WASHINGTON, D.C. - Deputy Attorney General James B.
Comey, Assistant Attorney General Christopher A. Wray
of the Criminal Division, FBI Director Robert Mueller,
and Enron Task Force Director Andrew Weissmann
announced today that a federal grand jury in Houston
has indicted former Enron Corp. Chairman and Chief
Executive Officer Kenneth L. Lay on charges of
conspiracy, securities fraud, wire fraud, bank fraud
and making false statements.
A superseding indictment returned by the grand jury
in Houston Wednesday, and unsealed today, charges Lay,
62, of Houston, with conspiracy to commit securities
fraud, four counts of securities fraud and two counts
of wire fraud, one count of bank fraud and three
counts of making false statements to a bank. The
superseding indictment joins Lay as a defendant in a
case pending against former Enron CEO Jeffrey K.
Skilling and former Enron Chief Accounting Officer
Richard Causey. Causey was originally indicted in
January 2004, and Skilling was added to the case in
February 2004. The new indictment also adds a money
laundering conspiracy count and four counts of money
laundering against Causey in connection with
fraudulent hedging vehicles, and expands certain
factual allegations against Causey in connection with
the securities fraud conspiracy. The case is pending
before U.S. District Judge Sim Lake in Houston, Texas.
Lay surrendered this morning to FBI agents in Houston
and the indictment was unsealed. Lay had an initial
appearance this morning before Magistrate Judge Mary
Milloy.
"The indictment charges that Lay, Skilling, Causey
and others oversaw a massive conspiracy to cook the
books at Enron and to create the illusion that it was
a robust, growing company with limitless potential
when, in fact, Enron was an increasingly troubled
business kept afloat only by a series of deceptions,"
said Deputy Attorney General James B. Comey, who heads
the President's Corporate Fraud Task Force. "These
charges demonstrate the Department's commitment to the
rule of law, its commitment to the principle that no
one is above the law, and its commitment to unravel
even the most complex of fraudulent schemes."
"This indictment alleges that every member of Enron's
senior management participated in a criminal
conspiracy to commit one of the largest corporate
frauds in American history," said Assistant Attorney
General Wray. "Kenneth Lay is charged with abusing his
powerful position as Chairman of the Board and CEO and
repeatedly lying in an effort to cover up the
financial collapse that caused devastating harm to
millions of Americans. The progress of this
investigation shows that the Department of Justice
will work tirelessly to hold corporate America to the
high standards imposed by federal law."
"The collapse of Enron was devastating to tens of
thousands of people and shook the public's confidence
in corporate America," said FBI Director Mueller. "The
FBI and our partners on the President's Corporate
Fraud Task Force responded with a concerted effort to
uncover the truth and to bring those responsible to
justice. The charges against Ken Lay, Jeffrey Skilling
and Richard Causey take us one step closer to
restoring the public confidence in our financial
markets."
The indictment alleges that at various times between
at least 1999 and 2001, Lay, Skilling, Causey and
other Enron executives engaged in a wide-ranging
scheme to deceive the investing public, the U.S.
Securities and Exchange Commission and others about
the true performance of Enron's businesses. The
alleged scheme was designed to make it appear that
Enron was growing at a healthy and predictable rate,
consistent with analysts' published expectations, that
Enron did not have significant write-offs or debt and
was worthy of investment-grade credit rating, that
Enron was comprised of a number of successful business
units, and that the company had an appropriate cash
flow. It had the effect of inflating artificially
Enron's stock price, which increased from
approximately $30 per share in early 1998 to over $80
per share in January 2001, and artificially stemming
the decline of the stock during the first three
quarters of 2001.
The indictment alleges that Lay had a significant
profit motive for participating in the scheme. As
stated in the indictment, between 1998 and 2001, Lay
received approximately $300 million from the sale of
Enron stock options and restricted stock, netting over
$217 million in profit, and was paid more than $19
million in salary and bonuses. During 2001 alone, Lay
received a salary of over $1 million, a bonus of $7
million and $3.6 million in long term incentive
payments. Additionally, during the period of August 21
through Oct. 26, 2001, Lay sold 918,104 shares of
Enron stock to repay advances totaling $26,025,000 he
had received from a line of credit extended to Lay by
Enron.
As a part of the alleged scheme, unrealistic and
unattainable earnings goals were set for Enron, based
on analysts' expectations rather than on actual or
reasonably achievable business results. When, as
expected within the company, Enron consistently fell
short of those goals, Lay, Skilling, Causey and others
allegedly orchestrated a series of accounting gimmicks
designed to make up the shortfall between actual and
predicted results. Enron then announced publicly that
it had met or exceeded analysts' expectations when, as
Lay, Skilling and Causey allegedly knew, it made its
numbers only by engaging in fraud. The indictment also
alleges that Lay, Skilling and Causey made false and
misleading representations about Enron's finances and
business operations to analysts, at press conferences,
in SEC filings and elsewhere.
Lay is principally charged for his conduct during the
third quarter of 2001. As the indictment alleges, upon
Skilling's abrupt departure from Enron in August 2001,
Lay resumed his position as CEO of the company,
intensified his oversight of Enron's day-to-day
operations, and took control as leader of the
conspiracy. Starting in August, according to the
indictment, Lay was briefed extensively about mounting
and undisclosed financial and operational problems,
including overvaluation of Enron's assets and business
units by several billion dollars. As a result of these
and other issues confronting Enron, Lay privately
considered a range of potential solutions, including
mergers, restructurings, and even divestiture of
Enron's pipelines, assets that Lay considered to be
the crown jewels of the company. However, the
indictment alleges he failed to disclose Enron's
problems to the investing public and affirmatively
misled the investing public about Enron's financial
condition, while falsely claiming that he was
disclosing everything that he had learned.
For example, the indictment states that during August
2001, Lay participated in Management Committee
meetings at which reports were presented showing
earnings shortfalls in virtually every Enron business
unit, totaling approximately $1 billion. During early
September 2001, Lay attended a Management Committee
retreat in the Woodlands, Texas, at which the serious
problems besetting Enron, including underperforming
business units and troubled assets, were further
discussed. Among other things, executives discussed
the need to take in the third quarter of 2001 at least
a $1 billion charge and that Enron had committed an
accounting error in the amount of $1.2 billion.
The indictment alleges that throughout the remainder
of September 2001, Lay engaged in a series of
high-level meetings to discuss the growing financial
crisis at Enron and the likely impact on Enron's
credit rating. Among other things, Lay knew that the
total amount of losses embedded in Enron's assets and
business units was, at a minimum, $7 billion. Lay also
knew that Enron's auditors had changed their position
concerning the accounting treatment of four
off-balance sheet vehicles called the Raptors, which
required Enron to determine in short order whether an
acceptable alternative methodology existed or whether,
instead, Enron would have to restate its earnings and
admit the error.
Despite knowing these negative facts, on Sept. 26,
2001, in an online forum with thousands of Enron
employees, many of whom were investors in Enron stock,
Lay allegedly stated that Enron was going to "hit
[its] numbers." Lay allegedly created the false
impression that his confidence in Enron's stock was
such that he had increased his personal ownership of
Enron stock in the past two months as a sign of his
belief in what he was espousing. As the indictment
alleges, during the prior two months, Lay actually
purchased $4 million in Enron stock while also selling
$24 million in Enron stock through nonpublic
transactions.
The indictment states that in the weeks leading up to
Enron's third quarter earnings release on Oct. 16,
2001, Lay determined that Enron could not publicly
report a loss in excess of $1 billion without
triggering negative action by Enron's credit rating
agencies. Lay thus artificially capped Enron's losses
to that amount. Also during this time, Lay learned
that changes to the accounting rules governing
goodwill (i.e., the difference between what Enron paid
for an entity and the book value of that entity's net
assets) would require Enron to disclose impairments to
certain of its assets, including its interest in
Wessex Water, a business located in Bath, England. In
order to hide the impact of asset impairment, Lay
allegedly claimed, falsely, that Enron was committed
to engaging in a "water growth strategy," which would
have required Enron to expend between $1 billion and
$28 billion in capital investments in the water
industry. Lay allegedly knew that Enron had no
intention of pursuing such a strategy and did not have
the capital to support it.
According to the indictment, on Oct.16, 2001, when
Enron announced losses of approximately $1 billion,
Lay allegedly sought to minimize the import of the
reported losses by falsely describing the losses as
"nonrecurring," that is, a one-time or unusual
earnings event. Enron also disclosed the same day an
approximate $1.2 billion reduction in shareholder
equity, which Lay again sought to minimize by falsely
attributing it to the unwind of the Raptor vehicles,
rather than to an accounting error. According to the
indictment, on October 12, Lay misled a representative
of a national credit rating agency about the need to
take additional writedowns and the extent of Enron's
goodwill problems. On both October 16 and 23, Lay told
the investing public that Enron had determined that
its goodwill impairment was up to $200 million.
However, he failed to disclose the impact on Enron of
an additional goodwill impairment of up to $700
million in connection with Wessex. Also on October 23,
Lay allegedly espoused faith in Elektro, a Brazilian
power plant which Enron carried on its books as worth
in excess of $2 billion. In fact, as Lay allegedly
knew, Elektro was overvalued by up to $1 billion. Lay
also allegedly distributed materials at the road shows
that misleadingly described the value of the
international portfolio as $6.5 billion. In reality,
as Lay knew, this vastly overstated the true value of
the international assets by billions of dollars.
These and other schemes alleged in the indictment
quickly unraveled, and on Dec. 2, 2001, Enron filed
for bankruptcy, making its stock, which less than a
year earlier had been trading at over $80 per share,
virtually worthless.
Lay was also charged in four counts with bank fraud
and making false statements to three banks arising out
of his obtaining and using four personal lines of
credit worth over $60 million. Lay allegedly promised
the banks that the loans would not be used to purchase
stock. As a result of these false representations, the
banks extended far greater loans to Lay than they
otherwise would. The indictment alleges that in spite
of his promises, Lay repeatedly used the lines of
credit to buy the stock. The lines of credit were
collateralized mainly by artificially inflated shares
of Enron stock and were repaid with the same.
If convicted of all the charges in the indictment,
Lay faces a maximum sentence of 175 years in prison
and millions of dollars in fines.
Criminal indictments are only charges and not
evidence of guilt. A defendant is presumed to be
innocent unless and until proven guilty.
The investigation into Enron's collapse is being
conducted by the Enron Task Force, a team of federal
prosecutors supervised by the Justice Department's
Criminal Division and agents from the FBI and the IRS
Criminal Investigations Division. The Task Force also
has coordinated with and received considerable
assistance from the Securities and Exchange
Commission. The Enron Task Force is part of President
Bush's Corporate Fraud Task Force, created in July
2002 to investigate allegations of fraud and
corruption at U.S. corporations.
Thirty-one defendants have been charged to date,
including 21 former Enron executives. Eleven
defendants have been convicted to date, including
former CFO Andrew Fastow and former Treasurer Ben
Glisan. To date, the Enron Task Force has restrained
more than $161 million in proceeds derived from
criminal activity. The Task Force investigation is
continuing.
