Ken Lay, R.I.P.

Ken Lay, former CEO of Enron, died of a heart attack in Aspen, Colorado on Wednesday. Lay was convicted last month of securities fraud and conspiracy charges in the failure of the energy giant along with Jeff Skilling who had succeeded Lay.

Why do I care?

I think that Lay was innocent of the charges, was badly railroaded by Justice Department and was a victim of the public 'outrage' against anyone who (was) extremely wealthy and associated with Enron. And I think the verdict literally killed him.

Two New York Times reporters who followed the Lay/Skilling trial wrote a lengthy piece entitled "The Case That Almost Wasn't" Tuesday detailing how difficult the case really was and how the special task force was literally grasping at straws. At the end of the day they hung Lay (literally) on the fact that he was deliberately mis-representing Enron's condition in October 2001. And, that, frankly is in doubt.

...The public widely perceived the criminal case against Mr. Lay to have been a "can't lose" proposition, similar to the parallel case assembled against Enron's former chief executive, Jeffrey K. Skilling. But the legal hurdles on the path to Mr. Lay's conviction were so daunting that some prosecutors privately worried that they would never even be able to charge Mr. Lay with any crimes.

Prosecutors eventually defined and pinned down Mr. Lay's misdeeds by focusing on what amounted to the most basic of childhood transgressions. After analyzing millions of pages of documents, deconstructing complex accounting mechanisms, unwinding complex trading transactions and interviewing scores of witnesses, they found a theme that carried the day: Mr. Lay chose to lie — to his shareholders, his employees and his banks — and those lies were his crimes.
...
Even so, the case against Mr. Lay was never clear-cut, prosecutors say.

SHORTLY after Enron collapsed in December 2001, the Justice Department assembled a special federal task force to delve into the complexities of the company. One fact emerged quickly, task force members said: there was no obvious case to be made against Mr. Lay. Investigators focused on the use of murky partnerships, particularly a vehicle known as LJM, to manipulate Enron's financial performance. But that inquiry unearthed little evidence of crimes involving Mr. Lay.

"There was this public perception of Ken Lay as the mastermind, but that really didn't bear out," said Leslie R. Caldwell, who headed the task force in its first two years. "We realized very fully early on that Lay was not involved in the decision-making day to day and that we weren't going to be able to prove his involvement in the structuring of transactions like LJM."

This was the crux of the government's case:

But on the same day Mr. Skilling was indicted in early 2004, Enron's former treasurer, Ben F. Glisan Jr., appeared before a grand jury in Houston and gave prosecutors a little gift. In addition to providing evidence against Mr. Skilling, he testified that Mr. Lay knew he was lying in 2001 when he provided upbeat statements about Enron's prospects even as the company was plummeting toward bankruptcy proceedings.

That's it.

The government also prevented the defense from calling potentially exculpatory witnesses by denying them immunity from prosecution as a blogger notes here.

Another thoughtful reflection here.

Two thoughts:

First, Enron's collapse was directly precipitated by a massive loss of CONFIDENCE by the market. That leads to crises of liquidity and margin calls. (Enron also linked a lot of structures that increased their liability when their stock price fell which is very risky but seemed like a good idea when the stock price seemed only able to rise). Additionally once the market senses weakness, it goes for blood. Every single time. These are the short sellers that Lay inveighed against.

Remember Long Term Capital? Their trades ultimately had limited naked risk - however, because they put it on in such massive size by margining themselves to the hilt they made themselves vulnerable to relatively small adverse price movements which once the market was aware, was more than happy to exacerbate.

As CEO, a big part of Lay's responsibility was to instill confidence in the firm and forestall a crisis. As a matter of fact it would have been egregiously irresponsible for him to be unduly pessimistic. This doesn't mean that he should lie overtly about the condition of the firm. Did he lie? It's not at all clear that he did.

Second, and I think this is very simple and, in my view, exculpatory. Lay was once worth $400 million with the vast bulk of it in Enron stock. Why didn't he diversify to any real extent especially after he retired? The most plausible explanation was that he believed in the company and the stock.

I do think it's fair to expect a CEO to be strongly familiar with key aspects of his firm even one as complex and far-flung as Enron. It's also fair to expect the CEO to know if his CFO is a crook. If anything a charge of negligence (whether its gross negligence I'll leave to the lawyers) can easily be leveled against Lay. But negligence isn't a felony and should be resolved civilly.

Quite a few are tastelessly grumbling about how Lay 'escaped' justice. On the contrary if he was guilty, he's paid the ultimate price. I wager that the destruction of his reputation hurt him more than the prospect of a lengthy prison term.

And if he was innocent the prosecution has not only assassinated the man's character but the man as well.