ENRON CASE: Court the Next Stop in a Four-Year Saga

By Patti Bond, The Atlanta Journal-Constitution

Jan. 29–Part Greek tragedy, part soap opera, Enron’s fall from grace is about to unfold once more, this time to the most important audience of all.

Jury selection begins tomorrow in the Houston trial of Enron founder Kenneth Lay and former Chief Executive Jeffrey Skilling, two men who have become symbols of Corporate America gone wrong.

The streak of white-collar scandals in recent years comes full circle with this Texas-sized tale. Before WorldCom, Tyco, Adelphia Communications and HealthSouth, there was Enron, the first to jolt us with its spectacular collapse in late 2001.

It has taken four years for prosecutors to get Lay and Skilling to trial, but the waiting hasn’t depleted the magnitude.

Investors had lost about $68 billion by the time Enron went bankrupt after allegations of massive fraud. In addition to the shock on Wall Street, the bankruptcy cost more than 5,000 jobs and $800 million in employee pensions.

Four years after filing for bankruptcy, Enron has only recently begun to make payments to its creditors. Estimates of the total allowable claims range from $51 billion to $63 billion. Several creditors from Georgia are on the list, including Georgia-Pacific, which bought energy from Enron, and Mirant, a former energy trader itself that just emerged from bankruptcy protection.

As Lay and Skilling prepare to take their turn in the courtroom, it looks like they’ve learned a few things from last year’s executive trial spree. Unlike WorldCom’s Bernie Ebbers, Tyco’s Dennis Kozlowski and HealthSouth’s Richard Scrushy — all of whom used the “idiot defense” with mixed results — Lay and Skilling recently moved away from the know-nothing plan to a nothing-was-wrong plan. Enron’s highly questionable business practices? All perfectly legitimate, they’ll say. Illegal activities? Chalk those up to former Enroners who’ve pleaded guilty.

“The risk presented by this new strategy is simply breathtaking,” said Atlanta attorney Ross Albert, a former federal prosecutor who’s now a partner at Morris Manning & Martin. “By now it has been amply demonstrated that the corporate culture at Enron was dominated by gamblers and extreme risk-takers. The [courtroom] strategy seems just to be a further manifestation of that.”

Likewise, this trial is the manifestation of a lot of things for a lot of people. For many former Enron employees and investors, it represents possible vindication for billions of dollars in losses. For former employees of now defunct accounting firm Arthur Andersen in Atlanta and elsewhere, it’s a painful reminder that they were dragged down in the Enron aftermath.

The trial is being called the most important in business history, for both its symbolism and its scope.

Before Enron’s bankruptcy, the highflying energy trader ranked seventh on the Fortune 500 list, posting billions in revenue to the delight of Wall Street analysts and stockholders alike.

Then the federal investigations started, uncovering what has been described as a supersized Ponzi scheme. Prosecutors wish it were only that simple, though.

Enron’s accounting practices have been widely acknowledged as a bewildering patchwork of partnerships and other financial structures that hid billions of dollars in debt in order to inflate the company’s bottom line.

Sixteen former Enron executives, including the chief financial officer, have pleaded guilty to crimes ranging from securities fraud to insider trading.

In the bigger picture, Enron was yet another lesson in the too-good-to-be-true category, some say.

“Enron was a wake-up call for all Americans,” said Paul Lapides, a corporate governance expert at Kennesaw State University.

Among those who heard the alarm loudly was Roswell resident Thomas Arlotto, a former Enron employee who’ll be watching the Houston proceedings with more than just a passing interest. Unlike longtime “Enroners,” as they call themselves, Arlotto escaped the flameout relatively scrape-free. He had been recruited from Atlanta-based Southern Co. just four months before Enron filed for bankruptcy, so he hadn’t racked up the hundreds of thousands — and in some cases millions — of dollars that others had in retirement plans funded with Enron stock.

It was long enough, though, to get a sense that Enron had a very different way of doing things, he said.

Arlotto started his Enron job the week that Skilling suddenly quit as CEO — a resignation now seen as a major turning point in the company’s subsequent slide. Skilling, regarded as Enron’s brilliant visionary, fell into an erratic pattern of depression and tantrums during his last days with the company.

“I asked my boss if this was bad news, and he said it was great news because it was a sign that things were getting on the right track,” Arlotto recalled.

Yet the red flags kept coming.

“The projects didn’t make sense,” said Arlotto, a Georgia Tech-trained engineer who was brought in as the general manager of Enron’s regional construction office in Norcross, where he oversaw energy services projects. “At Southern Co., the plans and the paperwork for [similar] projects would be as thick as several phone books. At Enron, there was nothing to it. There just wasn’t the due diligence I was used to.”

There were other disturbing signs: sudden calls from his boss at 10 p.m., telling Arlotto to get everyone’s expense reports turned in by midnight; urgent orders from Houston for accounting records.

Four years later, he considers his time at Enron more as an interesting cocktail party topic than a lasting black mark on his resume.

“Personally, I am long over it. The big impact to me was 10 months lost in getting the next job,” said Arlotto, who spent three years at Siemens as director of its electric power market before fleeing big-company life last year to devote full attention to his own management consulting firm, Wilcox Arlotto & Associates. “For me, Enron was a step on the path to giving up on the corporate world.”

Still, he’s tuning into the trial.

“It’s like watching a car wreck. I know it’s a bad thing, but I can’t take my eyes off it.”

It certainly will be a drama.

Skilling and Lay have already spent millions to fight charges that they lied about Enron’s shaky finances to keep the stock price up, all the while raking in bonuses and stock options.

Prosecutors plan to depict Enron as a freewheeling company where breaking the law was part of the culture.

The defense will present just the opposite.

In a recent speech to Houston business and academic leaders, Lay said the government was zeroing in on financial activities that occur every day in public companies across America.

“In virtually every other situation, if there were concerns that any of these business activities were not being done appropriately, these concerns would be addressed by a regulatory agency … or as a civil matter in the courts. However, in this case, the [government] is attempting to criminalize these very same business activities,” Lay said.

The trial is expected to last about four months. Like other white-collar crime trials, it’s going to be an endurance test for jurors. Prosecutors struggled in the Birmingham trial of Scrushy, the HealthSouth CEO, to keep jurors’ attention with financial statement presentations, while defense lawyers talked about the lack of fingerprints. In that case, HealthSouth had a simple business to understand: physical therapy.

With Enron’s convoluted business structure, it won’t be easy.

“If the government cannot explain what happened at Enron and why it was wrong in terms a jury of 12 lay persons can understand, then the government will likely fail to obtain convictions,” said Albert, the former federal prosecutor. “All the defense has to do is put on a sincere expert, or several sincere experts, that the jury likes. The government always has the burden of proof, and confusion and lack of clarity will only aid the defense.”

All eyes on both sides have turned to the jury pool.

Defense lawyers have tried for more than a year to persuade U.S. District Judge Sim Lake to move the trial from Houston, Enron’s headquarters, to Atlanta or another more neutral site.

Lawyers tried again as recently as last week, saying that four years of “poisonous publicity” in Houston has ruined the chances for an impartial jury regarding Enron, once one of the city’s largest employers. By the end of Friday, an appeals court had not moved on the defense attorneys’ last-ditch request to change venue.

The lawyers have cited 280 questionnaires completed by the jury pool, noting that nearly half said they were “angry about what happened at Enron.”

Some people called Skilling “the devil” and “a high-class crook.” As for ex-chairman Lay? “A lowdown scumbag.”

One hundred made the cut for tomorrow’s kickoff for the final selection.

Despite a deluge of exhibits and witnesses, legal experts and other observers expect this case to go down to the wire.

“I’d like to see them in jail, but I don’t think that’s going to happen,” said Arlotto, the former Enron manager, noting it’s too bad that the accounting scandal overshadowed what was good at Enron.

“Enron may have had some crooked, amoral people at the very top of the organization, but its impact on the electric utility business was profound and, in many ways, positive.”

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