Ken Lay Surrenders

Finally, the federal prosecutors responsible for building a case against the executives who lorded over Enron's collapse believe that they have enough to indict former Chairman Ken Lay, making him the 31st person to be indicted over the massive financial fraud at the company. Lay turned himself in to the FBI in Houston this morning and entered a not-guilty plea in court today on 11 charges, including insider trading, securities fraud, and other fraud charges. Further, the Securities and Exchange Commission, which has cooperated closely with prosecutors, filed a separate lawsuit against Lay seeking to recover some $90 million in "unlawful proceeds" from stock sales.

For two years, ever since I testified before Congress about the financial scandal and collapse at Enron, I've made this same point: Making cases against individuals in instances of corporate fraud is very, very hard. People wanted the folks at the top at Enron to go down hard. Very understandable, of course -- so did I. Many went so far as to say that Lay's close relationship with President Bush meant that he would gain protection from ever seeing the inside of a courtroom.

Upon hearing word of his arrest, one Democratic National Committee spokesperson rhetorically asked whether Lay's special relationship with President Bush caused "the lengthy delay" in his indictment. That might make for good cheap political points, but it's absolutely moronic, showing disrespect for the difficulty and resources needed to make these kinds of charges stick. Ask any district attorney, any attorney general, what their least favorite kind of cases are, and corporate fraud will be near the top. The cases require massive resources, tons of man-hours, simply aren't very interesting (better to convict 10 drug dealers with the same resources), and are still extraordinarily difficult to prove. People who are lower on the totem pole blame management directives; their managers blame rogue employees.

So as to what caused "the delay" in indicting Ken Lay, I pose the following: Under law, we get one chance to get a conviction. Would you want to be the prosecutor who indicts too early and allows Ken Lay, the face of corporate greed, to be acquitted?

It's just an insulting question. I'm glad they took their time, because this one shot had better count. Cases that happened several years prior to Enron, for example, the massive fraud at CUC -- which became part of Cendant(NYSE: CD) -- have still not resulted in some of the main ne'er-do-wells having to show themselves before a judge. Who's protecting them? Who protects the fund managers who still haven't seen a day in court? Why weren't there more individual prosecutions on Wall Street from the securities frauds that went on during the IPO bubble? Is Eliot Spitzer protecting the folks who put "strong buy" on garbage stocks they hoped little old ladies would buy? Once former Enron Chief Financial Officer Andrew Fastow decided to plea-bargain, I figured it was a matter of time before the case against Lay was finally airtight enough for prosecutors to move to indict.

The fact of the matter is that Ken Lay became a liability for the Bush administration -- it had no benefit in protecting "Kenny Boy." And there is no indication that it did. Exhibit 1: "Not guilty, your Honor."

The SEC and prosecutors claim that Lay took an active role in various accounting shenanigans that presented Enron as a dazzlingly profitable, healthy company -- even as it rotted from the inside. They note that Lay sold millions of dollars worth of shares of company stock at prices inflated due to the fraudulent reports and accounting schemes. At the same time, thousands of Enron employees were limited from selling their own company stock in 2001, even as those who hatched the scheme bailed out as the company collapsed.

The most bizarre thing about Lay is that he voluntarily left the company in 2000, turning the reins over to also-indicted former CEO Jeff Skilling. Only when Skilling suddenly resigned in 2001 did Lay come back to try to rescue the company that he had helped create in 1985. Some have postulated, not implausibly, that such an action suggests that Lay was not nearly as engaged in the running of the company, or the ongoing fraud, as it appears on the outside. Now would be a great time to go back and read the original Powers Report.

Of course, that's for the courts and jury to decide, based on the evidence. I for one am ecstatic that Lay is going to have the opportunity to explain for himself in a court of law. Justice, be ye not blind.

Bill Mann has no stake in any company or court case mentioned in this story. To learn about companies the Motley Fool believes have managements that act in the best interest of shareholders, consider a free trial to The Motley Fool Stock Advisor.

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