Skilling, Enron Settlements, Corporate Earnings Restatements

The Enron story continues to intrigue me. Beyond the implications of crime and malicious intent, I'm interested in the machinations of Corporate America, and how they played out in the unquestionably corrupt Enron Corporation. As always, I'm following the meta story pretty closely, but I'm also interested in the drama of middle management: the pressure of productivity from above and below, the secret of method, and -- even among the worst of us -- that nagging sense of wrong vs. right.

The quick status report of the Enron saga is this: Enron went bust, many of the multi-millionairres at Enron turned States Witness, and now Kenneth Lay and Jeffrey Skilling, the two heads of the company, are on trial. The government is trying to prove that Skilling and Lay masterminded the fraud. The two defendants have selected different defenses. While it seems Lay will contend he didn't know about the fraud, Skilling has continued to insist that no fraud took place because none was necessary: "Standing like a weatherman next to charts and graphs showing Enron's explosive growth in the energy markets, (Skilling) was trying to persuade the jury that pursuing a conspiracy to falsify Enron's financial performance would be nonsensical," Alexei Barrionuevo and Kurt Eichenwald reported today. Interesting (and briefly free) reading.

Since the trial began, I've been aware of Lay's intended defense: I didn't know about the fraud. He intends, apparently, to paint himself as the blissfully unaware figurehead. As chairman of the company, it seems possible. Less day-to-day. Because he was also and for long stretches the company President, it seems less plausible. Whatever. Lay's defense will play out soon enough. It was only today, though, that I realized Skilling has been arguing that Enron's fraud was unnecessary. Seems a bold defense. If true, it casts Skilling as a different sort of misfit among the brilliant criminals responsible -- rather than Lay's lazy, it's Skilling's stupid. By every assessment I've encountered, Enron's books were seriously troubled. Anyway. Skilling has argued this point pretty consistently, the NYTimes reported last week, and there have been slight variations in his story. Oops. Biggest oops? Probably Skilling's denial in December 2001 that Enron had a slush fund that they used to manipulate earnings. They clearly did.

I then bounced to a small piece that would interest lawyers and their kin. Earlier in the trial, somebody fingered Skilling as a supporter of an aspect of questionable bookmaking -- the Raptors financing vehicle. Skilling supported the questionable practice because, the witness said, it allowed Enron to "circumvent" accounting rules. On cross-examination, witness admitted he wasn't sure Skilling ever said "circumvent." Also on cross, witness admitted he had no concrete proof Skilling even supported the Raptors etc. The witness's knowledge was all second hand, he admitted, and everything was based on conversations with individuals who had pled guilty.

Perhaps the most interesting bits I read today were about the settlements and the earnings restatements. But it is all very archane, and I'm definitely done with lunch. So, in near bullet form:

Banks are being held fiscally responsible for Enron's collapse. Banks are now settling with former shareholders for pennies on the dollar. Interestingly, it might be wise to settle early. The two banks held most reponsible were the first to settle, and they paid less than a third bank, which in theory was less culpable. Also as part of this article, the law firm representing the shareholders has earned $680 million, with fewer than half of the sued banks having settled. The law firm is going to clear a billion on this. Whack.

I read another article on settlements, this one written earlier, after only two banks had settled. It confirms that early settlements are good things for the banks. They pay less.

Earnings restatements and the fudging of numbers is something that always makes me uneasy. Maybe I'm wrong to be concerned. Perhaps some of the restatements are corrections from past ill gotten gains, perhaps they are less incriminating. Interesting analysis on accounting firms. "Within the Big Four, there are some substantial variations. Ernst & Young had restatements by only 3 percent of its clients, while the figure for Deloitte & Touche was 7 percent," writes Floyd Norris. Well played, sir.