The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

by Bethany McLean

  Each man had made an unusual choice to lead his defense. Petrocelli, fifty-three, while an enormously gifted trial lawyer, had never represented a criminal defendant. Lay’s lead attorney was sixty-five-year-old Mike Ramsey, a cantankerous Houston criminal-trial legend better known for defending murderers than for defending CEOs. But he’d won cases that seemed impossible: In 2004, he’d famously helped Robert Durst, a cross-dressing millionaire, walk away free from his Texas murder trial, even though Durst had admitted shooting his elderly neighbor, chopping up the body, and dumping the pieces in Galveston Bay.

  Although many legal observers expected Lay and Skilling, who had never really been friends, to turn on each other in court (some experts viewed it as Lay’s best chance of winning acquittal), they would reveal nary a hint of conflict. Skilling faced far more charges, and his massive defense team would do much of the heavy, behind-the-scenes lifting for the joint defense. But because of procedural maneuvering by the defense that had backfired, the government would actually have two separate shots at convicting Lay. After the jury had adjourned to deliberate in their joint trial, U.S. District Judge Simeon Lake, presiding in the case, would conduct a short, separate bench trial on the government charges that Lay had committed four counts of bank fraud by lying to his lenders about how he intended to use the proceeds from multimillion-dollar lines of credit. Appointed by President Ronald Reagan, Lake was highly respected in Houston as a fair, no-nonsense jurist whose rulings were rarely overturned.

  • • •

  The prosecutors were getting ready too. By then, the Enron Task Force was on its third director, thirty-eight-year-old Sean Berkowitz, an unflappable assistant U.S. attorney from Chicago who had graduated from Harvard Law School. Since joining the task force in late 2003, Berkowitz had focused on the case against Skilling. The new deputy director was Kathy Ruemmler, thirty-four, a Washington, D.C.–based prosecutor who had won convictions in the Nigerian barge case, the task force’s one big trial victory to date. The third key member of the team—and Lay’s personal nemesis—was a federal prosecutor from California named John Hueston, who had never lost a criminal case. After joining the task force in early 2004, Hueston, forty-one, had revitalized the investigation against Lay, then dead in the water—Lay had simply been too distant from most of the fraudulent deals—by refocusing it on Lay’s misleading statements to investors in the second half of 2001.

  As they prepared their case, the prosecutors made a critical strategic decision. Wary of getting bogged down in arcane technical details—a huge problem in the broadband trial—they resolved to brutally simplify the story they’d present to the jury. And they took a big step toward doing that on December 28, 2005—just a month before the trial was set to start—by reaching an unexpected plea-bargain agreement with Rick Causey.

  Enron’s former chief accounting officer pled to a single count of securities fraud, accepted a sentence of up to seven years, and agreed to cooperate with the government. But in terms of the big trial about to start, it was really a matter of addition by subtraction: While Causey wouldn’t even end up taking the witness stand against Lay or Skilling, his removal from the case eliminated a huge amount of accounting testimony that was likely to confuse the jury; weakened the two ex-CEOs’ ability to defend themselves by saying that they had relied on Causey’s accounting advice; shortened the trial by weeks; and focused attention solely on the two men at the top.

  As it turned out, given the event’s billing as the biggest corporate fraud trial ever, both sides were offering the jury—eight women and four men, selected in a single day—a remarkably simple story. Hueston, delivering the government’s opening argument, proclaimed that this was not a case about accounting, but instead about “lies and choices.” Lay and Skilling, he declared over and over, knew about serious problems at Enron—and chose to lie about them to employees, analysts, and investors.

  The advocates for Lay and Skilling, for their part, offered an especially audacious argument, echoing the themes the defendants had been offering themselves: Except for the thievery of Fastow and his tiny circle, there was absolutely nothing at all wrong with Enron, Petrocelli declared. “This is not a case of hear no evil, see no evil. This is a case of there was no evil.” Enron, he told the jury, was “a wonderful company—a shining star.” Its failure had resulted not from fraud but from an irrational panic (the “run-on-the-bank” theory) triggered by irresponsible media stories (especially those Wall Street Journal articles) written by reporters in cahoots with short sellers bent on destroying the company. Refusing to distance his client from Skilling, Ramsey surprisingly insisted that Lay was fully engaged and knew of absolutely no serious problems at Enron because . . . well, because there were no problems. As for his client’s surreptitious stock sales in 2001—at a time when he was telling others to buy—Ramsey told the jury that Lay “never sold one share of Enron stock that he wasn’t compelled to sell” because of margin calls on loans he’d taken out to make other investments. “This case will rise or fall on that,” he declared.

  As the government’s case soon made clear, this defense posed a serious problem: If there really was nothing wrong with Enron, why had so many of its former top executives pled guilty to committing crimes? By this point, sixteen ex–Enron managers had signed plea agreements admitting that they’d participated in fraud at Enron—and eight of them would take the stand to testify against Lay and Skilling.

  Petrocelli urged the jury to ignore all of that testimony. Except for Fastow and Glisan, he would argue, the parade of government “cooperators” hadn’t really committed crimes at all, but had only cut deals with prosecutors because they’d been bludgeoned into doing so, for fear of a long prison sentence. Their testimony was of zero value, Petrocelli declared.

  But for anyone listening to the former Enron executives in the courtroom, it was hard to believe that they were all just making it up. Mark Koenig and Paula Reiker, the investor-relations chiefs, testified about last-minute manipulations made to hit analysts’ quarterly earnings targets. Tim Belden described how Enron was really a speculative trading company. Ken Rice talked about the contortions required to make his numbers at broadband. Dave Delainey detailed how losses were hidden at EES. Fastow, appearing deeply repentant, testified about his secret side deals with Skilling and Causey on LJM. And Glisan described telling Lay about Enron’s dire financial straits, then hearing his boss tell the world that all was well. (Clearly stung by the testimony, Ramsey told reporters outside the courtroom that Glisan reminded him of a “trained monkey.”)

  To be sure, the defense—especially the silver-tongued Petrocelli—scored points on cross-examination. And, to be sure, there was no smoking gun. But through twenty-two witnesses over two months of testimony, the government steadily built a case whose weight became overwhelming.

  As promised, Lay and Skilling took the witness stand in their own defense, offering their best last hope of avoiding conviction. And here all expectations went out the window. Through weeks of prosecution witnesses, the two defendants had remained true to form. Skilling was often snarly and taciturn, reportedly trash-talking to prosecutors (“Figured out the business yet, Kathy?” he asked Ruemmler in court one day) and at one point (according to a courtroom source) mouthing “son of a bitch” to Koenig, who was then on the witness stand. Lay remained personally gracious and charming, even to reporters and prosecutors.

  There were expectations that once he took the stand, Skilling would flash his infamous temper, maybe even implode. But during eight days of testimony, he maintained a surprisingly even keel. Nonetheless, his appearance was often weird (his mood seemed to shift at least once a day) and ultimately unconvincing. On direct, Skilling denied reality as virtually everyone else saw it, insisting that nothing had been amiss at Enron and rejecting every government charge in carefully crafted detail. On cross-examination, he was vague and evasive, displaying a string of sudden memory lapses. Berkowitz bruised Skilling’s credibility on two side issues:
an attempt he’d made to unload five hundred thousand shares of Enron stock shortly after he’d left the company; and his personal investment in Photofete, a start-up company launched by an ex-girlfriend, which did most of its business with Enron.

  But Ken Lay was the defendant who would lose his cool on the witness stand. Oddsmakers watching the case—bookies in Dublin and Costa Rica were actually taking bets—had properly given Enron’s founder a better chance than Skilling of beating the rap. He was further removed from events; he faced fewer charges; and there was, of course, his winning personality. But things had not gone well at trial. The government had produced a surprising amount of evidence from executives who told of warning Lay about dire problems at Enron, only to watch him then tell investors that all was well. Ramsey, the one defense attorney with whom Lay had a personal rapport, suffered heart problems midtrial and was never a factor in the courtroom. Worst of all, when Lay took the stand he appeared angry and self-righteous, even contemptuous of one of his own lawyers, George “Mac” Secrest, at one point snapping: “Where are you going with this, Mr. Secrest?”

  Things got worse on cross-examination. Eager to demolish Lay’s credibility—or at least, any remaining vestige of his nice-guy persona—prosecutor John Hueston went after Lay fast and hard. First, he accused him of attempted witness tampering, by placing calls to government witnesses. Next Hueston noted that Lay had stood idly by when Ramsey told reporters that Glisan resembled a “trained monkey,” charging him with character assassination. After that, Hueston suggested that Lay had violated the Enron ethics code by failing to report his own investment in Photofete. Over three more days of questioning, Hueston kept pounding, eviscerating the defense claim that Lay’s secret 2001 sales of more than $70 million in Enron shares had been forced by showing how Lay had had other ways to meet the margin calls. Meanwhile, Hueston pointed out, the Enron CEO had spent tens of millions on an extravagant lifestyle, including $200,000 in early 2001 to rent a yacht for Linda’s birthday party. Lay handled it all horribly, shooting back at Hueston in a loud, contemptuous tone.

  Lay’s disastrous performance worried Skilling’s lawyers as much as his own. They couldn’t imagine a scenario where Lay was found guilty while Skilling won acquittal on all twenty-eight charges he faced.

  And they were right. When the Enron jurors retired to deliberate on Wednesday, May 17, in the trial’s sixteenth week, they were an unusually unified bunch. They had begun each morning in the jury room with a prayer. On Valentine’s Day, they all had dressed in red for court. On Fat Tuesday, they wore Mardi Gras beads.

  It took them six days to reach a unanimous verdict, finding Skilling guilty on nineteen of twenty-eight counts, and Lay guilty on all six charges he faced. Immediately after the jury’s decision was announced, Judge Lake weighed in too, finding Lay guilty on all four counts of bank fraud.

  Interviews the jurors gave with the media afterward provided reassurance about how they had come to their judgment. It was clear, for example, that they had refused to demonize the two defendants, with more than one speaking of how they’d admired much of what Lay and Skilling had accomplished during their careers. Nor did they seize blindly on a single document or a single witness, choosing instead to assess the sum total of all that they had seen and heard. As juror Wendy Vaughan put it, it was as though they had been given “a puzzle with about 25,000 pieces dumped on the table.” Added Vaughan, of the defendants: “I wanted to believe very, very badly what they were saying.” Ultimately, the jurors concluded, that simply wasn’t possible.

  At a sidewalk press conference outside the courthouse, Enron Task Force director Sean Berkowitz, flanked by the prosecutors and FBI agents who had worked with him, proclaimed that the guilty verdicts sent an “unmistakable message to boardrooms across the country: You can’t lie to shareholders. You can’t put yourself in front of your employees’ interests. No matter how rich and powerful you are, you have to play by the rules.”

  Skilling responded publicly with an oddly casual air. “We fought a good fight, and some things work, some things don’t,” he told the media mob on the sidewalk. Petrocelli, who seemed to take the defeat harder, vowed a “vigorous” appeal.

  As for Lay, he was surrounded after court adjourned by sobbing members of his family, who had erupted in gasps and tears as the guilty verdicts were read in court. Judge Lake, who would set a sentencing date for October 23 (both men were expected to get more than twenty years), had insisted that Lay surrender his passport and post a $5 million bond before leaving the building. As Lay waited in the courtroom for the necessary paperwork, he whispered consoling words to his relatives as they stepped up, one by one, to embrace him. “God has another plan now,” he told them. In the well of the courtroom where Lay had been found guilty, they then gathered in a circle with a pair of Houston ministers, held hands, and prayed.

  “We’re shocked,” Lay told the press when he finally left the building. “I firmly believe I’m innocent. . . . Despite what happened today, I am still a very blessed man. . . . I have a very warm and loving and Christian family that supports me. . . . Most of all, we believe that God, in fact, is in control, and indeed, he does work all things for good for those who love the Lord. And we love our Lord. And ultimately, all of these things will work for good.”

  Forty-one days later, Ken Lay was dead. On July 5, during a weeklong stay with Linda in a cabin outside Aspen, he had gotten out of bed at 1:00 a.m. to go to the bathroom and collapsed. Lay was pronounced dead at Aspen Valley Hospital of a heart attack. An autopsy report revealed yet another Lay secret: He had had a history of cardiac problems—“at least” two previous heart attacks, severe coronary blockages, and two stents that had been placed in his arteries to aid blood flow.

  The news of Lay’s death was met with a bizarre mix of sadness, frustration, and even suspicion. The front page of the New York Post carried a picture of Lay and a casket, accompanied by the giant headline: BEFORE THEY PUT CHEATO LAY’S COFFIN IN THE GRAVE CHECK HE’S IN IT. Coroner’s report notwithstanding, the blogosphere swirled with insistent declarations that Lay wasn’t really dead, and Web sites sprang up titled kenlaylives.com and kenlaylives.org. Many weighed in that he had somehow escaped justice by leaving earth without spending a single day behind bars.

  The June 12 memorial service at First United Methodist Church in Houston was eerily reminiscent of Ken Lay’s glory days at Enron—the days before he had become a pariah. He was packing them in one last time, more than one thousand people in all, with a heavy draw from the ranks of Houston’s rich and powerful. Former president George H. W. Bush was there with his wife Barbara. Former secretary of state James Baker. Former commerce secretary Robert Mosbacher. Legendary heart surgeon Dr. Denton Cooley. Former Texas governor Mark White. Houston Astros owner Drayton McLane. Former Houston mayor Bob Lanier. And on it went.

  They were there not to bury Lay (whose body would be cremated), but to praise him. Mick Seidl, his early Enron colleague (and a bit player in the Enron Oil scandal), eulogized Lay as a “good, honest, God-fearing man who did not have a criminal bone in his body.” The Reverend William Lawson, a Houston civil-rights icon who had earlier likened Lay to Martin Luther King, Jr., and Jesus Christ, told the mourners that “he was the victim of a lynching.” Lay’s stepson, Beau Herrold, added bitterly: “I’m glad he’s not in a position anymore to be whipped by his enemy.”

  Notwithstanding the anger of Lay’s family and friends, in the United States in 2006, a criminal trial in federal court—especially for a rich, white former CEO—hardly approximates a lynching. And beyond the small, privileged circle in Houston who filled a downtown church on that July day, the truth is that the conviction of Ken Lay and Jeff Skilling was generally received as the fitting culmination of a long, arduous search for justice.

  Because he had died before Judge Lake imposed his sentence—and before his conviction had survived legal appeal—Lay’s sentence was ultimately erased as a matter of legal record.

&nbs
p; Ken Lay’s death was yet another sudden turn in the long and painful Enron tragedy. Without Lay, Enron would never have existed, and for virtually its entire history, he was its public face. But the modern Enron, with all its errant ways, was Jeff Skilling’s creation. And now Skilling would be left alone to face the public reckoning, for himself and for the company he had built that had climbed so high—and fallen so far.

  It came on October 23, 2006, when Judge Lake sentenced him to 24 years and four months in prison and a fine of $45 million. Skilling’s request to remain free while he appealed his conviction was denied. He reported to a low-security prison in Waseca, Minnesota, and began serving his sentence on December 13, 2006—with a projected release date of 2028, when he would be 74 years old.

  AFTERWORD

  “Ladies and gentlemen, Mr. Andrew Fastow!”

  He was a most improbable Las Vegas headliner—especially for a national convention of fraud examiners. But by June 2013, the former Enron CFO had finished his prison sentence and become a popular speaker on business ethics. This new career, in contrast to his old one, was unpaid.

  After serving more than five years, Fastow had returned to his family in Houston, where he went to work as a document-review clerk for the law firm that represented him in civil litigation. A few months later, after reading a column on the importance of teaching ethics by the dean of the Leeds School of Business at the University of Colorado-Boulder, he contacted the dean and volunteered to speak to his students. When Fastow appeared in Boulder, the auditorium was packed. By the time he arrived in Las Vegas, he’d given more than a dozen talks, addressing small business groups and students at such schools as Tufts, Tulane, and Dartmouth.

  As always, he began with a mea culpa. “Why am I here?” asked Fastow, dressed in a blazer and button-down shirt, before a full house of 2,500. “First of all, let me say I’m here because I’m guilty. . . . I caused immeasurable damage. . . . I can never repair that. But I try, by doing these presentations, especially by meeting with students or directors, to help them understand why I did the things I did, how I went down that path, and how they might think about things so they also don’t make the mistakes I made.” (Fastow later explained that he kept his red prison ID card in his wallet and took it out every morning to remind himself “that I harmed so many people in what I did.”)