Following days of damaging revelations about his actions as the company he created collapsed into bankruptcy, Kenneth Lay resigned Wednesday as chairman of the board and chief executive officer of Enron Corp.
Lay, a farm boy from tiny Rush Hill, Mo., had been the CEO of the Houston energy giant for all but six months of its life, since he fashioned it in 1985 from two old natural gas pipeline companies. From there, he led it to its zenith as one of America’s largest companies–a bold pioneer in creating energy and other commodities markets that had never existed.
But the financial structure on which Enron was built toppled last fall after Lay acknowledged that questionable accounting methods had vastly overstated the company’s health, though Lay himself had made more than $200 million in the last three years.
Investors fled. The stock went into freefall. And calls from the politically connected Lay, whom President Bush called “Kenny Boy,” to top administration officials couldn’t save the company.
Late Wednesday, Lay said the burgeoning number of investigations set off by Enron’s demise proved too much for him to handle as he prepares to face Capitol Hill inquisitors on Feb. 4.
“I want to see Enron survive,” Lay said in a statement. “Unfortunately, with the multiple inquiries and investigations that currently require much of my time, it is becoming increasingly difficult to concentrate fully on what is most important to Enron’s stakeholders.”
Lay will retire as an Enron employee but remain on the company’s board of directors. The company said the board and its creditors committee would seek “a restructuring specialist” to serve as interim CEO.
In a financial scandal that seems to generate a new chapter every day, Wednesday’s announcement was a stunning reminder of how far Lay has fallen since mid-October. On Oct. 17, Enron cut its shareholder equity by $1.2 billion due in large measure to partnerships set up by former company chief financial officer Andrew Fastow that kept debts off the company’s books. A federal investigation ensued; by early December, the company had filed for bankruptcy protection, followed by revelations of destruction of documents at both Enron and its embattled former auditor, Chicago-based Andersen.
`Country gentleman’
Such an end to his career was once unthinkable for Lay, who was once so popular among his employees that they lined up to take photos with him at the annual holiday party. They considered him a “country gentleman” of a boss, the sort of guy who held the elevator door for people many links down the corporate food chain.
Even after Enron’s bankruptcy filing, many defended Lay, saying his only mistake was placing too much trust in the executives below him. But a series of disclosures over the last week undercut the perception–partly encouraged by Lay himself–that he was disengaged from the questionable accounting and other practices that led to Enron’s failure.
His remaining support seemed on the verge of an Enron-style implosion even before Wednesday’s announcement. For instance, transcripts of a Sept. 26 online chat with employees now show Lay was urging them to promote the stock to family and friends, even though an executive had warned him of serious accounting problems more than a month earlier.
Such revelations bred in former Enron employees a deep sense of sadness and betrayal.
“I remember thinking it was an honor to have my picture taken with him . . . because we all honored that man,” said Kim Lerro, 39, a laid-off Enron executive assistant. “I still have that stupid picture.”
Questionable e-mails
A review of Lay’s e-mail exchanges with employees provides new details on the substance of what he told the workers–and reveals the extraordinary level of intimacy and personal contact that existed at Enron between the highest-ranking officer at the company and his rank-and-file workers.
Lay’s comments during the exchanges also have fueled questions about how much he will be able to say when he appears before congressional committees next month. Some defense experts say he faces the risk of being charged with perjury unless he invokes his 5th Amendment right against self-incrimination.
“He may believe in his heart that he’s innocent. He may want to come out and give his side of the story,” said David Schertler, a former federal prosecutor in Washington and now a white-collar criminal defense attorney. “But testifying before a congressional committee is not the time and not the place to do it.”
The e-mail exchanges reveal a wide variety of Enron employees taking advantage of their top executive’s offer to “Lay it on the line” during in-house chat sessions.
Some asked questions that cut to the heart of Enron’s problems, while others yearned for hopeful news. One worker even expressed appreciation for Lay’s ethical leadership.
“Thanks for emphasizing integrity,” the employee wrote in an exchange with Lay about two months before the company collapsed. “It makes it much easier for some of us to stand up to questionable practices we see going on around us.”
On the topic of Enron’s stock, Lay had some specific advice for his doting employees.
“Talk up the stock and talk positively about Enron to your family and friends,” Lay wrote earlier in the session. “The company is fundamentally sound. The balance sheet is strong. … [T]his seems to be an incredibly cheap stock.” Enron shares closed that day at $25.15. They were fetching 67 cents apiece before the New York Stock Exchange delisted them last week.
Given the developments, many former Lay loyalists increasingly suspect that Lay was dumping stock while talking it up to his trusting workers.
“If the facts come out that he did do what I’m hearing, that’s crummy. It puts the tarnish on the man’s image,” said Fahd Lodi, 26, who assisted Lay and other top Enron executives with their computers before being laid off last month.
“I think the rest of the country doesn’t like him anyway. He’s not going to be in some hall of fame for energy anymore,” Lodi added. “But it tarnishes his reputation among his employees, who were like his only supporters left in this.”
Attorneys for former Enron employees are raising the same complaints. Eli Gottesdiener, who disclosed the transcripts of the September online chat, said his clients have a simple question: “Was it right for him to basically lead his employees over the cliff?”
“People were hanging on his every word for guidance,” Gottesdiener said of the Sept. 26 session. “Was it right for him to take advantage of their desire to believe their chief, and to basically put his arm around their shoulders and say, `Hey, I’ve got a hot inside tip that this stock is incredibly cheap.'”
Lay’s attorney, Earl J. Silbert, acknowledged in an interview that his client had disposed of shares just days after being warned of Enron’s potential accounting disaster by an Enron vice president, Sherron Watkins, in an anonymous Aug. 15 memo.
But Silbert said Lay did so to pay back millions of dollars in Enron loans, not because he thought the company would tank. “There was no connection between the loan repayment in August and the information Mr. Lay received from Ms. Watkins,” said Silbert, a former Watergate prosecutor, adding that Lay also actually purchased about 68,000 Enron shares in late August, “which he continues to own to this day.”
Asked to give Lay’s explanation for his bullish predictions at a time when serious questions had been raised internally about Enron’s financial health, Lay’s attorney said he could not comment yet.
Employees dismayed
But many Enron employees have drawn their own conclusions.
“He already made his money. He should have told the employees: `Something’s wrong in the accounting. It’s my advice that until we further investigate this, move all your money into a safer mutual fund or something,'” Lerro said. “And he didn’t do any of that.”
Last fall, one Enron employee in the online chat had pointedly noted to Lay how Andersen had been fined for its approval of the same sort of partnerships.
“You are a man of integrity,” the employee wrote, “so my `question’ is a chance for you to so reassure us we have no such problems here at Enron.”
Lay answered: “I can assure you that I or the board of directors would not approve the use of [such partnerships]… unless we were convinced both by all of our internal officers as well as our external auditor and counsel, that they were legal and totally appropriate.”
The timing of Lay’s assurances to employees, many of them heavily invested in Enron stock for their retirement plans, has captured the attention of their attorneys.
“How could he in good conscience say that, knowing that Watkins had warned him that the company was essentially a monumental accounting hoax?” Gottesdiener asked.
This wasn’t the way it was supposed to go for Lay, the likable executive who engineered the merger between his old company, Houston Natural Gas Corp., and InterNorth, an Omaha pipeline company, to create Enron in 1985.
A native of a tiny Missouri town (population 121), Lay earned a doctorate in economics and served in the Pentagon as a naval officer before working for a federal regulator of the natural gas industry.
The 59-year-old was “almost like a grandfather type,” Lodi said. “He’d talk to people in the elevator: `How’s your day going? Have you seen the stock price?’ You knew he was a very powerful man. But you always felt like you could talk to him–`Hey, Ken, how’s it going?'”
At his first meeting with workers upon returning to the CEO job after Jeffrey Skilling’s departure in August, they gave Lay a standing ovation. Some of those same employees now are busily sending e-mails to congressional investigators seeking help in probing what Lay was telling them about the company and its stock last fall.
