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Skilling's Fall From Grace Comes To This

Feb 20, 2004 | USA TODAY

Federal prosecutors have charged 29 defendants in connection with Enron's collapse in 2001, advancing up the corporate ladder during a two-year investigation. Among the former high-ranking Enron executives charged:

Former Enron CEO Jeffrey Skilling unloaded $200 million in Enron stock from 1998 until the energy giant's collapse in 2001, presenting to the public a face of sunny optimism even as the company's fortunes darkened and his personal stock sales accelerated, according to a grand jury indictment unsealed Thursday.

In attempting to transform Enron from a traditional oil-and-gas pipeline company into a "virtual" corporation whose assets consisted of its employees' brainpower, Skilling, 50, promoted himself as a standard bearer of innovation who would revolutionize markets and conventional business models. His ambitions for the USA's seventh-largest company ranged from the brave, new world of broadband communications to global water sales and California's newly deregulated electricity market.

But when the scaffolding around Enron came crashing down in December 2001, three months after Skilling abruptly resigned for undisclosed "personal reasons," the great motivator and creative capitalist left behind a crater in its place. The destruction caused by the failed Enron experiment contributed to the demise of Arthur Andersen, a major accounting firm; regulatory actions against several investment banks; a congressionally mandated overhaul of the securities industry; and a rain of criminal actions on former Enron executives.

Enron's collapse also deepened a two-year bear market from which stock investors only now are beginning to recover.

"If one person embodied the hubris and greed and overarching self-congratulation that epitomized Enron, it was Jeff Skilling. I guarantee you there are thousands of former Enron (employees) who are dancing a jig watching Jeff Skilling in handcuffs. They could not be happier," said Robert Bryce, author of Pipe Dreams: Greed, Ego and the Death of Enron.

Indeed, former Enron plant manager Charlie Prestwood, 65, of Conroe Texas, who watched his $1.3 million in retirement savings disappear amid the rubble of his former employer, said Thursday, "I'm tickled pink they finally got to him. They ought to have had him two years sooner." Prestwood is a plaintiff in an employee lawsuit against Enron.

In the long history of Texas-style booms and busts, Skilling fits a pattern of outsized ambition: great expectations followed by great disappointment. Enron's failure differs only in order of magnitude, say economists and historians.

Since the Enron scandal erupted, Skilling is reported to have been seen periodically around his hometown of Houston, sometimes at popular restaurants, but he spends much time in his $4 million mansion. He reportedly has been abandoned by some former friends and is reviled by many former employees.

Denial of wrongdoing

Skilling proclaims his innocence, likening Enron's failure to a classic "run on the bank."

Skilling's attorneys vowed to vigorously defend their client, saying they would accept no plea bargains offered by the government. "We're not going to stop until we get our acquittal," said defense attorney Daniel Petrocelli. "They have no proof he stole anything, no proof he lied, no proof he cheated anybody."

During the course of a two-year investigation by a special unit of the Justice Department known as the Enron Task Force, 29 defendants have been charged, and nine have pleaded guilty. Former chairman Kenneth Lay still hasn't been accused of a crime. The charges against Skilling come a month after former Enron chief financial officer Andrew Fastow pleaded guilty to related fraud charges and began cooperating with prosecutors. The Skilling charges were added to an earlier indictment against former chief accounting officer Richard Causey.

The Justice Department action, and a parallel civil lawsuit by the Securities and Exchange Commission, accuse Skilling of securities fraud, illegal inside trading, wire fraud and false statements to auditors, among other allegations. The lawsuits extensively cite the executives' representations to investors and analysts during conference calls and in routine financial documents filed with the SEC from 1999 to 2001.

The 57-page superseding indictment against the former CEO offers little hard documentation to support the claims.

But SEC enforcement director Stephen Cutler said in a statement that the former CEO was "quick to take credit for the 'innovations' behind Enron's spectacular rise and its apparent transformation into a 'new economy' powerhouse. He was just as quick to abandon Enron, to sell massive amounts of his Enron stock, and to disclaim responsibility for the harms visited on Enron's shareholders."

Most of Skilling's stock sales came when Enron was at or near the peak of its market value in late 2000, the criminal indictment and SEC action show. But even nine months into the company's long slide into bankruptcy protection, Skilling made one last sale of 500,000 shares for $10 million on Sept. 17, 2001, four weeks after he abruptly resigned, the legal actions show. It was also a month before the company reported its first loss in four years.

Hiding losses, inflating profits

According to the criminal indictment, Skilling, Causey and other Enron executives engaged in a sweeping scheme to hide large losses, jack up Enron's earnings and mislead investors. Among the charges, the executives fraudulently portrayed Enron as a healthy company by:

Hiding massive energy-trading profits made during the California energy crisis by putting hundreds of millions of dollars into secret reserve accounts.

Inflating Enron earnings and stock price through fraudulent accounting schemes that allowed officials to falsely tout the company's broadband business and overvalue assets in Enron's portfolio of energy and high-tech companies.

Concealing large losses in Enron's energy and broadband businesses from analysts and investors who were told the businesses were performing well.

Skilling's contradictory actions in reassuring investors while cashing out many of his shares came into sharp focus in early 2001, when Enron's stock price plunged to $60 a share from $80 a share and speculation grew that the company's broadband and energy businesses were stumbling.

During a March 2001 conference call with securities analysts, the indictment charges, Skilling reassured the audience he was "highly confident" about the company's prospects. "I know this is a bad stock market, but Enron's in good shape," he said during one briefing with analysts.

But, according to the grand jury indictment, Skilling knew that Enron's broadband unit was failing, jobs were getting cut and the broadband industry faced "a total meltdown."

According to the indictment, Enron's problems arose as early as 1999, when the company failed to meet its revenue targets through normal operations and resorted to fraudulent accounting gimmicks.

Defense attorneys Petrocelli and Bruce Hiler, a former SEC enforcement official, reply that Skilling passed a lie-detector test conducted by Paul Minor, a former FBI official now at American International Security in Fairfax, Va. The test was conducted Dec. 4, 2001 two days after Enron filed for bankruptcy court protection from creditors.

Although polygraph results are inadmissible as evidence in court, a copy of the report provided by defense attorneys shows that Skilling said he:

Did not draw on inside information to sell Enron stock in September 2001.

Was unaware of "any improper financial arrangement that was concealed from the board."

Believed that special partnerships known as Chewco, Jedi and LJM accounting vehicles by which Enron executives allegedly hid debt and inflated earnings were properly accounted for in Enron's books.

Earlier this week, defense attorneys met with prosecutors in Washington, D.C., hoping to ward off the indictment. According to the defense lawyers, they provided the polygraph report to the prosecutors, who replied: "We're going to indict your client."

It has been a long fall from grace for Skilling. A few years ago, the Harvard MBA and former McKinsey consultant was hailed as a business alchemist.

Skilling and Enron fit well in Houston, a crossroads of capital and opportunity. Named after Sam Houston, the great general of Texas' frontier independence, Houston always attracted politicians and power, says David McComb, author of Houston: A History. Its port led to King Cotton and the oil and gas industries. A can-do ethic prevailed. "That kind of climate may well have supported the rather buccaneering career of the people at Enron," McComb says.

"Enron really was a perfect reflection of Houston. Houston has always been a city of booms and busts," says Bryce, another author. "This indictment of Skilling and the other Enron miscreants is reflective of Houston. You live large, you play hard and you fall hard."

Skilling epitomized Enron's hard-driving corporate culture. He took Enron colleagues on adventuring trips, including off-road-vehicle races in the desert and mountaineering trips. But Skilling also was brash and arrogant and he helped create Enron's brutal, cutthroat culture, according to former colleagues.

After Skilling became president of Enron in 1997, revenue shot up from $12 billion in 1996 to $150 billion in 2001. Wall Street loved him. And Worth magazine dubbed him the No. 2 CEO in America, after Microsoft's Steve Ballmer.

"He had everyone buying into everything he said," Sherron Watkins, the former Enron executive and whistle-blower, said in an interview with USA TODAY last spring.

If the criminal case goes to trial in the next two or three years, there is sure to be legal warfare between hardnosed organized-crime and drug prosecutors and a "dream team" of defense lawyers.

Legal watchers predict the court will be flooded by defense motions, including a change-of-venue request to move the trial from Houston, where former Enron executives are still despised by many.

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