Jeffrey Skilling, Enron Corp.’s former chief executive officer, was the maestro who directed the energy giant’s massive frauds, the government charged yesterday in a 35-count indictment calling for $80 million in fines and up to 325 years in prison.
The biggest fish to be caught in the government’s net in a frenetic two years of securities fraud indictments, Mr. Skilling, 50, was charged with lying about Enron’s failing condition, hiding losses with disguised profits derived from California’s energy crisis, and then cashing in with stock sales that reaped him $63 million in profits.
A CEO with a reputation for brilliance whose testimony on Enron’s fiery demise two years ago transfixed Washington, Mr. Skilling pleaded not guilty in an appearance at the U.S. District Court in Houston after being arrested and paraded in handcuffs. He was freed after posting $5 million in bond.
The indictment comes as public distrust of corporate America is soaring, in part because of perceptions that many of the key figures in the Enron, WorldCom and other corporate scandals remain free and unpunished.
“Often I hear folks say, mostly on TV, ‘Why don’t they go after CEOs?’ Here we are,” said Deputy Attorney General James Comey, who called Mr. Skilling “the guy” who ran Enron and orchestrated the sweeping and complicated schemes that caused its dramatic fall into bankruptcy in December 2001.
Despite public doubts, all signs are that the government’s indictments of high-ranking corporate executives and the stiff penalties exacted in recent years are serving as a powerful deterrent against white-collar fraud, he added.
Corporate executives and accountants read the newspapers and “respond to painful stimuli. They will change their behavior,” he said.
Mr. Comey and other law-enforcement officials at a press briefing yesterday indicated that the series of Enron-inspired indictments that have swept 29 executives into the enforcement net may go no higher, however.
When asked whether the government’s long-running investigation would finally lead to Enron founder Kenneth Lay, who was CEO before turning day-to-day management over to Mr. Skilling in February 2001, Mr. Comey stressed that the government can only go as far as the facts lead.
“You wouldn’t want to live in a country where I or the FBI could go out and lock somebody up because a company failed and we had a bad feeling about them.
“Our business is facts,” he said. “We have been working like crazy to find the facts and to punish those who are guilty. … That’s really hard, and it should be hard.”
A lack of convincing evidence was blamed last year for a hung jury in the government’s case against star Wall Street analyst Frank Quattrone, and it apparently is behind a string of unfavorable rulings in the securities fraud trial of lifestyle maven Martha Stewart in New York.
As in those cases, the complaint against Mr. Skilling draws on some novel and untested legal theories, such as characterizing Enron’s efforts to “smooth out” its earnings from quarter to quarter — an earnings-management practice at many corporations — as a kind of wire fraud.
Mr. Skilling and his accomplices at Enron, including former Chief Accounting Officer Richard Causey, who also is charged in the indictment, had a “one-track mind” focused on meeting Wall Street’s earnings expectations, and they concocted a dizzying array of schemes to ensure they did, Mr. Comey said.
Mr. Skilling’s role was pivotal, because it was his “falsely optimistic public statements” about Enron’s struggling broadband business that fueled Wall Street’s expectations for higher earnings each quarter, he said.
One previously undisclosed scheme that the Enron executives used to improve earnings figures was to draw from reserve accounts that were created to conceal huge profits Enron made from selling power to California during its 2000-2001 energy crisis, the indictment says.
The undisclosed reserves, estimated at $1 billion, also were used to conceal big losses in Enron’s energy services division, it says.
In a key conference call with investors in January 2001, Mr. Skilling fraudulently promoted Enron’s broadband business by touting assets that it didn’t possess and then manufactured earnings from the resulting spike in the company’s stock price, the indictment says.
The government’s case against Mr. Skilling will be aided by testimony from Enron’s former chief financial officer, Andrew Fastow, whose agreement to cooperate with prosecutors earlier this year was a breakthrough leading to the Skilling indictment.
The government’s complaint charges Mr. Skilling with participating in and aiding Fastow’s schemes, such as those dubbed “Raptor” and “Nigerian Barge,” which were devised to hide Enron’s debt and failing assets through complicated off-balance-sheet partnerships.
After setting up these schemes, Mr. Skilling cashed in by selling more than 1 million shares of Enron stock for $63 million in profits, making him guilty of insider trading, the government said.
Mr. Skilling, Mr. Lay and other Enron executives were paid largely with stock options and had programs for redeeming their stocks to generate cash for living expenses — a factor that may make the government’s case more difficult to prove.
“Jeff Skilling has nothing to hide,” said the former executive’s attorney, Daniel Petrocelli. “He did not steal. He did not lie. He did not take anyone’s money … Jeff Skilling is their scapegoat.”