What Did Ken Lay Know on Aug. 20?
JANUARY 24, 2002
NEWS ANALYSIS
In an interview with BW Online that day, Enron's then-CEO said: "There
are no accounting issues...no previously unknown problem issues." Probers
think he may have had reason to think otherwise
On Aug. 20, 2001, Kenneth L. Lay was absolutely
upbeat about Enron's prospects. Although Jeffrey
K. Skilling had abruptly resigned as Enron's
president and CEO less than a week before, Lay
insisted that the company's slate was clean. "There
are absolutely no problems that had anything to do
with Jeff's departure," Lay, who had just reassumed
the CEO job, told BusinessWeek Dallas
Correspondent Stephanie Anderson Forest that
day. "There are no accounting issues, no trading
issues, no reserve issues, no previously unknown
problem issues.... There is no other shoe to fall."
Two months later, Enron's finances began to
unravel. By December, the company was in
bankruptcy, and on Jan. 23, Lay resigned under
pressure from Enron's creditors. But what federal
investigators want to know is: Did Lay know more
than he was admitting on Aug. 20 -- and were his
statements to BusinessWeek Online an act of
securities fraud?
THE FAMOUS MEMO. Investigators in Congress and
at the Securities & Exchange Commission have uncovered a chronology they
believe suggests Lay should have known of Enron's massive accounting
problems before that interview. Enron Vice-President Sherron S. Watkins'
now-famous memo to Lay -- asking, "Has Enron become a risky place to
work?" and pointing out that "Enron has been very aggressive in its
accounting" -- was written and dropped off for Lay to review on Aug. 15,
according to congressional investigators and Watkins' lawyer. By Aug. 20,
Lay had scheduled a meeting with Watkins to discuss her concerns, according
to her lawyer, Philip Hilder of Houston. Documents obtained by congressional
investigators back up that date.
If Lay knew of the problems and had good reason to view them as substantial,
any public statements denying those problems could be deemed false and
misleading corporate disclosures. That would be a potential civil or even
criminal violation of federal securities laws. "If it appears in BusinessWeek or
on its Web site, he's as vulnerable for that as if he put it out in a company
news release," says a former top SEC lawyer. The interview with Lay was
posted on the Web site on Aug. 24, 2001.
Lay's statements are now a matter of interest to the SEC, which has
acknowledged it is investigating the company. BusinessWeek has provided the
agency with the published transcript of the interview from its Web site. Enron
is also under investigation by the Justice Dept., the Internal Revenue Service,
the Labor Dept., two Cabinet-level task forces, and 10 congressional
committees.
Lay's attorney, Earl J. Silbert of the Washington firm Piper Marbury Rudnick
& Wolfe, declined to speak on the record about Lay's knowledge of Watkins'
allegations at the time of the interview.
A MATTER OF TIMING. The evidence starts with Watkins' memo, in which she
told Lay: "I am incredibly nervous that we will implode in a wave of accounting
scandals." Although Watkins' letter was unsigned, she soon identified herself
and met with Lay for one hour on Aug. 22.
The question for investigators is: Had Lay read Watkins' memo detailing
questionable transactions and aggressive accounting in Enron's
now-controversial trading partnerships by the time he got on the phone with
BusinessWeek's Forest -- between noon and 1 p.m. on Aug. 20 -- and issued
his "no other shoe" statements?
Watkins says her meeting with Lay was scheduled by Aug. 20, according to
Hilder, her lawyer. Further, on the 20th, Watkins told a friend at Enron's
auditing firm, Arthur Andersen, about the coming meeting. According to an
Aug. 21 memo by James A. Hecker, a Houston-based Andersen partner,
Watkins called Hecker on Aug. 20 to discuss her concerns about Enron's
accounting. In a memo he wrote about the conversation, Hecker said:
"Sherron told me she was concerned enough about these issues that she was
going to discuss them with Ken Lay, Enron's Chairman, on Wednesday,
August 22, 2001."
ANONYMOUS DROP BOX. What's unclear is how much Lay knew of Watkins'
concerns when he spoke to BusinessWeek Online. Hilder, the lawyer, says
Watkins had delivered only the first page of what became a seven-page memo
at that point. That page contains Watkins' most explosive allegations, while the
ensuing six pages are detailed backup. Further, she delivered the memo to a
"drop box" Lay had provided for employees to express their concerns
anonymously in the wake of CEO Skilling's resignation. Hilder could not say
whether Watkins called her memo to Lay's or his staff's attention when she
scheduled her meeting with him.
A bigger question may be whether Lay had sufficient reason to believe
Watkins' charges were credible. He's likely to argue that the charges were
unsubstantiated and that his knowledge of the company supported his
statement that Enron "is probably in the strongest and best shape that it has
ever been in."
But Lay's later actions indicate he did take Watkins' concerns seriously: He
sent her memo to Enron's general counsel, who asked Enron's Houston law
firm, Vinson & Elkins, to review the partnership transactions. That review was
carefully circumscribed: V&E's report said Enron and the law firm "decided
that our initial approach would not involve the second guessing of [Andersen's]
accounting advice...there would be no detailed analysis of each and every
transaction."
"IN HIS HEAD"? And V&E itself had previously issued legal clearance for
many of the Enron partnerships. Under those conditions, V&E concluded on
Oct. 15 that Watkins' allegations "do not, in our judgment, warrant a further
widespread investigation by independent counsel and auditors."
That sequence of events may strengthen the investigators' case. The
BusinessWeek Online interview was conducted after Watkins had delivered
her memo but before V&E's report. If Lay had read the memo, "The
knowledge was in his head, but he didn't have the benefit of someone having
assured him [the Watkins charges] didn't matter," says a source familiar with
the federal investigations.
And Lay's categorical statement to BusinessWeek Online -- "no accounting
issues, no trading issues, no reserve issues, no previously unknown problem
issues" -- may have dug the legal hole a little deeper. That statement hits on
most of the areas that have since tripped Enron into massive earnings
restatements and bankruptcy.
By speaking so strongly, Lay himself appeared to be aware of those risks. "If
there's anything material and we're not reporting it, we'd be breaking the law,"
he told BusinessWeek's Forest. "We don't break the law." Now, SEC and
Justice Dept. investigators will be probing these statements.
By Mike McNamee, with Wendy Zellner and Stephanie Anderson Forest in
Dallas, and Laura Cohn in Washington
Edited by Douglas Harbrecht
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