The End of Enron

 by Steven D. Laib  

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It is not clear what exactly happens when big business goes bad.  Somehow no one wants to accept responsibility even when it is obvious who played a role in what went wrong.  Perhaps it is the egos  of the people involved that won't allow them to accept defeat or admit wrongdoing. 

With the convictions of Ken Lay and Jeff Skilling two days ago, the last major chapter in the demise of former energy giant Enron is complete.  Yet, despite the jury's conclusions both men continued to assert their innocence.  This is something that should have been expected by all of us.  It seems that somehow, when big business goes awry and ordinary folk pay the price, the guys at the top never seem to see why most, if not all of it, was their fault.  They almost never take responsibility, even when it was obvious that they had to know exactly what was going on.   As the trial unfolded it brought back some memories of two cases I worked on back in the 1980's.  One came in very early in the rash of Saving's and Loan collapses, and involved a very eager young man who had somehow come into control of what was described by a local paper as a "sleepy mom and pop S&L."  It has specialized in making very conservative home mortgage loans in the same area where it was located, but Mr. Banker, as I will call him, had other ideas.  He took it public, and proceeded into the world of construction lending, because as he later testified, construction lending is a zero risk business.  Of course, he was wrong.  Oblivious of that fact, he proceeded to build a new corporate headquarters, buy expensive art works to decorate it, and so on.  

Eventually, problems began to develop due to insufficient underwriting controls, and the company got into serious trouble.  Mr. Banker got into a series of major arguments with the CPAs who refused to sign off on their audit for company annual report to shareholders.  The company controller sided with the auditors.  It was soon after this that the federal regulators stepped in and the matter ended up in court.  Mr. Banker ended up with criminal and civil penalties, but despite the overwhelming amount of evidence against him, he continued to assert that if he had been left alone to run things, it would have all turned out okay.  He refused to acknowledge that he had made mistakes or that his actions had amounted to fraud on the shareholders, or had put depositor money at risk.  

Meanwhile two lending officers whom I was assisting with the defense of were experienced and careful people.  They had taken great care in authorizing loans only on projects they believed would be successful based on strict guidelines.  As it turned out, all of their loans were performing properly, and they were absolved of any liability.  Not everyone was so lucky.   The second matter involved someone I will refer to as Mr. Developer.  His adventures began when he attempted to take over ownership of a very large apartment complex in a fashionable location with the intent to turn it into condominiums.  When he couldn't get sufficient backing from a lender he set up a bogus foreign corporation, which was able to get the loan and bought the property.  Title was then transferred from the corporation to himself, after which he began the process of conversions.  

But it didn't end there.  Mr. Developer wanted to build a hotel and casino property in Nevada and again he needed money.  His solution was to sell the same condominium units several times over; using straw buyers who deeded the properties back to him after the purchase was completed.  The series of straw transactions was possible only because he had help from a title and escrow company that essentially ignored the chain of title issues, presumably to get fees from the tremendous number of transactions involved.  

Things fell apart some time later when two lending officers from different banks sat down to lunch, and began talking shop. They discovered that they might both have loans out on the same property at the same time.  Sure enough, they did, and so did other banks.  They found numerous properties in this condo development with multiple first loans.  

Mr. Developer and some of his associates ended up in criminal court.  I assisted with prosecuting a civil claim against him and the title company, which was successful.  His defense, consistently, was that the banks had advised him on his course of action from start to finish, and that he was only following their instructions.  This, of course, was completely without foundation.  Not only was there no evidence other than his testimony, but also if the banks had done so, they would have put depositor funds at risk, and worse.  This was quite aside from the fact that the whole situation was fraudulent from the start.  

It is not clear what exactly happens when big business goes bad.  Somehow no one wants to accept responsibility even when it is obvious who played a role in what went wrong.  In another matter I once encountered a man who declared that he would rather be president and CEO of a defunct business than VP of research for a highly successful company paying him millions.  It seems that ego is involved somewhere.  All of these people had gotten into situations where they were over their heads.  They didn't want to give up their control, and they didn't want to admit defeat.  They continually insisted that if they had been given a free hand to continue things would have straightened out and all the problems would have been solved.  In each case they were wrong.  

There was another case I encountered when I was in law school.  It concerned a man who had been involved in a legitimate business, but encountered problems he couldn't handle.  He tried to cover it up, but things got worse.  He ended up in trouble with the law, but came clean as to what happened.  He he was sent to do a year at Club Fed, had to pay restitution, but eventually, after all was said and done, he passed the Bar, was admitted to practice, and the last I heard had a successful practice.  It is unlikely that Lay and Skilling will be able to say the same.   One can hope that anyone associated with the top management of Enron will never come up for consideration as a member of management with any other corporation in the future.  One can also hope that the adventures of people such as Lay and Skilling would serve as lessons for the next generation of egotistical business leaders.  Whether or not they do will be a matter of time.  We should be watching the business pages with some interest.  

Econ. & Public Policy, Science, Technology, Energy

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