The 'Warning' Of Kenneth Lay
Tuesday January 15, 8:57 am Eastern Time
Forbes.com
By Dan Ackman
An Enron employee warned company Chairman Kenneth Lay last August of accounting problems and a "veil of secrecy'' surrounding Enron partnerships. This revelation comes from congressional investigators probing the energy trader's downfall.
But warning Ken Lay about partnerships isn't like warning the captain of the Titanic about icebergs; it's more like warning him he was on a ship.
Partnerships were not something that surprised Enron ; they were Enron's way of doing business. There were not one or two; there were more than 3,000. Enron didn't need a warning. What it needed was to warn others.
Chairman Lay knew about the partnerships in August, as the Enron board had to approve them. The problem is that few others knew about them or how they were employed to hide Enron's debt and generate revenue from trades that lacked economic substance.
Along with other top Enron officials, Lay's problem--both as an executive and as a possible criminal defendant--wasn't that he lacked information; it was that he denied it to others. The "warning" about the partnerships was likely met with a shrug: Tell me something I don't know.
Enron Special Report: Enron's Endgame The letter from the employee was unearthed by House Energy and Commerce Committee Chairman Billy Tauzin and investigations subcommittee head James Greenwood. "I am incredibly nervous that we will implode in a wave of accounting scandals,'' wrote Sherron Watkins, a vice president of corporate development, in her letter to Lay.
Lay, of course, kept Enron's true state of affairs hidden from public view for months after this letter was written. Ultimately, on Dec. 2, his company filed for the largest bankruptcy in U.S. history. Enron was once the seventh largest company in the U.S., according to its reported sales.
"It sure looks to the layman on the street that we are hiding losses,'' Watkins told Lay. She said several senior Enron employees "consistently and constantly'' questioned the corporation's accounting methods to senior Enron officials, including Chief Executive Jeffrey Skilling. Skilling resigned in August. His reasons were unexplained at the time, but recently Skilling's spokesman has said Skilling told Lay he wanted to leave even before he took the CEO job in early 2001.
After receiving the letter, Lay asked Vinson & Elkins, Enron's corporate law firm, to investigate the issues raised in it. That's classic. Faced with charges of its own wrongdoing, Enron gets its law firm to "investigate," all with the understanding that the lawyers will not ask the top executives hard questions. The lawyers work very, very hard "investigating," and when they come up empty, Enron's executives say, "Don't blame us, we hired the best lawyers in Texas."
Enron insisted that the law firm limit its investigation. It could review the "facts" in the letter, but it should not question the underlying accounting policies. On Oct. 15, Vinson & Elkins found that Enron had committed no wrongdoing, The New York Times reports, citing lawyers familiar with the matter.
Around the time of the August letter, Lay was telling Enron's employees in Houston that the growth of the company "has never been more certain.''
The Washington, D.C., lawyer who is representing Enron, but not technically Lay, said he was "very disappointed" by the committee's disclosure and said the leak called into question the congressional committee's "objectivity."
Actually, the release of the letter, in a sense, absolves Lay and other Enron executives. It suggests that he did not know what he was doing, that the partnerships were being set up without his knowledge or consent. In fact, according to Skilling's spokesman, the board had to approve each of the partnerships and did so.
The larger question is why Lay needed to ask lawyers to investigate his own company. If they wanted to reveal the truth, they could have done so. Instead, Enron kept spinning.
After August, Enron borrowed more money. It allowed people to buy Enron's shares without warning. In late October, Lay started phoning U.S. Cabinet officials: Treasury Secretary Paul O'Neill and Commerce Secretary Donald Evans.
Even they came away from talks with Lay with wildly different impressions. "I frankly think what Ken told me over the phone was not new news. You all had been reporting for weeks that Enron had problems, that they were in trouble," O'Neill told reporters. Evans, meanwhile, told Meet the Press, "When I was talking to Ken, I wasn't thinking about bankruptcy ... I was thinking maybe their credit rating would be dropped some ... but it wasn't the crisis yet that ensued some 30 days later.''
If anyone was in a position to know about the crisis that would ensue, it was Lay, not his lawyers and not his accountants. He said nothing then, and he is saying nothing now. |
