Ever since Enron Corp. collapsed more than two years ago, the Justice Dept. has been hot on the trail of former CEO Jeffrey K. Skilling. A chorus of critics have charged prosecutors with foot-dragging. But they're missing the point. The real reason it has taken so long to indict Skilling is that putting him behind bars is going to be a surprisingly tough thing to do.
The visionary manager, who graduated in the top 5% of his class at Harvard Business School and made partner at McKinsey & Co. in a nearly record-breaking five years, did an amazing job keeping his fingerprints off the Enron disaster. He bailed out of the energy giant just in time, two months before the first disclosure of accounting problems and four months before it declared bankruptcy. He initiated an automatic stock-sale program, which will help insulate him from any potential insider-trading charges, 10 months before he resigned. He rarely used e-mail or gave orders in writing. Alone among the current crop of vilified corporate chieftains, he seems to have managed to walk away from the ruins without leaving a trace.
CIRCUMSTANTIAL EVIDENCE. As a result, Skilling will be the hardest target yet for the hand-picked prosecutors on the Enron Task Force, which as of press time was expected to indict the former CEO on Feb. 19. Millions of pages of internal corporate documents have been made public, and so far not one smoking gun has emerged directly linking Skilling to wrongdoing at the company. That means Justice's case may have to be built entirely on circumstantial evidence. "People talk as if Jeff Skilling rolled up his sleeves and said: 'This is how we are going to do these transactions,"' says his lawyer, Bruce Hiler, of the Washington office of O'Melveny & Myers LLP. "That just isn't true."
The Skilling case looms large because the public, fairly or not, sees Enron's top executives as the poster boys of corporate crime -- and won't be satisfied with the clean-up until they're dealt with. While the government has nabbed several key execs, including former Chief Financial Officer Andrew S. Fastow and ex-CEO David W. Delainey of Enron Energy Services (EES), none of these scalps will matter to burned investors if Skilling and ex-Chairman Kenneth L. Lay remain untouched. "Skilling embodies the arrogance that led to the whole raft of corporate scandals more than any other figure," says George Washington University Law School Professor Lawrence E. Mitchell. "It would be a disaster to indict him, go to trial, and lose the case."
Clearly, it will be challenging to send Skilling to jail, but prosecutors have more than a few cards to play. The Justice Dept. has won cooperation from several key executives who worked closely with him. When a case is filed, they will be able to testify about any verbal instructions they may have received from the former CEO -- who often left messages on voice mail, according to one high-ranking former manager.
And Skilling's notoriety, in the end, could seal his fate. The 50-year-old Houstonian has become a symbol of corporate irresponsibility. Politicians and pundits have already pronounced him guilty in the court of public opinion. "Truthfully, do you think Jeff Skilling can get a fair trial anywhere in America?" asks criminal defense lawyer Robert Mintz, a former Assistant U.S. Attorney in New Jersey who prosecuted white-collar cases. "It is difficult to find a jury that can approach this case with a completely open mind."
That, in fact, gets at a perplexing aspect of this case. When viewing Enron from a distance, most people assume Skilling must be guilty. But the assumption becomes murkier when examined up close. Consider the issue of insider trading. It is, in the public mind, the chief sin of Enron's leaders. Well aware of the company's problems, they dumped more than $1 billion worth of stock before the final collapse. And Skilling, who sold 1.12 million shares for $67 million between 1999 and his resignation in August, 2001, joined right in.
INSULATED. But a closer look reveals that Skilling hardly fits the profile of the typical "pump-and-dump" inside trader. Unlike, say, the friends and family allegedly tipped off by ImClone Systems Inc. ex-CEO Samuel D. Waksal, Skilling held on to a large percentage of his stock. From July, 1999, until his departure from the company more than two years later, he always owned more than 1 million shares. Throughout that period, he exercised options and sold shares at about the same rate he got new ones.
And Skilling didn't trade like a man who was racing to get his money out of the market before bad news hit. Many of his biggest stock sales took place in 1999 -- well before the deals that led to the company's demise. In November, 2000, more than a year before the company went bankrupt, Skilling executed an automatic stock-sale plan, instructing his broker to sell 10,000 shares a week. Under Securities & Exchange Commission rules, this type of program serves as a defense against insider-trading charges for sales executed after it began. Skilling halted the plan and made his last sale as an employee on June 13, 2001 -- nine weeks before he left the company. "If he thought the whole company was a house of cards at this point, would he have stopped selling?" asks Hiler.
This doesn't mean it would be impossible to bring insider-trading charges against Skilling -- just that experts interviewed by BusinessWeek could not readily identify any other cases where somebody had been convicted of insider trading based on a similar pattern. "Prosecutors would rather see a whole lot of selling in a very short time following some very bad [undisclosed] news," says David N. Yellen, dean of Hofstra University School of Law and an expert on white-collar crime.
Because of the weaknesses in a potential insider-trading case, most authorities think the Enron Task Force is likely to focus on securities fraud. Unlike insider trading, which is based on what people know, securities fraud is based on what they say -- the crime of lying to investors.
It isn't hard to predict what a securities-fraud case against Skilling would look like. In paperwork recently filed against Delainey and Richard A. Causey, Enron's former chief accounting officer, the government has developed something of an Enron template, portraying the company as a vast criminal conspiracy. Senior managers "engaged in a wide-ranging scheme, through a variety of devices, to deceive the investing public about the true performance [of] Enron's businesses," reads one sentence that appears in both the Delainey and Causey indictments. The scheme's goal was "to produce reported earnings that grew by approximately 15% to 20% every year."
To substantiate this claim, Justice goes on to detail a variety of specific frauds. One of them is the purported sale of underperforming assets to partnerships that were funded by Enron itself -- the deals managed by former CFO Fastow. Another is the concealment of losses inside the EES division. A third is the misrepresentation of the prospects for Enron's broadband division.
Together, these and other episodes will be woven into a broader story about a failing company that presented itself to the world as an enormous success. For an example of some of the roadblocks government prosecutors might encounter, look at an event the Justice Dept. team would be quite likely to raise at trial: the so-called Raptor restructuring. In the spring of 2000, Fastow's lieutenants created four special-purpose entities, known as the Raptors, to buy underperforming assets from the company. The goal, Justice says, was to dress up the company's earnings. Incredibly, the Raptors were funded with money from Enron and its spin-offs -- meaning the company was basically buying assets from itself.
This circular transaction worked only as long as Enron's share price kept rising. When it started to fall later on in autumn of 2000, the company faced a crisis: Some of the Raptors might default in their obligations to Enron, forcing managers to declare a huge loss. So the energy giant's many financial engineers used creative accounting and allowed the healthy Raptors to support the sick ones.
A STRONGER TRAIL. So far, there is quite a bit of evidence that Skilling played a direct role in the Raptor restructuring. Lawyers hired by the board's special investigative committee reported that Causey told them he "was certain that he told Skilling about the shortfall in the Raptor vehicles [and] when they found what Causey thought was a solution, Causey sought and obtained Skilling's approval." A pair of Causey deputies, Rodney Faldyn and Ryan Siurek, testified that they heard Causey say the same thing to them.
Even if a jury were to believe these witnesses -- no sure bet -- Skilling would still have formidable defenses. According to Hiler, the board of directors approved the Raptor restructuring. An April, 2000, Enron memo indicates that four accountants from Arthur Andersen participated in the transactions, as well as three attorneys from Vinson & Elkins LLP. A separate Andersen memo dated Dec. 28, 2000, notes that two high-ranking partners concluded that "the client's position" on the Raptor restructuring "was acceptable." The involvement of these professionals is important, because their assurances can be used as proof that Skilling did not know the deal was illegal -- a powerful defense against criminal charges.
The bottom line: Skilling will be able to throw some mean counterpunches. For every instance in which an employee alerted him to operational fiascoes, Skilling's lawyers will present e-mails in which people are talking about concealing problems from him. For every meeting where he is briefed about underperforming units, "there's a meeting where somebody tells him things are going great," says Hiler.
In the end, the government probably wouldn't be able to win such a battle by knockout. Both sides will land blows, and the jury will be forced to decide who scored the most. Coming into the case, Skilling will have almost no credibility. The issue is how much he will be able to tarnish the government's already difficult case. By Mike France in New York, with Wendy Zellner in Dallas, and Mike McNamee in Washington