Which Way Is the Enron Probe Going?
In the days ahead, the federal government's latest charges against two mid-level Enron broadband executives will likely be remembered as a crucial watermark in the far-flung probe. The latest criminal complaints will be revealed as proof for either Scenario A: Prosecutors are moving methodically in this complex investigation to build their way to the top. Or Scenario B: They don't have a case against Enron's former top executives, Kenneth Lay and Jeffrey Skilling, despite more than a year of intense scrutiny.
Those are the sharply divergent views close observers of the case offer. But whichever answer becomes clear, there's no question that dissecting the Enron (ENRNQ ) debacle has proven to be far more difficult and complicated than anyone would have guessed when the energy-trading giant collapsed in an accounting scandal in December, 2001.
It's not that the government has been standing still. It has already won a guilty verdict for obstruction of justice against accounting firm Arthur Andersen and won guilty pleas and cooperation from four former Enron trading and finance executives. Prosecutors have also indicted former Enron Chief Financial Officer Andrew Fastow and three British bankers involved in one of Fastow's alleged schemes.
But for all the time and resources devoted to this probe -- including eight prosecutors and two dozen FBI investigators -- some critics say the government should have more to show for its efforts. "There's absolutely no excuse for it taking this long, none whatsoever," says former federal prosecutor Jacob Frenkel, a partner at Smith, Gambrell & Russell. He figures gun-shy prosecutors are "wanting to make sure they have looked under every rock" after squeaking out a victory in the Andersen case last June.
Another factor is the investigations' sprawling nature, covering everything from energy trading to Enron's relationships with investment bankers to building out broadband services. Frenkel has his scorecard: "If at the end of the day, [prosecutors] bring cases against high-end investment bankers, the lawyers, the audit committee for failing to discharge their duty, then the [government's Enron] task force will have made an impact," he says.
That'll be a tall order, however, considering how long it has taken to build a case against even lower-level executives. On Mar. 12, a Justice Dept. complaint charged former broadband managers Kevin Howard and Michael Krautz with securities fraud, wire fraud, conspiracy, and making false statements to FBI agents. Howard was the unit's vice-president for finance, and Krautz was senior director for transactional accounting.
After the two were arrested and charged, Enron announced that they were "no longer with the company." Through their lawyers, both men say they intend to enter not guilty pleas and fight the charges. A source close to Enron says insiders were surprised that the complaint didn't reach higher, even within the former broadband division. "It doesn't say much for the government's case."
Former CEO Skilling, who resigned before Enron's collapse, was believed to be a major target of the government's investigation into the much-hyped broadband unit. But the latest complaint gives no evidence of involvement on his part in the alleged fraud. The government charges that Howard and Krautz deliberately violated accounting rules -- and hid their wrongdoing from Andersen accountants -- to fraudulently record $111 million in revenues in 2000 and 2001.
Like many of the charges involving Enron, these stem from a complicated structured-finance transaction. Code-named "Braveheart," it allowed Enron to immediately record future revenues from a 20-year deal with Blockbuster (BBI ) to offer video on demand to consumers.
"STILL THE LINCHPIN."
With Enron in control of the venture and no outside investors truly at risk, Braveheart should have been consolidated on Enron's balance sheet, the government charges. The project ultimately collapsed and never produced any revenue for Enron. Legal experts note that the government is smartly focusing on transactions that were allegedly concealed from Andersen. That would undercut any defense that executives relied on the advice of their outside accountants.
Investigators are likely following a tried-and-true approach of nabbing lower-level executives, in the hopes of pressuring them to help build cases against the people at the top. Former federal prosecutor Robert Mintz figures the feds are particularly interested in squeezing Fastow, who was indicted on 78 counts of wire fraud, money laundering, and conspiracy in October. "Fastow is still the linchpin to the government's case if there's any hope of ultimately bringing charges against Skilling or Lay," says Mintz, now a white-collar criminal defense lawyer at McCarter & English.
So far, the pressure doesn't appear to be working. Fastow has vowed to fight the charges against him at trial. But that could still change, legal experts note, especially since his wife, a former Enron executive, may also be in prosecutors' sights. Fastow's lawyer did not return a call seeking comment.
YEARS OF LITIGATION?
Former federal prosecutor John J. Fahy points to another reason for the government's failure to reach the top: "It's very possible the buck stops at Fastow." He and other finance executives were allegedly benefiting personally from the deals they put together to boost Enron's earnings and hide debt. "I would take a bet that [Lay and Skilling] are not going to be charged," says Fahy. "If [prosecutors] had the goods on them, they would have been charged by now." Even so, he expects the two men will be bogged down in civil litigation for years to come.
Lay's lawyer, Michael Ramsey, says he doesn't believe the broadband probe involves his client. And the government's investigation of insider-trading charges against Lay appears to have dissipated, too. "That case, at least, is in abeyance right now," says Ramsey. But he credits prosecutors for "being methodical. They're looking under every rock. They're doing what they should do."
Justice spokesman Bryan Sierra insists the government is "making a case against the top guys," but he won't say when further charges might come or against whom. "We cannot live off artificial deadlines others may impose on us. We have to make our case in court." With complex cases like this, he notes, it's not unusual for the investigation to last for years. But whether this probe will end with a bang or a whimper is still very much in question.
Edited by Douglas Harbrecht