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Blog : Lay and Skilling Guilty: Boo Hoo
by John Whitefoot on June 2nd, 2006
In 2005 when design diva Martha Stewart was convicted of “obstructing justice and lying” I don’t recall a lot of people getting excited or claiming her conviction was another jewel in the crown of justice.
In fact, I think the only people who were overtly pleased (or cared) were a few ego boosting Wall Street fat cats, and fashion victims who like to wear white after Labor Day.
The same cannot be said for the conviction of former Enron executives Ken Lay and Jefferey Skilling. In fact, I have yet to read of a tear being shed. Most former employees’ reactions ranged from elation to satisfaction, to indifference.
In case you can’t recall the specifics of the company’s implosion, Enron was once one of the hottest companies on Wall Street. That is, until Lay and Skilling orchestrated a conspiracy to artificially inflate profits, hide millions in losses, and misrepresent the true nature of the company’s finances.
In the fall of 2001, CEO Ken Lay encouraged his worker bees to buy more Enron stock while selling off his own. Just to rub some salt into the wound, before Enron announced that its financial statements for previous years were bogus, the company placed a lockdown on its 401(k) retirement plans, thus preventing employees from accessing the accounts.
By the time the lockdown was lifted, the shares were virtually worthless.
In December 2001, Enron collapsed, and the company’s employees were given only 30 minutes to box-up their belongings and leave the building in downtown Houston. All told, Enron’s demise vaporized $2 billion in company pension plans and retirement savings, along with 5,600 jobs and $60 billion in company market value.
Fast forward five years and, surprise, surprise...Lay is convicted on all six counts – as well as four counts of bank fraud and making false statements to banks in a separate, non-jury trial related to his personal banking. Lay now faces a maximum penalty of 165 years. Skilling, convicted on 19 of 28 counts, faces 185 years in federal prison.
Naturally Lay and Skilling are shocked at the verdicts and will “vigorously” defend themselves.
Is there a shred of silver lining for the former employees? Not really.
While the convictions of Lay and Skilling will help former company employees, shareholders and other creditors reach settlements to recoup their losses, legal experts said the actual payouts will probably amount to pennies on the dollar.
Lawyers representing several groups of creditors have already reached agreements with the company. Now that the Houston jury has found the two executives guilty of conspiracy and fraud, the remaining civil claims, experts say, will probably be more quickly resolved.
Last week, a federal judge gave final approval to a $6.6 billion civil settlement by Canadian Imperial Bank of Commerce, JPMorgan Chase & Co. and Citigroup Inc., accused by Enron shareholders of aiding the company’s financial transgressions.
Earlier agreements with other banks and financial firms, including Lehman Bros. Holdings Inc., and Bank of America Corp., bring the total shareholder settlement pool to $7.2 billion. Still pending are shareholder claims against nine other financial institutions.
But those payouts could be substantially lower than shareholders’ losses, which one law expert estimated at $40 billion.
Another group looking for financial justice includes Enron’s former employees who saw their $2 billion retirement savings plan evaporate. Most of the company’s employees had everything in company stock. Many had close to $1 million in retirement...and lost it all.
Skilling and Lay are also named in other pending civil claims, but the prospect is bleak that employees or any other creditors will actually collect money from them. With their once-massive fortunes essentially gone, the two now owe millions of dollars in fines for their crimes on top of hefty tax bills.
If there’s anything left, Lynn Stout, a UCLA law professor said, the law accords lawyers a high priority among creditors. And each man still owes millions in legal bills. “They’re always the first at the corpse,” she said of the lawyers.
In the meantime, I think Martha Stewart should give Skilling and Lay a dingle on the phone and give them some much needed advice on surviving incarceration. She could also make them feel more at home in the cells by custom designing their prison blues.