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Lay no direct wrongdoings { November 25 2003 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A11747-2003Nov24.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A11747-2003Nov24.html
Warnings Were Clear, Says Enron Examiner
However, No Evidence Ties Lay, Skilling Directly to Wrongdoing
By Peter Behr and Carrie Johnson
Washington Post Staff Writers
Tuesday, November 25, 2003; Page E01
Kenneth L. Lay and Jeffrey K. Skilling, the former chief executives of Enron Corp., should have seen warning signs that their top subordinates were using complex transactions to mislead investors about the company's financial condition, a report by a court-appointed bankruptcy examiner concludes.
Both men were "hands-on" managers who regularly monitored Enron's financial performance, examiner R. Neal Batson told U.S. Bankruptcy Judge Arthur Gonzalez. Batson concludes that there may be grounds to sue Lay and Skilling to recover millions of dollars in loans the company made to them, though he did not uncover smoking-gun evidence that either had direct knowledge of wrongdoing at the company.
Batson's report said the two executives, who have denied wrongdoing, were "infrequent users of e-mail, and they also apparently did not retain many documents. They produced very little relevant written material" in response to the examiner's subpoenas. Batson's attorneys questioned Lay, though not under oath. Skilling declined to be interviewed.
The lengthy report -- the fourth by Batson in 14 months -- underscores challenges facing the Justice Department's Enron Task Force in its ongoing investigation to determine whether Lay or Skilling broke the law, said attorneys following the case.
"The report comes up short of ascribing criminal knowledge [to Lay and Skilling], but it marches up to the doorstep," said Robert Mintz, a former federal prosecutor.
In bringing charges against other former senior executives, prosecutors have alleged that Enron officials systematically deceived investors by padding profits and concealing debts through the use of intricate, hidden financial transactions.
"It's difficult to imagine what innocent explanation there could be for [Lay and Skilling's] failure to act on some of the information in this report," Mintz said. "It's a preview of what we're ultimately going to see in a likely criminal prosecution."
To bring a successful federal criminal case against the two men, however, prosecutors must show that they knew of and condoned wrongdoing, not that they should have spotted it, Mintz added.
"The bankruptcy examiner offers a great deal of hope to Skilling and Lay," said David H. Berg, a Houston attorney and author of a recent book on trial lawyering. "It's usually the paper trail that constitutes the 'should have known.' If this man has combed the papers and he doesn't find anything, it's going to be hard to indict Lay and I think Skilling just got a shot in the arm."
Michael Ramsey, Lay's defense lawyer, said in a statement that the report left him "highly encouraged. There is no allegation of crime, no claim of intentional wrongdoing, and no assertion of fraud on the part of Ken Lay. After a nearly $100 million investigation, the bankruptcy examiner suggests only negligence, which we strongly deny."
Skilling's lawyer didn't return calls, but Skilling has said in the past that he depended on the judgments of outside lawyers and accountants.
Batson, who was appointed to investigate possible claims against Enron's former executives and principal legal and accounting advisers, contends that both men violated their executive duties to the company by ignoring the "red flags" they saw about the company's conduct. The two executives knew, for example, about Enron's heavy reliance on billions of dollars from its leading bankers that were loans disguised as commodity transactions, according to the examiner. Without these "prepay" transactions, Enron would have had to raise more funds by borrowing publicly, which could have seriously damaged its credit rating and stock price, Batson has concluded.
Batson concluded there was not enough evidence to prove that board members "abdicated" their responsibilities or "consciously disregarded" red flags. But he added that some of the individual board members may have breached their duty to the company's shareholders by approving deals that lacked a clear business purpose.W. Neil Eggleston, a lawyer for the board members, said the report "confirms that the outside directors acted in what they truly believed were the best interests of Enron."
For the first time, Batson homed in on the role of lawyers in helping Enron conceal a widespread accounting fraud. Vinson & Elkins, the energy trader's chief outside law firm, earned $42.8 million in fees from the company in 2000 alone. Batson's report, and a separate 202-page appendix on Enron's legal advisers, stopped short of concluding that the law firm had committed malpractice.To win a malpractice case, Batson said, a person must present evidence that a lawyer had "actual knowledge" of wrongdoing and failed to report it. Investigators for the bankruptcy examiner cited some circumstantial evidence.
Harry Reasoner, a senior partner at Vinson & Elkins, said, "We are comfortable that we will be able to defend the limited roles that we played. . . . It's unrealistic and it doesn't happen for lawyers to sit around thinking should we second-guess what accountants are telling us and wonder if executives are telling us the truth."
© 2003 The Washington Post Company
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