”—such that by the end of November, Enron had no alternative but to seek protection under the U.S. Bankruptcy Law. It is probably more than coincidental that the architects of the “Chewco” transaction were Andrew Fastow and Michael Kopper.
As a point of historical significance, a Citibank analysis completed in early November 2001, clearly demonstrates that Enron’s bankruptcy was caused by liquidity problems, not by solvency problems—the company’s on and off balance sheet assets exceeded its liabilities by billions of dollars.
In an April 2005 review of Kurt Eichenwald’s book “Conspiracy of Fools”, a former Wall Street analyst concluded that “…it does not seem a stretch to suggest that if someone [other than Andrew Fastow] had been CFO of Enron, the company would probably exist today. Fastow crossed the line… [allowing him]…to profit at the company’s expense. Ultimately, it was the crisis of confidence triggered by these transactions…that brought Enron down.”
This reviewer also concluded, “If nothing else, Skilling and Lay installed Fastow as CFO and trusted him—a catastrophic error in judgment (though not itself a crime).” I agree. We did trust Andy Fastow and sadly—tragically—that trust turned out to be fatally misplaced.
The amount of money that Fastow and Kopper have admitted they stole from Enron did not bring Enron down. As despicable and criminal as their deeds were, the amount they stole—tens of millions of dollars—given Enron’s size, was relatively small. It was the stench of possible misconduct by Fastow—the notion that Enron’s CFO might be involved in shady or even illegal activities that provoked the loss of confidence causing the run on the company’s treasury. Twenty-twenty hindsight pointed out the downside of becoming so big and so successful in the wholesale business. This business was dependent on trust—as is true of virtually all financial and trading/intermediation businesses in the world—and the actions of Andrew Fastow and his cohorts irreparably breached that trust. The result for Enron was catastrophic.
One of the early tragic consequences of Enron’s filing for bankruptcy was the ultimate annihilation of Arthur Andersen, at the time the largest accounting firm in the world and Enron’s auditors. In early 2002, Arthur Andersen told the Enron Task Force that they had discovered shredding of documents in their Houston office, which might be inappropriate. The Enron Task Force immediately launched an investigation. Despite repeated efforts by Arthur Andersen, as well as its newly formed and very distinguished board, chaired by former Federal Reserve Chairman Paul Volker, to negotiate a settlement that would allow the firm to survive, the Enron Task Force indicted Arthur Andersen in March 2002 and obtained a conviction three months later, resulting in an immediate death sentence for the firm.
Earlier this year, the U.S. Supreme Court in a unanimous decision, overturned that conviction. The late Chief Justice William Rehnquist, who wrote the opinion, concluded that the instructions to the jury that had been urged on the federal district court judge by Andrew Weissmann, lead attorney in the case and at that time Deputy Director of the Enron Task Force allowed the jury to find the firm guilty of criminal conduct, “…even if Arthur Andersen honestly and sincerely believed that its conduct was lawful…”, he added, “[the]…jury instructions…simply failed to convey the requisite consciousness of wrongdoing. Indeed, it is striking how little culpability the instructions required.”
Thus, Arthur Andersen was belatedly vindicated and just three weeks ago, the Enron Task Force advised the Fifth Circuit Court of Appeals, to which the Supreme Court had remanded the case, that it would not retry the case against Arthur Andersen. Additionally, the Enron Task Force allowed David Duncan, the head of the Arthur Andersen audit team for Enron, to withdraw his guilty plea agreement, but without any protection against further prosecution, which I’ll comment on later.
Despite these decisions, however, the death sentence given to an entire firm resulting from the Arthur Andersen indictment and conviction three and a half years ago cannot be reversed. One of the oldest, most respected and biggest accounting firms in the world was executed and, unlike Lazarus, cannot be brought back to life. Over 28,000 American jobs were destroyed, more than five times the number of jobs lost when Enron filed for bankruptcy, and cannot be recreated; retirement and savings were lost and cannot be restored. The “Big Five” accounting firms now became the “Big Four”, shrinking competition at the very time when there was increased demand for accounting services because of the Sarbanes/Oxley bill and other regulatory requirements.
The sordid history of this case and how it was handled clearly begs the question: Does the U.S. Justice Department or anyone else in our federal government feel any need to find out how and why this happened, and whether anyone should be held personally accountable or responsible? The Supreme Court decision very clearly concludes that Andrew Weissmann and the Enron Task Force persuaded the judge to issue instructions to the jury that as the opinion stated, “[so]…diluted the meaning of ‘corruptly’ that it covers innocent conduct [and thus] no longer was any type of dishonesty necessary to a finding of guilt.”
Our U.S. Justice Department makes no apologies for spending almost four years and by some estimates $100 million or more to investigate Enron, its executives and its outside advisors (such as Arthur Andersen). Shouldn’t the Justice Department feel at least some obligation to the American people to commit some time and money to determine how the Enron Task Force’s first indictment and first conviction caused such widespread devastation to so many, but yet was overturned by the highest court in our nation in a unanimous decision? The only response from the Justice Department following the Supreme Court’s decision overturning the Arthur Anderson conviction was a one sentence statement, “We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law.”
This past summer, Enron Task Force Director and lead attorney in the Arthur Andersen case, Andrew Weissmann, left his post unexpectedly in the middle of the jury deliberations in the Enron Broadband trial, which resulted in 24 not-guilty verdicts and zero guilty verdicts. Indeed, thus far the Enron Task Force has been able to convict by trial exactly one former Enron employee, which was in the Nigerian Barge Trial. Andrew Weissmann’s sudden and unexpected departure occurred only months before his potentially career enhancing opportunity to try me along with Jeff Skilling and Rick Causey in what some have referred to as the biggest criminal business trial in U.S. history. Was it a coincidence that Andrew Weissmann’s decision to leave came only days after our defense team filed a motion in court claiming prosecutorial misconduct in our case?
In less than a year after Enron’s bankruptcy, Enron Task Force Director Leslie Caldwell was quoted as saying that she expected all indictments relating to Enron to be wrapped up by year-end 2002. We now know that instead of finishing the investigation after one year, it was just beginning. The original Enron grand jury completed a lengthy 18-month term, only to be extended another 18 months. Then, at the end of the second, extended term, a whole new grand jury was convened for yet another 18 months and is now over one-half way through that term. If asked, I am certain that the Enron Task Force would say they have taken so much time because the crimes at Enron are so complicated. However, I would say the Enron Task Force has taken so much time because it is complicated to find crimes where they do not exist.
The Enron Task Force investigation is largely a case about normal business activities typically engaged in on a daily basis by corporate officers of publicly held companies throughout the country. In virtually every other situation, if there were concerns that any of these business activities were not being done appropriately, these concerns would be addressed by a regulatory agency, like the SEC, or as a civil matter in the courts. However, in this case, the Enron Task Force is attempting to criminalize these very same business activities. In an article published in the National Law Journal, John Coffee, professor at Columbia Law School and director of its Center of Corporate Governance writes concerning my indictment, “to be sure, an intense political need to indict Lay may explain why prosecutors have pushed the envelope of securities and mail fraud theories to their limit. But, what happens once will predictably happen again.”
