Commentary: Ken Lay's Audacious

Ignorance
Even if one of America's worst ex-CEOs beats the rap -- and he just might --
history's verdict will be harsh

The only remaining question of great consequence about Enron is whether its prime
movers, Kenneth L. Lay and Jeffrey K. Skilling, will go to prison for their part in its
transformation from icon of New Age corporate cool to synonym for Bubble Era greed
and deceit. As the pair go on trial on Jan. 30 in Houston, it will be important to keep in
mind that the jury's decision will serve only to fix criminal culpability. Even if Lay and
Skilling are acquitted, the trial holds zero hope of redemption for Enron's Big Two.
History's verdict is already in, and it is harsh: As two of the most inept executives in
business history, Lay and Skilling are heavily to blame for the demise of a company that
once employed 31,000 people and had a stock market value of $35 billion but which
survives today in shriveled form under the protection of the bankruptcy code.

Although the brash, combustible Skilling, now 52, makes a more flamboyant villain, the
burden of responsibility falls mainly on the smoothly self-effacing Lay, 63. After all, Lay
was Enron's highest-ranking executive from 1986 until the company filed for bankruptcy
protection from its creditors in late 2001 -- both as CEO (except for a six-month stretch
when Skilling held the job) and as chairman throughout. A prolific Republican Party
contributor nicknamed "Kenny Boy" by President George W. Bush, Lay not only was The
Man at Enron, once America's seventh-largest company, but also was Houston's most
influential power broker for a decade.

Enron's fatal flaws emerged from two contradictory traits that defined Lay as a corporate
leader. A PhD economist by training, he was a free-market devotee hell-bent on
liberating the natural gas business from the dead hand of regulatory constraint. But for
all the passion of his intellectual convictions, Lay was a weak, even spineless manager.
He soon lost interest in the mundane realities of Enron's operations as he concentrated
on manipulating the political system, and he made no real effort to control Skilling and
his kamikaze minions as they gamed energy markets and U.S. accounting laws. Lay
signed off on so many crazily convoluted transactions designed to mask high-risk
investments gone bad that by the late 1990s most of the "cash flow" that Enron was
reporting came from the company's dealings with itself.

POWERFUL ROLODEX
Lay's failings now seem to be working to his advantage legally. Since resigning from
Enron, he has repeatedly insisted that he was unaware of any wrongdoing committed on
his watch. Prosecutors have tacitly conceded the effectiveness of Lay's use of what is
known in legal circles as the "idiot" or "ostrich" defense. The indictment handed down
against him was narrowly drawn, consisting of seven counts of fraud and conspiracy,
compared with the 35 counts leveled against Skilling and the 98 against former Chief
Financial Officer Andrew Fastow, who is set to testify against Lay and Skilling under a
plea bargain that limits his prison term to 10 years. Confined almost entirely to Lay's
actions during the last few months of 2001, the indictment accuses him of
misrepresenting Enron's condition as it careered toward insolvency.
It is entirely possible that Lay will beat the rap. As last year's acquittal of HealthSouth
Corp. (HLSH ) CEO Richard Scrushy showed, financially complex executive suite
prosecutions are problematic by definition. Fraud and conspiracy are crimes of
commission, not omission -- Lay's managerial forte. Lay "glided on the coattails of others
and a Rolodex of influential relationships," says Jeffrey A. Sonnenfeld, senior associate
dean at the Yale School of Management and founder of the Chief Executive Leadership
Institute. "When he sensed dangerous truths, he saw his job as one of containment,
rather than showing courage or character."

Lay is as audacious a defendant as he once was a corporate promoter. Even as the

disgraced ex-CEO was readying himself for trial, he launched a PR campaign to
overturn history's verdict against him with a defiant speech on Dec. 13. "Contrary to
popular belief today, I firmly believe that Enron was a great company," Lay told some
250 invited VIPs at the Houston Forum. If not for the wrongdoing of "less than a handful"
of rogue employees, he added, Enron would not have gone belly-up and would "still be a
great and growing company today."

CORRUPTION INC.
Lay's powers of self-delusion appear intact, but his fall from power has deprived him of
the ability to count. To date, prosecutors have collected guilty pleas from 16 of his former
colleagues, including Chief Accounting Officer Richard A. Causey as well as CFO
Fastow. Another Enron manager was convicted at trial, along with four outside
investment bankers. Five more Enron executives will go before a jury this fall. Factor in
the 100 or so unindicted co-conspirators mentioned in the various cases, and it is plain
that what differentiated Enron from Tyco (TYC ), WorldCom, and the era's other A-list
corporate miscreants was not just the rococo sophistication of its dealings but also the
sheer number of diligent, highly educated people that it corrupted.

Enron never was a great company, although it did have its transcendent moments. Lay's
only significant accomplishment came at the outset, with the mid-1980s reverse takeover
that birthed Enron from two old-line gas pipeline operators, InterNorth Inc. and Houston
Natural Gas Co. Lay was CEO of the latter company, which was one-third InterNorth's
size, but after much boardroom finagling, he emerged as top dog at Enron, the
successor to InterNorth. With 37,500 miles of pipeline, Enron was the largest U.S.
distributor of natural gas and seemed ideally positioned to profit as the deregulatory
steps Lay had championed finally came to pass.

However, neither Lay nor anyone else at Enron was able to devise a business model to
capitalize on a deregulatory process that proved frustratingly slow, erratic, and politically
compromised. In fact, Lay's managerial shortcomings nearly doomed Enron in the
cradle. One of its few profitable businesses at the outset was a small but hyperactive oil
trading desk that InterNorth had set up in a suburb of New York. Lay and other Houston
execs ignored mounting evidence of irregularities at the oil unit until disaster struck in
1987, according to a government filing in federal court in Houston. The subsidiary's top
two traders pleaded guilty to felonies. Enron was stuck with oil contracts that could have
bankrupted it had not a successful salvage operation reduced pretax losses to $140
million from a potential $1 billion.

It was only after Lay enticed Skilling away from McKinsey & Co. in 1990 that Enron
revved up its growth rate and developed its trademark swagger. Skilling, an inventive
and outlandishly ambitious executive, devised a brilliant scheme for trading gas supply
contracts. But the company spun out of control as it tried to sustain its momentum by
increasingly resorting to accounting legerdemain and trading-desk trickery. Like many of
the dealmakers who worked under them, Lay and Skilling were so smart they were
stupid -- blinded to the colossal risks that Enron routinely took by a fateful mix of hubris
and desperation.