Judgment Day for Enron

By Onnesha Roychoudhuri, AlterNet. Posted January 26, 2006.

"Ultimately, this is a story about people." So begins Bethany McLean and Peter Elkind's account of the remarkable collapse of Enron. While their book and film "The Smartest Guys in the Room" is chock full of incriminating documents, tales of accounting fraud and complex business rules bent, it is primarily the story of a handful of characters whose personalities and unethical actions led to the biggest business scandal of our time. When Enron collapsed, 4,500 jobs were eradicated along with $70 billion in investors' money, while top executives lined their pockets with millions.

Ken Lay and Jeff Skilling, chairman and CEO behind the company, led Enron to become one of the largest companies in the United States. Founded in 1985, the company generated billions of dollars in profits. But in December 2001, Enron was forced to declare bankruptcy, revealing that Enron's profits were artificially inflated. Lay and Skilling, whose company was once trumped as "the company of the future," now face a future in prison.

The government prosecution will seek to show that Lay and Skilling were well aware of, and had in fact encouraged and endorsed Enron's sleazy deals -- most notably manipulating the market and contributing to the California energy crisis. While the widely acclaimed book and film "The Smartest Guys in the Room" provide a prolific amount of evidence implicating Lay and Skilling in misleading the public, this is far from an "open and shut" case. Lay and Skilling have repeatedly pointed to CFO Andrew Fastow as the true culprit behind any corruption. Furthermore, both Lay and Skilling are expected to insist that they were "true believers" in the company, and that they had no idea that the company was collapsing.

The trial will therefore rely on key witnesses such as head of accounting Richard Causey, who recently negotiated a deal with the prosecution, to prove that Lay and Skilling were in the know. The importance of this trial hinges on the fact that Enron, and the many financial institutions implicated in their scandals, were once held as the paragon of innovative business strategy in the United States. The business world will be watching this case closely because it will set the standard for what will and will not be tolerated in corporate America.

Peter Elkind, co-author of "The Smartest Guys in the Room" and senior writer for Fortune spoke with AlterNet about the rise and fall of Enron, as well as what we can expect to see from the coming trial.

Why is this trial something the public should pay attention to?

Peter Elkind:This is the trial of the two top guys at Enron -- Ken Lay, chairman and CEO and Jeff Skilling, CEO. And Enron was a big deal because it was the consummate corporate scandal. It has powerful implications for how business is done in America. It also is a morality tale about people who were corrupted by greedy culture. These were not people who walked into Enron looking to commit fraud. They were people who were seduced by the millions they could make and the corruption of the culture itself. Throughout the past four years there has been a huge federal investigation to get to the bottom of what happened at Enron.

Briefly, what was the Enron scandal about?

This company, viewed as a model for how to do business in America and in the world, suddenly evaporated. What's dramatic about it is the transformation from what it appeared to be to the reality … was so stunning. It was a house of cards. It was an illusion. And now, finally, after three previous trials and a very long period of investigation, the government is trying to hold those top guys accountable for what happened. Ken Lay and Jeff Skilling are poster children for corporate misbehavior.

What kind of transactions was Enron involved in?

Enron was a number of businesses. It was most famously an energy trader and played a part in the California energy crisis in terms of multiplying prices for Californians. This caused blackouts in the California energy crisis that subsequently led to Arnold Schwarzenegger's ascendance to governor. Enron manipulated the semi-deregulated California energy, moving energy out of the state to create artificial shortages so that prices would spike, and then selling the power back into the state at higher prices.

Why were they able to this?

It was made possible because it was a newly deregulated market, but deregulated in a very complex way. There were lots of rules that Enron, which is a master of manipulating rules, could exploit. Enron had very smart energy traders, and if you gave them an opening, they would drive right through it. They were completely mercenary, and they did not stop to think that in creating a crisis in the state, and giving deregulation a horrible name, they would undo their long-term goal, which was to allow deregulation throughout the country. Because it was such a disaster in California, it brought the state-by-state process of deregulation to a grinding halt. These guys didn't stop to think if it was appropriate to destroy and ravage this economy and create a situation in which people couldn't cool their homes and power their businesses. All they thought was, "We can exploit these rules; there's clever ways to do it, so let's do it." But in contrast to their broadband business, energy trading was in fact a real business, and Enron actually made a lot of money.

Onnesha Roychoudhuri is an editorial fellow at AlterNet.

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