The Enron Effect

By Cathy Booth Thomas/Dallas

Enron's stock price was up 36% last week, despite the news that founder Ken Lay and former CEO Jeff Skilling had been convicted of lying to investors and employees as the company sank into bankruptcy in 2001. Can't find this heady little stock on the N.Y.S.E.? Try looking on the "pink sheets," where Enron is now a penny stock listed as ECSPQ.PK. The once mighty energy firm, which traded at $90 a share six years ago, is selling for 15-c-, up 4-c- on the day after the verdicts. It would be laughable if so many people hadn't lost so much--stockholders lost $60 billion in market value, long-serving employees lost more than $2 billion in pension money, and 5,600 people lost their jobs.

Today not much is left of the pipeline company that Lay, the preacher's son from Missouri, turned into a high-flying purveyor of wind and water, electricity and energy emissions and, ultimately, hot air. Billionaire investor Warren Buffett now owns the Big E's biggest pipeline. Texan T. Boone Pickens has replaced Enron as the nation's biggest energy trader. A holding company that operated Enron's international assets last week sold off 15 pipelines and power plants, from Bolivia to Turkey.

After a four-year investigation, 16 weeks of testimony and less than six days of deliberations, a jury of eight women and four men decided the decline and fall of Enron weren't just bad press and bad luck, as the two had claimed. The rot came from within. For all the Porsches parked in the company garage, it turns out Enron didn't have much in the bank. Forensic auditors have discovered that cash flow in 2000--the money left over after the bills are paid--was a negative $153 million, not the heady $3 billion claimed. The nearly $1 billion profit was bogus. (Forget 2001. Even the auditors couldn't fathom the books that year.)

The jury found that Lay criminally touted the stock even after whistle-blower Sherron Watkins gave him her famous memo in August 2001 warning that Enron's accounting was deeply flawed; Skilling had quit only days before. Both men were found guilty on every charge of fraud and conspiracy in the indictment--six against Lay, 13 against Skilling. While Skilling was acquitted on nine charges of insider trading, he and Lay were also convicted on various other charges involving stock sales and audits. The 64-year-old founder faces up to 165 years of hard time; Skilling, 52, is up against a possible 185 years.

Sam Buell, an early member of the Enron Task Force, remembers how difficult it was to assemble a case back in January 2002--a month after the company's bankruptcy and with the suicide of Enron's vice chairman Cliff Baxter seared into everyone's conscience. "Enron was the 9/11 of the financial markets," says Buell, now a visiting law professor at the University of Texas, "but nobody wanted to be a witness." Slowly, the task force's prosecutors turned the screws on the bad guys. But it was early 2004 before they had enough "serious momentum" to indict Skilling. CFO Andrew Fastow and 15 others turned state's evidence in plea deals. Lay was indicted in July 2004.

Enron joins WorldCom, Adelphia and Tyco among the big companies busted by President Bush's Corporate Fraud Task Force, which has won 1,063 convictions, including guilty verdicts against 36 chief financial officers and 167 corporate CEOs and presidents. "Behavior has clearly changed since the Enron crisis," says Roman Weil, a professor of accounting at the University of Chicago. Part of that is a result of the Sarbanes-Oxley bill, which holds bosses criminally responsible if their company's accounting is faulty. So CEOs are paying closer attention to financial statements--and passing that responsibility down the line. "The criminalization has made executives more alert to what they're signing," says Weil.

Enron's greatest failure may have been asserting that it could offset major risks by buying assets like utilities and then developing and trading complex financial instruments around them. The company's energy-trading imitators paid a dear price: the Williams Co., based in Oklahoma, and Dynegy, based in Texas, saw their stock prices drop from the $45 range to less than $1 before rebounding slightly.

And yet risk taking is very much alive. About 500 hedge funds, up from 180 in less than two years, have more than $100 billion at work in the energy sector, says tracker Peter Fusaro, head of Energy and Environmental Capital Management. "We're in the middle of the vortex," he says, pointing to hot economies in Houston and Calgary, Canada. "The bigger issue is--get to know your risks. Enron was the dumbest energy company in the world."

Attorneys for Skilling and Lay plan to appeal, possibly using the argument that got Enron accountant Arthur Andersen off the hook--the fine points of jury instructions. Like most appeals, that's a long shot. Sentencing for Lay and Skilling is set for September, but with the trial over, 16 other Enron employees who turned state's witness can also be sentenced.

The moral victory is won, says Steve Berman, a Seattle attorney representing some 21,000 employees who lost their pensions. "Now we hope to get them an economic victory." Banks like JPMorgan Chase and Citigroup, who financed Enron's schemes with stock and bond offerings, have already agreed to pay $7.3 billion in restitution to shareholders. They're getting nothing from Skilling and Lay, whom the feds are already dunning for more than $150 million. "There's little chance of recovery from them, but most will be satisfied that Skilling and Lay were convicted," says Robin Harrison of Houston, one of the attorneys representing retired employees. "Right to the end, people were concerned they might get away with it."

With reporting by Greg Fulton/Atlanta, Wendy Grossman/Houston, Kathleen Kingsbury/New York