Ignorant & Poor?

By Daniel Eisenberg

When Ken Lay shows up this week to testify before Congress, the disgraced former chairman of Enron should know how to handle a hostile crowd. Even his current employees, after all, are calling for his head. Just a few weeks ago, Enron employees tell TIME, the Houston-based energy-trading company brought in an outside consulting firm to conduct a series of focus groups with some of the remaining workers on how to reinvigorate the sagging firm. One of the first steps, six out of eight people indicated in one session, should be to get rid of Lay.

Before the company officially went bankrupt, Lay, who had earned admiration for his unpolished, affable manner, had lost his loyal fan base. In late October--a day after Enron acknowledged that the SEC had opened an investigation of its accounting practices--Lay tried his best to raise the spirits of his downtrodden workforce. At a company gathering caught on videotape, the son of a Missouri minister promised that there wouldn't be any layoffs and that Enron would rise again. For once, though, the rank and file weren't drinking Ken's Kool-Aid. As one disgruntled worker put it, in a statement that Lay chose to read aloud: "I would like to know if you are on crack. If so, that would explain a lot."

Not enough, surely, to satisfy members of Congress. An army of legislators, lawyers and federal agents is bearing down on Lay with the threat of both civil and criminal charges. They all want to know why he seemed to be touting Enron stock and simultaneously selling his own shares--while knowing that the firm he had turned from a staid pipeline operator into an innovative energy-trading giant was imploding. Investigators for plaintiff lawyers tell TIME they are looking into allegations that investment bankers helped top executives like Lay and former CEO Jeffrey Skilling (who is also supposed to pay a visit to Capitol Hill this week) put so-called collars on their stock options so they would not lose money, no matter how low the stock sank.

Lay's dubious defense strategy was foreshadowed by his wife Linda in an ill-conceived appearance last week on NBC's Today show. She claimed that her husband was hoodwinked by nefarious underlings and that the proof of his innocence is that he and his family are now near bankruptcy. "If those people had come back to him and told him there was anything wrong, he would have stopped it and fixed it," Linda Lay declared. "There's nothing left. Everything we had mostly was in Enron stock."

When he appears before the Senate Commerce Committee, Lay is expected to argue, as his wife did, that he relied on the counsel of legal and financial experts, who told him there was nothing illicit or unethical about hiding billions of dollars of Enron's debts in off-balance sheet partnerships that ended up inflating the company's reported earnings. To prove his point--and show how much he believed in the company until the bitter end--the man who has collected some $200 million in compensation over the past three years will try to explain how he is now flat broke. An internal Enron probe released Saturday night blamed the company's demise on a wide range of executives and auditors but went easy on Lay.

But the lawmakers and staff members preparing questions for Lay wonder how he is going to explain away all the evidence to the contrary. Lay's claim of ignorance is "as implausible as imagining that Richard Nixon did not know what was being done by his staff at Watergate," says David Beim, a professor of economics and finance at Columbia University Business School.

Lay knew all along about the possible ethical conflicts posed by the involvement of Enron chief financial officer Andrew Fastow in off-the-books partnerships with shell corporations, according to a confidential study conducted at Lay's request by the Houston law firm Vinson & Elkins. On Nov. 5, 1997, as first reported by the Wall Street Journal, the executive committee of Enron's board voted to provide hundreds of millions of dollars in loan guarantees to a partnership known as Chewco. Then, in June and November of 1999, the board waived the company's ethics code to allow Fastow to serve as general partner of two additional partnerships, both supposedly independent of Enron.

It's hard to imagine how the mounting evidence of trouble could have escaped Lay's attention by last summer. Vice chairman Clifford Baxter--who committed suicide late last month--resigned in May after voicing concerns about accounting practices to Lay's top deputy, Jeffrey Skilling. The whistle-blowing memo by Enron vice president Sherron Watkins was sent to Lay on Aug. 15. Another warning memo, from employee Margaret Ceconi, made its way to Lay soon after. Nonetheless, Lay in September was telling employees to buy more stock and bet on Enron's future.

It was an open secret at Enron that the company was all but a "house of cards that will fall," as a Texas energy executive attending an industry conference in Vail, Colo., a year ago groused to a senior Enron v.p. His dinner companion's startling reply: "You're more right than you know." Even people who believe that Lay was not involved in the dubious dealings of Skilling, Fastow and chief accounting officer Richard Causey concede that Lay had laid the foundation by encouraging Enron's ruthless, winner-take-all culture. A band of cocky, inexperienced young M.B.A.s was left alone to do whatever it took to structure a deal, regardless of the consequences. "Pushing the limits was what you were told to do, and you were given the resources to do it," says an Enron manager.

The Lays' claim that they are nearly as bankrupt as Enron is not winning them much trust or sympathy in Houston--or in Washington. Ken Lay now holds close to 3 million essentially worthless Enron shares, but he got most of his money by selling Enron stock early, reaping more than $100 million over the past three years. During that same period, he received salary and cash bonuses of more than $17 million. Last year alone he unloaded $25.7 million in Enron stock between January and mid-July as the share price fell from $80 to less than $50. And at the end of 2001, according to public records, he owned stock that today is worth more than $11 million in companies for which he was either an officer or director, including Compaq, Eli Lilly and a bevy of start-ups.

The Lays own at least 20 properties in Colorado and Texas. These include their principal home--a five-bedroom high-rise condo in Houston that's worth at least $8 million--as well as rental properties from Houston to Galveston that are worth an additional $4.5 million. The Lays are selling all their Aspen, Colo., properties, including a 4,537-sq.-ft. log cabin and a four-bedroom riverfront house, together worth about $20 million.

What's unclear is how much debt the Lays have. Lay and his lawyers declined to discuss that issue or answer other questions put to them by TIME. Last year Lay sold millions of dollars of Enron stock back to the company to repay some loans. It was not illegal, but it's a maneuver that makes it harder to track insider selling; instead of disposing of stock on the open market and having to declare it publicly soon afterward, Lay did not have to report it until 45 days after the end of the fiscal year.

It was just that penchant for secrecy that got Enron in trouble in the first place. But as FBI agents and 10 congressional committees and subcommittees probe the scandal, it's only a matter of time before someone breaks the code. And when they do, Ken Lay may well have to deal with an even less sympathetic audience.

--Reported by Bernard Baumohl and Eric Roston/New York and Cathy Booth Thomas and Jyoti Thottam/Houston

With reporting by Bernard Baumohl and Eric Roston/New York and Cathy Booth Thomas and Jyoti Thottam/Houston